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active quarter ever, and I am con¬dent that ¬scal
I am proud of Comdisco™s performance in ¬scal
1984 will prove to be Comdisco™s most successful
1983 and even prouder of the efforts and devotion
year to date.
of our employees. Without their outstanding efforts,
we would not have achieved the success we have
Kenneth N. Pontikes
enjoyed. The support of our lenders, customers and
Chairman of the Board and President
you, our shareholders, is particularly gratifying. The
November 28, 1983
¬rst quarter of ¬scal 1984 started out as our most


Leasing™s Four Fundamental Values source of revenue. In ¬scal 1983, for example, the
Company entered into 3,470 leases having total
Initially, Comdisco was a computer equipment lease payments of over $1 billion during the initial
dealer, buying and selling equipment for its own lease terms.
account. Exceptional marketing capability helped
Lease contracts cannot be canceled, and the cus-
make Comdisco the largest dealer in the industry by




Comdisco (B)
tomer has full responsibility for maintenance and
1976.
other expenses. Most leases have terms of two to
By the late 1970™s, market conditions had shifted ¬ve years.
and demand for computer leasing increased dra-
These leases also allow Comdisco to ¬nance its
matically. Based on its exceptional marketing capa-
leasing growth through “nonrecourse debt.” Typi-
bility, Comdisco™s emerging leasing operation
cally, Comdisco takes an existing lease to a bank
quickly grew to become the Company™s most signif-
and assigns the stream of lease payments to the
icant business activity. Both dealer activity and the
bank. In return, the bank gives Comdisco cash that
leasing operation”supported by unmatched remar-
is equal to the present value of the lease payment
keting capabilities”now contribute to Comdisco™s
stream at market interest rates. The debt is nonre-
overall success.
course because the bank looks to the lease pay-
Today, Comdisco™s fundamental business, the foun- ments to repay the loan. This nonrecourse debt for
dation on which its exceptional pattern of ¬nancial operating leases is recorded as “Discounted Lease
performance is based, is leasing”primarily the Rentals” on Comdisco™s Balance Sheet. Interest rates
leasing of new and used IBM computer equipment. are ¬xed in this transaction, eliminating Comdisco™s
And, as business and institutions world-wide exposure to rate ¬‚uctuations. Comdisco retains
become more and more information driven, the ownership of the computer equipment.
demand for data processing systems will continue
Comdisco™s continued success in computer leasing
to grow.
is supported by a variety of factors discussed in
Leasing is widely recognized as the most attractive greater detail on the following pages of this Annual
alternative to purchasing multi-million dollar com- Report. Among them are a customer relationship
puter systems. Over the years, Comdisco has with 70% of the Fortune 500 companies, a propri-
achieved leadership in the ¬eld, having built a lease etary data base containing information on all major
portfolio of IBM equipment currently valued at data processing installations, a seasoned sales team
approximately $1 billion. with of¬ces in key markets throughout the U.S., Can-
ada and Europe, and a complete line of customer
The leasing business also creates values that enable
support services.
Comdisco to capitalize on other related sources of
revenue and earnings. At the core of Comdisco™s
Remarketing Capacity”Value Two
business, there are four such fundamental values.
Data processing technology is among the most
Initial User Lease”Value One dynamic in the history of world commerce. The
When Comdisco leases its new or used computer marketplace has a virtually insatiable appetite for
equipment to a customer, the customer™s rental pay- increased capacity and a constant stream of new
ments during the original lease term are the primary technological advancements.
846 Case: Comdisco, Inc. (B)




116 Part 4 Additional Cases




With change as one of the few constants in the structure transactions in response to changes in tax
industry, Comdisco™s unmatched capacity to remar- laws. As long as Congress continues to encourage
ket equipment is a fundamental component in the capital spending, the Company™s control of equip-
Company™s formula for success. Indeed, leasing ment will enable it to continue structuring attractive
customers place a signi¬cant value on Comdisco™s tax-oriented transactions.
market making ability. As new products enter the For example, in 1981 Congress devised “Safe Har-
marketplace, customers know that Comdisco has a bor Leasing” of equipment as a method for transfer-
unique capacity to remarket existing equipment, ring tax bene¬ts from one corporation to another.
making it ¬nancially feasible to upgrade systems to Called “tax bene¬t transfers,” compensation for tax
a competitive, state-of-the-art level. bene¬ts was paid in a single lump sum at the begin-
Comdisco™s ability to capitalize on re-lease values ning of the lease. Tax bene¬t transfers were, in
and residual values is directly related to exceptional effect, simply the sale of investment tax credits and
market penetration, its proprietary data base of depreciation bene¬ts. In 1982, as part of the Tax
marketing information, its professional sales force, Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Comdisco (B)




