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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2004
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.)
5600 North River Road
Suite 800
Rosemont, Illinois 60018
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (847) 698-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 4,034,553 shares of the
registrant's Common Stock, $0.01 par value per share, were outstanding on
January 31, 2005.
COMDISCO HOLDING COMPANY, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION........................................... 3
Item 1. Financial Statements
Consolidated Statements of Earnings (Loss) -- Three months ended
December 31, 2004 and the three months ended December 31, 2003 (Unaudited).4
Consolidated Balance Sheets -- December 31, 2004 (Unaudited) and
September 30, 2004 (Audited) ............................................. 5
Consolidated Statements of Cash Flows -- Three months ended
December 31, 2004 and the three months ended December 31, 2003 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited).................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 22
Item 4. Controls and Procedures......................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 23
Item 3. Defaults Upon Senior Securities................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............. 23
Item 5. Other Information............................................... 23
Item 6. Exhibits ....................................................... 23
SIGNATURES.................................................................. 24
-2-
PART I
FINANCIAL INFORMATION
---------------------
Forward-Looking Statements
This quarterly report on Form 10-Q contains, and our periodic filings with
the Securities and Exchange Commission (the "SEC") and written and oral
statements made by the Company's officers and directors to press, potential
investors, securities analysts and others, will contain, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. These forward-looking statements
are not historical facts, but rather are predictions and generally can be
identified by use of statements that include phrases such as "believe,"
"expect," "anticipate," "estimate," "intend," "plan," "foresee," "looking
ahead," "is confident," "should be," "will," "predicted," "likely" or other
words or phrases of similar import. Similarly, statements that describe or
contain information related to matters such as our intent, belief, or
expectation with respect to financial performance, claims resolution under the
Plan (as defined below), cash availability and cost-cutting measures are
forward-looking statements. These forward-looking statements often reflect a
number of assumptions and involve known and unknown risks, uncertainties and
other factors that could cause our actual results to differ materially from
those currently anticipated in these forward-looking statements. In light of
these risks and uncertainties, the forward-looking events might or might not
occur, which may affect the accuracy of forward-looking statements and cause the
actual results of the Company to be materially different from any future results
expressed or implied by such forward-looking statements.
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 below in Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operation. Many of the risk factors that could affect
the results of the Company's operations are beyond our ability to control or
predict.
ITEM 1. FINANCIAL STATEMENTS
THE COMPANY EMERGED FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS ON AUGUST 12,
2002. THE PURPOSE OF THE COMPANY IS TO SELL, COLLECT OR OTHERWISE REDUCE TO
MONEY IN AN ORDERLY MANNER THE REMAINING ASSETS OF THE CORPORATION. PURSUANT TO
THE COMPANY'S FIRST AMENDED JOINT PLAN OF REORGANIZATION (THE "PLAN") AND
RESTRICTIONS CONTAINED IN THE COMPANY'S CERTIFICATE OF INCORPORATION, THE
COMPANY IS SPECIFICALLY PROHIBITED FROM ENGAGING IN ANY BUSINESS ACTIVITIES
INCONSISTENT WITH ITS LIMITED BUSINESS PURPOSE. ACCORDINGLY, WITHIN THE NEXT FEW
YEARS, IT IS ANTICIPATED THAT THE COMPANY WILL HAVE REDUCED ALL OF ITS ASSETS TO
CASH AND MADE DISTRIBUTIONS OF ALL AVAILABLE CASH TO HOLDERS OF ITS COMMON STOCK
AND CONTINGENT DISTRIBUTION RIGHTS IN THE MANNER AND PRIORITIES SET FORTH IN THE
PLAN. AT THAT POINT, THE COMPANY WILL CEASE OPERATIONS AND NO FURTHER
DISTRIBUTIONS WILL BE MADE. THE COMPANY FILED ON AUGUST 12, 2004 A CERTIFICATE
OF DISSOLUTION WITH THE SECRETARY OF STATE OF THE STATE OF DELAWARE TO FORMALLY
EXTINGUISH COMDISCO HOLDING COMPANY, INC.'S CORPORATE EXISTENCE WITH THE STATE
OF DELAWARE EXCEPT FOR THE PURPOSE OF COMPLETING THE WIND-DOWN CONTEMPLATED BY
THE PLAN.
-3-
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED)
(in millions except per share data)
Three months ended
December 31,
---- ----
2004 2003
----- -----
Revenue
Leasing
Operating ......................................... $ -- $ 7
Direct financing .................................. -- 1
Sales-type ........................................ -- 1
----- -----
Total leasing .................................. -- 9
Sales .................................................. 2 21
Agere lease participation payment ...................... 2 7
SIP recovery ........................................... 5 -
Sale of properties ..................................... -- 2
Other .................................................. 8 7
----- -----
Total revenue .................................. 17 46
----- -----
Costs and expenses
Leasing
Operating ......................................... -- 4
Sales-type ........................................ -- 1
----- -----
Total leasing .................................. -- 5
Sales .................................................. 1 17
Selling, general and administrative .................... 6 6
Contingent distribution rights ......................... 3 --
Write-down of equity securities ........................ -- --
Bad debt expense ....................................... (2) (5)
----- -----
Total costs and expenses .......................... 8 23
----- -----
Earnings (loss) from continuing operations before income
taxes (benefit) ...................................... 9 23
Income taxes (benefit) ................................. -- (3)
----- -----
Earnings (loss) from continuing operations ............. 9 26
Earnings (loss) from discontinued operations, net of
tax .................................................... -- (12)
----- -----
Net earnings ........................................... $ 9 $ 14
===== =====
Basic earnings (loss) per common share:
Earnings (loss) from continuing operations ........... $2.20 $6.16
Earnings (loss) from discontinued operations ......... 0.04 (2.87)
----- -----
Net earnings ......................................... $2.24 $3.29
===== =====
Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations ........... $2.20 $6.16
Earnings (loss) from discontinued operations ......... 0.04 (2.87)
----- -----
Net earnings ......................................... $2.24 $3.29
===== =====
See accompanying notes to consolidated financial statements.
-4-
Comdisco Holding Company, Inc.
CONSOLIDATED BALANCE SHEETS
(in millions except share data)
(Unaudited) (Audited)
December 31, September 30,
2004 2004
----- -----
ASSETS
Cash and cash equivalents ....................... $ 145 $ 157
Cash - legally restricted ....................... 11 10
Receivables, net ................................ 5 4
Inventory of equipment .......................... 2 1
Leased assets:
Direct financing and sales-type ............... - 1
Operating (net of accumulated depreciation) ... - 2
----- -----
Net leased assets ........................... - 3
Equity securities ............................... 14 14
Assets of discontinued operations ............... 4 5
Other assets .................................... 4 4
----- -----
$ 185 $ 198
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................ $ 1 $ 2
Income taxes .................................... 7 6
Liabilities related to assets of
discontinued operations ........................ 1 1
Deferred income ................................. - 2
Other liabilities:
Accrued compensation .......................... 8 12
Contingent distribution rights ................ 57 70
Other ......................................... 2 2
----- -----
Total other liabilities ...................... 67 84
----- -----
76 95
Stockholders' equity:
Common stock $.01 par value. Authorized
10,000,000 shares; issued 4,200,000 shares
4,034,553 shares outstanding at
December 31, 2004 (4,196,022 at
September 30, 2004) .......................... - -
Additional paid-in capital .................... 109 109
Accumulated other comprehensive income ........ 11 10
Retained deficit .............................. (7) (16)
Common stock held in treasury, at cost; 165,447
shares at December 31, 2004 and 3,978
September 30, 2004 ........................... (4) -
----- -----
Total stockholders' equity ................ 109 103
----- -----
$ 185 $ 198
===== =====
See accompanying notes to consolidated financial statements.
