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ness, which has resulted in a greatly expanding third party leasing market.
IBM Credit Corporation™s (ICC) entry into the third party leasing business merely
replaces part of the parent company™s participation in leasing. ICC is participating in the
third party market as a broker in much the same way as Comdisco. Comdisco has access




Comdisco (B)
to the same debt and equity markets as ICC, and on terms that will at most be only mar-
ginally less attractive to Comdisco than to ICC.

Tax Advantaged Investment Program
Our tax advantaged transactions have been carefully structured and documented.
These transactions are bona ¬de investments with real economic substance and pro¬t
potential to the investor. They provide a valuable and effective way for individuals to pro-
vide capital for and participate in the equipment leasing industry. We take great pride in
our reputation for providing a high quality computer leasing investment.
Like any tax advantaged investment, these transactions have certain tax risks, such as
the possibility of IRS challenge and the risk of an adverse change in federal tax laws. We
have made every effort to minimize these risks. Our nationally recognized tax counsel
have provided their opinion that these transactions qualify as true leases for federal tax
purposes under current law. We constantly monitor proposed federal tax changes, and
we know of no imminent changes in federal tax laws or regulations affecting tax advan-
taged “wraparound” leases of computer equipment.
While these transactions have contributed substantially to Comdisco™s pro¬tability in
recent years, our continued success in the computer equipment marketplace is not depen-
dent on our ability to offer this speci¬c form of transaction to investors. Nor does Com-
disco™s success depend on continuation of the status quo with respect to federal tax policy.
We have employed and continue to employ a variety of transaction structures and have a
history of adapting quickly to changes in the federal tax law and the marketplace. In fact,
previous changes in federal tax laws and in the marketplace have often created signi¬-
cant opportunities for Comdisco.

Management Stockholdings
Management currently holds approximately 8,950,000 shares or 31% of the out-
standing shares of the Company. These shares represent an ownership interest of approx-
imately $240,000,000, based on the closing price on the New York Stock Exchange as of
October 11, 1983. Over the years, sales of common stock have been made periodically
by management. Tax liabilities created as a result of the exercise of stock options and
sales by a retired senior executive who still owns approximately 650,000 shares account
for a signi¬cant portion of these sales. The remaining sales are not signi¬cant when com-
pared to current insider holdings.
842 Case: Comdisco, Inc. (B)




112 Part 4 Additional Cases




Conclusion
In 1969, when we started Comdisco, we committed ourselves to building our busi-
ness based on the principle of serving our customers with the highest degree of integrity
and professionalism. Fortunately, over the years we have attracted talented individuals
who share that commitment and who continue to value the principles of service, integrity
and professionalism just as we did in 1969. We feel that our reputation and the trust that
we have developed with our customers, our equity and debt investors, and our stockhold-
ers are our most valuable assets. We have not, and will not, compromise these principles
in the conduct of our business.
Finally, it is important for you, our stockholders, to understand completely that
Comdisco is stronger ¬nancially than it has ever been; that we have greater opportunities
before us than at any time in our history; and that management is dedicated to retaining
stockholder con¬dence and enhancing stockholder wealth.
Comdisco (B)




Sincerely,

Kenneth N. Pontikes
(President)
843
Case: Comdisco, Inc. (B)




113
Part 4 Additional Cases




EXHIBIT 4
Comdisco, Inc. Annual Report for Fiscal Year 1983 (abridged)

To Our Stockholders tax credits increased the effective income tax rate to
45.4%. In ¬scal 1983 the large volume of 308X
mainframe and 3380 disk storage equipment pur-
I am pleased to report that in ¬scal 1983 your Com-
chased for its leasing activity increased the amount
pany continued its outstanding growth and perfor-
of investment tax credit available to Comdisco.
mance. Net earnings for ¬scal 1983 of $51.8
Because of changes in tax laws in late 1982 effec-
million, or $1.78 per share, represented increases
tively eliminating tax bene¬t transfers, it was no
of 76% and 56%, respectively, over ¬scal 1982
longer attractive for Comdisco to enter into these
results. Total revenue increased 15% to $543.2 mil-
transactions, so these investment tax credits were
lion. Your Company™s continued success in the lease
utilized for its own account. Investment tax credits of
placement of IBM computer equipment, particularly