and the Company™s expertise in computer equip- Congress effectively eliminated Safe Harbor Leas-
ment and that equipment™s life cycle. ing. In doing so, Congress did not change its desire
to stimulate capital investment through tax incen-
Tax Bene¬ts”Value Three tives, as evidenced by the fact that in 1984 a new
Tax bene¬ts are an integral part of any leasing oper- type of tax-oriented lease, the ¬nance lease, will be
ation. Substantial tax bene¬ts”particularly in the permitted.
form of investment tax credits and accelerated
Despite the effective elimination of Safe Harbor
depreciation deductions”are generated through
Leasing, Comdisco continues to be in a position to
Comdisco™s acquisition of computer equipment.
generate value from signi¬cant investment tax cred-
Comdisco has a number of valuable alternatives its and ownership rights to substantial amounts of
concerning these tax bene¬ts. Comdisco can claim equipment. While the laws have changed, the Con-
the investment tax credits, thus reducing its own gressional philosophy underlying tax-oriented leas-
income tax. The Company can also choose to pass ing has not.
the investment tax credit through to the lessee in
exchange for higher rentals. Or, as a third option, Tax Advantaged Transactions”Value Four
leveraged lease transactions with third party inves- The fourth fundamental value of Comdisco™s leasing
tors can also be arranged. This option has the effect activity is the tax advantaged transaction. In this
of passing on all bene¬ts of ownership, including tax alternative, Comdisco may sell equipment that is
and residual values. The compensation leasing under an initial user lease to an independent third
companies typically receive is a lump sum payment party. This is a completely separate transaction hav-
and a share in the residual value of the leased ing no effect on the equipment user. The buyer is
equipment. typically an individual or corporate investor who
wants to share in the ¬nancial rewards of leasing”
The capacity of the Company™s basic leasing busi-
re-lease values, residual values and tax bene¬ts.
ness, which generates signi¬cant tax bene¬ts, allows
Comdisco to capitalize on certain favorable tax When Comdisco sells computer equipment in a tax
laws. Such laws can be traced to the Congress™ advantaged transaction, it receives an equity pay-
longstanding desire to provide industry with incen- ment from the buyer in an amount equal to between
tives for capital spending. Both investment tax cred- 10% and 22% of the equipment™s fair market value.
its and accelerated depreciation deductions are the In return for this equity payment, the new owner
product of laws that re¬‚ect this Congressional intent. receives: (a) the accelerated depreciation bene¬ts
Comdisco generates value by structuring transac- on the equipment, (b) a portion of the lease rentals
tions which permit the full utilization of the tax in the sixth and seventh years after the sale is made,
bene¬ts associated with its equipment portfolio. and (c) 100% of the equipment™s value after the sev-
Comdisco has demonstrated its ability to pro¬tably enth year.
847
Case: Comdisco, Inc. (B)




117
Part 4 Additional Cases




The utilization of tax bene¬ts, either by the Company recorded as a sales-type lease. All other leases
for its own account or by an investor as a result of a which do not meet one or more of the preceding cri-
tax advantaged transaction, results in a lower effec- teria are classi¬ed and accounted for as operating
tive cost to the equipment user, which is in accor- leases. Operating leases are generally shorter term
dance with Congress™ objective to stimulate capital leases (2“4 years).
expenditures. Sales-Type Lease. A sales-type lease is recorded in
the income statement as “Sale of computer equip-
These four values form the core of Comdisco™s
ment,” along with other sales. The amount recorded
business”leasing activity, computer remarketing,
as a sale is the present value of the lease payments.
tax bene¬ts and tax advantaged transactions.
The cost of the equipment less the present value of
Understanding these values is key to understanding
estimated residual value at lease termination, if any,
Comdisco™s growth potential and how the Company
is recorded in the income statement as “Cost of
effectively minimizes the business risk in its
computer equipment.”
operations.
Direct Financing Lease. It is Comdisco™s policy to




