Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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
Registrant's telephone number, including area code: (847) 698-3000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No |X|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 4,197,100 shares of the
registrant's Common Stock, $0.01 par value per share, were outstanding on August
14, 2003.
COMDISCO HOLDING COMPANY, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION.............................................3
Item 1. Financial Statements
Consolidated Statements of Earnings (Loss) (Unaudited)--Three
and nine months ended June 30, 2003 (Successor) and the three
and nine months ended June 30, 2002 (Predecessor)...........................4
Consolidated Balance Sheets (Unaudited) June 30, 2003 (Successor) and
September 30, 2002 (Successor)..............................................5
Consolidated Statements of Cash Flows (Unaudited)--Nine months ended
June 30, 2003 (Successor) and the nine months ended June 30, 2002
(Predecessor)...............................................................6
Notes to Consolidated Financial Statements (Unaudited)......................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................25
Item 3. Quantitative and Qualitative Disclosures About Market Risk........42
Item 4. Controls and Procedures...........................................42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................43
Item 2. Changes in Securities and Use of Proceeds.........................43
Item 3. Defaults Upon Senior Securities...................................43
Item 4. Submission of Matters to a Vote of Security Holders...............43
Item 5. Other Information.................................................43
Item 6. Exhibits and Reports on Form 8-K..................................43
SIGNATURES............................................................44
PART I
FINANCIAL INFORMATION
---------------------
Forward-Looking Statements
This quarterly report on Form 10-Q contains, and our periodic filings with
the Securities and Exchange Commission and written and oral statements made by
the Company's officers and directors to press, potential investors, securities
analysts and others, will contain, forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934 as amended (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 importance. Similarly, statements that describe or contain
information related to matters such as our intent, belief, or expectation with
respect to financial performance, claims resolution under the Plan, cash
availability and cost-cutting measures are forward-looking statements. These
forward-looking statements often reflect a number of assumptions and involve
known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those currently anticipated in these
forward-looking statements. In light of these risks and uncertainties, the
forward-looking events might or might not occur, which may affect the accuracy
of forward-looking statements and cause the actual results of the Company to be
materially different from any future results expressed or implied by such
forward-looking statements.
Important factors that could cause actual results to differ materially from
those suggested by these written or oral forward-looking statements, and could
adversely affect our future financial performance, include the risk factors
discussed in Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations, below. Many of the risk factors that could affect the
results of the Company's operations are beyond our ability to control or
predict.
ITEM 1. FINANCIAL STATEMENTS
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED)
(in millions except per share data)
Three months ended, Nine months ended,
June 30, June 30,
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
-------------- | --------------- -------------- | ---------------
2003 | 2002 2003 | 2002
-------------- | --------------- -------------- | ---------------
Revenue | |
Leasing | |
| |
Operating $ 24 | $ 69 $ 115 | $ 415
Direct financing 1 | 3 3 | 18
Sales-type 2 | 11 4 | 28
-------------- | --------------- -------------- | ---------------
Total leasing 27 | 83 122 | 461
| |
Sales 38 | 44 70 | 162
Technology services 2 | 11 12 | 37
Other 10 | 34 35 | 59
-------------- | --------------- -------------- | ---------------
Total revenue 77 | 172 239 | 719
-------------- | --------------- -------------- | ---------------
| |
Costs and expenses | |
Leasing | |
Operating 21 | 59 98 | 328
Sales-type 2 | 10 4 | 22
-------------- | --------------- -------------- | ---------------
Total leasing 23 | 69 102 | 350
| |
Sales 32 | 62 68 | 184
Technology services 1 | 6 7 | 25
Selling, general and administrative 40 | 24 91 | 74
Write-down of equity securities 7 | 27 15 | 70
Bad debt expense (27) | 17 (74) | 112
Interest (total Predecessor contractual interest 2002 | |
- - $60 and $195) 1 | 1 25 | 16
Reorganization items -- | 57 -- | 345
-------------- | --------------- -------------- | ---------------
Total costs and expenses 77 | 263 234 | 1,176
-------------- | --------------- -------------- | ---------------
| |
Earnings (loss) from continuing operations before income | |
taxes (benefit) -- | (91) 5 | (457)
Income taxes (benefit) (1) | -- -- | (60)
-------------- | --------------- -------------- | ---------------
Earnings (loss) from continuing operations 1 | (91) 5 | (397)
Earnings (loss) from discontinued operations, net of | |
tax 39 | (6) 80 | 194
-------------- | --------------- -------------- | ---------------
Net earnings (loss) $ 40 | $ (97) $ 85 | $ (203)
============== | =============== ============== | ===============
Basic earnings (loss) per common share: | |
Earnings (loss) from continuing operations $ 0.24 | $ (0.60) $ 1.12 | $ (2.64)
Earnings (loss) from discontinued operations 9.25 | (0.04) 19.13 | 1.29
-------------- | --------------- -------------- | ---------------
Net earnings (loss) $ 9.49 | $ (0.64) $ 20.25 | $ (1.35)
============== | =============== ============== | ===============
Diluted earnings (loss) per common share: | |
Earnings (loss) from continuing operations $ 0.24 | $ (0.60) $ 1.12 | $ (2.64)
Earnings (loss) from discontinued operations 9.25 | (0.04) 19.13 | 1.29
-------------- | --------------- -------------- | ---------------
Net earnings (loss) $ 9.49 | $ (0.64) $ 20.25 | $ (1.35)
============== | =============== ============== | ===============
See accompanying notes to consolidated financial statements.
Comdisco Holding Company, Inc.
CONSOLIDATED BALANCE SHEETS
(in millions except share data)
Unaudited Audited
June 30, September 30,
2003 2002
-------------------- --------------------
ASSETS
Cash and cash equivalents $ 130 $ 546
Cash - legally restricted 30 18
Receivables, net 41 98
Inventory of equipment 13 33
Leased assets:
Direct financing and sales-type 30 46
Operating (net of accumulated depreciation) 63 247
-------------------- --------------------
Net leased assets 93 293
Equity securities 17 36
Assets of discontinued operations 236 1,251
Other assets:
Electronics contingent payment 36 35
Other 13 31
-------------------- --------------------
Total other assets 49 66
-------------------- --------------------
$ 609 $ 2,341
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Term notes payable $ -- $ 35
Discounted lease rentals 1 2
Notes payable -- 1,050
Accounts payable 9 21
Income taxes 24 49
Liabilities related to assets of discontinued operations 94 420
Deferred income 8 16
Other liabilities:
Accrued compensation 43 27
Contingent Distribution Rights 42 10
Other 33 70
-------------------- --------------------
Total other liabilities 118 107
-------------------- --------------------
254 1,700
Stockholders' equity:
Common stock $.01 par value. Authorized 10,000,000 shares;
issued 4,200,000 shares. 4,197,100 shares outstanding at
June 30, 2003; 4,200,000 shares outstanding at
September 30, 2002 -- --
Additional paid-in capital 355 413
Accumulated other comprehensive income -- 4
Retained earnings -- 224
Common stock held in treasury, at cost; 2,900 shares at
June 30, 2003 (none at September 30, 2002) -- --
-------------------- --------------------
Total stockholders' equity 355 641
-------------------- --------------------
$ 609 $ 2,341
==================== ====================
See accompanying notes to consolidated financial statements.
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
For the nine months ended June 30, 2003 and 2002
SUCCESSOR PREDECESSOR
2003 2002
--------------- ------------------
Cash flows from operating activities: |
Operating lease and other leasing receipts $ 190 | $ 545
Leasing costs, primarily rentals paid -- | (1)
Lease portfolio sales 7 | 334
Sales of equipment 71 | 157
Sales costs (2) | (6)
Technology services receipts 14 | 42
Technology services costs (2) | (18)
Note receivable receipts 74 | 181
Warrant proceeds 3 | 28
Other revenue 17 | 34
Selling, general and administrative expenses (44) | (75)
Interest (37) | (21)
Income taxes (18) | (2)
--------------- | ------------------
Net cash provided by continuing operations 273 | 1,198
Net cash provided by discontinued operations 981 | 1,795
--------------- | ------------------
Net cash provided by operating activities before reorganization items 1,254 | 2,993
--------------- | ------------------
Operating cash flows from reorganization items: |
Interest received on cash accumulated because of Chapter 11 |
proceeding -- | 22
Professional fees paid for services rendered in connection with |
the Chapter 11 proceeding -- | (40)
--------------- | ------------------
Net cash used by reorganization items -- | (18)
--------------- | ------------------
Net cash provided by operating activities 1,254 | 2,975
--------------- | ------------------
|
Cash flows from investing activities: |
Equipment purchased for leasing (5) | (45)
Notes receivable (1) | (18)
Equity investments -- | (1)
Equipment purchased for leasing by discontinued operations (27) | (238)
Other (1) | 3
--------------- | ------------------
Net cash used in investing activities (34) | (299)
--------------- | ------------------
Cash flows from financing activities: |
Cash used by discontinued operations (135) | (269)
Net decrease in notes and term notes payable (1,085) | (317)
Principal payments on secured debt (1) | (115)
Discounted lease proceeds -- | 12
Dividends paid (367) | --
Decrease (increase) in legally restricted cash (12) | 1
Other (36) | 7
--------------- | ------------------
Net cash used in financing activities (1,636) | (681)
--------------- | ------------------
Net increase (decrease) in cash and cash equivalents (416) | 1,995
Cash and cash equivalents at beginning of period 546 | 515
--------------- | ------------------
Cash and cash equivalents at end of period $ 130 | $ 2,510
=============== | ==================
See accompanying notes to consolidated financial statements.
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED (in millions)
For the nine months ended June 30, 2003 and 2002
SUCCESSOR PREDECESSOR
2003 2002
---------------- ------------------
Reconciliation of earnings (losses) from continuing |
operations to net cash provided by operating activities: |
|
Earnings (losses) from continuing operations $ 5 | $ (397)
|
Adjustments to reconcile earnings (losses) from continuing |
operations to net cash provided by operating activities |
|
Leasing costs, primarily |
depreciation and amortization 102 | 349
Leasing revenue, primarily principal portion of |
direct financing and sales-type lease rentals 68 | 84
Cost of sales 66 | 178
Technology services costs, primarily |
depreciation and amortization 5 | 7
Interest (12) | (5)
Income taxes (18) | (62)
Principal portion of notes receivable 68 | 159
Selling, general, and administrative expenses (12) | 181
Warrant proceeds in excess of income 1 | 12
Reorganization items -- | 327
Lease portfolio sales 7 | 334
Other, net (7) | 13
---------------- | ------------------
Net cash provided by continuing operations 273 | 1,180
Net cash provided by discontinued operations 981 | 1,795
---------------- | ------------------
Net cash provided by operating activities $ 1,254 | $ 2,975
================ | ==================
See accompanying notes to consolidated financial statements.
COMDISCO HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003 and 2002
1. Reorganization
On July 16, 2001, Comdisco, Inc. ("Predecessor") and 50 of its domestic
subsidiaries filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Illinois (consolidated case number 01-24795) (the "Filing").
Comdisco Holding Company, Inc., as the successor company ("Successor") to
Comdisco, Inc., emerged from bankruptcy under a confirmed plan of reorganization
(the First Amended Joint Plan of Reorganization (the "Plan")) that became
effective on August 12, 2002 (the "Effective Date"). For financial reporting
purposes only, however, the effective date for implementation of fresh-start
reporting was July 31, 2002.
Implementation of the Plan resulted in the reorganization of Comdisco, Inc.
and its domestic and foreign subsidiaries into Comdisco Holding Company, Inc.
and three new primary subsidiaries: (i) Comdisco Global Holding Company, Inc. (a
direct wholly-owned subsidiary of Comdisco Holding Company, Inc.), which manages
the sale and run-off of the Company's reorganized European IT Leasing operations
and assets; (ii) Comdisco, Inc. (a direct wholly-owned subsidiary of Comdisco
Holding Company, Inc.), which manages the sale and run-off of the Company's
reorganized US Leasing operations and assets; and (iii) Comdisco Ventures, Inc.
(a direct wholly-owned subsidiary of Comdisco, Inc.), which manages the sale and
run-off of the Company's venture financing operations and assets ("Ventures").
The Company's Corporate Asset Management 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") to holders of the
Predecessor company's common stock; and (vi) the cancellation of the Predecessor
company's notes, notes payable, common stock and stock options.