-5-
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
For the three months ended December 31, 2004 and 2003
2004 2003
----- -----
Cash flows from operating activities:
Operating lease and other leasing receipts ............... $ 1 $ 18
Sales of equipment ....................................... 1 23
Note receivable receipts ................................. - 1
Warrant proceeds ......................................... 3 1
Other revenue ............................................ 6 12
Collections and recoveries ............................... 2 5
Selling, general and administrative expenses ............. (6) (37)
Contingent distribution rights payments .................. (15) (8)
Income taxes ............................................. - 25
----- -----
Net cash provided (used) by continuing operations ...... (8) 40
Net cash provided (used) by discontinued operations .... (1) 8
----- -----
Net cash provided (used) by operating activities ....... (9) 48
----- -----
Cash flows from investing activities:
Equipment purchased for leasing .......................... - (1)
Equipment purchased for leasing by discontinued operations - (1)
Other .................................................... - (1)
----- -----
Net cash used in investing activities .................. - (3)
----- -----
Cash flows from financing activities:
Cash used by discontinued operations ..................... - (2)
Common stock purchased and placed in treasury ............ (4) -
Dividends paid on Common Stock ........................... - (50)
Decrease (increase) in legally restricted cash ........... (1) 13
Other .................................................... 2 (1)
----- -----
Net cash used in financing activities .................. (3) (40)
----- -----
Net increase (decrease) in cash and cash equivalents ........ (12) 5
Cash and cash equivalents at beginning of period ............ 157 97
----- -----
Cash and cash equivalents at end of period .................. $ 145 $ 102
===== =====
See accompanying notes to consolidated financial statements.
-6-
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
(in millions)
For the three months ended December 31, 2004 and 2003
2004 2003
---- ----
Reconciliation of earnings (loss) from
continuing operations to net cash provided by
operating activities:
Earnings (loss)from continuing operations ............ $ 9 $ 26
Adjustments to reconcile earnings (loss) from
continuing operations to net cash provided by
operating activities
Leasing costs, primarily depreciation and
amortization .................................... - 5
Leasing revenue, primarily principal portion
of direct financing and sales-type lease rentals - 9
Cost of sales .................................... 1 17
Technology services costs, primarily
depreciation and amortization ................. - 1
Income taxes ..................................... - 22
Principal portion of notes receivable ............ - 1
Selling, general, and administrative expenses .... (1) (32)
Contingent distribution rights ................... (12) (8)
Other, net ....................................... (5) (1)
---- ----
Net cash provided (used) by continuing operations (8) 40
Net cash provided (used) by discontinued operations (1) 8
---- ----
Net cash provided (used) by operating activities $ (9) $ 48
==== ====
See accompanying notes to consolidated financial statements.
-7-
COMDISCO HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2004 and 2003
The following discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 2 below and in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2004, and with the Consolidated
Financial Statements and related notes in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2004.
1. Reorganization
On July 16, 2001, Comdisco, Inc. ("Predecessor") and 50 of its domestic
subsidiaries filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division (the "Bankruptcy court") (consolidated
case number 01-24795) (the "Filing"). Comdisco Holding Company, Inc., as the
successor company ("Successor") to Comdisco, Inc., emerged from bankruptcy under
a confirmed plan of reorganization (the First Amended Joint Plan of
Reorganization (the "Plan")) that became effective on August 12, 2002 (the
"Effective Date"). For financial reporting purposes only, however, the effective
date for implementation of fresh-start reporting was July 31, 2002.
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 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.
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 the former Comdisco Global Holding
Company, Inc., Comdisco, Inc., the former 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,
presented herein, are not comparable to those of the Predecessor company,
presented in prior filings with the SEC.
Certain reclassifications, including those for discontinued operations,
have been made in the 2004 fiscal year financial statements to conform to the
2005 fiscal year presentation.
3. Discontinued Operations
Because of the sale of assets, amounts in the consolidated financial
statements and related notes for all periods shown have been restated to account
for the US Leasing operations, International Leasing and German operations (the
"German Leasing Subsidiary") as discontinued operations. "International Leasing"
refers to the Company's former French, Swiss, Austrian, Australian and New
Zealand leasing operations. The Company sold the stock of its French, Swiss and
Austrian subsidiaries and sold the assets of its Australian and New Zealand
operations. Each of the aforementioned transactions resulted from an extensive
offering and competitive bidding process run by the Company's independent
investment banking firm.
Revenue and net earnings from discontinued operations for the three months
ended December 31, 2004 were nominal. The following is summary financial
information for the Company's discontinued operations for the three months ended
December 31, 2003:
German
International Leasing
US Leasing Leasing Subsidiary Total
---------- -------- ----------- ------
Revenue $ 7 $ 1 $ - $ 8
========== ======== =========== ======
Earnings (loss) from discontinued operations:
Before income taxes $ (7) $ 1 $ (6) $ (12)
Income taxes - - - -
---------- --------- ----------- ------
Net earnings (loss) $ (7) $ 1 $ (6) $ (12)
========== ========= =========== ======
-8-
4. Receivables
Receivables include the following as of December 31, 2004 and September 30,
2004 (in millions):
December 31, September 30,
2004 2004
------------- ------------
Notes $ 1 $ 2
Accounts 1 1
SIP recovery 1 -
Other 3 2
------------- ------------
Total receivables 6 5
Allowance for credit losses (1) (1)
------------- ------------
Total $ 5 $ 4
============= ============
SIP recovery
In February 1998, pursuant to Comdisco, Inc.'s Shared Investment Plan
("SIP"), senior managers of Comdisco, Inc. (the "SIP participants") took out
full recourse, personal loans (the "SIP Loans") to purchase approximately six
million shares of Comdisco, Inc.'s common stock. In connection therewith,
Comdisco, Inc. executed a guaranty dated February 2, 1998 (the "Guaranty")
providing a guaranty of the loans in the event of default by the SIP
participants to the lenders under the SIP (the "SIP Lenders"). On November 29,
2001, the SIP Lenders filed a master proof of claim in the Comdisco, Inc.
Bankruptcy in the amount of $133 million ("SIP Guaranty Claim").
On December 22, 2004, Comdisco settled the Guaranty on the SIP Loans. As
part of the settlement, the individual notes signed by the SIP participants were
assigned to either the Company or the litigation trust. The notes assigned to
the Company relate to individual SIP participants who settled with the Company
prior to the settlement with the SIP Lenders. During the three months ended
December 31, 2004, Comdisco recorded approximately $5 million of SIP recovery
revenue consisting primarily of restricted cash currently held by the Company
and $1 million of receivable for the balance of the notes assigned to the
Company. Comdisco expects the restricted cash to be released to the Company in
the second quarter of fiscal 2005.
Allowance
The allowance for credit losses includes the Company's estimate of the
amounts expected to be uncollectable on specific accounts.
5. Equity Securities
Windspeed Acquisition Fund GP, LLC ("Windspeed") manages the Company's
investments in equity securities. Windspeed receives fixed and declining
management fees. Additionally, after the Company has realized a specified
amount, Windspeed will share in the net receipts at various percentages.
