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Obligations under capital leases 1,984 5,663 14,249
Discounted lease rentals 257,096 145,626 183,557
Other 543 4,201 924
735,147 338,030 346,304
Application of Funds
Increase in leased equipment and inventory 282,341 190,180 202,002
Decrease in notes payable 2,385 1,060 33,460
Redemption of convertible debentures 50,000 ” ”
Reduction of discounted lease rentals and obligations under
capital leases 168,762 87,795 75,781
Purchase of subordinated debentures ” ” 2,162
Capitalized leases”computer equipment 1,984 5,663 14,249
Other assets and deferred charges 32,887 21,950 12,343
Cash dividends 3,990 1,468 1,093
542,349 308,116 341,090
Increase in cash and marketable securities 192,798 29,914 5,214
Cash and marketable securities at beginning of year 39,762 9,848 4,634
Cash and marketable securities at end of year $232,560 $ 39,762 $ 9,848
857
Case: Comdisco, Inc. (B)




127
Part 4 Additional Cases




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cost. During the initial lease term, computer equip-
1. Summary of Signi¬cant Accounting Policies
ment is depreciated to the Company™s estimate of
Principles of Consolidation: The accompanying
fair market value at expiration of the initial lease
consolidated ¬nancial statements include the
term. Equipment sold under tax advantaged trans-
accounts of the Company and its wholly-owned sub-
actions is fully depreciated within ¬ve years. Equip-
sidiaries after elimination of inter-company accounts
ment not sold under tax advantaged transactions is
and transactions.
fully depreciated over the next lease term or ¬ve
Inventory of Computer Equipment: Inventory of years from the date of acquisition, whichever is
computer equipment is stated at the lower of cost or longer.
market.
Financial Service Transactions: At a date after the
Initial Direct Costs: Salesmen™s commissions and inception of an initial user lease and independent
other initial direct costs related to operating leases thereof, the Company may sell some or all of the




Comdisco (B)
are deferred and amortized over the lease term. equipment to a third party investor. The sales price
equals the then current fair market value of the
Investment in Sales-Type and Direct Finance Leases:
equipment and is paid in the form of cash and a
At lease commencement, the Company records the
negotiable, interest-bearing promissory note (due
total lease rentals, estimated residual value of the
within two years) for 10“22% of the sales price (the
leased equipment and unearned lease income as
“equity payment”), and an installment note for the
investment in sales-type and direct ¬nancing leases.
balance (90“78% of the sales price) payable over an
A. Sales-Type Leases 84- to 96-month period. Simultaneously with the
Revenue from sales-type leases is recorded as sale sale, the Company leases such equipment back from
of computer equipment upon acceptance of the the investor for 84 to 96 months. The lease payments
equipment by the customer. The amount of the sale payable under the leaseback obligation generally
is the present value of the lease payment. The carry- are equal to the installment payments receivable
ing value of the equipment less the present value of under the installment note. As part of the leaseback
the estimated residual value at lease termination, if arrangement, from the 61st month of the leaseback
any, is charged to cost of computer equipment. period until the expiration of the leaseback, the
Unearned lease income represents the lease rentals investor shares in the release proceeds that the Com-
plus the estimated residual value of the equipment pany receives from subleasing the equipment. Upon
less the present value of these amounts. the expiration of the leaseback period, the investor
B. Direct Financing Leases has the exclusive right to the equipment.
The total lease rentals plus the estimated residual For equipment subject to sales-type and direct
value of lease termination, if any, less the equipment ¬nancing leases, the equity payment is ¬rst applied
cost is recorded as unearned lease income. to remove a portion of the residual value of the
The Company ¬nances most sales-type and direct equipment at the expiration of the initial user lease.
¬nancing leases by assigning the noncancellable The residual value is decreased because the Com-
rentals on a nonrecourse basis. The proceeds from pany™s right to the full residual has been reduced by
the assignment eliminate the total lease rentals the tax advantaged transaction. Any excess of the
receivable and related unearned income on sales- equity payment over the reduction of residual value
type and direct ¬nancing leases. Any gain or loss on is recorded as ¬nancial services revenue in the
the ¬nancing is recognized at the time of such period in which the tax advantaged transaction
¬nancing. For leases which are not ¬nanced, occurs.
unearned lease income is recognized as other reve- For equipment subject to operating leases, the
nue using the interest method over the lease term. equity payment is recognized as ¬nancial services
Leased Computer Equipment: Leased computer revenue in the period in which the tax advantaged
equipment under operating leases is recorded at transaction occurs. Against this revenue, the Com-
858 Case: Comdisco, Inc. (B)




128 Part 4 Additional Cases




pany allocates as a cost a percentage of the net as of September 30:
book value remaining at termination of the initial
1983 1982
user lease. The balance of the net book value
remaining at initial lease termination will be fully Minimum lease payments $88,718 $24,142
depreciated within ¬ve years from the date of equip- Estimated residual values of
ment purchase. leased equipment 29,863 12,324
Net investment in equipment
In ¬scal 1982 and the ¬rst quarter of ¬scal 1983, pending sale to third parties 7,305 ”
the Company sold the tax bene¬ts (investment tax Less unearned income 29,789 12,784
credit and cost recovery allowances) on certain new Net investment in sales-type and
direct ¬nancing leases $96,097 $23,682
equipment purchased for the Company™s lease port-
folio, under the provisions of the Economic Recovery
Tax Act of 1981. The proceeds from the sale of tax Future minimum lease payments to be received as
bene¬ts are recorded as ¬nancial services revenue. of September 30, 1983 are as follows:
Comdisco (B)