Consummation of the Plan resulted in the election of a new Board of
Directors for the Company (the "Board"). The Board is comprised of five members.
The management director 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" and "our" mean Comdisco Holding Company, Inc.,
its consolidated subsidiaries, including Comdisco Global Holding Company, Inc.,
Comdisco, Inc., Comdisco Domestic Holding Company, Inc. and Comdisco Ventures,
Inc., and its predecessors, except in each case where the context indicates
otherwise. References to "Comdisco, Inc." mean Comdisco, Inc. and its
subsidiaries, other than the Prism entities, prior to the Company's emergence
from bankruptcy on August 12, 2002, except where the context indicates
otherwise.
Due to the Company's reorganization and implementation of fresh-start
reporting, the consolidated financial statements for the Successor company are
not comparable to those of the Predecessor company.
A black line has been drawn on the accompanying consolidated financial
statements to distinguish between the Successor company and the Predecessor
company.
Certain reclassifications, including those for discontinued operations,
have been made in the 2002 financial statements to conform to the 2003
presentation.
Legally restricted cash is comprised of the following at June 30, 2003 and
September 30, 2002 (in millions):
June 30, September 30,
2003 2002
--------------- ----------------
SunGard escrow $ 2 $ 2
Professional fee escrow -- 7
Letters of credit 3 3
Incentive compensation escrow 23 --
Cash received on non-owned leases -- 6
Other 2 --
--------------- ------------------
$ 30 $ 18
=============== ==================
3. Discontinued Operations
US Leasing operations: 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. Management of the Company is currently engaged in such
negotiations. For financial reporting purposes, the assets ($192 million) and
liabilities ($93 million) of the Company's US Leasing operations as of June 30,
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 three and nine months
ended June 30, 2003 and 2002 are included in the statement of earnings (loss) as
discontinued operations.
German Leasing Subsidiary: 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 Investment SA, a Swiss corporation. Comprendium Investment SA is
controlled by Thomas Flohr, who until January 2001 served as president of
Comdisco Europe, a division of Comdisco, Inc. 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 (approximately $42
million) over the 42 months following closing, contingent 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 U.S. dollar equivalents
were calculated using the average exchange rate of the foreign exchange
transactions completed by the Company on April 30, 2003.
For financial reporting purposes, at June 30, 2003, the contingent 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. 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. During the three months ended June 30, 2003 the Company repatriated funds
from the sale of stock of its German leasing subsidiary. As a result, the
Company recorded a $24 million gain related to the realization of deferred
translation gains which is included in earnings (loss) of discontinued
operations.
International Leasing: "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.
On October 18, 2002, the Company announced that it had sold its Swiss and
Austrian-based operations to Comprendium Investment SA and to PH Holding GmbH,
respectively. The Company received approximately $20 million from the sales.
These transactions closed on October 10, 2002 and August 14, 2002, respectively.
During July 2002, the Company recorded a $1 million pre-tax loss on the sale of
its Swiss and Austrian-based operations.
On December 23, 2002, the Company completed the sale of its French
operations, Comdisco France SA and Promodata SNC, to Belgium-based computer
services provider, Econocom Group and the Company received approximately $70
million from such sale. The sale was effective as of August 31, 2002. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," during July 2002, the Company recorded a pre-tax charge of
$35 million to reduce cost in excess of fair value to reflect the difference
between carrying value and estimated proceeds from the sale.
The Company has sold substantially all of its information technology (IT)
leasing assets in Australia and New Zealand to Allco, an Australian company
specializing in equipment and infrastructure finance and leasing. The bankruptcy
court approved the sale on April 18, 2002. Under the terms of the sale
agreement, Allco agreed to purchase most of the assets in Australia and New
Zealand in a series of closings. On June 28, 2002, the Company and Allco
completed the first closing on the sale of leased assets in Australia and New
Zealand, with the final closing completed on June 3, 2003. The Company received
approximately $32 million for the assets sold. In accordance with Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed" ("SFAS No. 121"), the Company
recorded pre-tax charges of $6 million in the third quarter of fiscal 2002 and
$2 million in the one month ended July 31, 2002 to reduce cost in excess of fair
value to reflect the difference between carrying value and estimated proceeds
from the sale.
Availability Solutions: The Company's Availability Solutions business was
offered for sale in the third quarter of fiscal 2001 with the sale completed in
the first quarter of fiscal 2002 (see Note 4 of Notes to Consolidated Financial
Statements). The gain for the Availability Solutions business is net of
estimated wind-down costs and asset write downs associated with the Company's
German and Spanish subsidiaries which were excluded from the sale to SunGard
discussed in Note 4, as well as wind-down costs and asset write downs associated
with the Company's Web-Availability Solutions business.
Each of the aforementioned transactions resulted from an extensive offering
and competitive bidding process run by the Company's independent investment
banking firm. In the case of Availability Solutions, the sale also resulted from
a bankruptcy court-supervised auction process.
Prism Communications: Continued declines in the telecommunications industry
in the three months ended June 30, 2002, negatively impacted the market for
telecommunications equipment. As a result, the Company recorded a charge of $3
million to write-down these assets to current fair market value.
As a result of the Board of Directors' approval of the plan to sell the
assets of US Leasing, the sale of the stock of its leasing subsidiary in
Germany, the sales of its International Leasing operations, the sale of Prism
assets and the sale of Availability Solutions, amounts in the consolidated
financial statements and related notes for all periods shown have been restated
to account for these operations as discontinued.
Following is summary financial information for the Company's discontinued
operations for the three and nine months ended June 30, 2003 and 2002. The
Availability Solutions information below includes the results from the Company's
Availability Solutions businesses sold to SunGard as well as the Availability
Solutions operations discontinued in Germany and Spain (in millions):
SUCCESSOR
Three months ended June 30, 2003
Availability International German Leasing
Solutions US Leasing Leasing Subsidiary Prism Total
------------- ----------- ------------- -------------- --------- ----------
Revenue $ -- $ 55 $ -- $ 1 $ -- $ 56
============= =========== ============= ============== ========= ==========
Gain on sale $ -- $ -- $ 7 $ 24 $ -- $ 31
============= =========== ============= ============== ========= ==========
Earnings (loss) from discontinued operations:
Before income taxes $ -- $ (3) $ 7 $ 25 $ -- $ 29
Income taxes(benefit)(1) -- (10) -- -- -- (10)
------------- ----------- ------------- -------------- --------- ----------
Net earnings $ -- $ 7 $ 7 $ 25 $ -- $ 39
============= =========== ============= ============== ========= ==========
PREDECESSOR
Three months ended June 30, 2002
Availability International German Leasing
Solutions US Leasing Leasing Subsidiary Prism Total
------------- ----------- ------------- -------------- --------- ----------
Revenue $ -- $ 81 $ 41 $ 58 $ -- $ 180
============= =========== ============= ============== ========= ==========
Gain (loss) on sale $ -- $ -- $ -- $ -- $ -- $ --
============= =========== ============= ============== ========= ==========
Earnings (loss) from discontinued operations:
Before income taxes $ -- $ (20) $ 3 $ 19 $ (3) $ (1)
Income taxes -- -- -- 5 -- 5
------------- ----------- ------------- -------------- --------- ----------
Net earnings (loss) $ -- $ (20) $ 3 $ 14 $ (3) $ (6)
============= =========== ============= ============== ========= ==========
Nine months ended June 30, 2003
Availability International German Leasing
Solutions US Leasing Leasing Subsidiary Prism Total
------------- ----------- ------------- -------------- --------- ----------
Revenue $ -- $ 170 $ 2 $ 80 $ -- $ 252
============= =========== ============= ============== ========= ==========
Gain on sale $ -- $ -- $ 7 $ 24 $ -- $ 31
============= =========== ============= ============== ========= ==========
Earnings (loss) from discontinued operations:
Before income taxes $ -- $ 27 $ 9 $ 37 $ -- $ 73
Income taxes(benefit)(1) -- (10) -- 3 -- (7)
------------- ----------- ------------- -------------- --------- ----------
Net earnings $ -- $ 37 $ 9 $ 34 $ -- $ 80
============= =========== ============= ============== ========= ==========
PREDECESSOR
Nine months ended June 30, 2002
Availability International German Leasing
Solutions US Leasing Leasing Subsidiary Prism Total
------------- ----------- ------------- -------------- --------- ----------
Revenue $ 67 $ 290 $ 121 $ 156 $ -- $ 634
============= =========== ============= ============== ========= ==========
Gain (loss) on sale $ 326 $ -- $ -- $ -- $ -- $ 326
============= =========== ============= ============== ========= ==========
Earnings (loss) from discontinued operations:
Before income taxes $ 334 $ (50) $ 12 $ 33 $ (3) $ 326
Income taxes 130 (10) 2 10 -- 132
------------- ----------- ------------- -------------- --------- ----------
Net earnings (loss) $ 204 $ (40) $ 10 $ 23 $ (3) $ 194
============= =========== ============= ============== ========= ==========
(1)The $10 million income tax benefit for US leasing during the three
and nine months ended June 30, 2003 is due to a reduction of deferred
tax liabilities relating to the Company's Canadian operations.
4. Sale of Assets
Leasing
Sales to GE
On January 24, 2002, the bankruptcy court approved the sale of the
Company's Electronics and Laboratory and Scientific equipment leasing businesses
to General Electric Capital Corporation ("GE Capital"). In accordance with SFAS
No. 121, the Company recorded a pre-tax charge of $250 million in the first
quarter of fiscal 2002 to reduce cost in excess of fair value to reflect the
difference between carrying value and estimated proceeds from the sale. On April
24, 2002, the Company and GE Capital completed a first closing on the sale of
approximately $794 million of assets, or approximately 81% of the Company's
Electronics and Laboratory and Scientific net leased assets at June 30, 2002.
The Company received approximately $548 million for the sale of those assets,
which included the assumption of approximately $258 million of related secured
debt and other obligations. On May 31, 2002, the Company and GE Capital
completed a second closing on the sale of Electronics and Laboratory and
Scientific assets, for which the Company received an additional approximately
$24 million, including the assumption of approximately $5 million of related
secured debt and other obligations. The purchase price for both closings was
subject to adjustment based upon the completion of a post-closing review of the
purchase price calculation. A portion of the purchase price was held back at
each closing pending the resolution of such review. Certain assets were not
purchased by GE Capital due to documentation, credit or other issues. The
Company, through its CAM group, continues to manage the sale or run-off of those
assets.
On April 18, 2002, the court approved the sale of the Company's Healthcare
leasing assets to GE Capital. In accordance with SFAS No. 121, the Company
recorded a pre-tax charge of $15 million in the second quarter of fiscal 2002 to
reduce cost in excess of fair value (primarily related to the write-down of
deferred assets) to reflect the difference between carrying value and estimated
proceeds from the sale. On May 31, 2002, the Company and GE Capital completed a
first closing on the sale of the Healthcare assets. The Company received
approximately $117 million for the sale of those assets, including the
assumption of approximately $46 million of related secured debt and other
liabilities. On June 30, 2002, the Company and GE Capital completed a second
closing on the sale of Healthcare assets for which the Company received an
additional $20 million, including the assumption of approximately $5 million of
related secured debt and other liabilities. The purchase price for both closings
was subject to adjustment based upon the completion of a post-closing review of
the purchase price calculations. A portion of the purchase price was held back
at each closing pending the resolution of such review. Certain Healthcare assets
were not purchased by GE Capital due to documentation, credit, or other issues.
The Company, through its CAM group, continues to manage the sale or run-off of
those assets.
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. 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 contingent payment obligations on the
Electronics equipment leasing business (the "Electronics Contingent Payment").
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 lease rental 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. As a result of the settlement of the purchase price holdback
and the settlement of the contingent payment obligations, the Company expects to
record a gain of approximately $7 million in its fourth fiscal quarter ended
September 30, 2003 and excepts to recognize approximately $29 million of
additional earnings as payments are received on the other consideration.
International Leasing
On October 18, 2002, the Company announced that it had sold its Swiss and
Austrian-based operations. These transactions closed on October 10, 2002 and
August 14, 2002, respectively. During the quarter ended September 30, 2002, the
Company recorded a $1 million pre-tax loss on the sale of its Swiss and
Austrian-based operations. For financial reporting purposes, the assets and
liabilities of the Swiss and Austrian-based operations are included in the
balance sheet as assets of discontinued operations and liabilities related to
assets of discontinued operations and the results of these operations are
included in the statement of earnings (loss) as discontinued operations.
