Part 4 Additional Cases
AnacompÔÇ”Stock Price and Trading Volume Data
Anacomp Anacomp S&P 500
Trading Volume Closing Price Composite
Trading (thousands) (dollars) Closing
9/1/82 109 10.875 118.25
9/2/82 92 10.875 120.38
9/3/82 437 11.125 122.68
9/7/82 120 10.875 121.37
9/8/82 231 11.000 122.20
9/9/82 230 10.750 121.97
9/10/82 417 10.625 120.97
9/13/82 284 10.375 122.24
AnacompÔÇ™s common stock beta = 1.3 (Value Line estimate)
STOCK TRADING INFORMATION
High Low Cash Dividends
Fiscal Year 1981
First quarter $15.63 $10.63 $.026
Second quarter 19.88 13.75 .026
Third quarter 16.50 12.75 .026
Fourth quarter 18.38 15.13 .030
Fiscal Year 1982
First quarter 16.63 11.25 .030
Second quarter 14.00 11.88 .030
Third quarter 12.25 10.00 .030
Fourth quarter 13.38 10.88 .030
Interest rate on 3-month Treasury bills: 8.2%
Interest rate on 20-year government bonds: 12.2%
P/E ratio for Standard & PoorÔÇ™s 400 Industrials: 23.2
738 Case: Anacomp, Inc.
8 Part 4 Additional Cases
Anacomp, Inc.ÔÇ”Abridged 1982 Annual Report
To our Shareholders
Fiscal 1982 marked the beginning of one era and the end of another for Anacomp.
A new era began with ´¬üve events having tremendous long-term signi´¬ücance for Ana-
comp: the purchase of two major software products, the completion of our most signi´¬ü-
cant acquisition, an offering of $50 million in convertible debentures, the formation of
historyÔÇ™s largest software research and development partnership and AnacompÔÇ™s listing
on the New York Stock Exchange. Thus, despite a dif´¬ücult fourth quarter which was
affected by several non-recurring items and resulted in lower earnings for the year, ´¬üscal
1982 was perhaps the most signi´¬ücant year of achievements in AnacompÔÇ™s history.
Judged solely by the numbers, of course, 1982 does not seem especially memora-
ble. Although revenues rose slightly over 1981, earnings per share declined due to the
impact of fourth quarter results, which re´¬‚ected several one-time changes and short-term
factors. These factors are described in detail in our fourth quarter report.
In terms of positioning the company for future growth, however, 1982 may well be
remembered as the most signi´¬ücant year in AnacompÔÇ™s history.
ÔÇó In January, Anacomp completed a $50 million offering of 137Ôü„ 8 percent convert-
ible subordinated debentures which, after an original issue discount, increased
the companyÔÇ™s working capital position by $41 million.
ÔÇó Listing on the New York Stock Exchange in April recognized AnacompÔÇ™s stature in
the computer services industry and provided the opportunity for greater visibility
as the computer reaches out to new, worldwide markets.
ÔÇó During June of the year, Anacomp purchased two major retail banking software
systems which we had been developing for investment partnerships. CIS, a totally
integrated system that we believe will revolutionize retail banking in the 1980s,
was purchased for nearly $16 million. CIS has already attracted a ´¬ünancial com-
mitment from nearly 35 banks, seven of which had signed substantial license
agreements by the end of the year. BANKSERV┬® 10000, a system to provide
banks with a new level of electronic transaction switching and processing capabil-
ities, was purchased for $2.3 million.
ÔÇó Also during June, Anacomp signed an agreement with IBM Corporation which
gives us the capability to be a primary source of supply for a bankÔÇ™s branch auto-
ÔÇó The acquisition of 24 micrographic data imaging centers from DSI Corporation
and Kalvar Corporation in May provided the ability to deliver Anacomp services
to an even broader base of regular, repetitive customers, and the opportunity to
offer new services through an expanded delivery system.
ÔÇó After the close of the ´¬üscal year, funding for the CIBS research and development
partnership was completed with the closing of the ´¬ünal portion of $26.25 million
in partnership interests. The partnership will contract with Anacomp to develop
CIBS, Corporate International Banking System, a complex software system for use
by large banks and other ´¬ünancial institutions engaged in international business.
Case: Anacomp, Inc.
Part 4 Additional Cases
We believe AnacompÔÇ™s performance in future years will demonstrate that the com-
pany is well along in its evolution from a small, explosive-growth ´¬ürm to a nationally rec-
ognized market leader.
To ensure that AnacompÔÇ™s evolution will result in a stable company, with performance
attractive to investors, Anacomp will be placing renewed emphasis in several areas.
These areas will include our rate of return, where we anticipate achieving a superior
return on investment from the maturation of software projects, existing operations, plus
the addition of quality investments.
We also expect to reduce our leverage ratio over the next few years by calling our
convertible debt, when this becomes practical, and by taking other appropriate mea-
sures. We will continue to employ strategic planning approaches in all our business units.
Lastly, we will seek out those acquisitions which blend with our long-term goals.
We have projected record ´¬ünancial results in ´¬üscal 1983 as the company asserts its
leadership in bank software and micrographic data imaging. We appreciate the contin-
ued support of our stockholders and employees which makes that goal achievable.
Ronald D. Palamara, Ph.D.
