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payments due under the lease discounted to their (43%) of the outstanding common stock at Septem-
present value at the interest rate charged by the ber 30, 1982, have waived their rights to any cash
lender, generally ranging from 10% to 19%. dividends through February 1, 1983 and did not
The difference between monthly rentals due receive any of the previously mentioned cash divi-
under discounted leases and the amortization of dends.
related discounted lease rentals represents interest
At September 30, 1982, the Company had reserved
expense. This expense amounted to $32,527,000,
the following number of common shares for future
$15,468,000 and $8,380,000 in 1982, 1981 and
issuance:
1980, respectively. In the event of default by the les-
see, the lender has a ¬rst lien against the underlying
1979 Stock Option Plan 334,438
leased equipment, with no further recourse against
1981 Stock Option Plan 750,000
the Company.
Employee Stock Purchase Plan 147,358
Conversion of Convertible Subordinated
9. Common Stock and Additional Paid-in
Debentures 2,564,103
Capital
3,795,899
On January 27, 1982, the Board of Directors
declared a three-for-two split of the Company™s
10. Stock Options and Stock Purchase Plan
common stock. This distribution was subject to the
stockholders approval, which was obtained, amend- On November 18, 1981, the Board of Directors
ing the Certi¬cate of Incorporation increasing the amended the Company™s 1979 Stock Option Plan
number of authorized shares from 15,000,000 to (the “1979 Plan”) to qualify the plan as an incentive
50,000,000 with the par value remaining at $.10 stock option plan in accordance with the provisions
828 Case: Comdisco, Inc. (A)




98 Part 4 Additional Cases




of the Economic Recovery Tax Act of 1981. All out- 30, 1982 for computer equipment and rentals pay-
standing stock options, which retained their original able for non-computer equipment and of¬ce space:
option price, are eligible for treatment as incentive
Computer equipment
stock options subject to certain limitations as de¬ned
in the amended 1979 Plan. Rents pay-
Rents Receivable on
Years able on Other
Equipment
On January 27, 1982, the stockholders approved ending subleased rents
Sept. 30 Owned Subleased equipment payable
the 1981 Stock Option Plan (the “1981 Plan”). An
aggregate of 750,000 shares were reserved for 1983 $180,581 $21,704 $25,497 $2,033
issuance pursuant to the exercise of options under 1984 107,125 13,269 12,197 1,735
1985 43,115 5,799 5,002 1,600
the 1981 plan.
1986 7,237 1,742 792 1,033
The Comdisco, Inc. Employee Stock Purchase Plan 1987 352 544 ” 233
(the “Stock Plan”) was adopted by the Board of Later
years 11 ” ” 77
Directors on November 17, 1981. An aggregate of
150,000 shares was reserved for issuance under the
Comdisco (A)




Total rental income and related expense for the
Stock Plan.
years ended September 30, 1982, 1981 and 1980
The changes in the number of shares under the
applicable to computer sublease activities are as
option plans during 1982, 1981 and 1980 were as
follows:
follows:
Years ending
1982 1981 1980
September 30 Rental income Rental expense
(in thousands except option price range)
(in thousands)
Number of shares:
1982 $23,633 $27,455
Shares under option
1981 24,152 22,415
beginning of the year 512 861 1,119
Options granted 169 ” 612 1980 22,614 22,455
Options exercised (188) (349) (870)
Shares under option end of
12. Commitments and Contingent Liabilities
year 493 512 861
At September 30, 1982, the Company was obli-
Aggregate option price:
Shares under option gated under the following commitments: (1) to pur-
beginning of year $2,533 $3,257 $480
chase computer equipment in the approximate
Options granted 3,284 ” 3,187
aggregate amount of $31,768,000, (2) to sell
Options exercised (850) (724) (410)
computer equipment in the approximate aggregate
Shares under option end of
the year $4,967 $2,533 $3,257 amount of $20,926,000, and (3) to lease computer
Options exercisable at end equipment to others with an aggregate initial term
of year 58 164 12
rental of approximately $55,107,000.
Aggregate option price of
exercisable options out- The Company has arranged for approximately
standing at end of year $295 $722 $19
$74,000,000 of letters of credit, primarily as guar-
Options available for future
antees for certain of the Company™s sublease obli-
grant at end of year 591 11 11
gations and for future purchases of IBM equipment.
Option price range $4.90“ $1.35“ $.12“
$19.38 $7.00 $7.00 The cost of such letters of credit range between 1„2%
and 3„4% per annum of the amount outstanding.
11. Operating Leases
The following table summarizes the Company™s
future rentals receivable and payable under non-
cancellable operating leases existing at September
829
Case: Comdisco, Inc. (A)