On October 18, 2002, the Company announced that it, along with Comdisco
Global Holdings Company, Inc., had entered into an agreement for the sale of the
stock of the Company's French leasing subsidiaries, Comdisco France SA and
Promodata SNC, to Econocom Group SA/NV. Comdisco France S.A. was a wholly-owned
subsidiary of Comdisco Global Holding Company, Inc. and Promodata SNC was a
wholly-owned subsidiary of Comdisco France S.A. The sale of the leasing assets
closed on December 23, 2002 and proceeds in the amount of approximately Euro 69
million were received. The sale was effective as of August 31, 2002. In
accordance with SFAS No. 121, the Company recorded a pre-tax charge of $35
million in the fourth quarter of fiscal 2002 to reduce cost in excess of fair
value to reflect the difference between carrying value and estimated proceeds
from the sale. For financial reporting purposes, the assets and liabilities of
the French operations are included in the balance sheet as assets of
discontinued operations and liabilities related to assets of discontinued
operations and the results of these operations are included in the statement of
earnings (loss) as discontinued operations.
The Company has sold substantially all of its information technology (IT)
leasing assets in Australia and New Zealand to Allco, an Australian company
specializing in equipment and infrastructure finance and leasing. The bankruptcy
court approved the sale on April 18, 2002. Under the terms of the sale
agreement, Allco agreed to purchase most of the assets in Australia and New
Zealand in a series of closings. On June 28, 2002, the Company and Allco
completed the first closing on the sale of leased assets in Australia and New
Zealand, with the final closing completed on June 3, 2003. The Company received
approximately $32 million for the assets sold. In accordance with SFAS No. 121,
the Company recorded pre-tax charges of $6 million in the third quarter of
fiscal 2002 and $2 million in the one month ended July 31, 2002 to reduce cost
in excess of fair value to reflect the difference between carrying value and
estimated proceeds from the sale.
German Leasing Subsidiary
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 Investment SA, a
Swiss corporation. Comprendium Investment SA is controlled by Thomas Flohr, who
until January 2001 served as president of Comdisco Europe, a division of
Comdisco, Inc. 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 (approximately $42 million) over the 42 months following closing,
contingent 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 U.S. dollar equivalents were calculated using the average exchange rate of
the foreign exchange transactions completed by the Company on April 30, 2003.
For financial reporting purposes, at June 30, 2003, the contingent 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. During the three months ended
June 30, 2003 the Company repatriated funds from the sale of stock of its German
leasing subsidiary. As a result, the Company recorded a $24 million gain related
to the realization of deferred translation gains which is included in earnings
(loss) of discontinued operations.
US Leasing operations
US Leasing operations: 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. Management of the Company is currently engaged in such
negotiations. For financial reporting purposes, the assets ($192 million) and
liabilities ($93 million) of the Company's US Leasing operations as of June 30,
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 three and nine months
ended June 30, 2003 and 2002 are included in the statement of earnings (loss) as
discontinued operations.
Services
On November 15, 2001, the Company completed the sale of its Availability
Solutions business to SunGard Data Systems Inc. ("SunGard") for $825 million in
cash (plus approximately $25 million in cash for estimated working capital
received in excess of agreed-upon levels). At closing, $45 million of the
purchase price was put into escrow to satisfy any post-closing indemnity claims
and $15 million was put into escrow to satisfy any closing date working capital
shortfalls. Of the $45 million put into escrow, the Company has received
approximately $43 million and approximately $2 million continues to be held in
escrow pending resolution of disputed matters. During the second quarter of
fiscal 2002, the Company returned the entire $15 million working capital escrow
to SunGard to settle all outstanding working capital adjustment issues. The
terms of the sale were arrived at pursuant to the auction process approved by
the bankruptcy court. The sale included the purchase of assets of the U.S.
operations of the Availability Solutions business and the stock of its
subsidiaries in the United Kingdom, France and Canada. The sale excluded the
purchase of the stock of subsidiaries in Germany and Spain, as well as other
identified assets, including Network Services and IT CAP services business. The
Company has exited the Availability Solutions businesses in Germany and Spain.
The Company announced on February 5, 2002 that it had executed an agreement
for the sale of substantially all of its North American IT CAP Services
contracts to T-Systems Inc. ("T-Systems") for approximately $7 million, plus
consideration for future business with those accounts. The sale was approved by
the bankruptcy court on February 14, 2002 and closed on February 28, 2002.
During the second quarter of fiscal 2002, the Company recorded a $3 million
pre-tax loss on the sale to T-Systems.
Real Estate
The Company is actively pursuing the sale of its four owned real estate
holdings located in Rosemont, Illinois; Schaumburg, Illinois; Carlstadt, New
Jersey; and, Eching, Germany. Under fresh-start reporting, as of the July 31,
2002 balance sheet the real estate holdings were valued at zero net book value.
5. Reorganization
Expenses and income of the Predecessor company directly incurred or
realized as a result of the Chapter 11 cases have been segregated from the
normal operations and are disclosed separately. As a result of the Company's
emergence from bankruptcy on August 12, 2002, the Company ceased recording
bankruptcy related expenses and income within reorganization items. As such, the
Company does not have reorganization items for either the three or nine months
ended June 30, 2003. The major components for three and nine months ended June
30, 2002 are as follows (in millions):
PREDECESSOR
Three months Nine months
ended June 30,
2002 2002
----------------- --------------
Estimated loss on sale of leased
assets $ 6 $ 267
Professional fees 12 40
Lease rejection claims 27 27
Other asset write-downs 22 22
DIP fees -- 8
Loss on IT CAP sale -- 3
Interest income (10) (22)
----------------- --------------
$ 57 $ 345
================= ==============
Professional fees relate to legal, investment advisory and other
professional services. DIP facility fees relate to the write-off of previously
capitalized arrangement and structuring fees the Company incurred in connection
with the Debtor-In-Possession (DIP) facility (see Note 6 of Notes to
Consolidated Financial Statements). Interest income includes interest earned on
the Company's unrestricted cash balance that would not have been earned if the
Company had not filed for Chapter 11 protection.
6. Interest-Bearing Liabilities
In connection with the Filing, the Company obtained a two-year, $450
million senior secured Debtor-In-Possession financing facility ("DIP facility").
During the second quarter of fiscal 2002, the Company terminated the DIP
facility, without ever drawing down upon it.
In connection with the DIP facility, the Company paid an arrangement and
structuring fee of $9 million or 2% of the credit line. The Company was also
required to pay a 50 basis point annual unused line fee and annual
administration and collateral monitoring fees, as defined in the agreement. The
unamortized fee balance as of September 30, 2001 was expensed in the first
quarter of fiscal 2002 (see Note 5 of Notes to Consolidated Financial
Statements).
Upon emergence, the Company's general unsecured creditors received, and the
Disputed Claims Reserve was funded with, their pro-rata share of an initial cash
distribution of approximately $2.2 billion. In addition, general unsecured
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%. General unsecured creditors also received, and the
Disputed Claims Reserve also was funded with, their pro rata share of 100% of
the Common Stock of the reorganized Company.
On October 21, 2002, the Company redeemed the entire $400 million
outstanding principal amount of its Senior Notes. The Senior Notes were redeemed
at 100% of their principal amount plus accrued and unpaid interest from August
12, 2002 to the redemption date. Following the redemption of the Senior Notes,
the Company was required to make cash interest payments on the Subordinated
Notes. The terms of the Subordinated Notes provided for the interest to be
paid-in-kind through the issuance of additional Subordinated Notes while the
Senior Notes were outstanding. The initial interest payment date for the
Subordinated Notes was December 31, 2002.
The Company made several mandatory and optional redemptions of its
Subordinated Notes between November 14, 2002 and March 4, 2003. In addition, on
April 2, 2003, the Company made an optional partial redemption of $75 million
principal amount of its Subordinated Notes. On April 28, 2003, the Company made
the final redemption of $85 million principal amount of its Subordinated Notes.
Each of these partial redemptions of the Subordinated Notes were redeemed at a
price equal to 100% of their principal amount plus accrued and unpaid interest
to the redemption date.
The average daily borrowings outstanding during the nine months ended June
30, 2003 were approximately $502 million, with a related contractual weighted
average interest rate of 8.68%. This compares to average daily borrowings during
the nine months ended June 30, 2002 of approximately $4.6 billion, with a
contractual related weighted average interest rate of 6.61%. A significant
portion of the contractual interest for the nine months ended June 30, 2002 was
neither expensed nor paid due to the Company's bankruptcy proceedings.
The Company had contractual letters of credit outstanding totaling $3
million at June 30, 2003 to landlords of the Company's customers, principally
Ventures' customers, for the guarantee of their office space leases in the event
of default by the Company's customer. The Company believes that $3 million,
which is held in restricted cash, is the maximum potential amount of
undiscounted future payments for which the Company would be required to remit
under these guarantees. The Company has estimated a liability of approximately
$2 million related to these guarantees which is included in other liabilities in
the accompanying consolidated balance sheet.
7. Receivables
Receivables include the following as of June 30, 2003 and September 30,
2002 (in millions):
June 30, September 30,
2003 2002
----------------- ------------------
Notes $ 20 $ 118
Accounts 38 63
Other 42 79
----------------- ------------------
Total receivables 100 260
Allowance for credit losses (59) (162)
----------------- ------------------
Total $ 41 $ 98
================= ==================
Notes
The Company provided loans to privately held venture capital-backed
companies in networking, optical networking, software, communications,
internet-based and other industries. The Company's loans were generally
structured as equipment loans or subordinated loans. Substantially all of the
loans were made by Ventures.
At June 30, 2003 and September 30, 2002, Ventures had notes receivable of
approximately $20 million and $117 million, respectively. 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 provide current income from interest and fees.
Accounts
Accounts receivable represent lease rentals, notes receivable and equipment
sales proceeds due but unpaid as of the balance sheet date.
Other
Of the $42 million in Other at June 30, 2003, $27 million relates to
portions of the purchase price of leased assets acquired by GE Capital which
were held back at each closing pending resolution of a post-closing review (see
Note 4 of Notes to Consolidated Financial Statements). On August 4, 2003, the
Company announced that it and GE Capital had completed the post-closing review
and had agreed to adjustments on the final purchase price for the sale of its
Electronics, Laboratory & Scientific, and Healthcare leasing portfolios to GE
Capital. The Company received approximately $25 million for the settlement of
the purchase price holdbacks relating to the sales, which closed in 2002. See
Allowance below for a discussion of the reserve related to the GE Capital
receivable.
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. The allowance for credit losses at June 30, 2003 included a $4.5
million specific reserve related to the GE Capital receivable for the purchase
price holdback discussed above in Other. In estimating the reserve component for
unidentified losses within the receivables and lease portfolio, management
relies on historical experience, adjusted for any known trends, including
industry trends, in the portfolio.
Changes in the allowance for credit losses for the nine months ended June
30, 2003 and 2002 were as follows (in millions):
Consolidated Ventures
--------------------------------- ------------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------------| ------------------ ---------------| --------------
Balance at beginning of period $ 162 | $ 245 $ 110 | $ 202
Provision for credit losses (74) | 112 (52) | 115
Net credit losses (29) | (131) (24) | (175)
--------------| ------------------ ---------------| --------------
Balance at end of period $ 59 | $ 226 $ 34 | $ 142
==============| ================== ===============| ==============
The negative provision for credit losses for the nine months ended June 30,
2003 is due to better than anticipated collection results on the Company's
assets to date. The balance at the end of the period represents management's
estimate of the reserves necessary for the Company's remaining assets as of June
30, 2003.
8. Equity Securities
The Company provided financing to privately held companies, in networking,
optical networking, software, communications, internet-based and other
industries through the purchase of equity securities. Substantially all of these
investments were made by the Company's Ventures group. For equity investments
which are non-quoted investments, the Company's policy is to regularly review
the assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on equity securities when events and circumstances indicate that such
assets might be impaired. Impairments in equity securities totaled $15 million
and $70 million during the nine months ended June 30, 2003 and 2002,
respectively. The Company's publicly traded security holdings were immaterial at
June 30, 2003 and September 30, 2002.
