<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
REGISTRATION NO. 333-10127
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7389 13-3160717
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
161 NORTH CLARK STREET, SUITE 2400
CHICAGO, ILLINOIS 60601
(312) 419-7600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
RHONDA I. KOCHLEFL
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
161 NORTH CLARK STREET, SUITE 2400
CHICAGO, ILLINOIS 60601
(312) 419-7600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DEBORAH M. REGAN DENNIS V. OSIMITZ ROBERT F. WALL
R. R. DONNELLEY & SONS SIDLEY & AUSTIN WINSTON & STRAWN
COMPANY ONE FIRST NATIONAL 35 WEST WACKER DR.
77 WEST WACKER DRIVE PLAZA CHICAGO, ILLINOIS
CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60601
(312) 326-8000 60603 (312) 558-5600
(312) 853-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
OCTOBER 28, 1996
PROSPECTUS
2,600,000 SHARES
DONNELLEY ENTERPRISE
SOLUTIONS INCORPORATED
COMMON STOCK
($.01 PAR VALUE)
Of the 2,600,000 shares of Common Stock, $.01 par value per share (the "Common
Stock"), of Donnelley Enterprise Solutions Incorporated ("DESI" or the
"Company") offered hereby (the "Offering"), 1,855,000 are being issued and sold
by the Company and 745,000 are being sold by R. R. Donnelley & Sons Company,
which is currently the sole stockholder of the Company ("R.R. Donnelley" or the
"Selling Stockholder"). The Company will not receive any of the proceeds from
the sale of shares of Common Stock by R.R. Donnelley. The Company will use a
significant portion of the net proceeds it receives in the Offering to repay
amounts owed to R.R. Donnelley and in final payment of certain contingent
obligations arising from its acquisition of LAN Systems, Inc. See "Use of
Proceeds." Upon completion of the Offering, R.R. Donnelley will own 48.0% of
the outstanding Common Stock (40.2% if the Underwriters exercise their over-
allotment option in full).
Prior to the Offering, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price of the Common
Stock will be between $24.00 and $26.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price.
LOGO
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "DEZI."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1) SELLING STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(2).................. $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company, estimated to be
approximately $900,000. The Company will bear all expenses of the Offering
other than the Underwriting Discount attributable to the shares of Common
Stock being sold by the Selling Stockholder, which will be borne by the
Selling Stockholder.
(2) The Selling Stockholder has granted the Underwriters an option, exercisable
within 30 days of the date of this Prospectus, to purchase up to an
additional 390,000 shares of Common Stock at the Price to Public, less the
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Stockholder will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
or through the facilities of The Depository Trust Company, on or about
, 1996.
SALOMON BROTHERS INC
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
The date of this Prospectus is , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
Donnelley
Enterprise
Solutions
Incorporated
is a single-source
provider of
integrated information
management services
to professional service
organizations,
primarily large law [Graphic representing range of services
firms, investment provided by Donnelley Enterprise
banks and accounting Solutions Incorporated]
firms. Donnelley
Enterprise Solutions
Incorporated offers its
clients the opportunity
to focus on their core
businesses through
a comprehensive
array of business
services outsourcing
and information
technology services.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements
and pro forma information (and the notes related thereto) included elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
THE COMPANY
Donnelley Enterprise Solutions Incorporated is a single-source provider of
integrated information management services to professional service
organizations, primarily large law firms, investment banks and accounting
firms. DESI offers its clients the opportunity to focus on their core
businesses by outsourcing a variety of functions, including business services
and information technology services. The Company has experienced substantial
growth by expanding its service offerings, adding new clients, increasing
business with existing clients and capitalizing on the growing trend toward
outsourcing. In 1995, the Company had revenues of $45.7 million from business
services outsourcing and $20.2 million from information technology services,
representing six months of operations following the June 1995 acquisition of
LAN Systems, Inc. ("LANSystems"). In the first six months of 1996, the
Company's revenues from business services outsourcing and information
technology services were $26.6 million and $18.6 million, respectively.
The Company has well-established client relationships with a significant
number of leaders in its target markets, including the law firms of Shearman &
Sterling and Sidley & Austin, the investment banks of Lehman Brothers Inc. and
Morgan Stanley & Co. Incorporated and the accounting firm of Ernst & Young LLP.
Revenues from these five clients accounted for approximately 28.9% of the
Company's 1995 revenues and approximately 25.4% of the Company's revenues for
the first six months of 1996. In 1995, the Company provided services to 30 of
the 100 largest law firms as ranked by the American Lawyer for 1995 and six of
the 10 largest investment banks ranked by dollar volume of public debt and
equity issuances for 1995 as reported by Securities Data Corporation. The
Company typically enters into contracts with business services clients that
have terms ranging from three to five years and which typically provide for
monthly minimum payments. The Company's record in retaining outsourcing clients
has been excellent. The Company's information technology services are
contracted for primarily on a project basis and generally result in follow-on
projects and on-going support.
DESI commenced outsourcing operations in 1988 as a provider of reprographic
services and expanded its service offerings to include networked and color
printing, mailroom and facsimile services, word processing, desktop publishing
and imaging. In June 1995, the Company broadened its capabilities from managing
paper-based information to include the management of electronic information
through the acquisition of LANSystems, which has provided information
technology services since 1983, including systems integration, consulting and
software development. Beginning in February 1996, the Company began providing
systems management outsourcing services, which include on-site management and
administration of servers and desktops and operation of the help-desk function.
The demand for business services outsourcing and information technology
services is accelerating as more businesses seek outside expertise in the
management of increasingly complex and crucial business and technology
requirements. DESI focuses on its target markets because the success of leading
professional service organizations greatly depends on their ability to manage
and process
3
<PAGE>
information, integrate information into document form and generate and deliver
high-quality documents, all under significant time pressures. Tolerance for
system downtime or disruption to normal business services is very limited. As a
result, the Company's clients demand premium service levels with stringent
controls to ensure quality, reliability and accuracy.
The Company believes its competitive strengths are as follows:
. Established Premier Client Base in Target Markets--DESI has well-
established relationships with a significant number of industry leaders
in its target markets. These relationships with high-quality professional
service organizations have been an important factor in enabling the
Company to add new clients.
. Comprehensive Array of Service Offerings--The Company is capable of
satisfying a client's needs for information management services for both
paper-based and electronic information by providing staff trained to
perform multiple functions, integrating technical and business processes
and providing consistency across the enterprise.
. Accumulated Knowledge and Expertise in Target Markets--DESI has
accumulated knowledge of the best practices to address the unique needs
of the professional service organizations in its target markets.
. Proven Quality Driven Processes--DESI has developed proven, cost-
effective processes for the delivery of business and information
technology services, including a copyrighted production management system
which permits the Company to monitor the client's needs and the quality
of services provided by tracking use, service levels, turnaround and
efficiency.
. Depth, Experience and Expertise of Service Delivery Personnel--The
Company has been successful in attracting and retaining talented,
motivated employees in critical positions which involve extensive client
interaction, including the client managers who oversee the performance of
the Company's business services and the technical employees who design,
implement and support computer networks and provide other information
technology services.
DESI's principal growth strategy is to become the single-source provider of
integrated information management services to the leading firms in its target
markets. Key elements of the Company's strategy include (i) increasing
penetration in its target markets; (ii) cross-selling its services to existing
clients; (iii) attracting and retaining outstanding employees; (iv) enhancing
its expertise in information management technology; and (v) selectively
acquiring businesses that strengthen service offerings or expand geographic
presence.
