<<

. 185
( 208 .)



>>

Company™s income statement for the respective of Value at Value at Net Book
years. Termination Termination Termination Value
b. Column B represents rentals due under direct
1984 $34,725 $70,234 $35,509
¬nancing leases that are not recorded as rental 1985 15,665 43,682 28,017
revenue because of the accounting treatment 1986 18,869 48,868 29,999
afforded direct ¬nancing leases. 1987 13,820 36,525 22,705
1988 1,170 4,191 3,021
As a result, the actual increase in the volume of leas-
$203,500 $119,251
Total $84,249
ing is not apparent from a review of the Company™s
income statement.
Tax Advantaged Transaction
Residual Values. Residual value is an estimate of the
While the speci¬c terms and conditions of tax
value of the equipment that is expected to be real-
advantaged transactions vary, the following is a
ized at the end of the lease term for sales-type and
general description of a typical tax advantaged
direct ¬nancing leases. Comdisco records the
transaction:
present value of a conservative estimate of residual
value. 1. At a date after the inception of the initial user
lease and independent thereof, the Company
Depreciation. All of Comdisco™s leased equipment
may sell all or some of the leased equipment to a
under operating leases is depreciated to zero within
third party investor (“investor”). If the equipment
¬ve years, with a higher rate applicable to the
is sold to an investor, the sale generally occurs
period covered by the initial user lease. Operating
three to nine months after the commencement of
leases are depreciated to Comdisco™s estimate of
the initial user lease. The sales price equals the
fair market value at lease termination. These con-
then current fair market value of the equipment
servative estimates are supported by forecasts pre-
and is paid in the form of:
pared by International Data Corporation (IDC), a
recognized expert in residual value projections for (a) cash and a negotiable, interest-bearing
computer equipment. In fact, at September 30, promissory note (due within two years) for 10“
1983 IDC™s fair market value projections are 242% 22% of the sales price (the “equity payment”),
of the equipment™s net book value at lease termina- and
849
Case: Comdisco, Inc. (B)




119
Part 4 Additional Cases




(b) an installment note for the balance (90“78% advantaged transaction occurs. The Company
of the sales price) payable over an 84-month allocates as a cost a percentage of the net book
period. value at the expiration of the initial user lease to
the revenue from the tax advantaged transaction
2. Simultaneously with the sale, the Company
because of its decreased right to re-lease rentals.
leases such equipment back from the investor for
In all cases, the equipment sold under tax advan-
84 months. The lease payments payable under
taged transactions is fully depreciated prior to the
the leaseback obligation generally are equal to
time the investor is entitled to share in re-lease
the installment payments receivable under the
rentals.
installment note described in 1(b) above.
2. For sales-type and direct ¬nancing leases, the
3. As part of the leaseback arrangement, during the
Company may record on its balance sheet an
61st through 84th month of the leaseback
estimated residual value at the inception of the
period, the investor also shares in the re-lease
initial user lease. The equity payment is ¬rst
proceeds that the company receives from sub-
applied to remove a portion of that residual
leasing the equipment. Upon the expiration of




Comdisco (B)
value. The residual value is decreased because
the leaseback period, the investor has the exclu-
the Company™s ability to recover such residual
sive right to the equipment.
value is reduced by the rental sharing under the
In summary, the Company has given up the acceler-
tax advantaged transaction. Any excess of the
ated depreciation bene¬ts on the equipment for tax
equity payment over the reduction of residual
purposes, a portion of the rentals for months 61“84
value is recorded as ¬nancial services revenue in
and 100% of the equipment value after the 84th
the period in which the tax advantaged transac-
month in exchange for the non-refundable equity
tion occurs.
payment. This equity payment is the only portion of
Lease accounting and tax advantaged transactions
the tax advantaged transaction that is recorded by
represent two of the more complex areas of Com-
the Company.
disco™s accounting. See the footnotes to the Consoli-
Revenue Recognition. Revenue is recognized,
dated Financial Statements for additional
according to the lease classi¬cation, in the following
information.
manner:
1. For equipment subject to operating leases, the
equity payment is recognized as ¬nancial ser-
vices revenue in the period in which the tax