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). Gross realized gains from the sale of equity
investments were $1 million and $5 million during the first nine months of
fiscal 2003 and 2002, respectively. Net realized gains from the sale of equity
investments were $1 million and $2 million during the nine months ended June 30,
2003 and 2002, respectively. Net realized gains would be included in other
revenue in the consolidated statements of earnings (loss).
The Company records the proceeds received from the sale or liquidation of
warrants received in conjunction with its lease or other financings as income on
the trade date. Warrant sale proceeds, which are included in other revenue in
the consolidated statements of earnings (loss), were $1 million and $14 million
for the nine months ended June 30, 2003 and 2002, respectively.
9. Stockholders' Equity
When the Company emerged from bankruptcy, 4,200,000 shares of new common
stock were issued. As of June 30, 2003, the Company had 4,197,100 shares of
common stock outstanding and 2,900 shares of common stock held in treasury.
The Predecessor company's common stock was cancelled on August 12, 2002.
The Predecessor company's common shareholders were entitled to distributions of
Contingent Distribution Rights under the Plan. However, in order to have been
eligible to receive any distribution of Contingent Distribution Rights, those
former common shareholders must have properly completed a transmittal form and
have surrendered all of their shares of the Predecessor company's common stock
to Mellon Investors Services LLC prior to August 12, 2003.
When the present value of distributions to certain former creditors of
Comdisco, Inc. reaches a threshold level of percentage recovery established
pursuant to the Plan, holders of Contingent Distribution Rights were entitled to
receive payments from the Company on the terms set forth in the Plan and further
clarified in the Contingent Distribution Rights Agreement and in two bankruptcy
court orders recently entered (incorporated by reference to Exhibits 99.3 and
99.4 filed with the Company's Quarterly Report on Form 10-Q dated May 14, 2003,
as filed with the Commission on May 14, 2003). The Company had approximately
152.8 million Contingent Distribution Rights outstanding as of June 30, 2003.
In May 2003, the Company distributed approximately $307 million to
stockholders in the form of a dividend paid on the Company's common stock. In
June 2003, the Company distributed approximately $60 million to stockholders in
the form of a dividend paid on the Company's common stock. Comdisco intends to
treat both the distributions for income tax purposes as part of a series of
liquidating distributions in complete liquidation of the Company.
In May 2003, the Company made a $2.7 million distribution with respect to
the CDRs. An additional CDR distribution of approximately $2.5 million was made
in June 2003.
Stockholders' equity consists of the following (in millions):
Additional Accumulated
Common paid-in other compre- Retained
stock capital hensive income earnings Total
- ----------------------------------------- -------------- ---------- --------------- --------- ----------
Successor Company
Balance at September 30, 2002 $ -- $ 413 $ 4 $ 224 $ 641
Net income for the nine months ended
June 30, 2003 85 85
Translation adjustment (4) (4)
----------
Total comprehensive income 81
Liquidating dividend (58) (309) (367)
-------------- ---------- --------------- --------- ----------
Balance at June 30, 2003 $ -- $ 355 $ -- $ -- $ 355
============== ========== =============== ========= ==========
Total comprehensive income (loss) consists of the following (in
millions):
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
Three months Nine months
ended June 30, ended June 30,
2003 2002 2003 2002
------------- --------------- ------------ ---------------
Foreign currency translation adjustments $ (38) | $ 43 $ (4) | $ 31
Unrealized gains (losses) on derivative | |
instruments -- | -- -- | (2)
Unrealized gains (losses) on securities: | |
Unrealized holding gains (losses) arising | |
during the period 1 | 1 2 | 17
Reclassification adjustment for gains | |
included in earnings before | |
income taxes (benefit) (1) | (7) (2) | (16)
------------- | --------------- ------------ | ---------------
Net unrealized gains (losses), before | |
income taxes (benefit) -- | (6) -- | 1
Income taxes (benefit) -- | (2) -- | --
------------- | --------------- ------------ | ---------------
Net unrealized gains (losses) -- | (4) -- | 1
------------- | --------------- ------------ | ---------------
Other comprehensive income (loss) (38) | 39 (4) | 30
Net earnings (loss) 40 | (97) 85 | (203)
------------- | --------------- ------------ | ---------------
Total comprehensive income (loss) $ 2 | $ (58) $ 81 | $ (173)
============= | =============== ============ | ===============
10. Other Financial Information
Other liabilities consists of the following (in millions):
June 30, September 30,
2003 2002
------------------- -----------------------
Accrued compensation $ 43 $ 27
Contingent Distribution Rights 42 10
Other:
Customer advances, deposits 20 30
Taxes other than income 6 8
Accrued interest - 13
Other, miscellaneous 7 19
------------------- ---------------------
Total Other 33 70
------------------- ---------------------
$ 118 $ 107
=================== =====================
The liability for CDRs has increased from $10 million to $42 million from
September 30, 2002 to June 30, 2003 respectively. The liability relating to CDRs
is based on distributions made to former creditors of Comdisco, Inc., which is
affected by both the value received on the liquidation of Company assets and the
resolution of disputed claims still pending in the bankruptcy estate of
Comdisco, Inc.
The portion of the CDR liability relating to the value received on Company
assets has increased due to favorable returns to date. As previously reported,
Comdisco was required to adjust the balance sheet to fair value upon emergence
from bankruptcy, which was July 31, 2002 for financial statement purposes. As
Company returns exceed the fair value amounts, the expected distributions to
former creditors of Comdisco, Inc. will increase causing the liability related
to CDRs to increase.
The portion of the CDR liability relating to the resolution of disputed
claim has increased primarily due to the success in resolving claims at less
than estimated amounts. Claims remaining in the Disputed Claim Reserve (as
defined in the Plan) as of August 14, 2003, which have not been allowed or
otherwise resolved, were estimated by the Company in the amount of $303 million
pursuant to bankruptcy court authority. As these claims are allowed or otherwise
resolved, distributions may be made to the former creditors of Comdisco, Inc.
that would entitle holders of CDRs to receive a payment. Since the minimum
threshold level has been achieved, the amounts due to contingent rights holders
will be significantly greater when disputed claims are disallowed, in whole or
in part, because supplemental distributions related to such disallowed claims
are entirely incremental to the recovery to formerly allowed Creditors of
Comdisco, Inc. In contrast, when disputed claims are allowed, the amounts due
CDRs holders will only be based on the amount distributed to such newly allowed
claimholder in excess of the threshold level. The minimum threshold level where
sharing begins is 85% as defined in the Plan. Payments by the Company in respect
of CDRs are made from cash on hand and not from funds released from the Disputed
Claim Reserve. Accordingly, the Company expects to maintain cash reserves to
make required payments on the CDRs resulting from the distribution of funds from
the Disputed Claim Reserve.
Other assets consists of the following (in millions):
June 30, September 30,
2003 2002
------------------- ---------------------
Electronics contingent payment $ 36 $ 35
Other:
Deferred commissions -- 7
Deferred costs 9 14
Other, miscellaneous 4 10
------------------- -------------------
Total Other 13 31
------------------- -------------------
$ 49 $ 66
=================== ===================
On August 4, 2003, the Company announced that GE Capital had agreed to
settle its future contingent payment obligations based on various Electronics
portfolio performance criteria by making a single $40 million cash payment and
providing other consideration valued by the Company at approximately $29
million. The other consideration primarily consists of a participation in
certain lease rental payments previously purchased by GE Capital.
11. Financial Information by Business Segment and Geographic Area
Following the Company's emergence from bankruptcy on August 12, 2002, the
Company's operations were reorganized into four reportable business groups.
These business groups are: (i) US Leasing, which includes leasing operations in
the US and Canada and is managed by Comdisco, Inc.; (ii) European IT Leasing,
which is managed by Comdisco Global Holdings Company, Inc.; (iii) Ventures,
which is managed by Comdisco Ventures, Inc.; and (iv) the Corporate Asset
Management group. The Company's CAM group is responsible for the sale and
run-off of certain assets held by Comdisco Global Holding Company, Inc.,
Comdisco, Inc. and their subsidiaries that remained after certain pre-emergence
bankruptcy asset sales. The CAM group's operations are managed through Comdisco,
Inc. For business segment reporting purposes, the CAM group also includes
various corporate assets and liabilities managed by Comdisco Holding Company,
Inc. corporate staff.
For financial reporting purposes, the assets ($192 million) and liabilities
($93 million) of the Company's US Leasing operations as of June 30, 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 three and nine months
ended June 30, 2003 and 2002 are included in the statement of earnings (loss) as
discontinued operations.
The Company evaluates the performance of its operating segments based on
cash flow from operations, revenues and earnings (loss) before income taxes.
Intersegment sales are not significant and all intersegment balances have been
eliminated in the summarized financial information presented below. The
information for 2002 has been restated from the prior year's presentation in
order to conform to the 2003 presentation. Cash flow from operations for 2002
are not available.
The following table presents cash flow from operations (in millions):
SUCCESSOR SUCCESSOR
Three months Nine months
ended ended
June 30, June 30,
2003 2003
------------------- ------------------
European IT Leasing $ 6 $ (4)
CAM group 34 42
Ventures 60 235
Discontinued operations 427 981
------------------- ------------------
Total $ 527 $ 1,254
=================== ==================
The following table presents segment revenues and earnings (loss)
before income taxes (in millions):
SUCCESSOR PREDECESSOR
Three months ended
June 30,
2003 2002
---------------------- | ----------------------
REVENUES: |
European IT Leasing $ 8 | $ 22
CAM group 47 | 84
Ventures 22 | 66
---------------------- | ----------------------
$ 77 | $ 172
====================== | ======================
|
SEGMENT EARNINGS (LOSS): |
European IT Leasing $ (16) | $ 4
CAM group 2 | (64)
Ventures 14 | (31)
---------------------- | ----------------------
$ -- | $ (91)
====================== | ======================
SUCCESSOR PREDECESSOR
Nine months ended
June 30,
2003 2002
---------------------- | ---------------------
REVENUES: |
European IT Leasing $ 31 | $ 40
CAM group 102 | 454
Ventures 106 | 225
---------------------- | ----------------------
$ 239 | $ 719
====================== | ======================
|
SEGMENT EARNINGS (LOSS): |
European IT Leasing $ (19) | $ (4)
CAM group (15) | (289)
Ventures 39 | (164)
---------------------- | ----------------------
$ 5 | $ (457)
====================== | ======================
The following table presents total assets for each of the Company's
reportable segments (in millions):
June 30, September 30,
2003 2002
------------------- ------------------
European IT Leasing $ 34 $ 42
CAM group 271 807
Ventures 68 241
Assets of discontinued
operation held for sale 236 1,251
------------------- ------------------
Total $ 609 $ 2,341
=================== ==================
The following table presents revenue by geographic location based on
the location of the Company's local offices (in millions):
SUCCESSOR PREDECESSOR
For the three months ended
June 30,
2003 2002
------------------- | ----------------------
North America $ 40 | $ 110
Europe 37 | 56
Pacific Rim -- | 6
------------------- | ----------------------
Total $ 77 | $ 172
=================== | ======================
SUCCESSOR PREDECESSOR
For the nine months ended
June 30,
2003 2002
------------------- | ----------------------
North America $ 159 | $ 491
Europe 77 | 108
Pacific Rim 3 | 120
------------------- | ----------------------
Total $ 239 | $ 719
=================== | ======================
The following table presents total assets by geographic location based
on the location of the Company's local offices (in millions):
June 30, September 30,
2003 2002
------------------- ----------------------
North America $ 480 $ 1,490
Europe 102 799
Pacific Rim 27 52
------------------- ----------------------
Total $ 609 $ 2,341
=================== ======================
Approximately $22 million of the assets in the Pacific Rim at June 30, 2003
and September 30, 2003 were related to the holdbacks and contingent payment
obligation discussed in Note 3 of Notes to Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMDISCO HOLDING COMPANY INC. WAS FORMED ON AUGUST 8, 2002 FOR THE PURPOSE
OF SELLING, COLLECTING OR OTHERWISE REDUCING TO MONEY IN AN ORDERLY MANNER THE
REMAINING ASSETS OF THE COMPANY AND ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES,
INCLUDING COMDISCO, INC. THE COMPANY'S BUSINESS PURPOSE IS LIMITED TO THE
ORDERLY SALE OR RUN-OFF OF ALL OF ITS REMAINING ASSETS. PURSUANT TO THE PLAN OF
REORGANIZATION AND RESTRICTIONS CONTAINED IN ITS CERTIFICATE OF INCORPORATION,
THE COMPANY IS SPECIFICALLY PROHIBITED FROM ENGAGING IN ANY BUSINESS ACTIVITIES
INCONSISTENT WITH ITS LIMITED BUSINESS PURPOSE. WITHIN THE NEXT FEW YEARS, IT IS
ANTICIPATED THAT THE COMPANY WILL HAVE REDUCED ALL OF ITS ASSETS TO CASH AND
MADE DISTRIBUTIONS OF ALL AVAILABLE CASH TO ITS COMMON STOCK AND CONTINGENT
DISTRIBUTION RIGHTS HOLDERS IN THE MANNER AND PRIORITIES SET FORTH IN THE PLAN.
