Question 1: Identify all the economic entities involved in the development of Anacomp’s
CIS software system.
Question 2(part 1): Describe the contractual arrangements between the economic entities
involved in the CIS development.
Question 2(part 2): Who bears the majority of the risk of failure of the development effort?
Question 2(part 3): Who stands to gain most if the development effort succeeds?
Question 2(part 4): Are Anacomp’s shareholders better off or worse off with this
arrangement, relative to in-house development of the system?
Question 3(part 1): What criteria will Anacomp’s management use in deciding on whether
or not to buy back the CIS system from RTS Associates?
Question 3(part 2): Is Anacomp’s management likely to be unbiased in deciding on the
timing and the price of the purchase? If not, what will be the direction of the bias?
Question 4: Describe how Anacomp accounts for the CIS development effort. How does
this type of accounting compare with the accounting for in-house software development?
What particular accounts will be affected differentially by the two development
arrangements?
Question 5: In general, do you think Anacomp’s use of R&D partnerships is a sensible
approach to new product development? What are the overall costs and benefits of this
approach?
Question 6: Anacomp’s earnings dropped from $0.87 per share in 1981 to $0.50 per share
in 1982. What are the reasons for this earnings decline? Are there any unusual and
one-time items that influenced Anacomp’s 1982 performance?
Question 7: What is the total amount of debt that Anacomp has on its books? Does the
company have any off-balance-sheet liabilities?
Question 8: What is your assessment of Anacomp’s financial flexibility at the end of 1982?
Can the company withstand any potential difficulties which could arise with the
completion of the CIS system?
Question 9: What is your overall assessment of Anacomp’s future? Do you think
Anacomp’s investors should be worried about the company’s viability?
Question 1: Identify all the economic entities involved in the development of Anacomp’s
CIS software system.
The entities involved are:
– Anacomp:
-limited partnerships with 4 banks: (BANKSERV 10000, CEFT, CBA and CIBS).
-RTS Associates (limited partnership)
-Top management of Anacomp (officers and directors)
-20 advisory banks (13 in 1981 and 7 other banks in 1982)
-Bank
-Partners of RTS Associates
Question 2(part 1): Describe the contractual arrangements between the economic entities
involved in the CIS development.
(This answer literally contains most of the content of page 735 and 750 of the case,
because they are facts)
Contractual agreement between Anacomp and RTS Associates:
-In June 1982, Anacomp announced that it purchased the system from RTS Associates for
$16 million.
-Anacomp stated that, in view of the anticipated significant developement expenditure for
the CIS system, the company had entered into an agreement in November 1979 with a
limited partnership, RTS Associates.
-Anacomp has an agreement with RTS Associates to develop the CIS system on behalf of
the partnership and in return RTS agreed to pay a developement fee of $6 million ($2.2
paid in 1980).
-After the completion of the CIS system, Anacomp agreed to market CIS for 5 years on a
commission basis.
-Anacomp also has the option to acquire all rights to the CIS system at the greater of its
appraised fair market value or RTS Associates’ investment plus a fixed profit.
-RTS also has the right to extend Anacomp’s 5- year marketing agreement an additional 5
years or to cancel it if Anacomp did not use its best effort to market CIS.
-If the CIS developement expenses exceeded $6 million and therefore RTS was required to
pay further developement fees, Anacomp agreed to loan RTS, without recourse to the
limited partners, up to $1.5 million to complete the CIS system (This happened in the
case).
4 banks: Anacomp has an agreement with 4 banks to collectively contribute $6 million (1.5
million each) and 24 software developement people for two years on behalf of a limited
partnership. The amount was to fund modifications of the CIS system to conform to their
specific requirements and thereby to obtain a nonexclusive license to CIS as so modified.
10% of any revenue from licensing CIS to others will accrue to each of the banks until
such time as their entire $1.5 million developement fee has been recovered.
Partners of RTS Associates: RTS’ payments for the CIS developement expenses were
financed by: $1.444 million invested by partners.
Bank: RTS’ payments for the CIS developement expenses were financed by $3.25 million
bank loan to RTS, secured by bank letters of credit and personal guarantees of the limited
partners.
Top management of Anacomp: The officers and directors of Anacomp owned 38.5% in
RTS Associates.
20 advisory banks: 20 major banks contracted with Anacomp to participate as advisory
banks in the CIS project for a nonrefundable fee of $150.000 each. The fee permits each
bank to review the project during developement and provide input.
Question 2(part 2): Who bears the majority of the risk of failure of the development
effort?
RTS Associates bears the most risk, because they provide a huge part of the funds for the
developement and have to pay a large amount if the developement fails, such as the
following: RTS’ payments for the CIS developement expenses were financed by: $1.444
million invested by partners, $3.25 million bank loan to RTS, secured by bank letters of
credit and personal guarantees of the limited partners and a $2.2 million loan to RTS from
Anacomp.
Question 2(part 3): Who stands to gain most if the development effort succeeds?
RTS Associates gains the most if the developement succeeds, because from then Anacomp