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. Net realized gains are included in other revenue in the
consolidated statements of earnings (loss).
Marketable equity securities:
The Company's available-for-sale security holdings were as follows (in
millions):
Gross Gross
unrealized unrealized Market
Cost gains losses value
---- ---------- ---------- ------
September 30, 2004 $ 1 $ 8 $ - $ 9
December 31, 2004 $ 1 $ 8 $ - $ 9
Changes in the valuation of available-for-sale securities are included as
changes in the unrealized holding gains (losses) in accumulated other
comprehensive income (loss) (see Note 6 of Notes to Consolidated Financial
Statements). At December 31, 2004, the Company held securities of four
publicly-traded companies: Blue Nile, Inc., Cytokinetics, Inc., Theravance, Inc.
and Volterra Semiconductor Corporation. Each of these holdings are subject to
lock-up periods, which restrict the Company's ability to sell in the near term.
The Company's practice is to work in conjunction with Windspeed to sell its
marketable equity securities upon the expiration of the lock-up period utilizing
various timing strategies which seek to maximize the return to the Company.
-9-
Equity investments in private companies:
The Company's policy for equity investments in privately held companies,
which are non-quoted investments, is, in consultation with Windspeed, to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on equity securities when market and customer specific
events and circumstances indicate the carrying value might be impaired. All
write-downs are considered permanent impairments for financial reporting
purposes.
6. Stockholders' Equity
When the Company emerged from bankruptcy, 4,200,000 shares of Common Stock
were issued. As of December 31, 2004, the Company had 4,034,553 shares of Common
Stock outstanding and 165,447 shares of Common Stock held in treasury.
Stockholders' equity consists of the following (in millions):
Additional Accumulated Common
Common paid-in other compre- Retained stock in
stock capital hensive income earnings treasury Total
- -------------------------------- ----------- ---------- --------------- --------- --------- --------
Balance at September 30, 2004 $ - $ 109 $ 10 $ (16) $ - $ 103
Net income 9 9
Translation adjustment 1 1
Change in unrealized gain - -
--------
Total comprehensive income 10
Liquidating dividend - - -
Common Stock placed in treasury (4) (4)
- -------------------------------- ----------- ---------- --------------- --------- --------- --------
Balance at December 31, 2004 $ - $ 109 $ 11 $ (7) $ (4) $ 109
=========== ========== =============== ========= ========= ========
In November 2004, in connection with the settlement of the Ventures
compensation dispute, the Company received from the Disputed Claims Reserve
31,681 shares of Common Stock which were placed in treasury stock.
In December 2004, in connection with the settlement of the SIP Guaranty
Claim, the Company received from the Disputed Claims Reserve 129,788 shares of
Common Stock which were placed in treasury stock. The shares were in partial
payment of a pre-bankruptcy receivable of Comdisco, Inc. set-off by the claimant
against amounts due the claimant under the SIP Guaranty (see Note 4 of Notes to
Consolidated Financial Statements).
Total comprehensive income (loss) consists of the following (in
millions):
Three months
ended December 31,
2004 2003
---- ----
Foreign currency translation adjustments $ 1 $ 1
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period 3 (2)
Reclassification adjustment for gains
included in earnings before income taxes (3) (1)
---- ----
Net unrealized gains (losses), before
income taxes - (3)
Income taxes - -
---- ----
Net unrealized gains (losses) - (3)
---- ----
Other comprehensive income (loss) 1 (2)
Net earnings 9 14
---- ----
Total comprehensive income $ 10 $ 12
==== ====
-10-
7. Other Financial Information
Legally restricted cash is comprised of the following at December 31, 2004
and September 30, 2004 (in millions):
December 31, September 30,
2004 2004
------------- ------------
Incentive compensation escrows $ 6 $ 6
SIP Recovery 3 3
Held by Windspeed 2 1
------------- ------------
$ 11 $ 10
============= ============
Other assets consists of the following (in millions):
December 31, September 30,
2004 2004
------------- ------------
Deferred costs $ 3 $ 3
Other 1 1
------------- ------------
$ 4 $ 4
============= ============
Other liabilities consists of the following (in millions):
December 31, September 30,
2004 2004
------------- ------------
Accrued compensation $ 8 $ 12
CDRs 57 70
Other:
Taxes other than income 1 1
Other 1 1
-------------- -------------
Total Other 2 2
-------------- -------------
$ 67 $ 84
============== =============
The liability for accrued compensation includes payroll and estimated
amounts payable under the Company's Bankruptcy court approved compensation
plans.
In December 2004, the Company made a cash payment of $.0982 per CDR (an
aggregate distribution of approximately $15 million) to CDR holders.
8. Financial Information by Business Segment and Geographic Area
The following table presents total revenue by geographic location based on
the location of the Company's offices (in millions):
Three months
ended December 31,
2004 2003
---- ----
North America $ 16 $ 30
Europe 1 16
---- ----
Total $ 17 $ 46
==== ====
The following table presents total assets and cash by geographic location
based on the location of the Company's offices (in millions):
December 31, September 30,
2004 2004
------------- ------------
Total Total
Assets Cash Assets Cash
------ ---- ------ ----
North America $ 180 $152 $ 191 $162
Europe 5 4 7 5
------ ---- ------ ----
Total $ 185 $156 $ 198 $167
====== ==== ====== ====
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related notes included elsewhere in
this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2004, and with the information
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2004.
THE COMPANY EMERGED FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS ON AUGUST 12,
2002. THE PURPOSE OF THE COMPANY IS TO SELL, COLLECT OR OTHERWISE REDUCE TO
MONEY IN AN ORDERLY MANNER THE REMAINING ASSETS OF THE CORPORATION. PURSUANT TO
THE COMPANY'S FIRST AMENDED JOINT PLAN OF REORGANIZATION (THE "PLAN") AND
RESTRICTIONS CONTAINED IN THE COMPANY'S CERTIFICATE OF INCORPORATION, THE
COMPANY IS SPECIFICALLY PROHIBITED FROM ENGAGING IN ANY BUSINESS ACTIVITIES
INCONSISTENT WITH ITS LIMITED BUSINESS PURPOSE. ACCORDINGLY, WITHIN THE NEXT FEW
YEARS, IT IS ANTICIPATED THAT THE COMPANY WILL HAVE REDUCED ALL OF ITS ASSETS TO
CASH AND MADE DISTRIBUTIONS OF ALL AVAILABLE CASH TO HOLDERS OF ITS COMMON STOCK
AND CONTINGENT DISTRIBUTION RIGHTS IN THE MANNER AND PRIORITIES SET FORTH IN THE
PLAN. AT THAT POINT, THE COMPANY WILL CEASE OPERATIONS AND NO FURTHER
DISTRIBUTIONS WILL BE MADE. THE COMPANY FILED ON AUGUST 12, 2004 A CERTIFICATE
OF DISSOLUTION WITH THE SECRETARY OF STATE OF THE STATE OF DELAWARE TO FORMALLY
EXTINGUISH COMDISCO HOLDING COMPANY, INC.'S CORPORATE EXISTENCE WITH THE STATE
OF DELAWARE EXCEPT FOR THE PURPOSE OF COMPLETING THE WIND-DOWN CONTEMPLATED BY
THE PLAN.