AT THAT POINT, IT IS EXPECTED THAT THE COMPANY WILL CEASE OPERATIONS AS A GOING
CONCERN AND THAT NO FURTHER DISTRIBUTIONS WILL BE MADE.
AS A RESULT OF THE REORGANIZATION AND THE IMPLEMENTATION OF FRESH-START
REPORTING, AS FURTHER DESCRIBED HEREIN, THE COMPANY'S RESULTS OF OPERATIONS
AFTER JULY 31, 2002 ARE NOT COMPARABLE TO RESULTS REPORTED IN PRIOR PERIODS FOR
COMDISCO, INC.
General
Overview
On July 16, 2001, Comdisco, Inc. and 50 of its domestic subsidiaries
voluntarily filed for bankruptcy. Prior to bankruptcy, the Company provided
technology services including leasing to customers worldwide, offered leasing to
key vertical industries and, through its venture financing group, provided
equipment leasing and other financing and services to venture capital-backed
companies. Comdisco Holding Company, Inc., as the successor company to Comdisco,
Inc., emerged from bankruptcy under a confirmed plan of reorganization that was
effective on August 12, 2002. In accordance with the Plan, Comdisco Holding
became the successor to Comdisco, Inc. In addition, the Company's operations
were reorganized into four reportable groups of business: US Leasing, European
IT Leasing; the Corporate Asset Management group ("CAM group"); and Ventures. As
previously discussed within the Note 3 of Notes to the Consolidated Financial
Statements, 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. As such, the
segment has been classified as a discontinued operation at June 30, 2003.
Since the Company emerged from Chapter 11 bankruptcy proceedings on August
12, 2002, the Company's business activities have been limited to the orderly
sale or run-off of all of its existing asset portfolios. Pursuant to the Plan
and restrictions contained in its certificate of incorporation, the Company is
specifically prohibited from engaging in any business activities inconsistent
with its limited business purpose. The Company has not engaged in any new
leasing or financing activities, except for previously existing customer
commitments and to restructure existing equipment leases and loans to maximize
the value of the Company's assets.
All funds generated from the Company's remaining asset portfolios 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,
to make significant investments in new or additional assets. The Company
continually evaluates opportunities for the orderly sale and run-off of its
remaining assets, including the sale of one or more of its leasing asset
portfolios. Accordingly, within the next few years, it is anticipated that the
Company will have reduced all of its assets to cash and made distributions of
all available cash to its Common Stock and Contingent Distribution Rights
holders in the manner and priorities set forth in the Plan. At that point, it is
expected that the Company will cease operations as a going concern and that no
further distributions will be made.
Fresh-Start Reporting
Upon its emergence from bankruptcy on August 12, 2002, the Company adopted
fresh-start reporting in accordance with Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7")
effective as of July 31, 2002 for financial reporting purposes. SOP 90-7
requires the Company to allocate the reorganization value of the reorganized
Company to its assets, and to state liabilities existing at the Plan
confirmation date at present values of amounts to be paid determined at
appropriate current interest rates. As a result, the adjustments made in
accordance with SOP 90-7 have materially impacted the financial statements of
the Company.
For financial reporting purposes only, the "effective date" of the
emergence from bankruptcy was selected as the close of business on July 31,
2002. Accordingly, the effects of the adjustments on the reported amounts of
individual assets and liabilities resulting from the adoption of fresh-start
reporting are reflected in the Company's financial statements as of July 31,
2002. As a result of the reorganization and the recording of the restructuring
transaction and the implementation of fresh-start reporting pursuant to SOP
90-7, the Company's results of operations after July 31, 2002 are not comparable
to results reported in prior periods for Comdisco, Inc.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires 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
financial statements. The Securities and Exchange Commission issued Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" ("FRR No. 60") which recommends that companies provide
additional disclosure and analysis of those accounting policies considered most
critical.
The Company believes the following to be among the most critical judgment
areas in the application of its accounting policies:
o Fresh-Start Reporting: Upon the emergence from bankruptcy proceedings,
the Company adopted fresh-start reporting which resulted in material
adjustments to the historical carrying amounts of the Company's assets
and liabilities. Fresh-start reporting was applied in accordance with
SOP 90-7, which required the Company to allocate the reorganization
value to its assets and liabilities based upon their estimated fair
value in accordance with the procedures specified by Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS
No. 141"). The fair values of the assets as determined for fresh-start
reporting were based on estimates of anticipated future cash flows of
assets discounted at rates consistent with the discount rates used in
the Plan. Liabilities existing at the Plan confirmation date are
stated at the present values of amounts to be paid discounted at
appropriate current rates. Deferred taxes are reported in conformance
with existing generally accepted accounting principles. Debt issued in
connection with the Plan is recorded at the stated value. The
difference between the net fair value of the assets and the
liabilities existing at the confirmation date (excluding restructured
debt in accordance with the Plan) and the reorganization value is
"Excess of the Net Fair Value over Reorganization Value." "Excess of
the Net Fair Value over Reorganization Value" is subject to the
provisions of SFAS No. 141. Under SFAS No. 141, the excess of the net
fair value is used to reduce certain assets, as defined by SFAS No.
141 (generally long-lived non-financial assets), to zero. Any excess
net fair value remaining after the reduction is recognized as an
extraordinary gain. The determination of the net fair values of the
assets and liabilities is subject to significant estimation and
assumptions. Actual results could differ from the estimates made.
o Ventures Investments: Ventures provided venture leases, venture debt
and direct equity financing to venture capital-backed companies
(collectively, the "investments"). Venture leases are leases with
warrants that were intended to compensate Ventures for providing
equipment leases with terms having lower periodic rental payments than
leases without warrants. Similarly, venture debt is a high-risk loan
with warrants or a conversion-to-equity feature with more flexible
terms than more traditional debt financing. Direct equity financings
involved Ventures' purchase of convertible preferred stock and common
stock from its customers. The Company carries the investments at the
lower cost or net realizable value. The Company regularly estimates
the net realizable value of these investments by adjusting their
carrying value for known trends and historical collection experience.
This estimate could require further adjustment based on changing
circumstances, including changes in the economy or in the particular
circumstances of a specific investment.
o Allowance for Doubtful Accounts: The Company maintains an allowance
for doubtful accounts. This allowance reflects management's estimate
of the amount of the Company's receivables that it will be unable to
collect and is based on current trends and historical collection
experience. The estimate could require adjustments based on changing
circumstances, including changes in the economy or in the particular
circumstances of individual customers. Accordingly, the Company may be
required to increase or decrease the amount of allowance.
o Residual Value of Rental Equipment: Direct financing and sale-type
leased assets consist of the present value of the future minimum lease
payments plus the present value of the residual (collectively referred
to as the "Net Investment"). Residual is the estimated fair market
value of the equipment on lease at lease termination. Revenue on
operating leases consists of the contractual lease payments which is
recognized on a straight-line basis over the lease term. Costs and
expenses are principally depreciation of the equipment. Depreciation
is recognized on a straight-line basis over the lease term to the
Company's estimate of the equipment's fair market value at lease
termination, commonly referred to as "residual value." In estimating
the equipment's fair value at lease termination, the Company relies on
historical experience by equipment type and manufacturer and, where
available, valuations by independent appraisers, adjusted for known
trends. The Company's estimates are reviewed 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 provided in the Company's
Annual Report on Form 10-K for the year ended September 30, 2002.
Basis of Presentation
The Company and 50 of its domestic subsidiaries filed voluntary petitions
for relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Northern District of Illinois on July 16, 2001.
Prior to emerging from Chapter 11 on August 12, 2002, Comdisco, Inc. operated
its business as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court. The reorganized Company adopted fresh-start reporting
and gave effect to its emergence as of July 31, 2002 for financial reporting
purposes.
Under fresh-start reporting, the final consolidated balance sheet as of
July 31, 2002 became the opening consolidated balance sheet of the reorganized
Company. Since fresh-start reporting has been reflected in the accompanying
consolidated balance sheet as of June 30, 2003 and September 30, 2002, the
consolidated balances as of those dates are not comparable in certain material
respects to any such balance sheet for any period prior to July 31, 2002. In
addition, Comdisco, Inc.'s results of operations prior to July 31, 2002 are not
comparable to the Company's results of operations after its emergence from
bankruptcy due to the adoption of fresh-start reporting.
Recent Developments
US Leasing operations: 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. Management of the Company is currently engaged in such
negotiations. For financial reporting purposes, the assets ($192 million) and
liabilities ($93 million) of the Company's US Leasing operations as of June 30,
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 three and nine months
ended June 30, 2003 and 2002 are included in the statement of earnings (loss) as
discontinued operations.
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 contingent payment obligations
on the Electronics equipment leasing business. 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 lease rental 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. As a
result of the settlement of the purchase price holdback and the settlement of
the contingent payment obligations, the Company expects to record a gain of
approximately $7 million in its fourth fiscal quarter ended September 30, 2003
and expects to recognize approximately $29 million of additional earnings as
payments are received on the other consideration.
Results of Operations
Certain reclassifications have been made to the prior period financial
statements to conform to the presentation used in the June 30, 2003 consolidated
financial statements.
As a result of the reorganization, the recording of the restructuring
transactions, the asset disposition transactions and the implementation of
fresh-start reporting pursuant to SOP 90-7, the Company's results of operations
for the three and nine months ended June 30, 2003 are not comparable to the
results of operations for the three and nine months ended June 30, 2002.
In May 2003, the Company distributed approximately $307 million to
stockholders in the form of a dividend paid on the Company's common stock. In
June 2003, the Company distributed approximately $60 million to stockholders in
the form of a dividend paid on the Company's common stock. Comdisco intends to
treat both the distributions for income tax purposes as part of a series of
liquidating distributions in complete liquidation of the Company.
In May 2003, the Company made a $2.7 million distribution with respect to
the CDRs. An additional CDR distribution of approximately $2.5 million was made
in June 2003.
The information in this section should be read in conjunction with the
consolidated financial statements and the related notes thereto.
Three months Ended June 30, 2003 Compared to Three months Ended June 30, 2002
Total Revenue
Total revenue decreased 55 percent to $77 million for the three months
ended June 30, 2003 from $172 million for the three months ended June 30, 2002.
The decrease is due to lower revenues from all of the Company's operations.
Since June 30, 2002, the Company has sold 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). As a result of these sales, the Company has significantly less
revenue producing assets. 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.
Additional revenue information for each of the Company's current three
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 decreased 67 percent to $27 million for the three
months ended June 30, 2003 from $83 million for the three months ended June 30,
2002. The decrease in total leasing revenue is primarily due to the continued
orderly run-off of the lease base, the absence of significant new business
volume and the sale of leasing assets rather than the extension of existing
leases or the re-leasing of the Company's inventory of equipment. Total leasing
revenue from the Company's European IT Leasing operations decreased 55 percent
to $5 million for the three months ended June 30, 2003. Ventures total leasing
revenue decreased 70 percent to $14 million for the three months ended June 30,
2003. Total leasing revenue from the Company's CAM group decreased 68 percent to
$8 million for the three months ended June 30, 2003.
Sales Revenue
The Company generates sales from two sources: (a) the sale of used
equipment from its inventory and (b) the sale of equipment either at original
lease termination or during the original lease. These transactions may be with
existing lessees or, when equipment is returned, with new customers. Given the
Company's limited business purpose, it conducts these types of sales
transactions rather than extending existing leases or re-leasing its inventory
of equipment. Revenue from sales decreased 14 percent to $38 million for the
three months ended June 30, 2003 from $44 million for the three months ended
June 30, 2002. This decrease is due primarily to the declining lease base and
the related declines in equipment available for sale. In addition, generally
declining values for electronics equipment in inventory has also resulted in
lower revenues on these sales. European IT Leasing sales revenue was $1 million
for both the three months ended June 30, 2003 and June 30, 2002. Ventures sales
revenue increased 17 percent to $7 million for the three months ended June 30,
2003 primarily due to a number of mid-term lease buyouts in the current year
quarter. CAM group sales revenue decreased 19 percent to $30 million for the
three months ended June 30, 2003.