R. R. Donnelley & Sons Company is currently the sole stockholder of the
Company and upon completion of the Offering will own 48.0% of the outstanding
Common Stock (40.2% if the over-allotment option granted to the Underwriters is
exercised in full). While R.R. Donnelley in the future may reduce its ownership
interest in the Company, R.R. Donnelley has advised the Company that it has no
plans to do so. In July 1996, the Company declared a dividend of $8.0 million
paid in the form of a promissory note to R.R. Donnelley (the "Dividend Note").
A significant portion of the net proceeds of the Offering received by the
Company will be used to repay the Dividend Note and the advances owed to R.R.
Donnelley and in final payment of certain contingent obligations arising from
the acquisition of LANSystems. See "Use of Proceeds" and "Relationship with
R.R. Donnelley."
The business services currently offered by the Company were operated by R.R.
Donnelley prior to 1996 as a division known as Donnelley Business Services
("DBS"). As of January 1, 1996, R.R. Donnelley contributed the assets and
liabilities of the DBS division to LANSystems and changed its corporate name to
Donnelley Enterprise Solutions Incorporated. See "The Company."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company...................... 1,855,000 shares
R.R. Donnelley................... 745,000 shares
----------------------
Total.......................... 2,600,000 shares
Common Stock to be outstanding
after the Offering................ 5,000,000 shares(1)
Use of net proceeds to the Company. Final payment of approximately $8.7 million
for certain contingent obligations arising
from the acquisition of LANSystems; repay-
ment of the $8.0 million aggregate princi-
pal amount of, and interest on, the Divi-
dend Note and the advances owed to R.R.
Donnelley, which advances as of June 30,
1996 totaled approximately $17.6 million,
and for general corporate purposes. The
Company estimates that the advances owed
to R.R. Donnelley will total approximately
$20.7 million as of the completion of the
Offering. See "Use of Proceeds" and "Rela-
tionship with R.R. Donnelley."
Nasdaq National Market Symbol...... DEZI
</TABLE>
- --------
(1) Excludes 400,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan and 1996 Broad-Based Employee Stock
Plan, including 5,000 shares of restricted Common Stock and options to
purchase approximately 308,000 shares of Common Stock (at the initial
public offering price set forth on the cover page of this Prospectus) that
the Company expects to grant to employees in connection with the Offering.
See "Management-- Stock Plans" and "Management--Employment Agreements."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes selected historical consolidated financial
data of DESI. Income statement data for each of the three years in the period
ended December 31, 1995 have been derived from the audited consolidated
financial statements of DESI contained herein. Income statement data for the
six month periods ended June 30, 1995 and 1996, respectively, and balance sheet
data as of June 30, 1996 have been derived from the unaudited consolidated
financial statements of DESI contained herein. Income statement data for each
of the two years in the period ended December 31, 1992 have been derived from
unaudited information of DESI. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Consolidated
Financial Information" and Consolidated Financial Statements of DESI and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- ---------------
1991 1992 1993 1994 1995(1) 1995(1) 1996(1)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $13,652 $17,985 $23,527 $34,745 $65,944 $21,108 $45,243
Cost of revenues....... 11,193 14,075 18,800 27,800 53,900 18,077 35,309
------- ------- ------- ------- ------- ------- -------
Gross profit......... 2,459 3,910 4,727 6,945 12,044 3,031 9,934
Selling expenses....... 1,120 1,657 1,665 2,110 5,563 1,249 4,633
General and
administrative
expenses.............. 1,312 1,648 1,333 1,540 4,866 1,082 3,536
Amortization of
goodwill.............. -- -- -- -- 295 -- 306
------- ------- ------- ------- ------- ------- -------
Earnings from
operations.......... 27 605 1,729 3,295 1,320 700 1,459
Interest expense....... 31 87 184 283 522 230 126
------- ------- ------- ------- ------- ------- -------
Earnings (loss)
before income taxes. (4) 518 1,545 3,012 798 470 1,333
Income taxes........... 4 248 684 1,277 495 208 712
------- ------- ------- ------- ------- ------- -------
Net income (loss).... $ (8) $ 270 $ 861 $ 1,735 $ 303 $ 262 $ 621
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(2) ADJUSTED(3)
------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................................... $46,339 $55,039 $63,163
Amounts due to LANSystems earnout participants... -- 8,700 --
Debt and advances due to R.R. Donnelley.......... 17,637 25,637 --
Capital lease obligations........................ 2,483 2,483 2,483
Total shareholders' equity....................... 15,757 7,757 50,218
</TABLE>
- --------
(1) Income statement data for the year ended December 31, 1995 and the six
months ended June 30, 1996 include the results of operations of LANSystems,
which the Company acquired in June 1995, beginning July 1, 1995.
(2) Represents the issuance of the Dividend Note in the principal amount of
$8.0 million and additional goodwill in the approximate amount of $8.7
million and the related amounts due to LANSystems earnout participants
resulting from the agreement to modify certain contractual obligations
under the LANSystems acquisition agreement that provided for additional
contingent payments to former LANSystems shareholders and certain
management participants based on specified financial targets for the years
ended December 31, 1995 through 1998.
(3) Adjusts the pro forma balance sheet data to give effect to the Offering
being completed and a significant portion of the assumed net proceeds of
the Offering received by the Company being applied to repay the Dividend
Note and the advances owed to R.R. Donnelley and in final payment of
certain contingent obligations arising from the acquisition of LANSystems,
as described under "Use of Proceeds."
6
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The unaudited pro forma consolidated statements of income for the year ended
December 31, 1995 and the six months ended June 30, 1996 set forth below
illustrate: (i) the effects of the historical results of operations (under the
Company's accounting policies) of LANSystems for the period from January 1,
1995 to June 21, 1995, the date on which LANSystems was acquired by the
Company;
(ii) the increase in the amortization of goodwill related to the acquisition of
LANSystems; and (iii) the Offering being completed and a significant portion of
the assumed net proceeds received by the Company therefrom being applied as
described under "Use of Proceeds." In addition, the pro forma statements of
income illustrate the estimated net operating effects resulting from the
Company being a public entity, which include pricing of certain services the
Company will receive from R.R. Donnelley after the Offering under certain
intercompany agreements, as well as other incremental public company expenses.
The pro forma adjustments are based on available information and upon certain
assumptions the Company believes are reasonable. The pro forma consolidated
statements of income do not purport to represent what the Company's results of
operations would actually have been or to project the Company's results of
operations for any future period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
AS AS
ACTUAL ADJUSTED(1) ACTUAL ADJUSTED(1)
------- ----------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................... $65,944 $79,545 $45,243 $45,243
Cost of revenues....................... 53,900 64,333 35,309 34,986
------- ------- ------- -------
Gross profit....................... 12,044 15,212 9,934 10,257
Selling expenses....................... 5,563 7,918 4,633 4,633
General and administrative expenses.... 4,866 8,138 3,536 3,906
Amortization of goodwill............... 295 1,065 306 533
------- ------- ------- -------
Earnings (loss) from operations.... 1,320 (1,909) 1,459 1,185
Interest expense....................... 522 543 126 126
------- ------- ------- -------
Earnings (loss) before income
taxes............................. 798 (2,452) 1,333 1,059
Income taxes........................... 495 (470) 712 692
------- ------- ------- -------
Net income (loss).................. $ 303 $(1,982) $ 621 $ 367
======= ======= ======= =======
Pro forma net income (loss) per
share (2)......................... $ (.43) $ .08
======= =======
</TABLE>
- --------
(1) For a detailed description of the adjustments to these unaudited pro forma
consolidated statements of income, see "Unaudited Pro Forma Consolidated
Financial Information."
(2) Pro forma net income (loss) per share is computed by dividing pro forma net
income (loss) for the year ended December 31, 1995 and the six months ended
June 30, 1996 by the pro forma weighted average shares outstanding during
such periods of 4,645,000.