MANAGEMENT™S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Summary Revenue
Fiscal 1983 was the third consecutive year of record Total revenue increased 15% over the prior ¬scal
revenue and earnings for the Company. Total reve- year. The increase in total revenue in ¬scal 1983
nue for ¬scal 1983 and 1982 was $543.2 million was not as dramatic as the increase in ¬scal 1982
and $471.6 million, respectively. Net earnings despite the substantial increase in the number of
increased from $29.4 million, or $1.14 per share, lease transactions in ¬scal 1983, primarily because
in ¬scal 1982 to $51.8 million, or $1.78 per share, of the different mix in lease transactions entered into
in ¬scal 1983. The Company™s continued success in in ¬scal 1983. The lease classi¬cation, as deter-
the lease placement of IBM computer equipment, mined by FASB Statement No. 13, “Accounting for
particularly 308X mainframes and 3380 disk stor- Leases,” has a signi¬cant effect on the manner in
age devices, and in ¬nancial services activities were which revenue is recorded. During ¬scal 1983, there
the primary reasons for the record results achieved. was an active market for 308X mainframes, which
850 Case: Comdisco, Inc. (B)




120 Part 4 Additional Cases




were recorded as direct ¬nancing leases. In ¬scal higher ¬nancial services revenue. Financial services
1982, a larger percentage of leases were accounted revenue for ¬scal 1983 and 1982 includes $6.0 mil-
for as operating leases. Under operating lease lion and $13.8 million, respectively, of net revenue
accounting, the gross rental is recognized in equal generated by arranging leases between third
monthly amounts over the lease term as rental reve- parties.
nue. Since the Company ¬nances most of its direct Other revenue for ¬scal 1983 totaled $39.8 million
¬nancing leases on a nonrecourse basis, the net in comparison to $24.5 million in ¬scal 1982 and
margins are recorded as other revenue. The net $13.7 million in ¬scal 1981. The increase in ¬scal
margin represents the sum of the present value of 1983 is primarily due to higher revenue from direct
the lease rentals, plus the present value of estimated ¬nancing leases, interest income earned on short
residual value at lease termination, if any, less the term investments and higher revenues from the
equipment. Company™s disaster recovery services.
The growth of the Company™s leasing activity contin-
Cost and Expenses
ued on a strong upward trend in ¬scal 1983. During
Comdisco (B)




Total costs and expenses of $484.3 million for ¬scal
¬scal 1983, the Company entered into 3,467 new
1983 increased 16% over total costs and expenses
leases with rental payments of $1.1 billion during
of $417.8 million in ¬scal 1982. Fiscal 1982 total
the initial lease terms. This compared to 2,259 new
costs and expenses were 49% higher than ¬scal
leases and $702 million of rental payments during
1981. The increases were the result of the growth in
the initial lease term for the prior ¬scal year. Rental
the Company™s leasing activities and the continuing
revenue from equipment subject to operating leases
expansion in the marketing of its services.
increased 29% in comparison to the year earlier.
Interest expense for ¬scal 1983 totaled $53.7 mil-
The increase in operating leases in ¬scal 1983 was
lion in comparison to $47.2 million in ¬scal 1982
primarily due to the high volume of lease place-
and $33.7 million in ¬scal 1981. The primary com-
ments of IBM™s newest disk storage device, the
ponent is the interest expense associated with the
3380.
discounting of operating leases. This represented
Revenue from the sale of computer equipment
67%, 69% and 46% of total interest expense in ¬scal
increased during ¬scal 1983, primarily as a result of
1983, 1982 and 1981, respectively. The Company
an active international market for 308X main-
¬nances leases by assigning the noncancellable
frames.
rentals to ¬nancial institutions on a nonrecourse
Financial services revenue for ¬scal 1983 totaled basis at ¬xed interest rates and receives from the
$65.6 million, in comparison to $73.9 million in ¬s- lender the present value of the rental payments (the
cal 1982 and $30.8 million in ¬scal 1981. While discounted amount). For operating leases, the Com-
the total ¬nancial services activity increased in vol- pany recognizes interest expense over the term of
ume during 1983, such increase is not re¬‚ected in the lease. The redemption of the Company™s 13%
¬nancial services revenue in comparison to 1982. Convertible Debentures Due 2001 reduced the
Pursuant to the Economic Recovery Tax Act of 1981, Company™s interest expense by approximately $5.3
the Company elected in ¬scal 1982 to sell tax bene- million in ¬scal 1983. Interest expense on the 8%
¬ts, including investment tax credits, to other corpo- convertible debentures issued May 1, 1983 totaled
rations and recorded the proceeds as ¬nancial $8.2 million. The increases in interest expense in ¬s-
services revenue. In ¬scal 1983, most of the ¬nan- cal 1982 and ¬scal 1981 were due to increased dis-
cial services revenue was generated by the sales of counted lease rentals as a result of the growth in the
leased equipment through the Company™s tax Company™s leased equipment portfolio.
advantaged transactions with the Company retain-
ing any available investment tax credits on the Income Taxes
equipment. In essence, in ¬scal 1983, the invest- Income taxes as a percentage of earnings before
ment tax credits associated with leasing were income taxes were 11.9% in ¬scal 1983 compared
re¬‚ected in the reduced income tax rate, while in ¬s- to 45.4% in ¬scal 1982 and 26.8% in ¬scal 1981.
cal 1982, the sale of such bene¬ts was re¬‚ected in The higher effective tax rate in ¬scal 1982 was
851
Case: Comdisco, Inc. (B)