Technology Services Revenue
Revenue from technology services decreased 82 percent to $2 million for the
three months ended June 30, 2003 from $11 million for the three months ended
June 30, 2002. The decrease is primarily the result of the continued wind down
of the Company's remaining network services business.
Other Revenue
Other revenue decreased 71 percent to $10 million for the three months
ended June 30, 2003 from $34 million for the three months ended June 30, 2002.
Interest income on notes decreased 83 percent to $1 million for the three months
ended June 30, 2003 from $6 million for the three months ended June 30, 2002.
Foreign exchange gain is due primarily to the strengthening of the Euro compared
to the U.S dollar during the three months ended June 30, 2003 (transaction
gains) and the realization of deferred translation gains related to dividends
received from its Canadian operations. Transaction gains and losses arise from
the impact of exchange rate fluctuations on transactions denominated in a
currency other than the functional currency.
The components of other revenue were as follows (in millions):
SUCCESSOR PREDECESSOR
For the three months ended
June 30,
2003 2002
------------------ | -----------------------
|
Sale of equity holdings $ 1 | $ 7
Interest income on notes 1 | 6
Foreign exchange gain 6 | 18
Other 2 | 3
------------------ | -----------------------
Total other revenue $ 10 | $ 34
================== | =======================
Total Costs and Expenses
Total operating costs and expenses decreased 71 percent to $77 million for
the three months ended June 30, 2003 from $263 million for the three months
ended June 30, 2002. Additional cost and expense information for each of the
Company's current business segments is set forth below.
Total Leasing Costs and Expenses
Total leasing costs and expenses decreased 67 percent to $23 million for
the three months ended June 30, 2003 from $69 million for the three months ended
June 30, 2002. The decrease in total leasing costs and expenses is primarily due
to the continued orderly run-off of the lease base, the absence of significant
new business volume and the 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 the Company's European IT Leasing operations
decreased 50 percent to $4 million for the three months ended June 30, 2003.
Ventures total leasing costs and expenses decreased 71 percent to $12 million
for the three months ended June 30, 2003. Total leasing costs and expenses from
the Company's CAM group decreased 63 percent to $7 million for the three months
ended June 30, 2003.
Sales Costs and Expenses
Sales costs and expenses decreased 48 percent to $32 million for the
three months ended June 30, 2003 from $62 million for the three months ended
June 30, 2002. The decrease in the three months ended June 30, 2003 compared to
the three months ended June 30, 2002 reflects reductions in the volume of sales
due to continued reductions in assets available for sale. Generally declining
fair market values for electronics equipment has resulted in losses on sales of
such equipment. Equipment inventory is carried at the lower of net book value at
lease term or fair value. European IT Leasing sales costs and expenses were $1
million for both the three months ended June 30, 2003 and June 30, 2002.
Ventures sales costs and expenses decreased 33 percent to $2 million for the
three months ended June 30, 2003. CAM group sales costs and expenses decreased
50 percent to $29 million for the three months ended June 30, 2003.
Technology Services Costs and Expenses
Technology services costs and expenses decreased 83 percent to $1 million
for the three months ended June 30, 2003 from $6 million for the three months
ended June 30, 2002. The decrease is primarily the result of the continued wind
down of the Company's remaining network services business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 67 percent to $40
million for the three months ended June 30, 2003 from $24 million for the three
months ended June 30, 2002. The following table summarizes selling, general and
administrative expenses (in millions):
SUCCESSOR PREDECESSOR
For the three months ended
June 30,
2003 2002
------------------ | -----------------
Compensation and benefits $ 9 | $ 14
Outside professional services 6 | 6
Contingent Distribution Rights 22 | --
Other expenses 3 | 4
------------------ | -----------------
$ 40 | $ 24
================== | =================
The decrease in compensation and benefits in the current year compared to
the year earlier period reflect the continued reduction in personnel. As of July
16, 2001, the date the Company filed bankruptcy, the Company had approximately
2,100 domestic employees. As of the date of emergence from bankruptcy, the
Company had approximately 400 domestic employees. As of June 30, 2003, the
Company had approximately 230 domestic employees.
The Company expensed $22 million relating to the accrual for Contingent
distribution rights for the three months ending June 30, 2003.
Write-down of Equity Securities
The charge for write-down of equity securities was $7 million for the three
months ended June 30, 2003 compared to $27 million for the three months ended
June 30, 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 decreased to $(27) million for the three months ended June
30, 2003 from $17 million for the three months ended June 30, 2002. The decrease
is primarily due to better than anticipated collection results in the three
months ended June 30, 2003 on the Company's assets and management's estimate of
the reserves necessary for the Company's remaining assets as of June 30, 2003
(See Note 7 of Notes to Consolidated Financial Statements).
Interest Expense
Interest expense was $1 million for both the three months ended June 30,
2003 and June 30, 2002. Interest expense on the Company's Subordinated Notes was
minimal during the three months ended June 30, 2003 due to the redemptions of
its Subordinated Notes (see Note 6 of Notes to Consolidated Financial Statements
and "Financial Condition" for a discussion of the Subordinated Notes).
As of July 16, 2001, the Predecessor company ceased accruing interest on
its unsecured debt obligations. Contractual interest on all obligations for the
three months ended June 30, 2002 was $59 million in excess of recorded interest
expense included in the accompanying financial statements.
Reorganization Items
Charges for reorganization items were $57 million for the three months
ended June 30, 2002. See Note 5 of Notes to Consolidated Financial Statements,
which is incorporated in this section by reference, for a discussion of
reorganization items.
Net Earnings (Loss) from Continuing Operations
Net earnings from continuing operations were $1 million in the three months
ended June 30, 2003, or $0.24 per common share, compared to a net loss of $91
million or $0.60 per share in the three months ended June 30, 2002. The decrease
in the net loss from continuing operations in the three months ended June 30,
2003 compared to the three months ended June 30, 2002 is primarily the result
the reorganization expenses incurred in the prior year period, reduced
provisions for credit losses, improved earnings contributions from sales,
partially offset by accruals for the Company's Contingent Distribution Rights
liability.
Discontinued Operations
Net earnings from discontinued operations were $39 million for the three
months ended June 30, 2003 compared to a net loss from discontinued operations
of $6 million for the three months ended June 30, 2002.
o US Leasing operations: 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. Management of the Company is
currently engaged in such negotiations. The results of operations for
this business segment have been classified as discontinued operations
and prior year periods have been restated. Revenue was $55 million
during the three months ended June 30, 2003 compared to $81 million
during the three months ended June 30, 2002. Costs and expenses for US
Leasing were $58 million during the three months ended June 30, 2003
compared to the $101 million during the three months ended June 30,
2002. The decrease in revenue in the current year period compared to
the year earlier period is due to declines in revenue producing assets
as a result of mid-term sales, leased asset sales and the runoff of
the lease portfolio. The decrease in costs and expenses in the three
months ended June 30, 2003 compared to the year earlier period is due
to the declines in revenue producing assets, reductions in personnel
and reductions in the allowance for doubtful accounts. Net earnings
for US Leasing were $7 million in the three months ended June 30, 2003
compared to a net loss of $20 million in the three months ended June
30, 2002.
o German leasing subsidiary: Revenue was $1 million and $58 million
during the three months ended June 30, 2003 and 2002, respectively.
The revenue recognized in the current quarter relates to foreign
currency transaction gains. Costs and expenses for these operations
were $39 million during the three months ended June 30, 2002. During
the nine months ended June 30, 2003 the Company repatriated funds from
the sale of stock of its German leasing subsidiary. As a result, the
Company recorded a $24 million gain related to the realization of
deferred translation gains. Net earnings were $25 million in the three
months ended June 30, 2003 compared to $14 million in the three months
ended June 30, 2002.
o International Leasing: Revenue from discontinued International Leasing
operations was $41 million during the three months ended June 30,
2002. Costs and expenses for these operations were $38 million during
the three months ended June 30, 2002. During the three months ended
June 30, 2003 the Company recorded a $7 million gain on the sales as a
result the realization of deferred translation gains. Net earnings
were $7 million and $3 million in the three months ended June 30, 2003
and 2002, respectively.
o Prism Communications: Continued declines in the telecommunications
industry in the three months ended June 30, 2002, negatively impacted
the market for telecommunications equipment. As a result, the Company
recorded a charge of $3 million to write-down these assets to current
fair market value.
Net Earnings (Loss)
Net earnings for the three months ended June 30, 2003 were $40 million
compared to a net loss of $(97) million for the three months ended June 30,
2002.
Nine months Ended June 30, 2003 Compared to Nine months Ended June 30, 2002
Total Revenue
Total revenue decreased 67 percent to $239 million for the nine months
ended June 30, 2003 from $719 million for the nine months ended June 30, 2002.
The decrease is due to lower revenues from all of the Company's operations.
Since June 30, 2002, the Company has sold 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). As a result of these sales, the Company has significantly less
revenue producing assets. 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.
Additional revenue information for each of the Company's current three
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 decreased 74 percent to $122 million for the nine
months ended June 30, 2003 from $461 million for the nine months ended June 30,
2002. The decrease in total leasing revenue is primarily due to the continued
orderly run-off of the lease base, the absence of significant new business
volume and the sale of leasing assets rather than the extension of existing
leases or the re-leasing of the Company's inventory of equipment. Total leasing
revenue from the Company's European IT Leasing operations decreased 54 percent
to $12 million for the nine months ended June 30, 2003. Ventures total leasing
revenue decreased 53 percent to $80 million for the nine months ended June 30,
2003. Total leasing revenue from the Company's CAM group decreased 89 percent to
$30 million for the nine months ended June 30, 2003.
Sales Revenue
Revenue from sales decreased 57 percent to $70 million for the nine months
ended June 30, 2003 from $162 million for the nine months ended June 30, 2002.
This decrease is due primarily to the declining lease base and the completion of
a sale to a single customer in the CAM group, which generated $38 million of
sales revenue during the nine months ended June 30, 2002. European IT Leasing
sales revenue increased 200 percent to $9 million for the nine months ended June
30, 2003 primarily due to one significant mid-term lease buyout in the second
quarter of fiscal 2003. Ventures sales revenue increased 20 percent to $18
million for the nine months ended June 30, 2003 primarily due to an increase in
the number of mid-term lease buyouts in the current year period compared to the
prior year period. CAM group sales revenue decreased 70 percent to $43 million
for the nine months ended June 30, 2003.
Technology Services Revenue
Revenue from technology services decreased 68 percent to $12 million for
the nine months ended June 30, 2003 from $37 million for the nine months ended
June 30, 2002. The decrease is primarily the result of the sale of the North
American portion of the IT CAP Services business in February 2002, and the
continued wind down of the Company's remaining network services business.
Other Revenue
Other revenue decreased 41 percent to $35 million for the nine months ended
June 30, 2003 from $59 million for the nine months ended June 30, 2002. Interest
income on notes decreased 70 percent to $7 million for the nine months ended
June 30, 2003 from $23 million for the nine months ended June 30, 2002. Foreign
exchange gain is due to the strengthening of the Euro compared to the U.S dollar
during the nine months ended June 30, 2003 and the realization of deferred
translation gains related to dividends received from its Canadian operations.
These transaction gains and losses arise from the impact of exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency.
The components of other revenue were as follows (in millions):
SUCCESSOR PREDECESSOR
For the nine months ended
June 30,
2003 2002
------------------ | ---------------------
|
Sale of equity holdings $ 2 | $ 16
Interest income on notes 7 | 23
Foreign exchange gain 22 | 15
Other 4 | 5
------------------ | ---------------------
Total other revenue $ 35 | $ 59
================== | =====================
Total Costs and Expenses
Total operating costs and expenses decreased 80 percent to $234 million for
the nine months ended June 30, 2003 from $1.2 billion for the nine months ended
June 30, 2002. In the nine months ended June 30, 2002, the Company recorded $345
million of reorganization items, including the $267 million of pre-tax charges
for the sales of the Electronics and Laboratory and Scientific leased asset
portfolios discussed in Note 4 of Notes to Consolidated Financial Statements.