7
<PAGE>
RECENT UNAUDITED FINANCIAL DATA
The following table sets forth a summary of certain unaudited financial data
for the Company for the three and nine-month periods ended September 30, 1995
and 1996, respectively. The summary unaudited financial operating results set
forth below are not necessarily indicative of the Company's results for any
future interim period or the year ended December 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ---------------
1995 1996 1995 1996
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues................................ $21,080 $25,780 $42,188 $71,023
Earnings (loss) before interest and
taxes.................................. (74) 1,136 625 2,596
Net income (loss)....................... (162) 474 100 1,096
</TABLE>
For the quarter ended September 30, 1996, the Company's revenues from
business services outsourcing and information technology services were $15.0
million and $10.8 million, respectively, and for the nine months then ended
were $41.6 million and $29.4 million, respectively. The unaudited financial
data for the nine-month period ended September 30, 1995 includes the results
of operations of LANSystems from July 1, 1995. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Quarterly
operating results."
The three and the nine months ended September 30, 1996 include (1) a special
charge of $300,000 related to the departure of Thomas P. Bradbury, former
President, LANSystems division, and (2) $128,000 of interest expense
associated with the Dividend Note. See "Management--Agreement with Former
Executive Officer."
8
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the factors set forth below,
in addition to the other matters set forth in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
DEPENDENCE ON KEY CLIENTS
The Company's top 20 clients accounted for approximately 70.4% of the
Company's 1995 revenues, with the top two clients accounting for approximately
8.9% and 7.3% of such revenues, respectively. For the six months ended June
30, 1996, the Company's top 20 clients accounted for approximately 62.4% of
the Company's revenues, with the top two clients accounting for approximately
9.1% and 6.2% of such revenues, respectively. Of these top 20 clients in 1996,
the Company provides both business and information technology services to four
clients, business services only to 10 clients and information technology
services only to six clients. The loss of any one of the Company's major
clients could have a material adverse effect on the Company's business,
operating results or financial condition. Because recommendations from
satisfied clients are critical to the Company's success in attracting new
clients, the loss of a significant client as a result of poor performance
could have an adverse impact on the Company. See "Business--Clients" and Note
3 of Notes to Consolidated Financial Statements of DESI.
It is the Company's general policy with respect to the provision of business
services to enter into contracts with terms ranging from three to five years,
although the Company has entered into a limited number of shorter-term
contracts at the request of its clients. The Company provided business
services to 16 of its top 20 clients in 1995. Of the 16 contracts with these
clients, nine expire prior to December 31, 1997, including the contract with
the largest client, which expires in December 1996. Although most of DESI's
business services outsourcing contracts are cancellable only for cause, the
Company generally is willing to renegotiate contracts that no longer meet the
needs of its clients. Notwithstanding the fact that the Company has
successfully renewed each business services outsourcing contract that has come
up for renewal (except for one contract with a client that was acquired),
there can be no assurance that the Company will be able to renew its contracts
with its top business services clients or that any renewed contract will be on
terms as favorable to the Company as those contained in the existing contract.
DEPENDENCE ON ABILITY TO MANAGE GROWTH
DESI is continuing to experience significant growth, which has placed, and
could continue to place, a strain on the Company's managerial and other
resources. From December 1994 through June 1996, the number of the Company's
employees has increased from 505 to 875 and further increases are anticipated
during 1996. In addition, further expansion in the number of production
facilities located at its clients' offices is likely to occur, including
internationally as a result of requests from clients to serve their
international offices. The Company's future performance and profitability will
depend, in large part, on its ability to manage this growth, particularly with
respect to its decentralized workforce, which will require DESI to continue to
improve its operational, financial and other internal systems and the
training, motivation and management of its employees. If the Company is unable
to manage growth effectively or perform its services at anticipated levels,
the Company's business, financial condition or results of operations could be
adversely affected.
SENSITIVITY TO FLUCTUATIONS IN PROFESSIONAL SERVICE ECONOMY
The Company's business and results of operations are sensitive to the state
of the U.S. professional service economy, particularly as it affects the
Company's target markets. The volume of services provided by the Company
generally are lower in periods in which activities of the Company's clients
are reduced by economic or other factors. The resulting decline in the
Company's revenues from a particular client affects the Company's net income
because a large percentage of the
9
<PAGE>
Company's costs are fixed, although this effect historically has been more
than offset by a growth in revenues from other clients. In addition, clients
have imposed pricing pressures on the Company during periods in which their
activities are reduced because of their own reduced levels of profitability,
thereby adversely affecting the Company's gross margins and results of
operations. Again, these pricing pressures have been offset by a growth in
revenues and the Company's ability to attract new clients who desire to reduce
their expenses by outsourcing certain services to the Company. There can be no
assurance that the state of the U.S. professional service economy will not
adversely affect the Company's business, financial condition or results of
operations in the future or that other factors, including those cited above,
will offset any such adverse effect.
RISKS ASSOCIATED WITH PERFORMANCE OF INFORMATION TECHNOLOGY PROJECTS
Most of DESI's engagements to provide information technology services
involve projects that are critical to the operations of its clients'
businesses and that provide benefits that may be difficult to quantify. The
Company's failure or inability to meet a client's expectations in the
performance of a particular project could result in the incurrence by the
Company of a financial loss and could damage the Company's reputation and
adversely affect its ability to attract new business. The majority of the
Company's information technology projects are priced on a fixed-fee basis and
contain scope of work and acceptance criteria for identifying project
completion. Although the Company generally seeks to obtain an increase in its
fees if any significant change in the assumptions upon which the original
estimate was based leads to higher costs than anticipated, there can be no
assurance that the Company will be successful in obtaining any such increase.
See "Business--Services."
FOCUS ON LIMITED TARGET MARKETS
The Company focuses the marketing of its services primarily on large law
firms, investment banks and accounting firms, and, therefore, the number of
potential clients within the Company's target markets is limited. Within these
markets the Company faces several barriers to its ability to increase
revenues. First, the Company's success in this regard will depend, to a large
extent, on its ability to persuade firms that currently perform business
services and information technology functions of the type offered by the
Company through their own in-house departments to outsource those services and
functions to the Company. Second, the Company's success in winning outsourcing
business from those firms that currently outsource various services with
competitors of the Company may be hindered by the significant costs a firm may
incur in switching from one outsourcing service provider to another. A firm is
unlikely to switch providers unless it is not satisfied with the performance
of its provider or unless it believes it can substantially reduce its costs.
Finally, the Company's ability to increase revenues in these markets will
depend on its success in persuading clients to use the Company as their
single-source provider of a number of outsourcing and information technology
services. Because of the limited number of organizations in the Company's
target markets, the need to overcome these barriers with respect to any one
potential client is greater than it would be if the Company's target markets
were larger. No assurance can be given that the Company will be successful in
expanding its presence in its target markets or otherwise increasing its
revenues from its current clients. Although the Company anticipates expanding
its target markets to include other professional service organizations that
have similar needs to those in its current markets, such as commercial banks
and asset management companies, no assurance can be given that the Company
will be successful in this regard. See "Business--Clients" and Note 3 of Notes
to Consolidated Financial Statements of DESI.
ABILITY TO GROW THROUGH INTRODUCTION OF NEW SERVICES, INCLUDING SYSTEMS
MANAGEMENT OUTSOURCING
The Company's business strategies include growth through the introduction of
new services that expand on the Company's expertise in business services
outsourcing and information technology services. In February 1996, the Company
began providing systems management outsourcing services.
10
<PAGE>
These services combine DESI's business services outsourcing and information
technology expertise by offering systems administration, network management
and help-desk support services to clients in DESI's target markets. The
Company's systems management outsourcing services have generated minimal
revenues to date primarily from contracts that are limited in duration and
scope. The systems management outsourcing services are subject to the various
risks inherent in the start-up and development of a new service. There can be
no assurance that DESI will be able to market successfully new services, such
as the systems management outsourcing services, that it will be able to
operate any new service profitably or that the failure to perform such new
services satisfactorily would not adversely affect the Company's reputation as
a premier provider of information management services. See "Business--
Services."