General
Wind-Down of Operations
Since emerging from bankruptcy proceedings on August 12, 2002, the Company
has, pursuant to the Plan, focused on the monetization of its remaining assets.
Therefore, comparisons of quarter-to-quarter or year-to-year results of
operations should not be relied upon as an indication of the Company's future
performance.
The Company has reduced, and expects to continue to reduce, the size and
complexity of its organizational and systems infrastructure concurrently with
the monetization of its assets.
On August 12, 2004, Randolph I. Thornton's appointment as Initial
Disbursing Agent became effective. As Initial Disbursing Agent, he assumed the
roles and responsibilities performed by the former Board of Directors and
officers of the Company, including all measures which are necessary to complete
the administration of the reorganized debtors' Plan and Chapter 11 cases.
See "Risk Factors Relating to the Company--Uncertainties Relating to the
Wind-down of Operations."
Overview
On July 16, 2001, Comdisco, Inc. and 50 of its domestic subsidiaries
voluntarily filed for bankruptcy.
Comdisco Holding Company, Inc., as the successor company to Comdisco, Inc.,
emerged from bankruptcy under a confirmed plan of reorganization that was
effective on August 12, 2002. In accordance with the Plan, Comdisco Holding
became the successor to Comdisco, Inc.
Since the Company emerged from Chapter 11 bankruptcy proceedings on August
12, 2002, the Company's business activities have been limited to the orderly
sale or run-off of all of its existing asset portfolios. Pursuant to the Plan
and restrictions contained in its certificate of incorporation, the Company is
specifically prohibited from engaging in any business activities inconsistent
with its limited business purpose. Since emerging from bankruptcy, the Company
has not engaged in any new leasing or financing activities, except for
previously existing customer commitments and the restructuring of existing
equipment leases and loans to maximize the value of the Company's assets. See
"Risk Factors Relating to the Company--Uncertainties Relating to the Bankruptcy
Plan and the Limited Business Plan."
The Company's revenues are generated primarily by sales of equipment from
inventory, off-lease sales, the sale of equity securities, interest income on
cash balances and, for the three months ended December 31, 2004, one-time events
such as its participation interest in certain Agere lease payments, the SIP
recovery and other settlements. Because of the Company's declining assets,
revenue has declined significantly in the current year period compared to the
year earlier period and, because of the Company's limited business purpose, this
trend is expected to continue. The Company's expenses are primarily cost of
equipment sold, CDRs, and selling, general and administrative expense (including
legal costs associated with the administration and/or litigation of Disputed
Claims). As a result of the wind-down of operations, the Company expects
continued declines in total costs and expenses, subject to volatility in the
amount of expense associated with the liability for CDRs.
-12-
All funds generated from the Company's remaining assets are required by the
Plan to be used to satisfy liabilities of the Company and, to the extent funds
are available, to pay dividends on the Company's Common Stock and to make
distributions with respect to the CDRs in the manner and priorities set forth in
the Plan. Payments to CDR holders resulting from recent claims resolution were
$15 million in the three months ended December 31, 2004.
The Company is required to maintain sufficient cash reserves for the
potential CDR liability associated with the eventual allowance or disallowance
of the remaining Disputed Claims. The outcome and the timing of the resolution
of the remaining Disputed Claims will impact both the timing and the amount of
future dividends and CDR payments. See "Critical Accounting Policies" and "Risk
Factors Relating to the Company" for a discussion of the impact of Disputed
Claims on the distributions.
The Company has material restrictions on its ability, and does not expect,
to make significant investments in new or additional assets. The Company
continually evaluates opportunities for the orderly sale and run-off of its
remaining assets. Accordingly, within the next few years, it is anticipated that
the Company will have reduced all of its assets to cash, substantially or
completely resolved the Disputed Claims in the bankruptcy estate of Comdisco,
Inc. and made distributions of all available cash to holders of its Common Stock
and CDRs in the manner and priorities set forth in the Plan. At that point, the
Company will cease operations and no further distributions will be made.
The Company's assets at December 31, 2004 consist primarily of cash,
receivables and equity securities. The Company believes that its collections on
leases in default, recoveries on accounts previously written off, and proceeds
from the disposition of equity securities will likely provide future cash flows
in excess of the current carrying value of these assets.
Collections and recoveries: The Company has potential collections on
accounts that are in default and recoveries on accounts previously
written off. A substantial number of such recoveries involve prior
lessees or debtors now in bankruptcy and in whose respective case the
Company has filed and is pursuing a claim to maximize its recovery. It is
the Company's expectation that actual collections and recoveries will
exceed the approximately $1.0 million receivable amount reflected in the
Company's financial statements as of December 31, 2004 (see Note 4 of
Notes to Consolidated Financial Statements). The amount and timing of
such collections and recoveries, if any, are subject to the risk factors
discussed in "Risk Factors Relating to the Company--Uncertainties in
Collections and Recoveries."
Equity Securities: The Company carries its common stock and preferred
stock investments in public companies at fair market value and in private
companies at the lower of cost or estimated fair market value in its
financial statements. Any warrants held by the Company in private
companies are carried at zero value (collectively, "Equity Investments").
Any write-downs in the carrying value of such Equity Investments in
private companies are considered permanent for financial reporting
purposes. See "Critical Accounting Policies". It is the Company's
expectation that the amount ultimately realized on Equity Investments
will, in the aggregate, exceed the amount reflected in the financial
statements as of December 31, 2004. The Company estimates that the
realizable value, net of fees and sharing with Windspeed, at December 31,
2004 for its common stock, preferred stock and warrants in private
companies was approximately $22 million. The following table summarizes
the changes in the value of the Company's equity securities since
September 30, 2004:
Public Private
Companies(1) Companies (2)
--------- ---------
September 30, 2004 estimated
realizable value $ 9 $ 20
Realized--net of fees (3) -
Increase in unrealized estimated value (3) 3 2
--------- ---------
December 31, 2004 estimated
realizable value $ 9 $ 22
========= =========
(1) Carrying value of public companies for financial statements. See Note
5 of Notes to Consolidated Financial Statements.
(2) Carrying value of private companies for financial statements is cost,
or approximately $5 million.
(3) Net of fees and sharing with Windspeed.
The Company's estimate was made in consultation with Windspeed
Acquisition Fund GP, LLC ("Windspeed"), a professional management group
which the Company engaged to manage the Company's Equity Investments on
an ongoing basis in February 2004. However, there is no assurance as to
the timing or the amount the Company will ultimately realize on the
Equity Investments. The Company's expectations are subject to the risk
factors discussed in "Risk Factors Relating to the Company--Current
Market Conditions Have Made It Difficult and May Continue to Make It
Difficult for the Company to Timely Realize on the Value of Its Warrant
and Equity Securities" and "Company Exposed to Asset Concentration Risk."
-13-
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires Comdisco to use estimates
and assumptions that affect reported amounts of assets and liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. These
estimates are subject to known and unknown risks, uncertainties and other
factors that could materially impact the amounts reported and disclosed in the
consolidated financial statements.
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" which recommends that
companies provide additional disclosure and analysis of those accounting
policies considered most critical.
The Company believes the following to be among the most critical judgment
areas in the application of its accounting policies:
o CDRs and CDR Liability: The Plan entitles holders of Comdisco
Holding's CDRs to share at increasing percentages in the proceeds
realized from the monetization of the Company's assets based upon the
present value of distributions made to the general unsecured creditors
in the bankruptcy estate of Comdisco, Inc.