Additional cost and expense information for each of the Company's current
business segments is set forth below.
Total Leasing Costs and Expenses
Total leasing costs and expenses decreased 71 percent to $102 million for
the nine months ended June 30, 2003 from $350 million for the nine months ended
June 30, 2002. The decrease in total leasing costs and expenses is primarily due
to the continued orderly run-off of the lease base, the absence of significant
new business volume and the 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 the Company's European IT Leasing operations
decreased 57 percent to $9 million for the nine months ended June 30, 2003.
Ventures total leasing costs and expenses decreased 50 percent to $71 million
for the nine months ended June 30, 2003. Total leasing costs and expenses from
the Company's CAM group decreased 88 percent to $22 million for the nine months
ended June 30, 2003.
Sales Costs and Expenses
Sales costs and expenses decreased 63 percent to $68 million for the nine
months ended June 30, 2003 from $184 million for the nine months ended June 30,
2002. The decrease in the nine months ended June 30, 2003 compared to the nine
months ended June 30, 2002 reflects reductions in the volume of sales due to
continued reductions in assets available for sale. European IT Leasing sales
costs and expenses increased 125 percent to $9 million for the nine months ended
June 30, 2003 primarily due to one significant mid-term lease buyout in the
second quarter of fiscal 2003. Ventures sales costs and expenses decreased 22
percent to $7 million for the nine months ended June 30, 2003 compared to $9
million for the nine months ended June 30, 2002. CAM group sales costs and
expenses decreased 70 percent to $52 million for the nine months ended June 30,
2003. CAM group sales in the current quarter are primarily electronics equipment
remarketed from inventory. Declining fair market values for electronics
equipment has resulted in losses on sales of such equipment and has negatively
impacted the carrying value of the CAM group inventory.
Technology Services Costs and Expenses
Technology services costs and expenses decreased 72 percent to $7 million
for the nine months ended June 30, 2003 from $25 million for the nine months
ended June 30, 2002. The decrease is primarily the result of the sale of the
North American portion of the IT CAP Services business in February 2002, and the
continued wind down of the Company's remaining network services business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 23 percent to $91
million for the nine months ended June 30, 2003 from $74 million for the nine
months ended June 30, 2002. The following table summarizes selling, general and
administrative expenses (in millions):
SUCCESSOR PREDECESSOR
For the nine months ended
June 30,
2003 2002
------------------ | ----------------
Compensation and benefits $ 27 | $ 47
Outside professional services 24 | 16
Contingent Distribution Rights 38 | --
Other expenses 2 | 11
------------------ | ----------------
$ 91 | $ 74
================== | ================
The decrease in compensation and benefits in the current year compared to
the year earlier period reflect the continued reduction in personnel. As of July
16, 2001, the date the Company filed bankruptcy, the Company had approximately
2,100 domestic employees. As of the date of emergence from bankruptcy, the
Company had approximately 400 domestic employees. As of June 30, 2003, the
Company had approximately 230 domestic employees.
The increase in outside professional service costs is attributable to the
Company recording professional service costs related to the bankruptcy in
reorganization items in the prior year. As a result of the Company's emergence
from bankruptcy on August 12, 2002, the Company ceased recording bankruptcy
related expenses and income within reorganization items.
The Company expensed $38 million relating to the accrual for Contingent
distribution rights for the nine months ending June 30, 2003.
Write-down of Equity Securities
The charge for write-down of equity securities decreased 79 percent to $15
million for the nine months ended June 30, 2003 from $70 million for the nine
months ended June 30, 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 decreased to $(74) million for the nine months ended June
30, 2003 from $112 million for the nine months ended June 30, 2002. The decrease
is primarily due to better than anticipated collection results in the nine
months ended June 30, 2003 on the Company's assets and management's estimate of
the reserves necessary for the Company's remaining assets as of June 30, 2003
(See Note 7 of Notes to Consolidated Financial Statements).
Interest Expense
Interest expense increased 56 percent to $25 million for the nine months
ended June 30, 2003 from $16 million for the nine months ended June 30, 2002.
The increase in the current year period compared to the year earlier period is
primarily due to interest expense incurred on the Company's Subordinated Notes
during the current year.
As of July 16, 2001, the Predecessor company ceased accruing interest on
its unsecured debt obligations. Contractual interest on all obligations for the
nine months ended June 30, 2002 was $179 million in excess of recorded interest
expense included in the accompanying financial statements.
Reorganization Items
Charges for reorganization items were $345 million for the nine months
ended June 30, 2002. See Note 5 of Notes to Consolidated Financial Statements,
which is incorporated in this section by reference, for a discussion of
reorganization items. Included in reorganization items is the $267 million of
pre-tax charges for the sales of the Electronics and Laboratory and Scientific
leased asset portfolios.
Net Earnings (Loss) from Continuing Operations
Net earnings from continuing operations were $5 million in the nine months
ended June 30, 2003, or $1.12 per common share, compared to a net loss of $397
million or $2.64 per share in the nine months ended June 30, 2002. The net loss
from continuing operations in the nine months ended June 30, 2002 is primarily
the result of reorganization items as well as provisions for credit losses.
Discontinued operations
Net earnings from discontinued operations were $80 million for the nine
months ended June 30, 2003 compared to net earnings from discontinued operations
of $194 million for the nine months ended June 30, 2002.
o US Leasing operations: The results of operations for this business
segment have been classified as discontinued operations and prior year
periods have been restated. Revenue for US Leasing was $170 million
during the nine months ended June 30, 2003 compared to $290 million
during the nine months ended June 30, 2002. Costs and expenses for
these operations were $143 million during the nine months ended June
30, 2003 compared to $340 million during the nine months ended June
30, 2002. Net earnings were $37 million during the nine months ended
June 30, 2003 compared to a net loss of $40 million during the nine
months ended June 30, 2002.
o German leasing subsidiary: Revenue for these operations was $80
million during the nine months ended June 30, 2003 compared to $156
million during the nine months ended June 30, 2002. Costs and expenses
for these operations were $67 million during the nine months ended
June 30, 2003 compared to $123 million during the nine months ended
June 30, 2002. During the nine months ended June 30, 2003 the Company
repatriated funds from the sale of stock of its German leasing
subsidiary. As a result, the Company recorded a $24 million gain
related to the realization of deferred translation gains. Net earnings
were $34 million and $23 million during the nine months ended June 30,
2003 and 2002, respectively.
o International Leasing: Revenue from these operations was $2 million
during the nine months ended June 30, 2003 compared to $121 million
during the nine months ended June 30, 2002. The revenue recognized
during the nine months ended June 30, 2003 relates to foreign currency
exchange gains. Costs and expenses for these operations were
immaterial during the nine months ended June 30, 2003 compared to $109
million during the nine months ended June 30, 2002. The decrease in
both revenue and costs in the current year period compared to the
prior year period is a result of the sales. During the nine months
ended June 30, 2003 the Company recorded a $7 million gain on the
sales as a result of the realization of deferred translation gains.
Net earnings were $9 million and $10 million during the nine months
ended June 30, 2003 and 2002, respectively.
o Prism Communications: Continued declines in the telecommunications
industry in the nine months ended June 30, 2002, negatively impacted
the market for telecommunications equipment. As a result, the company
recorded a charge of $3 million to write-down these assets to current
fair market value.
o Availability Solutions: Revenue from availability solutions was $67
million for the nine months ended June 30, 2002. Availability
solutions costs were $59 million for the nine months ended June 30,
2002.
Net earnings of the availability solutions business were $204 million
for the nine months ended June 30, 2002. Approximately $199 million of
the net earnings within discontinued operations for the nine months
ended June 30,2002 relates to the gain on the sale of the availability
solutions business.
The sale excluded the purchase of the stock of subsidiaries in Germany
and Spain. However as a result of the Company's intention to exit the
availability solutions businesses of Germany and Spain (including the
possible sale of assets in either or both countries), the Company has
also accounted for these operations as discontinued operations.Revenue
and expense for the Company's operations in Germany and Spain for the
nine months ended June 30, 2002 were immaterial.
Net Earnings (Loss)
Net earnings for the nine months ended June 30, 2003 were $85 million
compared to a net loss of $203 million for the nine months ended June 30, 2002.
Financial Condition
On September 30, 2002, in accordance with the Plan, the Company made an
initial distribution to the holders of certain Allowed Claims (as defined in the
Plan) against the Comdisco, Inc. bankruptcy estate. As part of that initial
distribution, the Company, along with its direct wholly-owned subsidiary,
Comdisco, Inc., co-issued the Senior Notes in aggregate principal amount of $400
million and the Subordinated Notes in aggregate principal amount of $650
million.
On October 21, 2002, the Company redeemed the entire $400 million
outstanding principal amount of its Senior Notes. The Senior Notes were redeemed
at 100% of their principal amount plus accrued and unpaid interest from August
12, 2002 to the redemption date. Following the redemption of the Senior Notes,
the Company was required to make cash interest payments on the Subordinated
Notes. The terms of the Subordinated Notes provided for the interest to be
paid-in-kind through the issuance of additional Subordinated Notes while the
Senior Notes were outstanding. The initial interest payment date for the
Subordinated Notes was December 31, 2002.
The Company made several mandatory and optional redemptions of its
Subordinated Notes between November 14, 2002 and March 4, 2003. In addition, on
April 2, 2003, the Company made an optional partial redemption of $75 million
principal amount of its Subordinated Notes. On April 28, 2003, the Company made
the final redemption of $85 million principal amount of its Subordinated Notes.
Each of these partial redemptions of the Subordinated Notes were redeemed at a
price equal to 100% of their principal amount plus accrued and unpaid interest
to the redemption date.
Prior to the final redemption of the Subordinated Notes on April 28, 2003,
the Company's obligations with respect to payment of interest and principal
under the Subordinated Notes were secured by a first-priority security interest
in all the capital stock of Comdisco Global Holding Company, Inc., Comdisco,
Inc., Comdisco Domestic Holding Company, Inc. and Comdisco Ventures, Inc.
Because the Company's investments in its subsidiaries were pledged to secure the
obligations under the Subordinated Notes, Comdisco Holding's ability to obtain
additional or alternate financing was restricted.
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 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 continually evaluates opportunities for the orderly sale and
run-off of its remaining assets, including the sale of one or more of its
leasing asset portfolios. Comdisco, Inc.'s bankruptcy filing and the potential
sale of some or all of these businesses created uncertainty that had an adverse
impact on the Company's business. The Company believes this uncertainty
negatively impacted the Company's financial results for the nine months ended
June 30, 2003. Furthermore, and in addition to the uncertainty created by the
Company's limited business purpose, this uncertainty will continue to have an
impact on the Company's operations and its ability to implement the Plan. See
Risk Factors below for additional risks associated with the bankruptcy filing
and the Company's future results of operations.
At June 30, 2003, the Company had unrestricted cash and cash equivalents of
approximately $130 million, a decrease of approximately $416 million compared to
September 30, 2002. Net cash provided by operating activities for the nine
months ended June 30, 2003 was $1.3 billion. Net cash used in investing
activities was $34 million for the nine months ended June 30, 2003.
The Company's operating activities during the nine months ended June 30,
2003, including capital expenditures, were funded primarily by cash flows from
operations (primarily lease receipts), including the realization of residual
values through remarketing activities. The Company's liquidity has typically
been augmented by the realization of cash from the remarketing of leased
equipment. Liquidity from remarketing during the nine months ended June 30, 2003
decreased compared to the year earlier period and this trend is expected to
continue as the Company's asset base decreases and is reduced to cash. See the
risk factor entitled "Remarketing Results Are Uncertain" in Risk Factors
Relating to the Company, below, for information regarding remarketing.
The Company's current and future liquidity depends on cash on hand, cash
provided by operating activities and asset sales. As of August 12, 2003, the
Company's unrestricted cash balances exceeded $240 million. The Company expects
its cash on hand and cash flow from operations to be sufficient to fund
operations and to meet its obligations 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, the ability of the Company to
implement its reorganization Plan, timely payment by its customers, global
economic conditions and controlling operating costs and expenses.