President and Chairman of the Board
September 10, 1982
MANAGEMENTÔÇ™S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Anacomp, Inc. and Subsidiaries
In September 1980, Anacomp completed a public offering of $30,000,000 of 91Ôü„2% Con-
vertible Subordinated Debentures due 2000. In January 1981, Anacomp completed an
offering outside the United States of $12,500,000 of 9% Convertible Subordinated
Debentures due 1996, with warrants to purchase a like amount of debentures. In Janu-
ary 1982, Anacomp completed the public offering of $50,000,000 of 137Ôü„ 8 % Convertible
Subordinated Debentures due 2002. The Debentures were offered at an original issue
discount of 15%, with net proceeds of $41,125,000, and carry an effective cost of 16.6%.
The cash from these offerings has been used to ´¬ünance the expansion of receivables and
unbilled revenues, to retire long-term debt, to provide funds for acquisitions, and to
increase working capital. During the past three years, Anacomp has completed the acqui-
sition of eleven business entities. The acquisitions and the debenture offerings accounted
for the major changes in AnacompÔÇ™s ´¬ünancial condition and results of operations.
Financial Condition and Liquidity
During 1982, working capital increased $1,949,000. The major source of working capi-
tal, other than operations, was the increase in long-term debt, primarily the result of the
740 Case: Anacomp, Inc.
10 Part 4 Additional Cases
January offering of $50,000,000 of debentures and to a lesser extent the exercise of war-
rants to purchase $1,289,000 of additional 9% debentures. The major use of working
capital was the purchase of computer software systems from limited partnerships. Other
major uses of working capital were the purchase of marketable securities held as long-
term investments, the retirement of long-term debt, and additions of ´¬üxed assets. During
the year, cash was used to ´¬ünance the increase in unbilled revenues, to purchase 92% of
the shares of DSI Corporation, and to pay certain software development costs. As a
result, the current ratio at June 30, 1982, is 2.40, compared to 3.84 at June 30, 1981. At
June 30, 1982, Anacomp had $35,000,000 of available but unused lines of credit that
could be used if needed to provide short-term ´¬ünancing. Negotiations are currently being
held with a group of banks to establish a revolving credit arrangement which will replace
the existing lines of credit.
At the present time, Anacomp has no major commitments to acquire assets or facili-
ties which will require a substantial outlay of working capital. It is anticipated that the cur-
rent acquisition program will continue in the future as opportunities present themselves.
Anacomp currently expects to incur approximately $6,000,000 during 1983 on
enhancements to a computer software system, of which approximately $3,000,000 is
expected to be funded by others. The project is being undertaken because the results will
yield a product with improved marketability, which at the same time will meet commit-
ments to certain customers.
OperationsÔÇ”Fiscal 1982 Compared to 1981
Revenues for 1982 increased only 3% over ´¬üscal 1981, with the increase being gen-
erated primarily by internal growth and the addition of internally generated projects. Soft-
ware development projects, especially two new projects contracted for by major banks
and limited partnerships, and higher levels of sales of minicomputers and microcomput-
ers and related software, contributed the largest portion of the increase. Revenues were
also increased by certain data centers. These increases, along with smaller increases in
other areas, were largely offset by reduced revenue being generated by other data cen-
ters as a result of a consolidation of certain operations.
Total operating costs and expenses increased 10.4% during ´¬üscal 1982. Personnel
costs and outside services costs associated with the increased software development activ-
ity were the major factors in the increase. Other contributors to the increase were higher
supply costs, equipment-related costs, and the cost of computer hardware sales, each
caused by higher levels of activity. Also, amortization of purchased software added to the
overall increase, along with generally higher prices for all purchased goods and services.
These increases were partially offset by cost reductions from the synergism obtained from
prior acquisitions, a reduction in costs as a result of consolidating certain administrative
functions and, in the third quarter, from the recovery of previously recorded expenses.
Margins for the current periods were substantially lower than the prior year due to the
emphasis on completing large systems development projects as opposed to generating
new license fees for other products. Margins earned on development work have typically
been less than those earned from software licensing and related activities. The reduction
in revenue in certain data centers has also tended to reduce margins, as the revenue
losses have preceded to some extent the current cost reduction and consolidation efforts.
Interest expense increased in the convertible year as a result of the interest on the
9 Ôü„2% Convertible Subordinated Debentures offered during ´¬üscal 1981 and the 137Ôü„8%
Case: Anacomp, Inc.
Part 4 Additional Cases
Convertible Subordinated Debentures offered in January 1982. Interest income was
derived from investing the proceeds from these offerings not otherwise utilized. Due to the
uses of cash mentioned previously and a lowering of interest rates on investments, interest
income decreased throughout the current period.
The extraordinary credit arose from the sale of a branch of´¬üce which had been
acquired in 1981 in a transaction accounted for as a pooling of interests. The amount of
the credit is the gain realized, net of related income taxes.
The provision for income taxes re´¬‚ects the normal tax relating to the income reported
for ´¬ünancial statement purpose4 after recognizing the impact of investment tax credits,
non-deductible expenses, and the effect of interest due from the under-depositing of tax
payments as a result of the denial of a request for a change in certain reporting policies
for tax purposes.
Fiscal 1981 Compared to 1980
Of the $34,725,000 increase in revenue, the major portion was attributable to