DEPENDENCE ON ABILITY TO ANTICIPATE TECHNOLOGICAL ADVANCES
The success of DESI's information technology services will depend, to a
large extent, on its ability to anticipate and develop solutions that keep
pace with changes in information processing technology, evolving industry
standards and changing client preferences. Although the Company believes that
it has relationships with major vendors of information processing technology
that permit it to do so, there can be no assurance that the Company will be
successful in anticipating and addressing these developments in a timely
manner or that, if so anticipated and addressed, the Company will be
successful in the marketplace. The Company's failure to anticipate and address
these developments could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that products or technologies developed by third parties will
not render the information technology services of the Company noncompetitive
or obsolete. See "Business--Services."
RISKS ASSOCIATED WITH INTEGRATION OF LANSYSTEMS AND GROWTH THROUGH FUTURE
ACQUISITIONS
The Company's business strategies include growth through acquisitions of
businesses that meet client and market demands for an expanded geographic
presence, new services or enhanced skills. The Company's experience of
acquiring and integrating businesses is limited to its acquisition of
LANSystems in June 1995. Although the Company believes that it has been
successful to date in integrating LANSystems into the Company's operations,
such integration is not complete and there can be no assurance that the
integration of LANSystems' business will be completed successfully or that
DESI's management will be successful in managing the combined operations. The
Company's success in executing its acquisition strategy will depend, in part,
on its ability to identify potential targets that meet the Company's criteria,
including a reputation as a leading service provider with strong client
relationships and a complementary culture. There can be no assurance that the
Company will be successful in identifying potential acquisitions or that, if
identified, the acquisitions will be consummated on acceptable terms or that
any acquired assets or business will be integrated successfully into the
Company's operations. The Company may use Common Stock or preferred stock
(which could result in dilution to the purchasers of Common Stock in the
Offering) or may incur indebtedness or use a combination of stock and
indebtedness for all or a portion of the consideration to be paid in future
acquisitions. Although the Company continuously evaluates acquisition
opportunities and has had discussions with potential acquisition candidates
from time to time, it has no current commitments or agreements with respect to
any material acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General" and "Business--
Strategy."
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly operating results have been subject to variation,
and will continue to be subject to variation, depending upon factors such as
the mix of business among the Company's services; the cost of materials, labor
and technology, particularly in connection with the delivery of business
services; the costs associated with initiating new outsourcing contracts or
opening new offices; the economic condition of the Company's target markets;
and the costs of acquiring and
11
<PAGE>
integrating new businesses. Although most of the Company's long-term contracts
for the provision of business services provide for pricing adjustments to
reflect the Company's actual labor, material and technology costs, these
adjustments occur annually on a historical basis and therefore may add to
fluctuations in quarterly and annual operating results of the Company.
The Company's margins on its information technology services are higher than
those associated with its business services. Accordingly, a change in the
business mix can cause a fluctuation in quarterly and annual operating results
of the Company. Revenues from business services outsourcing comprised 69.3% of
total revenues in 1995 and 58.9% for the first half of 1996 and revenues from
information technology services represented 30.7% of total revenues in 1995
and 41.1% for the first half of 1996. The decline in 1996 in percentage of
revenues represented by business services outsourcing results from the
acquisition of LANSystems in June 1995. Prior to the acquisition, the Company
had no revenues from information technology services.
The Company's revenues derived from individual business services outsourcing
contracts historically have been somewhat seasonal, with the lowest percentage
of revenues being attributed to the third quarter as a result, in part, of
reduced volumes of business services used by clients. Revenues from
information technology services are also seasonal, with the highest percentage
of revenues being attributed to the fourth quarter primarily as a result of
clients' decisions to use funds remaining in their information technology
budgets for projects delayed during the year. The Company experienced net
losses in the third quarter of 1995, resulting primarily from the Company's
expansion to the western region of the United States, new client start-ups and
from costs associated with the acquisition of LANSystems, and in the first
quarter of 1996, resulting primarily from continuing start-up expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Operating Results."
NEED TO ATTRACT AND RETAIN KEY PERSONNEL IN HIGHLY COMPETITIVE MARKETPLACE
The Company's business involves the delivery of professional services and is
labor intensive. The Company's performance depends, to a large extent, on the
continued service of its key technical employees and client managers and its
ability to continue to attract, retain and motivate such personnel.
Competition for such personnel is intense, particularly for highly skilled and
experienced technical personnel who perform the Company's information
technology services. Such technical personnel are in great demand and are
likely to remain a limited resource for the foreseeable future. There can be
no assurance that the Company will be able to attract, retain and motivate
such personnel in the future, and the inability to do so could have a material
adverse effect upon the Company's business, operating results or financial
condition. See "Business--Human Resources."
COMPETITION
The Company's reprographic, facsimile and mailroom outsourcing services
compete with several large national companies, including Pitney Bowes
Management Services and Xerox Business Services, as well as several smaller
regional companies, some of whom provide only certain of such services or
focus on a particular geographic region of the United States. Competition in
the Company's target markets for other business services provided by the
Company, such as word processing, desktop publishing and imaging, is
fragmented with numerous competitors providing only certain of the services.
The Company's information technology services compete with a large number of
market participants, including management consulting firms, big six accounting
firms, systems integrators, facilities management companies and the
professional service groups of large computer manufacturers. There can be no
assurance that the Company will be able to compete successfully with its
existing competitors or with any new competitors. See "Business--Competition."
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<PAGE>
DEPENDENCE ON SENIOR MANAGEMENT
The Company's success will depend, in part, on its ability to retain its key
executive officers, including Rhonda I. Kochlefl, Chief Executive Officer, and
Leo S. Spiegel, Chief Technology Officer, and the effective performance of
such executive officers. The Company has entered into employment agreements
with Ms. Kochlefl and Mr. Spiegel. The loss of one or more of the Company's
key executive officers could have a material adverse effect on the Company and
its prospects. See "Management--Employment Agreements."
LACK OF OPERATING HISTORY AS A STAND-ALONE ENTITY
Prior to the Offering, the Company operated as a separate business within
R.R. Donnelley and relied on R.R. Donnelley for its financing needs and for a
number of support services, including legal, tax, insurance, benefits
administration, data processing and payroll. In addition, prior to the
Offering, the Company did not have its own stand-alone capital structure,
including levels of indebtedness typically associated with a stand-alone
entity in the Company's industry, and, therefore, did not manage its own
working capital borrowings. Furthermore, prior to the Offering, the Company
relied upon the creditworthiness of R.R. Donnelley to support its financial
needs. Following the Offering, the Company will take responsibility for
providing certain of the services previously provided by R.R. Donnelley and,
in other cases, R.R. Donnelley will continue to provide services to the
Company under the intercompany agreements to be executed at the completion of
the Offering. Although the Company will establish new policies and procedures
applicable to the operation of a public company and expects to enter into a
$22.0 million credit facility prior to completion of the Offering, there can
be no assurance that following the Offering the Company will be able to manage
successfully the additional obligations of being a public company, obtain
access to credit and other financial resources at reasonable rates or arrange
for comparably priced alternative sources for the services which will be
provided to the Company by R.R. Donnelley after the completion of the
Offering. See "Unaudited Pro Forma Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Relationship with R.R. Donnelley."
FINANCIAL STATEMENT PRESENTATION
The Company's consolidated financial statements and other financial data
appearing elsewhere in this Prospectus reflect the results of operations,
financial position and cash flows of the Company on a carve-out basis and are
derived from the historical financial statements and financial data of the
Company. The financial statements have been adjusted to reflect certain
expenses and liabilities incurred by R.R. Donnelley on behalf of the Company.
