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Capital expenditures increased by $102 million to $3.8 billion in ¬scal year 1996, or
2.8% more than in ¬scal year 1995 and approximately 2.5% less than just four years
ago. Expenditures on the infrastructure component of the Capital Budget were $2.1 bil-
lion in ¬scal year 1996, $873 million more than in ¬scal year 1995. Expenditures for
environmental protection (excluding sanitation) accounted for 48.6% of the total spent on
infrastructure in ¬scal year 1996. Expenditures for mass transit in ¬scal year 1996
accounted for 10.6% of the total expenditures on infrastructure. The amount expended on
the City™s water distribution and sewage collection system in ¬scal year 1996 was $1.0
billion.
In October 1990, the City completed a project to inventory the major portions of its
physical plant. The ¬rst citywide and individual agency report was published in ¬scal year
City of New York




1991, which has been updated yearly. It provides the City with a comprehensive assess-
ment of the condition of its major assets, the projected costs necessary to restore these
assets to a state of good repair and schedules detailing the maintenance required to
maintain the assets™ structural integrity. The City estimates costs for repairs, replacements,
and major maintenance for ¬scal years 1997 through 2000 to be $4.3 billion.
799
Case: The City of New York




69
Part 4 Additional Cases




EXHIBIT 5
The City of New York Debt

Combined Net City Debt

(in millions) 1996 1995 1994 1993 1992
..................................................................................................................................................
Net City debt $25,052 $23,258 $21,531 $19,424 $17,916
Net MAC debt 3,936 4,033 4,215 4,470 4,657
Net Samurai debt 200 200 200 200 ”
Total City, MAC and Samurai Debt 29,188 27,491 25,946 24,094 22,573
City guaranteed debt 1,155 1,104 1,114 733 745




City of New York
Combined Net City Debt $30,343 $28,595 $27,060 $24,827 $23,318
..................................................................................................................................................



City, MAC, and City-Guaranteed Proprietary Corporation Debt Service

Principal on Interest on City- Required
City Long- City Long- Guaranteed MAC
Fiscal Years Term Debt Term Debt Debt Funding Total
...................................................................................................................................................
1996 $ 22,718 $ 150,987 $ 22,560 $ 425,310 $ 621,575
1997 1,220,995 1,493,357 110,015 570,498 3,394,865
1998 1,206,764 1,401,147 116,997 583,535 3,308,443
1999 1,133,395 1,329,846 125,751 602,079 3,191,071
2000 1,072,079 1,271,698 125,749 537,438 3,006,964
2001 1,072,637 1,218,150 125,634 537,621 2,954,042
2002“2147 19,111,773 11,693,985 1,644,505 3,766,678 36,216,941
Total $24,817,643 $18,408,183 $2,248,651 $6,597,849 $52,072,326
...................................................................................................................................................



City, MAC, and City-Guaranteed Proprietary Corporation Debt

Debt per Capita
as Percent of Debt as Percent of Debt as Percent of
Debt Personal Income Assessed Value of Full Value of
Fiscal Year per Capita per Capita Taxable Property Taxable Property
..................................................................................................................................................
1989 $2,2028 9.96% 25.4% 4.6%
1990 2,490 10.49 26.0 4.5
1991 2,917 11.93 28.0 4.5
1992 3,192 12.14 28.5 4.1
1993 3,389 12.51 31.3 3.9
1994 3,691 n.a. 35.2 4.4
1995 3,901 n.a. 36.9 4.1
..................................................................................................................................................
800 Case: The City of New York




70 Part 4 Additional Cases




EXHIBIT 6
Moody's Investor Service, Inc.”Bond Ratings

Average Yield,
Rating Description of Rating December 20, 1995
.......................................................................................................................................
Aaa Best quality or “gilt edge,” with the smallest degree of invest- 5.38%
ment risk. Interest payments are protected by large or excep-
tionally stable margin and principal is secure. Protective
elements can be visualized and are most unlikely to impair
strong position of such issues.
Aa High quality by all standards. Together with the Aaa group they 5.50%
City of New York




comprise high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large,
¬‚uctuation of protective elements may be of greater amplitude,
or risks appear somewhat larger than in Aaa securities.
A Upper medium grade obligations. Security to principal and 5.55%
interest is considered adequate, but are susceptible to
impairment sometime in the future.
Baa Medium grade obligations, i.e., they are neither highly pro- 5.70%
tected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective
elements may be lacking or unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and have speculative characteristics.
Ba Judged to have speculative elements; their future cannot be n.a.
considered as well assured. Often the protection of interest
and principal payments may be very moderate, and not well
safeguarded during good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Lack characteristics of desirable investment. Assurance of inter- n.a.
est and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa Poor standing. Such issues may be in default or there may be n.a.
present elements of danger with respect to principal or interest.
Ca Speculative in a high degree. Such issues are often in default n.a.
or have other marked shortcomings.
C Lowest rated class of bonds. Issues so rated have extremely n.a.
poor prospects of ever attaining any real investment standing.
.......................................................................................................................................
Source: Moody™s Bond Record, Moody™s Investors Service, New York.
Comdisco, Inc. (A)




C omdisco Inc., the world™s leading independent lessor of IBM
computers, would seem like a company Wall Street ought to love. Annual revenues
are up fourfold since 1978, to an estimated $600 million in the ¬scal year that
ended September 30. Earnings per share have grown at an even more torrid tem-
po, and return on shareholders™ equity is running at an estimated 35%. Yet at a
recent price of $37, the stock was selling at 15 times projected earnings in ¬scal
1984”a tepid multiple for a company whose earnings could grow at a 30% clip
over the next ¬ve years.
...