Management has adopted a methodology for estimating the amount due to
CDR holders following the provisions of Statement of Financial and
Accounting Standards No. 5, "Accounting For Contingencies" ("SFAS No.
5"). Under SFAS No. 5, a liability must be booked that is probable and
reasonably estimable as of the balance sheet date.
The amount due to CDR holders is based on the amount and timing of
distributions made to former creditors of the Company's predecessor,
Comdisco, Inc., and is impacted by both the value received from the
orderly sale or run-off of Comdisco Holding's assets and the
resolution of Disputed Claims still pending in the bankruptcy estate
of Comdisco, Inc.
The Company is not able to definitively estimate either the ultimate
value to be received for the remaining assets or the final resolution
of the remaining Disputed Claims. Accordingly, the Company does not
forecast these outcomes in calculating the liability. Instead, the
liability calculation uses the Company's book equity value as the
basis for remaining asset value, reduced for estimated operating
expenses and increased for the estimated fair market value of the
remaining property held for sale.
In addition, the liability for CDRs is calculated assuming Disputed
Claims are either: 1) allowed at the amount estimated for the Disputed
Claim, or; 2) allowed at an approved amount where a settlement
agreement or Bankruptcy court order exists ("Approved Claims"). Any
estimates exceeding the Approved Claims would be considered disallowed
for purposes of the CDR liability. The amounts due to CDR holders will
be greater to the extent that Disputed Claims are disallowed. The
disallowance of a Disputed Claim results in a distribution from the
Disputed Claims Reserve to previously allowed creditors that is
entirely in excess of the minimum percentage recovery threshold, above
which recoveries to general unsecured creditors are shared with CDR
holders. In contrast, the allowance of a Disputed Claim results in a
distribution to a newly allowed creditor that is only partially in
excess of the minimum percentage recovery threshold.
Estimated Disputed Claims consisted of $289 million as of September
30, 2004. On November 15, 2004, a distribution from the Disputed
Claims Reserve in connection with approximately $85 million of
estimated Disputed Claims was made to creditors, which consisted of
approximately $30 million of claims allowed and paid to new
claimholders and approximately $55 million of claims disallowed
resulting in the associated funds being redistributed to all unsecured
creditors through a supplemental distribution. After the distribution,
the remaining estimated Disputed Claims totaled approximately $204
million.
Since the November 15, 2004 distribution, $183 million of the $204
million remaining estimated Disputed Claims have been allowed or
disallowed in full or in part by the Company either through a
settlement with certain parties, or the issuance of a Bankruptcy court
order, leaving only $21 million unresolved at the date of this filing.
These $21 million in estimated Disputed Claims have been considered
allowed for purposes of the CDR liability. If the $21 million is
ultimately ruled as disallowed, the CDR liability would increase by
approximately $8 million.
$62 million of the approximately $183 million of Approved Claims are
expected to be ultimately disallowed. A portion of the $62 million
estimated Disputed Claims are under appeal as of the date of this
filing. Any detrimental ruling to the Company under appeal may
materially reduce the CDR liability as of December 31, 2004 and could
negatively impact future CDR distributions. If the $62 million is
ultimately ruled as allowed, the CDR liability would be reduced by
-14-
approximately $25 million.
The remaining $121 million of the approximately $183 million relates
to the settlement between the Company and the bank group relating to
its unconditional guaranty on the Shared Investment Plan ("SIP"). On
December 9, 2004, the Bankruptcy court approved this settlement. While
the settlement resulted in an Allowed Claim of $133 million, the SIP
Lenders agreed to receive a reduced cash amount of approximately $123
million, which is net of an approximately $3 million off-set due
Comdisco. The SIP Lenders waived their rights to any consideration in
excess of the $123 million cash payment. On December 22, 2004,
Comdisco paid the $123 million cash payment from the Disputed Claims
Reserve. On January 11, 2005, the $3 million off-set was paid to
Comdisco in the form of 129,788 shares of Common Stock at the December
21, 2004 closing market value and an approximately $0.3 million cash
payment. Both the shares and cash were released from the Disputed
Claims Reserve. The equivalent claim amount relating to the cash
payment and off-set was $121 million. The excess between the estimated
Disputed Claim of $135 million and the equivalent claim amount of $121
million is $14 million, which the Company expects to release from the
Disputed Claims Reserve on its next Quarterly Distribution.
In addition, on November 10, 2004, the Bankruptcy court ordered the
Company not to distribute $10 million from the Disputed Claims Reserve
pending the Bankruptcy court's ruling on Wells Fargo's motion to
reinstate its claim. On November 17, 2004, the Bankruptcy court issued
an order that denied Wells Fargo's motion to reinstate its claim.
Wells Fargo has filed an appeal from this order, but the Bankruptcy
court's November 10, 2004 Order restricting a distribution has
expired. The Company anticipates releasing the $10 million from the
Disputed Claims Reserve on its next Quarterly Distribution.
These two items total $24 million in claim amount and were considered
as part of the $62 million of estimated Disputed Claims ultimately
disallowed for purposes of the CDR liability. Any funds associated
with the $24 million in claim amount will be released for the benefit
of all Class C-4 creditors. When and if released from the Disputed
Claims Reserve, current common shareholders not holding claims as
Class C-4 creditors will not receive any funds associated with the $24
million in claim amount.
o Equity Investments In Private Companies: Equity investments in
private companies consist primarily of small investments in over two
hundred private companies that are non-quoted securities. The Company
carries its common stock and preferred stock investments in private
companies at the lower of cost or estimated fair market value in the
financial statements. Warrants in non-public companies are carried at
zero value. The Company, in consultation with Windspeed, regularly
estimates the value of investments in private companies and adjusts
carrying value when market and customer specific events and
circumstances indicate that such assets might be impaired. All
write-downs are considered permanent impairments for financial
reporting purposes. On February 23, 2004, the Company announced that
its subsidiary, Comdisco, Inc., entered into agreements (collectively,
the "Agreements") with Windspeed for the ongoing management and
liquidation of Comdisco Ventures, Inc.'s warrant and equity investment
portfolio. The management agreement includes substantially all of the
Company's warrant and equity investment portfolio. As a result of the
Agreements, the ongoing management of the Company's equity investments
in private companies will be provided by Windspeed. The carrying value
of the Company's equity investments in private companies was
approximately $5 million at December 31, 2004.
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.
Recent Developments
On December 30, 2004, a lawsuit styled as a class action, was filed by
David Coons in the United States District Court, Northern District of
California, against specific former members of the Board of Directors of
Comdisco, Inc. in which he seeks class action status on behalf of himself and
certain other former Comdisco employees who participated in the SIP. The Company
has referred the complaint to its insurance carriers. However, under the terms
and provisions of Comdisco Inc.'s First Amended Joint Plan of Reorganization
certain of the named defendants may be entitled to indemnification. If the
insurance carriers do not provide for the defense of the complaint, then the
Company may have to provide for the payment of legal fees and other expenses
related to defending some of the defendants under the indemnification
obligation.
-15-
Results of Operations
Certain reclassifications have been made to the prior period financial
statements to conform to the presentation used in the December 31, 2004
consolidated financial statements.