The Company believes that the assumptions underlying all such adjustments are
reasonable; however, the consolidated financial statements do not necessarily
reflect the expenses and liabilities that would have been incurred by the
Company operating as a stand-alone entity. See Notes to Consolidated Financial
Statements of DESI.
PRINCIPAL STOCKHOLDER; POTENTIAL CONFLICTS OF INTEREST; POSSIBLE FUTURE SALES
OF COMMON STOCK BY R.R. DONNELLEY
Upon completion of the Offering, R.R. Donnelley will hold 48.0% of the
outstanding Common Stock (40.2% if the Underwriters exercise their
overallotment option in full). Consequently, R.R. Donnelley will be able to
significantly influence such actions as the election of directors of the
Company, the approval of matters submitted for stockholder approval or
preventing a potential takeover (even if advantageous to the other
stockholders). However, R.R. Donnelley will not have any rights or preferences
as compared to any other stockholder of the Company, other than those it may
have by reason of the number of shares of Common Stock it owns.
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<PAGE>
A significant portion of the net proceeds of the Offering received by the
Company will be used in final payment of approximately $8.7 million for
certain contingent obligations arising from the acquisition of LANSystems and
to repay the $8.0 million aggregate principal amount of, and accrued interest
on, the Dividend Note and the advances owed to R.R. Donnelley, which advances
as of June 30, 1996 totaled approximately $17.6 million. See "Use of
Proceeds."
Currently, two of the four members of the Board of Directors of the Company
are officers of R.R. Donnelley. The Company anticipates that, following the
Offering, the Board of Directors will be increased to six members and two
additional directors who are not affiliated with R.R. Donnelley or the Company
will be elected by the Board of Directors to fill the vacancies.
Prior to the Offering, the Company has funded its operations and capital
expenditures and its acquisition of LANSystems, in part, through amounts
advanced from R.R. Donnelley and the sale of its business services outsourcing
accounts receivable to a subsidiary of R.R. Donnelley. The arrangement
pursuant to which the Company sold certain receivables to a subsidiary of R.R.
Donnelley will terminate upon completion of the Offering and the Company
anticipates satisfying its financing needs through a $22.0 million credit
facility the Company expects to enter into prior to completion of the Offering
and from cash flow from operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Prior to the Offering, the Company obtained certain services from R.R.
Donnelley, participated in a number of employee benefit plans maintained by
R.R. Donnelley and was included as part of R.R. Donnelley's federal income and
certain other tax returns. To assure the continued provision of these services
after the completion of the Offering, the Company entered into certain
agreements with R.R. Donnelley relating to these matters. None of the
agreements entered into by the Company and R.R. Donnelley resulted from "arm's
length" negotiations. In addition, the Company did not retain separate counsel
from that retained by R.R. Donnelley in negotiating such agreements. The
Company believes, however, that the terms of such agreements are at least as
favorable to it as could be obtained from unaffiliated parties for comparable
services or arrangements. These agreements may be modified in the future and
additional arrangements or transactions may be entered into between
R.R. Donnelley and the Company. Any material modifications and any additional
agreements or transactions will be subject to review and approval by the Board
of Directors of the Company, acting pursuant to a special committee comprised
of directors not otherwise affiliated with the Company or R.R. Donnelley. The
Company intends that, insofar as a determination can be made objectively, each
future agreement or transaction between R.R. Donnelley and the Company will be
on terms at least as favorable to the Company as could be obtained from
unaffiliated parties for comparable services or arrangements. The Company and
R.R. Donnelley currently do not compete directly with one another in any
material respect, although Stream International, an approximately 80%-owned
subsidiary of R.R. Donnelley, provides system integration and help-desk
services to markets generally not targeted by the Company. There can be no
assurance that the Company and R.R. Donnelley, whether through Stream
International or otherwise, will not compete in any material respect in the
future. Any officer of R.R. Donnelley who serves as a director of the Company
may have conflicts of interest in addressing business opportunities and
strategies with respect to which the Company's and R.R. Donnelley's interests
differ. Except with respect to agreements and transactions between the Company
and R.R. Donnelley, the Company and R.R. Donnelley have not adopted any formal
procedures designed to assure that conflicts of interest will not occur or to
resolve any such conflicts that do occur. See "Relationship with R.R.
Donnelley."
Subject to the restrictions described below and to applicable law, after
completion of the Offering, R.R. Donnelley may sell any and all of the shares
of Common Stock then owned by it. No prediction can be made as to the effect,
if any, that future sales of Common Stock, or the availability of Common Stock
for future sale, will have on the market price of the Common Stock prevailing
from time to time.
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<PAGE>
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock and the ability of the Company to raise capital by issuing its
equity securities.
R.R. Donnelley has agreed with the Underwriters that it will not offer, sell
or contract to sell, or otherwise dispose of, directly or indirectly, or
announce an offering of, any shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Salomon Brothers Inc. Although R.R. Donnelley in the future may effect sales
of Common Stock that would reduce its ownership interest in the Company, R.R.
Donnelley has advised the Company it has no plans to do so. See "Relationship
with R.R. Donnelley," "Shares Eligible for Future Sale" and "Underwriting."
ABSENCE OF PRIOR PUBLIC TRADING MARKET; DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active public market will
develop for the Common Stock or that, if such a market develops, the market
price will equal or exceed the initial public offering price set forth on the
cover page of this Prospectus. For a discussion of the factors that were
considered in determining the initial public offering price, see
"Underwriting." The prices at which the Common Stock trades after the Offering
will be determined by the marketplace and may be influenced by many factors,
including, among others, the Company's operating and financial performance,
the depth and liquidity of the market for the Common Stock, future sales of
Common Stock (or the perception thereof), investor perception of the Company
and its prospects, the Company's dividend policy and general economic and
market conditions. See "Shares Eligible for Future Sale."
ANTITAKEOVER MATTERS
The Company's First Amended and Restated Certificate of Incorporation and
By-laws contain certain provisions that may delay, defer or prevent a takeover
of the Company. The Company's Board of Directors has the authority to issue up
to 1,000,000 shares of preferred stock and to determine the price, rights,
preferences and restrictions, including voting rights, of these shares,
without any further vote or action by the stockholders of the Company. The
rights of holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any preferred stock that may be issued
in the future. The First Amended and Restated Certificate of Incorporation
also provides for a classified board of directors, with three classes of
directors, each class being elected for three-year, staggered terms, prohibits
the removal of directors except for "cause" and prohibits stockholder action
by written consent (unless R.R. Donnelley holds 50% or more of the issued and
outstanding Common Stock). In addition, the Company's By-laws include
provisions establishing advance notice procedures with respect to stockholder
proposals and director nominations and permits the calling of special
stockholder meetings only by the Board of Directors, the Chairman or the
President. The Company has elected not to be governed by Section 203 of the
General Corporation Law of the State of Delaware, which, if applicable, would
impose a three-year moratorium on certain business combinations between the
Company and an "interested stockholder" (in general, a stockholder owning 15%
or more of the Company's outstanding voting stock). See "Description of
Capital Stock and Corporate Charter."
DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
an estimated immediate dilution of $19.10 per share. The per share purchase
price of the Common Stock offered hereby will exceed the net tangible book
value per share of the Common Stock immediately following the Offering. See
"Dilution." The net tangible assets of the Company as of June 30, 1996
represent approximately 74% of the Company's total assets, which include a
significant amount of goodwill. See "Dilution."
