Anacomp, Inc

1
Anacomp, Inc

• Tom Thomson, Todd Humphrey
• Owen Clements, Suzanne Ma
• June 21, 2006

2
Agenda

• Who is Anacomp?
• Software Industry evaluation
• Accounting issues
• Forecasts
• Questions

3
Who is Anacomp?

• A computer and data service company founded in
  1969
• Listed on the NYSE in 1982
• Released their first annual report on September
  10, 1982
• Willing to take Risk
• Anacomp mgmt feel their software development
  effort is one of the most substantial ever
  undertaken by an independent computer services
  vendor

4
Computer Services Industry

• Growth estimated at 23 for 1981 to 1986
• Breakdown of Industry
• Processing Services 57 Revenue (17 growth)
• Professional Services 23 Rev (29 growth)
• Software Products 20 Rev (33 growth)

5
Moving Forward

• Anacomp Mgmt feels primary source of growth is
  the Design and Development of Software for the
  Banking Industry.

6
Porter Analysis

• Internal Rivalry High
• Threat of Substitutes High
• 5000 companies, small up to IBM
• 33 growth rate of Software Products will attract
  competition
• IBM?

7
Porter Analysis

• Barriers to Entry Medium
• Supplier Power High
• Low Capital required
• Availability of Qualified Computer Professional?
• Establishing relationship with Banks

8
Porter Analysis

• Buyer Power High
• Competition based on Pricing
• Customers are Banks
• 4994 other companies Banks can work with

9
Industry Summary and Risks

• Competitive industry, price competition could
  drive down profits
• Bank customers are adopting technology and
  becoming more demanding
• Regulatory Changes are Predicted

10
Q. What is going on?
Anacomp Parent Company
Partnership Entities
Until this point, everything is perfectly legal,
if a bit confusing.
300 M in stocks, bonds and loans Privately
reported financial statements
11
This is confusing. Why do it?
Anacomp Parent Company
Anacomp Inc. shows only revenue. The risk to
shareholders is reduced.
The problem arises in note 3, page 17.
Partnership Entities
Each partner carries all the debt load.
12
Note 3. Why is it bad?
Anacomp Parent Company
The managers of Anacomp own a portion of the
partnership entities!
Partnership Entities
300 M in stocks, bonds and loans Privately
reported financial statements
13
Accounting Corrections

• Lets consolidate Anacomp and the partners
• Step 1 Remove profit from billings to partners
• Step 2 Write down cost for software
• Step 3 Estimate the amount of debt capital
  raised through the partnerships
• Step 4 Re-amortize goodwill 40 yrs vs. 7 yrs
• Step 5 Re-amortize software costs
• Step 6 Include leases in total debts

14
How do you do that?

• Revenue 88,045 x 0.80 70,436
• Software 20,363 x 0.70 14,254
• Goodwill 42,646/40 1,066
• 42,646/7 6,092
• Software 20,363/7.5 2,715
• 20,363/4 5,091

15
Debt Capital Correction
Adjustment Fees

EFT   910
    90
CEFT development fee 2,100
  fees 1,000
  bank fee 2,000
CBS fees 3,750
  fees 4,500
  banks 3,750
CIBS fees 23,000
  banks 500
Estimated debt in Partnerships   41,600
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Whats the final result?
Adjustment Balance Sheet Balance Sheet Balance Sheet Income Statement Income Statement Income Statement
Assets Liabilities Equity Sales - Expenses Net Income
Remove profit in billings to partnerships -17.6   -17.6 -17.6   -17.6
Write down purchased software -6.1   -6.1      
Revised Goodwill amortization -5.0   -5.0   5.0 -5.0
Revised software amortization' -2.4   -2.4   2.4 -2.4
Debt in partnerships   41.6 -41.6      
Capitalized leases (debt) 3.6 3.6        
             
Total adjustments -27.5 45.2 -72.7 -17.6 7.4 -25.0
             
Reported amounts 211.7 105.2 106.5 109.6 105.0 4.6
Adjusted amounts 184.2 150.4 33.8 92.0 112.4 -20.4
17
Balance Sheet Unadjusted vs. Adjusted
  1980 1981 Unadjusted 1982 Adjusted 1982
ASSETS  
CASH 29.390 29.392 34.519 34.519
NON CASH CURRENT ASSETS 4.060 46.061 64.525 64.525
LONG-TERM ASSETS 43.497 55.345 112.616 85.116
TOTAL ASSETS 76.950 130.798 211.660 184.160
   