Comdisco (B)
$22 million were earned in ¬scal 1983, including
308X mainframes and 3380 disc storage devices,
$12 million in the fourth quarter, reducing the effec-
and in ¬nancial services activities were the primary
tive income tax rate to 12%.
reasons for the record results achieved. Dividends
were increased 36% in ¬scal 1983 from $.11 to Financial Services Activity. In ¬scal 1982, proceeds
$.15 per share, as adjusted for the 2-for-1 stock from tax bene¬t transfers were recorded as ¬nancial
split distributed in March, 1983. services revenue. As I mentioned earlier, these tax
bene¬t transfers had the effect of increasing revenue
Leasing Activity. Leasing activity increased dramati-
and income tax expense. In ¬scal 1983, most of the
cally in ¬scal 1983 as Comdisco entered into 3,470
¬nancial services revenue was generated by the sale
new leases with total rentals in excess of $1 billion
of leased equipment in the Company™s tax advan-
during the initial lease terms. This compares to
taged transactions (see Understanding Comdisco™s
2,259 leases and over $700 million in total rentals
Accounting). In tax advantaged transactions, Com-
for leases entered into during ¬scal 1982. Comdisco
disco retains any available investment tax credit.
leased to its customers 3380 disk storage devices
Equipment with a fair market value of $430.2 mil-
and 3380 disk controllers with an initial cost in
lion was sold under tax advantaged transactions in
excess of $200 million in ¬scal 1983. In addition the
¬scal 1983 compared to $253.0 million of equip-
Company leased 308X mainframes having an
ment for the prior year.
aggregate purchase price of $289 million.
Marketplace Perspective. In ¬scal 1984, the data
The large volume of 308X mainframe lease transac-
processing industry is expected to continue its
tions did not correspondingly increase the Com-
annual growth rate of 15“25%. IBM Corporation
pany™s total revenue since these leases are required
continues to be the dominant factor in the computer
to be accounted for as direct ¬nancing leases.
leasing industry through its direct lease and rental
Under direct ¬nancing lease accounting only the net
programs.
margins are recorded as revenue, not the gross
rentals as under operating lease accounting (see However, in recent years IBM has been emphasizing
Understanding Comdisco™s Accounting for detailed the sale of its equipment, with less emphasis on
explanation). direct leasing. This is re¬‚ected in IBM™s pricing strat-
Pursuant to the Economic Recovery Tax Act of 1981, egy which favors the purchase of equipment. For
Comdisco elected in ¬scal 1982 to sell tax bene¬ts, example, during ¬scal 1983, IBM reduced lessee
including investment tax credits, to other corpora- purchase option credits to make its leasing program
tions, and recorded the proceeds as ¬nancial ser- even less attractive. In addition, IBM will eliminate,
vices revenue. These “tax bene¬t transfers” as of January 1, 1984 its practice of passing
increased both total revenue and earnings before through investment tax credits to its lessees. IBM™s
taxes, but the corresponding reduction in investment reduced emphasis on direct leasing has led to
844 Case: Comdisco, Inc. (B)




114 Part 4 Additional Cases




increased user demand for third party lease ¬nanc- utive Vice President from Senior Vice President-
ing, resulting in higher growth in the third party Corporate Development. Mr. Sebastian, an of¬cer
computer leasing marketplace. Your Company is of Comdisco for eight years, will continue to over-
successfully participating in this expanding market. see corporate development and take on additional
administrative duties. In October 1983 Nicholas M.
IBM Credit Corporation has entered the third party
DiBari resigned his positions as Senior Vice Presi-
leasing market, replacing part of IBM™s participation
dent-Marketing and as a Director, for personal rea-
in this market. However, we do not expect this devel-
sons. Mr. DiBari made valuable contributions to
opment to adversely affect our competitive position.
Comdisco™s marketing structure and philosophy.
We believe IBM Credit Corporation to be a reason-
Robert A. Bardagy has replaced Mr. DiBari as Senior
able competitor which will not take unacceptable
Vice President-Marketing and as a Director. For the
risks nor assume unrealistic residual values. Also,
past six years, Mr. Bardagy has been responsible
Comdisco has access to the same debt and equity
for the Company™s market making and trading
markets as IBM Credit Corporation. Finally, and of
programs.
critical importance, users of computer equipment
Comdisco (B)




need to remarket existing equipment when new
Other Activities. In ¬scal 1983, the Company
equipment is acquired. Because IBM Credit Corpo-
announced its Corporate Lease Line Program. The
ration does not remarket displaced equipment,
Corporate Lease Line Program allows the Com-
Comdisco still retains an advantage by virtue of its
pany™s customers to lease almost all types of capital
ability to remarket used equipment. No company is
equipment at attractive lease rates with very little
better situated to handle all of its customers™ needs
administrative burden. The Company has the ability
than Comdisco.
to administer the program based on the customer™s
Activity in 308X mainframe and 3380 disk drives requirements. This program is expected to make a
remains very strong, with your Company continuing substantial contribution to ¬scal 1984 results. Com-
to increase its market share. Comdisco™s success in disco Disaster Recovery Services has increased its
an expanding, competitive marketplace is directly capabilities to meet the growing demands for its ser-
attributable to its superior remarketing and lease vices. The contributions of Comdisco Technical Ser-
¬nancing capabilities. vices and Comdisco Maintenance Services assist the
Company in providing the whole array of services
Financial Condition and Liquidity. In ¬scal 1983
required by a data processing operation. The Com-
Comdisco converted its $50 million of 13% convert-
pany™s international operations continue to contrib-
ible debentures into common stock and subse-
ute signi¬cantly to our pro¬tability. Finally, our ability
quently issued $250 million of 8% convertible
to capitalize on opportunities both inside and out-
debentures. As a result of these and other factors,
side of our basic industry has never been greater.
Comdisco is in a stronger ¬nancial position than it
has ever been. Stockholders™ equity increased 110%
A recent misunderstanding of Comdisco has led to
to $91.5 million during ¬scal 1983. At September
lower market prices for our common stock. Accord-
30, 1983 total assets were nearly $1 billion and
ingly, we expanded this Annual Report to describe
cash and marketable securities exceeded $230 mil-
our key operations and our accounting policies in
lion. The continued improvement in your Com-
greater detail. By any measurement, there are few
pany™s ¬nancial condition was recognized by
publicly-held companies that can match Comdisco™s
Moody™s Investors Service, which raised Comdisco™s
performance since its inception in 1969. For the last
bond rating for its convertible debentures to BA2
¬ve years the Company™s compound growth rate for
in ¬scal 1983.
net earnings was an outstanding 60%, while net
Personnel Changes. In ¬scal 1983, the number of earnings per share and total revenue had growth
employees increased to 504, enhancing your Com- rates of 46% and 29%, respectively. In ¬scal 1983
pany™s commitment to full customer service and return on average equity was 37%, with a 5-year
helping to support continued growth. In November average return of 33%. Comdisco™s record speaks
1983, Raymond F. Sebastian was promoted to Exec- for itself.
845
Case: Comdisco, Inc. (B)




115
Part 4 Additional Cases


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