Just about the only thing wrong with Comdisco is the tainted reputation that
Comdisco (A)
computer-leasing companies acquired as a result of the well-known bankruptcies
of OPM Leasing and Itel. Securities analysts, though, see no similarities between
Comdisco and those fiascos. OPM Leasing turned out to be a spectacularly fraud-
ulent operation, and Itel™s downfall resulted in large part from overly optimistic
accounting assumptions, coupled with a large inventory of obsolete equipment.
Comdisco™s accounting couldn™t be more conservative, analysts say. They add
that the company has managed, through the use of ingenious leasing arrange-
ments, to eliminate almost all exposure to equipment obsolescence. Comdisco, as-
serts John Keefe of Drexel Burnham Lambert, has practically nothing to fear from
any future IBM decision.1
The quotes above appeared in the Personal Investing Section of Fortune magazine in
October 1983.


BUSINESS HISTORY AND OPERATIONS
Comdisco, Inc. is a Chicago-based company founded in 1969 by its current chairman of
the board and president, Kenneth Pontikes. The company originally began as an IBM
computer dealer. As demand for computer leasing started to grow during the late 1970s,
the company started emphasizing leasing operations. By 1982, leasing old and new IBM
computer equipment constituted the primary business activity of the company, and
Comdisco had become the largest computer leasing company. Comdisco™s customers

.........................................................................................................................
This case was prepared by Professor Krishna G. Palepu as the basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. Copyright © 1986 by the President and
Fellows of Harvard College. Harvard Business School case 9-186-299.
1. Reprinted with permission from Fortune, October 31, 1983.




801
802 Case: Comdisco, Inc. (A)




72 Part 4 Additional Cases




were primarily large corporations. In 1982, the company had business relationships with
70 percent of the Fortune 500 companies, including 49 of the 50 largest U.S. companies.
The computer remarketing industry had many participants: small independent oper-
ators, larger private organizations, and leasing subsidiaries of conglomerates. Comdisco
was one of the few independent public corporations in the industry. The ¬rms in the in-
dustry were primarily of two types: broker/dealers or third-party lessors. The broker/
dealers obtained for customers computer equipment from either a vendor or current user;
third-party lessors provided lease ¬nancing. Comdisco engaged in both these activities.
Comdisco achieved its dominance in the computer leasing industry through a strategy
of full-service leasing. Under this strategy, the company offered its customers a number
of services which were not offered by competitors. Comdisco™s subsidiaries, Comdisco
Technical Services, Inc. and Comdisco Transport, Inc., specialized in equipment refur-
bishment, delivery, installation, de-installation, and technical planning and site prepara-
Comdisco (A)




tion. Comdisco Maintenance Services, another subsidiary, offered a low-cost alternative
to IBM™s maintenance service. Comdisco Disaster Recovery Services, Inc. was estab-
lished to provide another valuable service to the company™s customers: contingent data
processing capacity to be used when a customer™s own data center had unavoidable fail-
ures. Through this service, Comdisco™s customers had access to four fully operational
data centers as a backup to their own data centers, to be used in the event of a natural
disaster or accident.
Comdisco™s broad customer base provided the company with a number of competi-
tive advantages. First, taking advantage of its access to 10,000 important users of IBM
equipment in the U.S., the company created a proprietary data base of their computing
needs. This data base provided Comdisco™s sales force with current and timely informa-
tion on potential customers and their requirements. Second, being the leading IBM
dealer, Comdisco maintained large inventories of a broad range of IBM equipment.
Comdisco™s personnel closely monitored IBM™s new products and pricing policies. This
product knowledge combined with large inventories enabled the company to assist cus-
tomers with their computer acquisition plans and to offer quick deliveries. Finally, using
its data base, the company could help its customers sell their old hardware when they
acquired new equipment from Comdisco.
While the above strategy enabled Comdisco to establish its dominance over others in
the computer leasing industry, the company was still potentially vulnerable to competi-
tion from IBM itself since IBM equipment accounted for most of Comdisco™s revenues.
In 1981, IBM formed a ¬nancing subsidiary, IBM Credit Corporation, to provide cus-
tomer ¬nancing. Shortly after that, IBM announced its intention to enter into computer
leasing and established a joint venture for this purpose with Merrill Lynch and Metro-
politan Life Insurance. A number of industry analysts felt that this might result in in-
creased competition for companies like Comdisco.
Comdisco™s management, however, felt that IBM™s recent moves did not pose a threat
to the company™s competitive position because IBM™s entry into leasing would enhance
the tarnished image of the computer leasing business, a net bene¬t to the industry. They
also believed that, as IBM began to emphasize outright sale of its equipment over short-
803
Case: Comdisco, Inc. (A)




73
Part 4 Additional Cases




term rentals, many of IBM™s customers might be forced to look for other lessors like
Comdisco who offered short-term leases. This was likely to provide additional business
opportunities which would offset any loss of long-term lease business to IBM.
While equipment leasing to computer users was Comdisco™s primary activity, the

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