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<PAGE>
THE COMPANY
R.R. Donnelley began offering reprographic services in 1988 through a
division known as Donnelley Business Services ("DBS"). In 1993, DBS expanded
its outsourcing service offerings to include word processing, desktop
publishing and imaging services. In 1995, DBS broadened its capabilities from
managing paper-based information to include the management of electronic
information through the acquisition of LANSystems, a provider of information
technology services primarily to firms within the same markets targeted by
DBS. As of January 1, 1996, R.R. Donnelley contributed the assets and
liabilities of DBS to LANSystems and changed LANSystems' corporate name to
Donnelley Enterprise Solutions Incorporated (the "Company" or "DESI").
LANSystems was incorporated in Delaware in 1989 as a successor to a business
started in 1983.
The Company's executive offices are located at 161 North Clark Street, Suite
2400, Chicago, Illinois 60601, and its telephone number is (312) 419-7600. The
Company's internet address is http://www.desi.net.
USE OF PROCEEDS
The net proceeds to the Company in the Offering are estimated to be
approximately $42.5 million, assuming an initial public offering price of
$25.00 per share and after deducting the estimated underwriting discount and
offering expenses payable by the Company. A significant portion of the net
proceeds to the Company will be used, first, in final payment of approximately
$8.7 million for certain contingent obligations to former shareholders of
LANSystems and management participants arising from the acquisition of
LANSystems and, second, to repay amounts owed by the Company to R.R.
Donnelley, which amounts are comprised of: (i) the Dividend Note, in the
principal amount of $8.0 million, which bears interest at the prime rate
payable quarterly and becomes immediately due and payable upon the completion
of the Offering; and (ii) intercompany obligations to R.R. Donnelley, which
consist primarily of operating advances that are payable on demand and do not
bear interest (approximately $17.6 million as of June 30, 1996). The Company
estimates that advances payable to R.R. Donnelley will total approximately
$20.7 million as of the completion of the Offering. Leo S. Spiegel, Senior
Vice President and Chief Technology Officer of the Company, and Thomas P.
Bradbury, former President, LANSystems division, will receive $1,386,600 and
$1,143,827, respectively, of the payments to be made to former shareholders of
LANSystems and management participants. The remaining net proceeds received by
the Company in the Offering (approximately $5.0 million) will be used for
general corporate purposes, including for working capital or acquisitions.
Pending such uses, such net proceeds may be invested in short-term,
investment-grade interest-bearing securities. See Notes 4 and 11 of Notes to
Consolidated Financial Statements of DESI. The Company expects to enter into
the $22.0 million credit facility described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" prior to completion of the Offering. Such facility would be
used to provide working capital and for general corporate purposes.
The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Stockholder.
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<PAGE>
CAPITALIZATION
The following table sets forth the actual short-term debt and advances and
total capitalization of the Company as of June 30, 1996 and, as of June 30,
1996 (i) after giving effect to the issuance of the Dividend Note in the
principal amount of $8.0 million and to reflect approximately $8.7 million due
to LANSystems earnout participants resulting from the agreement to modify
certain contractual obligations under the LANSystems acquisition agreement
that provided for additional contingent payments to former LANSystems
shareholders and certain management participants based on specified financial
targets for the years ended December 31, 1995 through 1998, and (ii) pro forma
as adjusted to give effect to the issuance and sale of 1,855,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $25.00 per share and the application of a significant
portion of the assumed net proceeds to the Company from the Offering in final
payment of approximately $8.7 million for the contingent obligations described
in clause (i) above and to repay the Dividend Note and the advances owed to
R.R. Donnelley. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements of DESI and the
Unaudited Pro Forma Consolidated Financial Information and the related notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(1) ADJUSTED
------- -------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Short-term debt and advances:
Amounts due to LANSystems earnout
participants............................... $ -- $ 8,700 $ --
Dividend Note due to R.R. Donnelley......... -- 8,000 --
Advances due to R.R. Donnelley.............. 17,637 17,637 --
Current portion of capital lease
obligations................................ 1,169 1,169 1,169
------- ------- -------
Total short-term debt..................... $18,806 $35,506 $ 1,169
======= ======= =======
Long-term capital lease obligations........... $ 1,314 $ 1,314 $ 1,314
Shareholders' equity:
Common Stock--$.01 par value, 15,000,000
shares authorized; 3,145,000 issued and
outstanding and 5,000,000 shares issued and
outstanding, as adjusted(2)................ 31 31 50
Additional paid-in capital.................. 15,726 7,726 50,168
------- ------- -------
Total shareholders' equity................ 15,757 7,757 50,218
------- ------- -------
Total capitalization...................... $17,071 $ 9,071 $51,532
======= ======= =======
</TABLE>
- --------
(1) After giving pro forma effect to the issuance of the Dividend Note and the
agreement to modify certain contractual obligations under the LANSystems
acquisition agreement that provided for additional contingent payments to
former LANSystems shareholders and certain management participants based
on specified financial targets for the years ended December 31, 1995
through 1998.
(2) Excludes 400,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan and 1996 Broad-Based Employee Stock
Plan, including 5,000 shares of restricted Common Stock and options to
purchase approximately 308,000 shares of Common Stock (at the initial
public offering price set forth on the cover page of this Prospectus) that
the Company expects to grant to employees in connection with the Offering.
See "Management-- Stock Plans" and "Management--Employment Agreements."
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<PAGE>
DIVIDEND POLICY
The Company currently intends to retain earnings to finance the growth of
its business and therefore does not intend to pay any cash dividends for the
foreseeable future. Payment of any cash dividends in the future will depend on
the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors of the Company. In
addition, the credit facility the Company expects to enter into prior to
completion of the Offering will contain restrictions on the Company's payment
of cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company has not paid any dividends in the last two fiscal years. The Company
declared and paid a cash dividend of $621,000 as of June 30, 1996, and, in
July 1996, declared a dividend of $8.0 million paid in the form of the
Dividend Note.