Three Months Ended December 31, 2004 Compared to the Three Months Ended
December 31, 2003
Revenue
Changes in total revenue for the three months ended December 31, 2004
compared to the three months ended December 31, 2003 were as follows:
Three months ended
December 31, Percent
------ ------ Increase
2004 2003 (Decrease) Explanation of Change
------ ------ --------- -------------------------------
Leasing $ - $ 9 (100%) The company's remaining revenue
generating leased assets are
nominal.
..........................................................................................................
Sales 2 21 (90%) Asset sales prior to
September 30, 2004 results in
little remaining equipment to
be sold.
..........................................................................................................
Agere lease participation payment 2 7 (71%) Last payment received in
November 2004.
..........................................................................................................
SIP recovery from participants 5 - 100% Collection on notes assigned to
the Company. See discussion
below.
..........................................................................................................
Sale of properties - 2 (100%) Day care facility remains unsold
as of December 31, 2004 (only
remaining property).
..........................................................................................................
Other:
Sale of equity holdings 3 1 200% Primary remaining revenue
generating asset. Managed by
Windspeed. See "Overview" for
additional information.
Interest income 1 1 -% Interest earned on cash balances.
Receipt of pre-bankruptcy receivable
set-off by claimant against amounts
due 3 - 100% Bankruptcy court approved as
part of SIP Guaranty settlement.
Technology services - 1 (100%) Services business had no
customers after December 31, 2003.
Other 1 4 (75%)
------ ------ ---------
Total other revenue 8 7 14%
------ ------ ---------
...........................................................................................................
$ 17 $ 46 (63%)
====== ====== =========
In February 1998, pursuant to Comdisco, Inc.'s Shared Investment Plan
("SIP"), senior managers of Comdisco, Inc. (the "SIP participants") took out
full recourse, personal loans (the "SIP Loans") to purchase approximately six
million shares of Comdisco, Inc.'s common stock. In connection therewith,
Comdisco, Inc. executed a guaranty dated February 2, 1998 (the "Guaranty")
providing a guaranty of the loans in the event of default by the SIP
participants to the lenders under the SIP (the "SIP Lenders"). On November 29,
2001, the SIP Lenders filed a master proof of claim in the Comdisco, Inc.
Bankruptcy in the amount of $133 million ("SIP Guaranty Claim").
On December 22, 2004, Comdisco settled the Guaranty on the SIP Loans. As
part of the settlement, the individual notes signed by the SIP participants were
assigned to either the Company or the litigation trust. The notes assigned to
the Company relate to individual SIP participants who settled with the Company
prior to the settlement with the SIP Lenders. During the three months ended
December 31, 2004, Comdisco recorded approximately $5 million of SIP recovery
revenue consisting primarily of restricted cash currently held by the Company
and $1 million of receivable for the balance of the notes assigned to the
Company. Comdisco expects the restricted cash to be released to the Company in
the second quarter of fiscal 2005.
-16-
All remaining notes were assigned to the litigation trust and are
considered "Trust Assets" as defined in the Plan. Under the terms and conditions
of the Trust Agreement, any funds received on Trust Assets will not be
distributed to the Company. Rather, Trust Assets will be distributed to all
Class C-4 Creditors as required by the Plan. Thus, common shareholders will not
benefit from any proceeds received on the notes assigned to the litigation
trust. In fact, shareholders may be negatively impacted because any payments
distributed to Class C-4 Creditors from the trust will require an associated
payment due the CDR's from the Company.
Costs and Expenses
Changes in total costs and expenses for the three months ended December 31,
2004 compared to the three months ended December 31, 2003 were as follows:
Three months ended
December 31, Percent
------ ------ Increase
2004 2003 (Decrease) Explanation of Change
------ ------ --------- -----------------------------------
Leasing $ - $ 5 (100%) The company's remaining revenue
generating leased assets are
nominal.
..............................................................................................................
Sales 1 17 (94%) Asset sales prior to
September 30, 2004 results in
little remaining equipment to
be sold.
..............................................................................................................
Selling, general and administrative 6 6 -% First quarter fiscal 2004 selling,
general and administrative costs
were $10 million, including approximately
$4 million included in discontinued
operations. No selling, general and
administrative expenses are included
in discontinued operations in fiscal
2005.
..............................................................................................................
Contingent distribution rights 3 - 100% See "Critical Accounting Policies."
..............................................................................................................
Bad debt expense (2) (5) (60%) Fiscal 2005 represents primarily
collections and recoveries.
..............................................................................................................
------ ------ ---------
$ 8 $ 23 (65%)
====== ====== =========
Income Taxes
The Company recorded an income tax benefit of approximately $3 million for
the three months ended December 31, 2003 as a result of the utilization of the
Company's deferred tax assets.
Net Earnings (Loss) from Continuing Operations
Net earnings from continuing operations were $9 million for the three
months ended December 31, 2004, or $2.20 per share-diluted, compared to net
earnings from continuing operations of $26 million for the three months ended
December 31, 2003, or $6.16 per share-diluted.
Discontinued Operations
Net earnings from discontinued operations were nominal for the three months
ended December 31, 2004 compared to a net loss from discontinued operations of
$12 million, or $2.87 per share-diluted, for the three months ended December 31,
2003.
o US Leasing operations: On September 9, 2003, the Company completed the
sale of its U.S. information technology leasing business to Bay4. On September
30, 2003, the Company completed the sale of its Canadian information technology
leasing business to Bay4 Capital Partners, Inc. Revenue and expenses were
nominal for the three months ended December 31, 2004. Revenue was $7 million
during the three months ended December 31, 2003. Costs and expenses for US
Leasing were $14 million during the three months ended December 31, 2003. The
net loss for US Leasing was $7 million for the three months ended December 31,
2003.
o German Leasing Subsidiary: On April 30, 2003, the Company announced that
it had completed the sale of the stock of its German Leasing Subsidiary to
Munich-based Comprendium Investment (Deutschland) GmbH, which is owned by
Comprendium Investment SA, a Swiss corporation. Revenue and expenses were
nominal for the three months ended December 31, 2004. During the three months
ended December 31, 2003, the Company recorded a $6 million charge against the
note receivable balance due from the sale. Net loss was $6 million for the three
months ended December 31, 2003.
-17-
o International Leasing: On October 18, 2002, the Company announced that it
had sold to Comprendium Finance S.A., Computer Discount GmbH and the Company's
French leasing subsidiaries, Comdisco France SA and Promodata SNC. The Company
sold substantially all of its information technology assets in Australia and New
Zealand to Allco pursuant to a sale approved by the Bankruptcy court on April
18, 2002. Revenue and expenses were nominal for the three months ended December
31, 2004. During the three months ended December 31, 2003, revenues were $1
million. The revenues related to foreign exchange gains and were noncash.
Net Earnings (Loss)
Net earnings were $9 million, or $2.24 per share-diluted, for the three
months ended December 31, 2004 compared to net earnings of $14 million, or $3.29
per share-diluted, for the three months ended December 31, 2003.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
that could be expected to have a material current or future effect upon the
Company's financial condition or results of operations.
Liquidity and Capital Resources
The Company must rely on cash generated from the orderly sale and run-off
of its assets to meet its liquidity needs. All funds generated from the
Company's remaining asset portfolios are required by the Plan to be used to
satisfy liabilities of the Company and, to the extent funds are available, to
pay dividends on the Company's Common Stock and to make distributions with
respect to the CDRs in the manner and priorities set forth in the Plan. Because
of the composition and nature of its asset portfolios, the Company expects to
generate funds from the sale or run-off of its asset portfolios at a decreasing
rate over time.