Comdisco (B)
Understanding Comdisco™s Accounting ¬nance all of its direct ¬nancing leases on a nonre-
course basis. Therefore, the net margin for a direct
Lease Accounting
¬nancing lease is recorded as “other revenue.” The
Comdisco accounts for its lease transactions in
net margin represents the sum of the proceeds from
accordance with the rules set forth in Accounting for
the ¬nancing of the lease plus the present value of
Leases (FASB 13) prescribed by the Financial
estimated residual value at lease termination, if any,
Accounting Standards Board. FASB 13 contains
less the equipment cost.
guidelines for classifying lease transactions as one
The present value of the residual values of sales-
of the following three types:
type and direct ¬nancing leases and the present
• sales-type lease value of the noncancellable lease rentals, prior to
• direct ¬nancing lease their ¬nancing, are included in the balance sheets
• operating lease as “Net investment in sales-type and direct ¬nancing
leases.”
A lease is classi¬ed and accounted for as sales-type
or direct ¬nancing by Comdisco if it meets any one Operating Lease. Revenue under an operating lease
of the following criteria: is recorded as payments accrue, that is, on a
monthly basis over the term of the lease. The depre-
a. The lease transfers ownership of the property to
ciation expense is also recorded on a monthly basis
the lessee (Comdisco™s customer) by the end of
and the equipment cost is recorded on the Com-
the lease term;
pany™s balance sheet as “Leased computer equip-
b. The lease contains an option allowing the lessee
ment.”
to purchase the property at a bargain price;
c. The lease term is equal to 75% or more of the To summarize, the revenue recognition effects of the
estimated economic life of the property; or three different types of leases is as follows:
d. The present value of the rentals is equal to 90% • For a sales-type lease, the present value of the
or more of the fair market value of the leased lease rentals is recorded as “Sale of computer
property, less any related investment tax credit equipment” at the closing of the transaction.
retained by Comdisco. • For a direct ¬nancing lease, the net margin is
The majority of Comdisco™s sales-type and direct recorded as “Other revenue.”
¬nancing leases are classi¬ed as such because they • For an operating lease, the monthly rentals are
meet criterion d above. recorded as “Rental revenue” over the term of the
lease.
If the leased equipment is new or purchased from
the lessee (purchase/leaseback) and meets one or Effect of Direct Financing Leases. In ¬scal 1983 a
more of the preceding criteria, the lease is recorded substantial portion of leases written by Comdisco
as a direct ¬nancing lease; otherwise, the lease is were recorded as direct ¬nancing leases. Because
848 Case: Comdisco, Inc. (B)




118 Part 4 Additional Cases




only the net margins on these leases are recorded, tion. As a result of this conservative depreciation
the total leasing volume that Comdisco transacted in policy, the Company has constantly realized sub-
¬scal 1983 is understated when compared to prior stantially more proceeds on the sale or re-lease of
years when many fewer direct ¬nancing leases were its equipment than its recorded book value.
recorded. The following table sets forth the cumula- The following table projects the runoff of the Com-
tive increase in rental revenue that would have been pany™s September 30, 1983 operating lease portfo-
recorded in recent ¬scal years if Comdisco had re- lio. The table compares the net book value of the
corded all direct ¬nancing leases as operating leases: equipment to its estimated fair market value in the
¬scal year in which the existing leases terminate.
Rental Revenue (in thousands) Fair market value represents IDC estimates of the
equipment value at lease termination.
As
Fiscal Reported Increase
Comdisco, Inc.”Operating Lease Portfolio Run-
Year (A) (B) Pro Forma
off as of September 30, 1983
Comdisco (B)




1979 $ 60,947 $ 9,634 $ 70,581
1980 80,979 14,612 95,591 Fair Market Value Comparison to Net
1981 131,571 24,220 155,791 Book Value (in thousands)
1982 206,592 65,284 271,876
Estimated
1983 266,628 179,528 446,156
Excess Fair
Estimated Market
a. Column A represents rentals reported in the Fiscal Year Net Book Fair Market Value over

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