DILUTION
The net tangible book value of the Company as of June 30, 1996 was $3.8
million, or $1.19 per share of Common Stock. See "Capitalization." Net
tangible book value per share is equal to the Company's total tangible assets
less total liabilities, divided by the total number of shares of Common Stock
outstanding. After giving effect to the sale of the 1,855,000 shares of Common
Stock offered by the Company hereby (less the estimated underwriting discount
and offering expenses payable by the Company) and the application of the net
proceeds therefrom as if such sale and application occurred on June 30, 1996,
the pro forma as adjusted net tangible book value of the Company at such date
would have been approximately $29.5 million or $5.90 per share. This
represents an immediate increase in net tangible book value of $4.71 per share
to R.R. Donnelley and an immediate dilution of $19.10 per share to the
purchasers of shares of Common Stock in the Offering. "Dilution" per share is
determined by subtracting pro forma net tangible book value per share from the
amount paid for a share of Common Stock in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $25.00
Net tangible book value per share before the Offering...... 1.19
Increase in net tangible book value per share attributable
to the Offering........................................... 4.71
----
Pro forma net tangible book value per share after giving
effect to the Offering...................................... 5.90
------
Dilution per share to purchasers of Common Stock in the
Offering.................................................... $19.10
======
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical and pro forma
consolidated financial data of DESI. Income statement data for each of the
three years in the period ended December 31, 1995 and balance sheet data as of
December 31, 1994 and 1995 have been derived from the audited consolidated
financial statements of DESI contained herein. Income statement data for the
six month periods ended June 30, 1995 and 1996, respectively, and balance
sheet data as of June 30, 1996 have been derived from the unaudited
consolidated financial statements of DESI contained herein. Income statement
data for each of the two years in the period ended December 31, 1992 and
balance sheet data as of December 31, 1991, 1992 and 1993 have been derived
from unaudited information of DESI. The unaudited financial data includes all
adjustments that the Company considers necessary for a fair presentation of
the consolidated financial position and results of operations for the periods
reflected therein. The pro forma consolidated financial information set forth
below includes adjustments based on available information and upon certain
assumptions the Company believes are reasonable. The pro forma consolidated
financial information set forth below does not purport to represent what the
Company's consolidated results of operations or financial position would
actually have been or to project the Company's consolidated results of
operations or financial position for any future period. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Consolidated Financial Information" and Consolidated Financial
Statements of DESI and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------- -------------------------
PRO FORMA PRO FORMA
AS AS
ACTUAL ADJUSTED ACTUAL ADJUSTED
---------------------------------------- --------- --------------- ---------
1991 1992 1993 1994 1995(1) 1995(2) 1995(1) 1996(1) 1996(2)
------- ------- ------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues............... $13,652 $17,985 $23,527 $34,745 $65,944 $79,545 $21,108 $45,243 $45,243
Cost of revenues....... 11,193 14,075 18,800 27,800 53,900 64,333 18,077 35,309 34,986
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 2,459 3,910 4,727 6,945 12,044 15,212 3,031 9,934 10,257
Selling expenses....... 1,120 1,657 1,665 2,110 5,563 7,918 1,249 4,633 4,633
General and
administrative
expenses.............. 1,312 1,648 1,333 1,540 4,866 8,138 1,082 3,536 3,906
Amortization of
goodwill.............. -- -- -- -- 295 1,065 -- 306 533
------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings from
operations.......... 27 605 1,729 3,295 1,320 (1,909) 700 1,459 1,185
Interest expense....... 31 87 184 283 522 543 230 126 126
------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss)
before income taxes. (4) 518 1,545 3,012 798 (2,452) 470 1,333 1,059
Income taxes........... 4 248 684 1,277 495 (470) 208 712 692
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).... $ (8) $ 270 $ 861 $ 1,735 $ 303 $(1,982) $ 262 $ 621 $ 367
======= ======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income
(loss) per share(3)... $ (.43) $ .08
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JUNE 30, 1996
-------------------------------------- ----------------------------------
ACTUAL PRO FORMA
-------------------------------------- AS
1991 1992 1993 1994 1995 ACTUAL PRO FORMA (4) ADJUSTED(5)
------ ------ ------ ------ ------- ------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIODS):
Total assets........... $2,236 $4,758 $6,826 $9,813 $39,696 $46,339 $55,039 $63,163
Amounts due (to)
LANSystems earnout
participants.......... -- -- -- -- -- -- (8,700) --
Debt and advances due
(to) from
R.R. Donnelley........ 492 (1,450) (2,181) (191) (4,672) (17,637) (25,637) --
Capital lease
obligations........... 687 1,203 2,672 3,845 3,125 2,483 2,483 2,483
Total shareholders'
equity(6)............. -- -- -- -- 15,757 15,757 7,757 50,218
</TABLE>
- -------
(1) Income statement data for the year ended December 31, 1995 and the six
months ended June 30, 1996 includes the results of operations of
LANSystems, which the Company acquired in June 1995, beginning July 1,
1995.
19
<PAGE>
(2) For a detailed description of the adjustments to these unaudited pro forma
consolidated statements of income, see "Unaudited Pro Forma Consolidated
Financial Information."
(3) Pro forma net income (loss) per share is computed by dividing pro forma
net income (loss) for the year ended December 31, 1995 and the six months
ended June 30, 1996 by the pro forma weighted shares outstanding during
such periods of 4,645,000.
(4) Represents the issuance of the Dividend Note in the principal amount of
$8.0 million and additional goodwill in the approximate amount of $8.7
million and the related amounts due to LANSystems earnout participants
resulting from the agreement to modify certain contractual obligations
under the LANSystems acquisition agreement that provided for additional
contingent payments to former LANSystems shareholders and certain
management participants based on specified financial targets for the years
ended December 31, 1995 through 1998.
(5) Adjusts the pro forma balance sheet data to give effect to the Offering
being completed and a significant portion of the assumed net proceeds of
the Offering received by the Company being applied to repay the Dividend
Note and the advances owed to R.R. Donnelley and in final payment of
certain contingent obligations arising from the acquisition of LANSystems,
as described under "Use of Proceeds."
(6) No shareholders' equity is shown as of the periods ended December 31, 1991
through 1994 because the Company was operated as a division of R.R.
Donnelley during such periods.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statements of income for the year ended
December 31, 1995 and the six months ended June 30, 1996 set forth below
illustrate: (i) the effects of the historical results of operations (under the
Company's accounting policies) of LANSystems for the period from January 1,
1995 to June 21, 1995, the date on which LANSystems was acquired by the
Company; and (ii) the Offering being completed and a significant portion of
the assumed net proceeds received by the Company therefrom being used in final
payment of approximately $8.7 million for certain contingent obligations
arising from the acquisition of LANSystems and to repay the Dividend Note and
the advances owed to R.R. Donnelley at January 1, 1995. In addition, the pro
forma statements of income illustrate the estimated net operating effects
resulting from the Company being a public entity, which include pricing of
certain services the Company will receive from R.R. Donnelley after the
Offering under certain intercompany agreements, as well as other incremental
public company expenses. The pro forma adjustments are based on available
information and upon certain assumptions the Company believes are reasonable.
The pro forma consolidated statements of income do not purport to represent
what the Company's consolidated results of operations would actually have been
or to project the Company's consolidated results of operations for any future
period.
The unaudited pro forma consolidated balance sheet as of June 30, 1996 set
forth below illustrates the issuance of the Dividend Note in the principal
amount of $8.0 million and additional goodwill in the approximate amount of
$8.7 million and the related amounts due to LANSystems earnout participants
resulting from the agreement to modify certain contractual obligations under
the LANSystems acquisition agreement that provided for additional contingent
payments to former LANSystems shareholders and certain management participants
based on specified financial targets for the years ended December 31, 1995
through 1998. The unaudited pro forma as adjusted consolidated balance sheet
as of June 30, 1996 set forth below illustrates the Offering being completed
and a significant portion of the assumed net proceeds received by the Company
therefrom being applied as described under "Use of Proceeds." The pro forma
consolidated balance sheet does not purport to represent what the Company's
consolidated financial position would actually have been or to project the
Company's consolidated financial position for any future date.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
LANSYSTEMS OPERATING
OPERATING STRUCTURE AS
ACTUAL ADJUSTMENTS(1) ADJUSTMENTS(2) OTHER ADJUSTED
------- -------------- -------------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................ $65,944 $13,601 $ -- $ -- $79,545
Cost of revenues........ 53,900 10,436 (3) -- 64,333
------- ------- ------ ----- -------
Gross profit......... 12,044 3,165 3 -- 15,212
Selling expenses........ 5,563 2,355 -- -- 7,918
General and
administrative
expenses............... 4,866 2,230 1,042 -- 8,138
Amortization of
goodwill............... 295 -- -- 770(3) 1,065
------- ------- ------ ----- -------
Earnings (loss) from
operations.......... 1,320 (1,420) (1,039) (770) (1,909)
Interest expense........ 522 21 -- -- 543
------- ------- ------ ----- -------
Earnings (loss)
before income taxes. 798 (1,441) (1,039) (770) (2,452)
Income taxes............ 495 (534) (431)(4) -- (470)
------- ------- ------ ----- -------
Net income (loss).... $ 303 $ (907) $ (608) $(770) $(1,982)
======= ======= ====== ===== =======
Pro forma net loss
per share........... $ (.43)(5)
=======
</TABLE>
- --------
(1) Represents the historical results of operations (under the Company's
accounting policies) of LANSystems for the period from January 1, 1995 to
June 21, 1995, the date on which LANSystems was acquired by the Company.
(2) Represents the estimated adjustments necessary to reflect the status of
the Company as an independent public company, such as legal, insurance,
accounting and tax compliance and benefits administration expenses.