At December 31, 2004, the Company had unrestricted cash and cash
equivalents of approximately $145 million, a decrease of approximately $12
million compared to September 30, 2004. Net cash used by operating activities
for the three months ended December 31, 2004 was $9 million. The primary use of
cash in the three months ended December 31, 2004 was a payment to CDR holders.
The Company's operating activities during the three months ended December
31, 2004 were funded by cash on hand and by cash flows from operations. During
the three months ended December 31, 2004, the Company received approximately $2
million in the final payment with respect to the participation interest in
certain Agere lease payments, approximately $2 million from Windspeed as a
result of the sale of equity securities and approximately $2 million from
recoveries on accounts that had been previously written off. The Company's cash
expenditures are primarily operating expenses (principally professional services
and compensation), dividends and payments to CDR holders.
The Company's current and future liquidity depends on cash on hand, cash
provided by operating activities and asset sales. The Company expects its cash
on hand and cash flow from operations to be sufficient to fund operations and to
meet its obligations (including its obligation to make payments to CDR holders)
under the Plan for the foreseeable future.
See "Risk Factors Relating to the Company--The Company's Liquidity is
Dependent on a Number of Factors."
Dividends
There were no dividend distributions to stockholders in the three months
ended December 31, 2004. Consistent with past practices, Comdisco intends to
treat any future dividend distribution for federal income tax purposes as part
of a series of liquidating distributions in complete liquidation of the Company.
See "Risk Factors Relating to the Company--The Payment of Dividends and
Distributions and Limited Public Market for Common Stock."
Contingent Distribution Rights
For financial reporting purposes, the Company records CDRs as a liability
and as an operating expense although the CDRs trade over-the-counter.
On December 10, 2004, the Company distributed a cash payment of $.09820 per
contingent distribution right (an aggregate distribution of approximately $15
million) to CDR holders of record on November 30, 2004.
Gross cash distributions (including the redemption of its Senior Notes and
Subordinated Notes and dividends to date) related to general unsecured claims
totaled $3.986 billion through November 15, 2004. The distributions funded
claims allowed on the initial distribution date and the Disputed Claims Reserve
where cash and Common Stock are being held pending the outcome of the remaining
Disputed Claims. A portion of the original Disputed Claims have been allowed
subsequent to the initial distribution date.
-18-
Pursuant to the Rights Agent Agreement that established the terms of the
CDRs distributed in accordance with the Plan, the Company agreed to provide
information in its annual and quarterly reports regarding the Present Value of
Distributions (as defined in the Rights Agent Agreement) made to certain former
creditors of Comdisco, Inc. The Present Value of Distributions calculation
requires the Company to discount the cash distributions to the initially allowed
claimholders from the date the distribution is made to the date of the Company's
emergence from bankruptcy on August 12, 2002. The gross distributions through
November 15, 2004 of approximately $3.685 billion made to initially allowed
claimholders equates to a present value of $3.535 billion. The associated
percentage recovery was approximately 97 percent as of November 15, 2004.
See Critical Accounting Policies for a further discussion of CDRs and the
methodology for estimating the CDR liability and the potential impact of the
resolution of Disputed Claims on liquidity. See "Risk Factors Relating to the
Company--The Payment of Dividends and Distributions, Impact of Disallowance of
Disputed Claims on the Company's Obligation To Make Payments in Respect of
Contingent Distribution Rights, Impact of Reconsideration and/or Allowance of
Newly Filed Claims, Late Filed Claims or Previously Disallowed Claims and
Limited Public Market for Contingent Distribution Rights."
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 and the Limited Business
Plan
The Company has incurred and will continue to incur significant costs
associated with the administration of the estate of Comdisco, Inc. and in
completing the wind-down of operations. The amount of these costs, which are
being expensed as incurred, are expected to have a significant adverse affect on
the results of operations and on the Company's cash position.
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 complete this business plan is inherently uncertain. In
addition, unanticipated events and circumstances occurring subsequent to the
date of this Report may affect the actual financial results of the Company's
operations.
Uncertainties Relating to the Wind-down of Operations
The Company has reduced the size and complexity of its organizational and
systems infrastructure concurrently with the monetization of its assets. The
success of the Company's continuing wind-down of operations and implementation
of the Order entered by the Bankruptcy court on April 15, 2004 is dependent on
numerous factors, including the timing and amount of cash received from the
monetization of its assets, the resolution of the remaining Disputed Claims, the
ability of the Disbursing Agent to fulfill the positions of the previous Board
of Directors and executive officers and the ability of the Company to
effectively consolidate its management structure and maintain its operations
with limited personnel.
Uncertainties in Collections and Recoveries
The Company believes that its collections on leases in default and
recoveries on accounts previously written off will provide future cash flows.
The amount and timing of such collections and recoveries are dependent upon many
factors including: the ability of the Company to recover and liquidate any of
its collateral, any offsets or counterclaims that may be asserted against the
Company and the ability of a lessee or debtor or its respective estate to pay
the claim or any portion thereof. Some of these factors are beyond the control
of the Company.
The Company's Liquidity is Dependent on a Number of Factors
The Company's liquidity generally depends on cash on hand and 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, market
conditions for the sale of equity securities, global economic and political
conditions, control of operating costs and expenses and the ability of the
Company to dispose or otherwise convert to cash its remaining assets.
-19-
The Payment of Dividends and Distributions
All funds generated from the Company's remaining asset portfolios are
required by the Plan to be used to satisfy liabilities of the Company and, to
the extent funds are available, to pay dividends on the Company's Common Stock
and to make distributions with respect to the Contingent Distribution Rights in
the manner and priorities set forth in the Plan. Because of the composition and
nature of its asset portfolios, the Company expects to generate funds from the
sale or run-off of its asset portfolios at a decreasing rate over time. The
Company has material restrictions on its ability, and does not expect or intend,
to make any significant investments in new or additional assets. Accordingly,
the amount of funds potentially available to pay dividends on the Company's
Common Stock and to make distributions with respect to the Contingent
Distribution Rights is limited to the funds (in excess of the Company's
liabilities) that may be generated from the remaining asset portfolios.
Impact of Disallowance of Disputed Claims on the Company's Obligation
To Make Payments in Respect of Contingent Distribution Rights
Because the present value of distributions to certain former creditors of
Comdisco, Inc. reached a threshold level of percentage recovery established
pursuant to the Plan, holders of CDRs are entitled to receive specified payments
from the Company. All payments by the Company in respect of CDRs are made from
the Company's available cash-on-hand and not from funds released from the
Disputed Claims Reserve. The Company expects to maintain cash reserves
sufficient to make any required payments on the CDRs. The Company's success in
reducing the Disputed Claims Reserve through disallowance of Disputed Claims
could have a significant negative impact on the cash available to be distributed
to common shareholders.
Impact of Reconsideration and/or Allowance of Newly Filed Claims, Late
Filed Claims or Previously Disallowed Claims
The reconsideration and/or allowance by the Bankruptcy court of newly filed
claims, late filed claims, or previously disallowed claims, in full or in part,
may negatively impact future distributions.