121
Part 4 Additional Cases




attributable to lower investment tax credits due to $50,000,000 of 13% convertible subordinated
the sale of such bene¬ts by the Company as permit- debentures. Cash and marketable securities totaled
ted under the Economic Recovery Tax Act of 1981. $232.6 million at September 30, 1983. In May
No signi¬cant tax bene¬t transfer leases were origi- 1983 the Company sold $250,000,000 of 8% con-
nated by the Company in ¬scal 1983 and the Com- vertible subordinated debentures, the primary
pany retained the investment tax credits for its reason for the increase in cash and marketable
account, thereby reducing the effective tax rate to securities. The proceeds of the offering were used to
11.9% in ¬scal 1983. Note 10 of Notes to Consoli- ¬nance the increase in the Company™s leasing
dated Financial Statements provides details about activities and to invest in short-term marketable
the Company™s income tax provisions and effective securities.
tax rates.
At September 30, 1983, the Company had $40 mil-
International Operations lion of available borrowing capacity under various
The Company operates principally in three geo- lines of credit from commercial banks and no short
graphic areas: the United States, Europe and Can-




Comdisco (B)
term debt.
ada. The Company has subsidiaries in Belgium,
The Company™s current ¬nancial resources and esti-
West Germany, Switzerland, the Netherlands,
mated cash ¬‚ow from operations will be adequate
France, Sweden, Denmark, the United Kingdom and
to fund anticipated requirements for ¬scal 1984.
Canada. These subsidiaries offer services similar to
The major portion of funds required by the Com-
those offered in the United States. A strong demand
pany to ¬nance its leasing operations is provided by
for IBM 308X processors, principally in Europe,
assigning the noncancellable rentals to various
resulted in an increase in revenue from international
¬nancial institutions at ¬xed interest rates on a non-
operations of 25% from $79.4 million in ¬scal 1982
recourse basis. The Company™s liquidity is aided by
to $98.9 million in ¬scal 1983. International reve-
the maturation of its lease portfolio, since the remar-
nues represented 18% of the Company™s total reve-
keting of its leased equipment generates substantial
nue in ¬scal 1983 and 17% in ¬scal 1982.
funds. For example, the successful remarketing of
Market and Dividend Information equipment under leases which expire in ¬scal 1984
The Company™s common stock is traded on the New is estimated to generate funds in excess of $50 mil-
York Stock Exchange under the symbol CDO. The lion.

<<

. 185
( 208 .)



>>