LIAB ILITIES AND STOCKHOLDERS' EQUITY  
CURRENT LIABILITIES 22.079 19.634 41.276 41.276
LONG-TERM LIABILITIES 10.794 55.273 109.349 154.349
STOCKHOLDERS' EQUITY 44.077 55.891 61.035 - 11.465
TOTAL LIB. AND STOCKHLDRS' EQUITY 76.950 130.798 211.660 184.160
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Income Statement Unadjusted vs. Adjusted
  1980 1981 Unadjusted 1982 Adjusted 1982
REVENUE (SALES) 71.643 106.368 109.599 92.000
COST OF GOODS SOLD 49.514 76.364 84.066 84.066
GROSS PROFIT 22.129 30.004 25.533 7.934
SELLING, GEN. AND ADM. EXPENSES 15.284 17.821 19.888 27.288
EARNINGS BEFORE INTR. AND TAXES 6.845 12.183 5.645 - 19.354
NET INTEREST EXPENSE - 0.940 - 1.814 2.023 2.023
EARNINGS BEFORE TAXES 7.785 13.997 3.622 - 21.377
INCOME TAX 3.160 6.059 - 0.987 - 0.987
NET INCOME 4.625 7.938 4.609 - 20.390
19
Ratio Analysis
UNADJUSTED DUPONT RATIO ANALYSIS UNADJUSTED DUPONT RATIO ANALYSIS    
  1980 1981 1982
Net Income/ Sales 0.065 0.075 0.042
Sales/Assets 2.812 1.301 0.807
Assets/Stockholders' Equity 0.578 1.463 2.226
ROE 0.105 0.142 0.076
ADJUSTED DUPONT RATIO ANALYSIS ADJUSTED DUPONT RATIO ANALYSIS    
  1980 1981 1982
Net Income/ Sales 0.065 0.075 -0.222
Sales/Assets 2.812 1.301 0.849
Assets/Stockholders' Equity 0.578 1.463 -9.452
ROE 0.105 0.142 1.778
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THE FUTUREFORECAST and VALUATION

• ASSUMPTIONS
• Software development company Hit or Miss
• 2 scenarios
• Grow aggressively
• Stay fairly static.
• Drivers
• Sales growth
• NOPAT expectations.
• Stable level of debt and equity.

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FORECAST (Variables) Recap Past and Present
1980 1981 1982 1982 Revised
Sales Growth 48.47 3.04 -17.68
NOPAT Margin 5.68 6.50 6.55 -26.09
After Tax Net Interest On Debt -.78 -.97 2.35 2.22
Net Operating WC/Sales -25.25 23.90 21.21 -13.99
Net Operating LT Asset/Sales 60.17 52.97 102.79 128.60
Net Debt/Net Capital -73.72 31.63 21.64 70.52
S.Hs Equity/Net Capital 173.72 68.37 78.36 29.48
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FORECAST SCENERIO 1 Optimistic

• SALES GROWTH 50
• Software(s) feasible
• NOPAT SIMILAR TO 1981_at_ 6.5.
• At this volume,realistically should obtain
  similar margin as per past volume (prior to
  adjustments).
• RESULTS 16-22 PRICE RANGE.
• Actual end of 1982 trading _at_ 10.88/13.38 (based
  on F/S performance as reported).

23
FORECAST SCENERIO 2 Pessimistic

• SALES GROWTH 5
• Software(s) not feasible.
• Some growth on the other business- equipment.
• NOPAT _at_ 2
• Actually break even after net interest expense.
• RESULTS -2.00 to-1.45 stock price.
• Given adjusted revenue volume, if company cant
  grow cant be viable.

24
Game time
25
THE REALITY..In the end

• Fiscal 1983
• Revenue 172 MM, 3.96 MM loss
• Decline in development fees and no new licenses
• CIS system was completed
• Fiscal 1984
• Revenue 132 MM, 116 MM loss
• CIS system failed tests major changes needed
• Lost license fees
• Negative net worth of 23.7 MM (ouch!)