Current Market Conditions Have Made It Difficult and May Continue to
Make it Difficult for the Company To Timely Realize on the Value of its Warrant
and Equity Securities (collectively, "Equity Securities")
Current market conditions have adversely affected, and may continue to
adversely affect, the opportunities for the acquisition/merger of the
Internet-related, communications and other high technology and emerging growth
companies that make up the substantial majority of the Company's Equity
Securities. Additionally, the public market for high technology and other
emerging growth companies is extremely volatile. Such volatility has adversely
affected, and may continue to adversely affect, the ability of the Company to
realize value from its Equity Securities. Exacerbating these conditions is the
fact that the Equity Securities held by the Company are subject to lockup
agreements restricting its ability to sell until several months after an initial
public offering. Without an available liquidity event, the Company is unable to
sell its Equity Securities. As a result, the Company, or Windspeed on behalf of
the Company, may not be able to generate gains or receive proceeds from the sale
of Equity Securities and the Company's business and financial results may
suffer. Additionally, liquidation preferences may continue to be offered by
companies in the Company's 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 the Company's Equity Securities. For those Equity
Securities without a public trading market, the realizable value of the
Company's Equity Securities may prove to be lower than the carrying value
currently reflected in the financial statements.
The estimated fair market value of the Company's equity securities was
determined in consultation with Windspeed based on a variety of factors,
including, but not limited to, quoted trading levels for publicly-traded
securities, industry and company multiples, industry acceptance in the market
place, liquidity discounts due to lock ups, estimated revenue, and customer,
product and market share growth by the respective companies in the portfolio.
Substantially all of these factors are outside the control of the Company and
are subject to significant volatility. There can be no assurance that the
Company will be able to realize the estimated fair market value. Furthermore,
the current estimated fair market value is subject to significant concentration
risk, as 73 percent of the estimated fair market value of the entire portfolio
is concentrated in ten individual companies and approximately 31 percent of the
estimated amount is in two companies.
Company Exposed to Asset Concentration Risk
The Company's assets are concentrated in certain obligors and asset
managers. A subsidiary of VarTec Telecom Inc. ("VarTec") owes the Company $2.7
million in payments through December 2005. VarTec filed for Chapter 11
bankruptcy protection in November 2004. In addition, the ongoing management and
liquidation of the Company's warrant and equity investment portfolio, with a net
book value of approximately $14 million at December 31, 2004, is handled by
Windspeed Acquisition Fund GP, LLC.
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Impact of Interest Rates and Foreign Exchanges Rates
Increases in interest rates would negatively impact the value of certain of
the Company's assets and a strengthening of the US dollar would negatively
impact the value of the Company's net foreign assets.
Limited Public Market for Common Stock
There is currently a limited public market for the Company's Common Stock.
Holders of the Company's Common Stock may, therefore, have difficulty selling
their Common Stock, should they decide to do so. In addition, there can be no
assurances that such markets will continue or that any shares of Common Stock
which may be purchased may be sold without incurring a loss. Any such market
price of the Common Stock may not necessarily bear any relationship to the
Company's book value, assets, past operating results, financial condition or any
other established criteria of value, and may not be indicative of the market
price for the Common Stock in the future. Further, the market price of the
Common Stock may be volatile depending on a number of factors, including the
status of the Company's business performance, its limited business purpose,
industry dynamics, news announcements or changes in general economic conditions.
Limited Public Market for Contingent Distribution Rights
There is currently a limited public market for the Company's Contingent
Distribution Rights. Holders of the Company's Contingent Distribution Rights
may, therefore, have difficulty selling their Contingent Distribution Rights,
should they decide to do so. In addition, there can be no assurances that such
markets will continue or that any Contingent Distribution Rights which may be
purchased may be sold without incurring a loss. Any such market price of the
Contingent Distribution Rights may not necessarily bear any relationship to the
Company's book value, assets, past operating results, financial condition or any
other established criteria of value, and may not be indicative of the market
price for the Contingent Distribution Rights in the future. Further, the market
price of the Contingent Distribution Rights may be volatile depending on a
number of factors, including the status of the Company's business performance,
industry dynamics, news announcements or changes in general economic conditions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk and Market Risk
Presently, the Company invests its cash and cash equivalents in money
market and other interest bearing accounts. Such cash and cash equivalents are
essentially the only floating rate assets held by the Company. The remaining
assets of the Company are fixed rate or non-interest bearing and are, therefore,
subject to a decrease in value if market rates increase. Currently, the Company
does not use derivative financial instruments to hedge this risk as the
Company's business purpose is to monetize all remaining assets.
At December 31, 2004, the Company held securities of four publicly-traded
companies: Blue Nile, Inc., Cytokinetics, Inc., Theravance, Inc., and Volterra
Semiconductor Corporation. Each of these holdings are subject to lock-up
periods, which restrict the Company's ability to sell in the near term. The
Company's practice is to work in conjunction with Windspeed to sell its
marketable equity securities upon the expiration of the lock-up period utilizing
various timing strategies which seek to maximize the return to the Company.
The Company has equity investments in private companies consisting
primarily of small investments in private companies that are all non-quoted
securities. Common stock and preferred stock investments are carried at the
lower of cost or estimated fair market value in the Company's financial
statements. Warrants in non-public companies are carried at zero value. These
investments are subject to significant volatility and are difficult to value.
Foreign Exchange Risk
The Company's business purpose is limited to the orderly sale or run-off of
all of its remaining assets, including assets denominated in foreign currencies.
Accordingly, the Company is exposed to the risk of future currency exchange rate
fluctuations, which is accounted for as an adjustment to stockholders' equity
until realized. Therefore, changes from reporting period to reporting period in
the exchange rates between various foreign currencies and the U.S. Dollar have
had and will continue to have an impact on the accumulated other comprehensive
loss component of stockholders' equity reported by the company, and such effect
may be material in any individual reporting period. In addition, exchange rate
fluctuation will have an impact on the US dollar value realized from the
repatriation of the proceeds from the sale or run-off of assets denominated in
foreign currencies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Randolph I. Thornton, the sole officer of the Company, 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 sole officer has 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.
Change in Internal Controls
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the first fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Events" for a discussion of a lawsuit styled as a
class action filed against former members of the Board of Directors of Comdisco,
Inc.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Repurchases of Common Stock
The Company does not regularly repurchase shares nor does the Company have
a share repurchase plan.
In November 2004, in connection with the settlement of the Ventures
compensation dispute, the Company received from the Disputed Claims Reserve
31,681 shares of Common Stock which were placed in treasury stock.
In December 2004, in connection with the settlement of the SIP Guaranty
Claim, the Company received from the Disputed Claims Reserve 129,788 shares of
Common Stock which were placed in treasury stock. The shares were in partial
payment of a pre-bankruptcy receivable of Comdisco set-off by the claimant
against amounts due to the claimant under the SIP Guaranty.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
{a} Exhibits
Exhibit No. Description of Exhibit
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3.1 Certificate of Incorporation of Registrant dated August 8,
2002 and as Amended August 12, 2004 (Incorporated by reference
to Exhibit 3.1 filed with the Company's Annual Report of Form
10-K dated September 30, 2004, as filed with the Commission on
December 14, 2004, 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 Certification of Chief Executive Officer and Principal
Financial Officer, Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Exchange Act, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
32.1 Certification of the 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 (Furnished herewith).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMDISCO HOLDING COMPANY, INC.
Dated: February 3, 2005 By: /s/ Randolph I. Thornton
----------------------------------
Name: Randolph I. Thornton
Title: Chief Executive Officer and
President
(Principal Executive Officer)
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