1. Identify all the economic entities involved in the development of Anacomp’s CIS software system.
The entities involved are Anacomp, RTS associates, partners of RTS associates, a bank and advisory banks.
2. Describe the contractual arrangements between the economic entities involved in the CIS development. Who bears the majority of the risk of failure of the development effort? Who stands to gain most if the development effort succeeds? Are Anacomp’s shareholders better off or worse off with this arrangement, relative to in-house development of the system?
Anacomp had an agreement with RTS associates. Under this agreement, Anacomp develops the CIS system on behalf of the partnership. In return, RTS pays a development fee of $6 million. Upon completion of the development of the CIS system, Anacomp markets CIS for five years on a commission basis. Anacomp also had the option to acquire all rights to the CIS system at the greater of its appraised fair market value or RTS’s investment plus a fixed profit. RTS had the right to extend Anacomp’s marketing agreement by an additional five years or to cancel it if Anacomp did not use its best efforts to market CIS.
Anacomp also lend RTS associates $2.2 million with interest at 11% per annum payable quarterly through December 31, 1981, and with principal and interest payable thereafter in 84 equal monthly installments. In addition if the CIS development expenses exceeded $6 million, Anacomp agreed to lend RTS up to $1.5 million to complete the system.
The partners of RTS associates invested $1.444 million in the development for RTS associates.
The bank lend RTS $3.25 million, secured by bank letters of credit and personal guarantees of the limited partners.
Twenty major advisory banks contracted with Anacomp to participate as advisory banks in the CIS project for a nonrefundable fee of $150,000 each. The banks could review the project during development and provide input to enhance the marketability...