Also included in ¬nancial services revenue are fees
for arranging lease transactions between third Minimum lease
parties. payments
Years ending September 30 receivable
Income Taxes and Investment Tax Credit: Deferred
(in thousands)
income taxes are provided for income and expenses 1984 $24,844
which are recognized in different periods for income 1985 22,910
tax purposes than for ¬nancial reporting purposes. 1986 20,696
Investment tax credits are accounted for on a ¬‚ow- 1987 14,706
through basis. 1988 5,562
$88,718
Earnings Per Share: Earnings per common and
common equivalent share are computed based on
3. Leased Computer Equipment
the weighted average number of common and com-
Leased computer equipment at September 30, 1983
mon equivalent shares outstanding during each
is comprised of the following:
period including the effect of conversion of the 13%
convertible subordinated debentures, after elimina-
Accumu-
tion of the related interest expense (net of tax), and
Year lease Equipment lated Net book
after giving retroactive effect to the two-for-one
commenced cost depreciation value
stock split effected in March 1983. (See Note 11).
Dilutive stock options included in the number of 1979 $20,357 $16,598 $3,759
common and common equivalent shares are based 1980 41,718 29,167 12,551
1981 146,118 96,179 49,939
on the treasury stock method. The number of com-
1982 182,301 85,348 96,953
mon and common equivalent shares used in the
1983 281,203 35,518 245,685
computation of earnings per share for the years
$671,697 $262,810 $408,887
ended September 30, 1983, 1982 and 1981 were
29,501,678, 28,973,476 and 24,539,406, respec-
tively. An analysis of the operating lease portfolio by year
the equipment was ¬rst available from the manufac-
turer follows below. This does not represent the year
2. Investment in Sales-Type and Direct
of purchase by the Company. The Company™s
Financing Leases
depreciation policy generally depreciates computer
The following table lists the components of the net equipment to zero within ¬ve years of the date of
investment in sales-type and direct ¬nancing leases purchase.
859
Case: Comdisco, Inc. (B)




129
Part 4 Additional Cases




5. Discounted Lease Rentals
Year of delivery Net book value
Leased equipment owned by the Company is
1970 $1,816
¬nanced by assigning the noncancellable rentals to
1973 8,244
various lenders at ¬xed interest rates on a nonre-
1974 21,319
course basis. The proceeds from the assignment of
1975 58,656
the lease rentals represent payments due under the
1976 9,290
1978 58,556 lease discounted to their present value at the interest
1979 88,338 rate charged by the lender. The proceeds from the
1980 42,543 ¬nancing of equipment subject to sales-type and
1981 31,637 direct ¬nancing leases reduce the investment in
1982 88,488
sales-type and direct ¬nancing leases (see Note 1).
$408,887 The proceeds from the ¬nancing of equipment sub-
ject to operating leases is recorded on the balance
sheet as Discounted Lease Rentals. Interest expense
4. Operating Leases




Comdisco (B)
under these ¬nancings is computed under the inter-
Rental revenue from operating leases is recognized est method and amounted to $36,173,000,
in equal monthly amounts over the term of the $32,527,000 and $15,468,000 in 1983, 1982 and
lease. The following table summarizes the Com- 1981, respectively. In the event of default by the les-
pany™s future rentals receivable and payable under see, the lender has a ¬rst lien against the underlying
noncancellable operating leases existing at Septem- leased equipment, with no further recourse against
ber 30, 1983 for computer equipment and rents the Company.
payable for non-computer equipment and of¬ce
The annual maturities of discounted lease rentals for
space:
the next ¬ve years are as follows:
Computer equipment
Year ending September 30 Aggregate maturities
Rents receivable Rents payable Other
on equipment
Year ending on subleased rents (in thousands)
September 30 Owned Subleased equipment payable 1984 $164,193
1985 113,318
(in thousands)
1986 56,099
1984 $213,012 $28,334 $28,023 $2,430
1987 20,528
1985 135,624 17,723 14,118 1,787
1988 2,409
1986 63,488 7,309 4,340 831
1987 20,378 2,399 883 435 $356,547
1988 1,345 275 60 250
$433,847 $56,040 $47,424 $5,733
6. Capitalized Leases”Computer Equipment
The Company, as lessee, leases computer equip-
Total rental income and related expense for the
ment from other parties which may be recorded as
years ended September 30, 1983, 1982 and 1981
capitalized leases pursuant to FASB Statement No.
applicable to computer sublease activities were as
13. If the lease quali¬es as a capital lease, the Com-
follows:
pany records as an asset the lesser of the fair market
value of the equipment or the present value of the
Years ended
minimum lease payments. The Company amortizes
September 30 Rental income Rental expense
the asset in a manner consistent with its normal
(in thousands)
depreciation policy for leased equipment.
1983 $29,316 $33,694
1982 23,633 27,455 Capitalized leases-computer equipment at Septem-
1981 24,152 22,415
ber 30, is comprised of the following:
860 Case: Comdisco, Inc. (B)




130 Part 4 Additional Cases



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