Contingent Distribution Rights
As previously discussed, all shares of the Predecessor company's common
stock were cancelled on August 12, 2002. The Predecessor company's common
stockholders were entitled to distributions of Contingent Distribution Rights
under the Plan if they properly completed a transmittal form and surrendered all
of their shares of the Predecessor company's common stock to Mellon Investor
Services LLC prior to August 12, 2003. More information on the Contingent
Distribution Rights can be found in a Registration Statement on Form 8-A filed
by the Company on August 12, 2002 with the Securities and Exchange Commission.
Pursuant to the terms of the Contingent Distribution Rights distributed in
accordance with the Plan, the Company agreed to provide information in its
annual and quarterly reports regarding the present value of distributions made
to certain former creditors of Comdisco, Inc. As the present value of
distributions to those creditors reaches a threshold level of percentage
recovery established pursuant to the Plan, holders of Contingent Distribution
Rights are entitled to receive payments from the Company on the terms set forth
in the Plan and further clarified in the Contingent Distribution Rights
Agreement and in two bankruptcy court orders entered in respect of the
Contingent Distribution Rights (incorporated by reference to Exhibits 99.3 and
99.4 filed with the Company's Quarterly Report on Form 10-Q dated May 14, 2003,
as filed with the Commission on May 14, 2003). As of August 14, 2003, after
giving effect to all prior distributions made to the relevant creditors,
including the payment of the common stock dividends to date and the August 14,
2003 quarterly distribution, the present value of distributions to such
creditors was approximately $3.249 billion and their percentage recovery was
approximately 89 percent.
Claims remaining in the Disputed Claim Reserve (as defined in the Plan) as
of August 14, 2003, which have not been allowed or otherwise resolved, were
estimated by the Company in the amount of $303 million pursuant to bankruptcy
court authority. As these claims are allowed or otherwise resolved,
distributions may be made to the former creditors of Comdisco, Inc. that would
entitle holders of Contingent Distribution Rights to receive a payment. Since
the minimum threshold level has been achieved, the amounts due to CDR holders
will be significantly greater when disputed claims are disallowed, in whole or
in part, because supplemental distributions related to such disallowed claims
are incremental to the recovery to formerly allowed creditors of Comdisco, Inc.
In contrast, when disputed claims are allowed, the amounts due contingent
distribution rights holders will only be based on the amount in excess of the
threshold level. The minimum threshold level where sharing begins is 85% as
defined in the Plan. Payments by the Company in respect of Contingent
Distribution Rights are made from cash on hand and not from funds released from
the Disputed Claim Reserve. Accordingly, the Company expects to maintain cash
reserves to make required payments on the Contingent Distribution Rights
resulting from the distribution of funds from the Disputed Claim Reserve.
A quarterly distribution of funds from the Disputed Claim Reserve was made
on August 14, 2003, as required by the Plan. This scheduled distribution of
funds from the Disputed Claim Reserve was considered in the calculation of the
present value of distributions to certain former creditors of Comdisco, Inc.,
and the percentage recovery of such creditors, as of August 14, 2003. The
Company expects to announce a payment on the Contingent Distribution Rights
corresponding to this distribution of funds from the Disputed Claim Reserve
shortly after the date of this filing. The claim amounts in the Disputed Claims
Reserve were reduced from $334 million to $303 million with this quarterly
distribution, which included $9 million of claim amounts that became allowed.
Risk Factors Relating to the Company
The following risk factors and other information included in this quarterly
report on Form 10-Q should be carefully considered. The risks and uncertainties
described below are not the only ones the Company confronts. Additional risks
and uncertainties not presently known to it or that it currently deems
immaterial also may impair the Company's business operations and the
implementation of the Plan. If any of the following risks actually occurs, the
Company's business, financial condition, operating results and the
implementation of the Plan could be materially adversely affected.
Uncertainties Relating to the Bankruptcy Plan
The results of the Company's operations may be affected by (i) the
reluctance of customers and third parties to do business with a company recently
emerged from bankruptcy proceedings; (ii) the ability of the Company to retain
employees; (iii) limitations imposed by the Plan's focus on the orderly run-off
or sale of assets; and (iv) third party competitive pressures.
In addition, the Company has incurred, and will continue to incur,
significant costs associated with its reorganization and implementation of the
Plan. The amount of these costs, which are being expensed as incurred, are
expected to have a significant adverse affect on the results of operations.
Inherent Uncertainty of Limited Business Plan
The Company's post-bankruptcy business plan is limited to an orderly
run-off or sale of its remaining assets. Pursuant to the Plan and restrictions
contained in its certificate of incorporation, the Company is specifically
prohibited from engaging in any business activities inconsistent with its
limited business plan. This business plan is based on numerous assumptions
including the anticipated future performance of the Company in running off its
operations, the time frame for the run-off, general business and economic
conditions, and other matters, many of which are beyond the control of the
Company and some of which may not materialize. As a result, the Company's
ability to effectively implement this business Plan is inherently uncertain. In
addition, unanticipated events and circumstances occurring subsequent to the
date of this quarterly report may affect the actual financial results of the
Company's operations.
The Company's Liquidity is Dependent on a Number of Factors
The Company's liquidity generally depends on cash provided by operating
activities. The Company's cash flow from operating activities is dependent on a
number of variables, including, but not limited to, timely payment by its
customers, global economic and political conditions, control of operating costs
and expense 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, to make
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
When the present value of distributions to certain former creditors of
Comdisco, Inc. reaches 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 satisfy
obligations of the Company or to be distributed to common shareholders as
discussed in Note 10 of Notes to Consolidated Financial Statements.
Remarketing Results Are Uncertain
Quarterly operating results and cash from the sale of assets depend
substantially upon remarketing transactions, which are difficult to forecast
accurately. The general economic slowdown and particularly the decrease in
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 Economic Conditions Have Made It Difficult for Ventures to Timely
Realize on its Investments and Have Adversely Affected the Ability of Ventures
Customers to Timely Meet Their Obligations to the Company
Ventures, through Comdisco, Inc.'s former Ventures group, leased equipment
to, made loans to and equity investments in various privately held companies.
The Company's Venture operations are now directed by Comdisco Ventures, Inc., a
wholly-owned subsidiary of Comdisco, Inc. Prior to the bankruptcy filing, the
companies in which Ventures invested were typically in an early stage of
development with limited operating histories and limited or no revenues and
expectations of substantial losses. The current slowdown in economic growth has
and could continue to materially affect these companies. Accordingly,
investments in these companies may not result in any return and the Company may
lose its entire investment and/or principal balance. Many of the companies to
which Ventures provided venture financing prior to the bankruptcy filing are
dependent on third parties for liquidity. The significant change in the
availability of funds has had, and may continue to have, a material impact on
the fair market value of the Company's equity instruments and credit risk on its
debt instruments. If more of these companies are unable to meet their business
plans, or unable to obtain funding or funding at reasonable rates to execute
their business plans, there could be an increase in the Company's credit losses.
Further, increases in credit losses during fiscal year 2002 indicate that there
is an increasing number of companies in the Ventures' portfolio than are
currently experiencing or will be experiencing liquidity shortfalls in the near
term. Early-stage companies, unable to obtain additional financing, are reducing
overhead or closing down completely. Management has an on-going portfolio review
process intended to identify problem companies within the Ventures' financing
portfolio. To the extent there are revisions in management's estimates requiring
additional bad debt provisions, the Company's operating results and financial
condition could be materially adversely affected.
Current economic conditions also have adversely affected the opportunities
for the acquisition/merger of the internet-related, communications and other
high technology and emerging growth companies that make up the substantial
majority of Ventures' portfolio. Additionally, the public market for high
technology and other emerging growth companies is extremely volatile. Such
volatility has adversely affected the ability of the Company to dispose of the
equity securities and the value of those securities on the date of sale.
Exacerbating these conditions is the fact that the equity instruments held by
the Company are subject to lockup agreements restricting its ability to sell
until several months after an initial public offering. Without an available
liquidity event, the Company cannot easily 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 Venture portfolio to parties willing to lend to such companies.
The liquidation preferences have had, and may continue to have, an adverse
impact on the value of Ventures equity and warrant holdings. For those
securities without a public trading market, the realizable value of Ventures'
interests may prove to be lower than the carrying value currently reflected in
the financial statements.
Company Exposed to Customer Concentration Risk
The Company's asset concentrations expose the Company to additional risk in
that the failure of any single customer or obligor, which represents a
concentration in the Company's existing portfolio of assets, to meet its
obligations to the Company could significantly negatively impact the Company's
revenues and cash flows.
Impact of Interest Rates and Foreign Exchanges Rates
Changes in interest rates and foreign exchange rates affect the fair market
value of the Company's leased assets. Decreases in interest rates generally
positively impact the value of the Company's assets and a strengthening of the
US dollar would negatively impact the US dollar value of our net foreign assets.
Discontinued Operations and the Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. With respect to the Company's
discontinued operations, actual losses could differ from those estimates and
will be reflected as adjustments in future financial statements when probable
and estimable.
Limited Public Market for Common Stock
There is currently a limited public market for the Company's Common Stock.
Holders of the Company's Common Stock may therefore, have difficulty selling
their Common Stock, should they decide to do so. In addition, there can be no
assurances that such markets will continue or that any shares of Common Stock
which may be purchased may be sold without incurring a loss. Any such market
price of the Common Stock may not necessarily bear any relationship to the
Company's book value, assets, past operating results, financial condition or any
other established criteria of value, and may not be indicative of the market
price for the Common Stock in the future. Further, the market price of the
Common Stock may be volatile depending on a number of factors, including the
status of the Company's business performance, industry dynamics, news
announcements or changes in general economic conditions.
Limited Public Market for Contingent Distribution Rights
There is currently a limited public market for the Company's Contingent
Distribution Rights. Holders of the Company's Contingent Distribution Rights
may, therefore, have difficulty selling their Contingent Distribution Rights,
should they decide to do so. In addition, there can be no assurances that such
markets will continue or that any Contingent Distribution Rights which may be
purchased may be sold without incurring a loss. Any such market price of the
Contingent Distribution Rights may not necessarily bear any relationship to the
Company's book value, assets, past operating results, financial condition or any
other established criteria of value, and may not be indicative of the market
price for the Contingent Distribution Rights in the future. Further, the market
price of the Contingent Distribution Rights may be volatile depending on a
number of factors, including the status of the Company's business performance,
industry dynamics, news announcements or changes in general economic conditions.
Other
Other uncertainties include general business conditions, ability to sell
assets, reductions in customers' 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
The local currency of the Company's German leasing subsidiary was Euros and
represented a significant portion of the Company's exposure to foreign exchange
rate fluctuations. Therefore, the sale and subsequent repatriation of the
proceeds from the sale of the stock of its German leasing subsidiary
significantly reduced but did not eliminate the Company's foreign exchange risk.
Otherwise, there has been no material change during the nine months ended June
30, 2003 from the disclosures about market risk provided in the Company's Annual
Report on Form 10-K for the year ended September 30, 2002.
Item 4. CONTROLS AND PROCEDURES
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
There have not been any changes in 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 affect,
the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
{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
On May 30, 2003, the Company filed a Current Report on Form 8-K, dated May
30, 2003. Pursuant to Item 5 of its Report, the Company reported that it had
issued a press release on May 30, 2003 announcing that its Board of Directors
had declared a cash dividend of $14.30 per share on the outstanding shares of
the Company's common stock, payable on June 19, 2003 to common stockholders of
record on June 9, 2003. In addition, the Company announced a cash payment of
$.01621 per right on its CDRs, payable on June 19, 2003 to CDR holders of record
on June 9, 2003. The Report added the press release as an exhibit pursuant to
Item 7.
On August 5, 2003, the Company filed a Current Report on Form 8-K, date
August 4, 2003. Pursuant to Item 5 of its Report, the Company reported that it
had issued a press release on August 4, 2003 announcing that the Company had
agreed to adjustments on the final purchase price for the sale of its
Electronics, Laboratory and Scientific, and Healthcare leasing portfolios to GE
Capital. In addition, the Company announced that GE Capital agreed to accelerate
its contingent payment obligations based on various Electronics portfolio
performance criteria by making a single cash payment and providing other
consideration to the Company.
On August 14, 2003, the Company filed Amendment No. 1 on form 8-K/A to its
Current Report on form 8-K and the Exhibits there to previously filed by the
Company with the Commission on August 5, 2003.
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: August 14, 2003 By: /s/ David S. Reynolds
--------------------------
Name: David S. Reynolds
Title: Senior Vice President and
Controller (Principal
Financial and Accounting Officer)