99
Part 4 Additional Cases




Accountants™ Report
The Stockholders and Board of Directors Comdisco, Inc.:

We have examined the consolidated balance sheets of Comdisco, Inc. and subsidiaries as of September 30,
1982 and 1981 and the related consolidated statements of earnings, stockholders™ equity and changes in
¬nancial position for each of the years in the three year period ended September 30, 1982. Our examina-
tions were made in accordance with generally accepted auditing standards and, accordingly, included such
tests of the accounting records and such other auditing procedures as we considered necessary in the cir-
cumstance.
In our opinion, the aforementioned consolidated ¬nancial statements present fairly the ¬nancial position of
Comdisco, Inc. and subsidiaries at September 30, 1982 and 1981 and the results of their operations and
the changes in their ¬nancial position for each of the years in the three-year period ended September 30,
1982, in conformity with generally accepted accounting principles applied on a consistent basis.




Comdisco (A)
Peat, Marwick, Mitchell & Co.
Chicago, Illinois
November 9, 1982


Quarterly Financial Data
Summarized Quarterly Financial data for the ¬scal years ended September 30, 1982 and 1981, is as
follows:

(in thousands of dollars except per share amounts)
Quarter ended: December 31 March 31 June 30 Septemer 30
1981 1980 1982 1981 1982 1981 1982 1981

Total revenue $121,189 $78,833 $118,309 $64,450 $94,691 $75,722 $137,441 $82,533
Net earnings 9,604 3,285 5,934 3,146 5,824 4,075 8,015 5,135
Net earnings per common and
common equivalent share $.73 $.29 $.47 $.27 $.46 $.35 $.61 $.42
Comdisco, Inc. (B)




A published report implying that the accounting practices of com-
puter leasing giant Comdisco, Inc. could result in overstated earnings has pro-
voked strong rebuttals from the leasing industry while rattling the skeleton of the
OPM Leasing Services, Inc. scandal.
The report appeared last week in Barron™s financial weekly and suggested that
internal and external forces are mixing to create a potential disaster scenario for
Comdisco as well as other third-party lessors. Meanwhile, the report stated, com-
pany officers, including founder and chairman Kenneth Pontikes, have gone on a
Comdisco stock-selling spree in the past two years, getting rich in the process.
After publication of the report, Comdisco™s stock lost nearly 37% of its paper
Comdis-
value in one frenzied day of trading last Monday, falling from $38 to $24 per
co (B)
share.1
The October 17, 1983 issue of Computerworld magazine carried the above report on
Comdisco, Inc.


BUSINESS HISTORY AND OPERATIONS2
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
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.

.........................................................................................................................
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 © 1987 by the President and
Fellows of Harvard College. Harvard Business School case 9-186-299.
1. Reprinted with permission from Computerworld, October 17, 1983
2. This section and the next, Tax Advantaged Transactions, can be skipped by those who read Comdisco, Inc. (A)
(case 9-186-299).




831
832 Case: Comdisco, Inc. (B)




102 Part 4 Additional Cases




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-
tion. Comdisco Maintenance Services, another subsidiary, offered a low-cost alternative
to IBM™s maintenance service. Comdisco Disaster Recovery Services, Inc. was estab-
Comdisco (B)




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 located 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 than, 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-
term rentals, many of IBM™s customers might be forced to look for other lessors like
833

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