(3) Represents the increase in the amortization of goodwill based on total
goodwill of $21,300,000 amortized over a useful life of 20 years. The
increase represents the assumptions that (a) the LANSystems acquisition
occurred on January 1, 1995 and (b) the increases to goodwill after the
acquisition relating to the 1995 earnout of $794,000 and the agreement in
1996 to modify certain contractual obligations under the LANSystems
acquisition agreement for $8,700,000 occurred on January 1, 1995. See
Notes 10 and 11 of Notes to Consolidated Financial Statements of DESI.
(4) Taxes are provided on income at the appropriate statutory rate of 41.5%,
the combined statutory federal and state rate on operating and capital
structure adjustments.
(5) Pro forma net income per share is based on 4,645,000 weighted average
shares of Common Stock outstanding, which includes 3,145,000 actual
weighted average shares outstanding and 1,500,000 weighted average shares
assumed to be outstanding. The 1,500,000 shares assumed to be outstanding
are equivalent to the number of shares that must be sold at the initial
public offering price of $25.00 per share in order to generate proceeds
equivalent to the principal amount of the Dividend Note of $8,000,000, the
advances owed to R.R. Donnelley of $17,637,000 and the amounts due to
LANSystems earnout participants of $8,700,000.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------
OPERATING
STRUCTURE AS
ACTUAL ADJUSTMENTS(1) OTHER ADJUSTED
------- -------------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................ $45,243 $ -- $ -- $45,243
Cost of revenues.................... 35,309 (323) -- 34,986
------- ----- ----- -------
Gross profit..................... 9,934 323 -- 10,257
Selling expenses.................... 4,633 -- -- 4,633
General and administrative expenses. 3,536 370 -- 3,906
Amortization of goodwill............ 306 -- 227(2) 533
------- ----- ----- -------
Earnings from operations......... 1,459 (47) (227) 1,185
Interest expense.................... 126 -- -- 126
------- ----- ----- -------
Earnings before income taxes..... 1,333 (47) (227) 1,059
Income taxes........................ 712 (20)(3) -- 692
------- ----- ----- -------
Net income....................... $ 621 $ (27) $(227) $ 367
======= ===== ===== =======
Pro forma net income per share... $ .08(4)
=======
</TABLE>
- --------
(1) Represents the estimated adjustments necessary to reflect the status of
the Company as an independent public company, such as legal, insurance,
accounting and tax compliance and benefits administration expenses.
(2) Represents the increase in the amortization of goodwill based on total
goodwill of $21,300,000 amortized over a useful life of 20 years. The
increase represents the assumption that the increases to goodwill after
the acquisition relating to the 1995 earnout of $794,000 and the agreement
in 1996 to modify certain contractual obligations under the LANSystems
acquisition agreement for $8,700,000 occurred on January 1, 1995. See
Notes 10 and 11 of Notes to Consolidated Financial Statements of DESI.
(3) Taxes are provided on income at the appropriate statutory rate of 41.5%,
the combined statutory federal and state rate on operating and capital
structure adjustments.
(4) Pro forma net income per share is based on 4,645,000 weighted average
shares of Common Stock outstanding, which includes 3,145,000 actual
weighted average shares outstanding and 1,500,000 weighted average shares
assumed to be outstanding. The 1,500,000 shares assumed to be outstanding
are equivalent to the number of shares that must be sold at the initial
public offering price of $25.00 per share in order to generate proceeds
equivalent to the principal amount of the Dividend Note of $8,000,000, the
advances owed to R.R. Donnelley of $17,637,000 and the amounts due to
LANSystems earnout participants of $8,700,000.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------------------------------------------------
DIVIDEND
NOTE AND
LANSYSTEMS
EARNOUT PRO PRO FORMA
ACTUAL OBLIGATION FORMA OFFERING(4) REPAYMENTS(5) AS ADJUSTED
------- ---------- ------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 298 $ -- $ 298 $42,461 $(34,337) $ 8,422
Accounts receivable(1).. 11,229 -- 11,229 -- -- 11,229
Unbilled receivables.... 5,660 -- 5,660 -- -- 5,660
Inventory............... 4,451 -- 4,451 -- -- 4,451
Prepaid expenses and
other current assets... 466 -- 466 -- -- 466
Income tax receivable... 1,277 -- 1,277 -- -- 1,277
Deferred income taxes... 978 -- 978 -- -- 978
------- ------- ------- ------- -------- -------
Total current assets... 24,359 -- 24,359 42,461 (34,337) 32,483
Property and equipment,
net, at cost........... 9,129 -- 9,129 -- -- 9,129
Deferred income taxes... 791 -- 791 -- -- 791
Goodwill, net........... 11,999 8,700 (2) 20,699 -- -- 20,699
Other noncurrent assets. 61 -- 61 -- -- 61
------- ------- ------- ------- -------- -------
Total assets........... $46,339 $ 8,700 $55,039 $42,461 $(34,337) $63,163
======= ======= ======= ======= ======== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Capital lease
obligations, current
portion................ $ 1,169 $ -- $ 1,169 $ -- $ -- $ 1,169
Amounts due to
LANSystems earnout
participants........... -- 8,700 (2) 8,700 -- (8,700) --
Dividend Note........... -- 8,000 (3) 8,000 -- (8,000) --
Advances due to R.R.
Donnelley.............. 17,637 -- 17,637 -- (17,637) --
Accounts payable........ 5,430 -- 5,430 -- -- 5,430
Accrued expenses........ 3,486 -- 3,486 -- -- 3,486
Customer prepayments and
deferred revenues...... 1,546 -- 1,546 -- -- 1,546
------- ------- ------- ------- -------- -------
Total current
liabilities........... 29,268 16,700 45,968 -- (34,337) 11,631
Capital lease
obligations............ 1,314 -- 1,314 -- -- 1,314
------- ------- ------- ------- -------- -------
Total noncurrent
liabilities........... 1,314 -- 1,314 -- -- 1,314
Common Stock--DESI...... 31 -- 31 19 -- 50
Additional paid-in
capital................ 15,726 (8,000)(3) 7,726 42,442 -- 50,168
Retained earnings....... -- -- -- -- -- --
------- ------- ------- ------- -------- -------
Total shareholders'
equity................ 15,757 (8,000) 7,757 42,461 -- 50,218
------- ------- ------- ------- -------- -------
Total liabilities and
shareholders' equity.. $46,339 $ 8,700 $55,039 $42,461 $(34,337) $63,163
======= ======= ======= ======= ======== =======
</TABLE>
- --------
(1) Excludes $6,800,000 of receivables factored to a subsidiary of R.R.
Donnelley that remain uncollected. The arrangement pursuant to which the
Company sold such receivables to a subsidiary of R.R. Donnelley will
terminate upon completion of the Offering. The Company expects to replace
this source of financing with cash flows from operations and the credit
facility described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(2) Represents additional goodwill and the related amounts due to LANSystems
earnout participants resulting from the agreement to modify certain
contractual obligations under the LANSystems acquisition agreement that
provided for additional contingent payments to former LANSystems
shareholders and certain management participants based on specified
financial targets for the years ended December 31, 1995 through 1998.
(3) Represents the issuance of the Dividend Note by the Company to R.R.
Donnelley.
(4) Represents the assumed net proceeds of the Offering. See "Use of
Proceeds."
(5) Represents the payment of the principal amount of the Dividend Note of
$8,000,000, the payment of advances owed to R.R. Donnelley of $17,637,000
and the payment of amounts due to LANSystems earnout participants of
$8,700,000.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Overview
Donnelley Enterprise Solutions Incorporated is a single-source provider of
integrated information management services to professional service
organizations, primarily large law firms, investment banks and accounting
firms. DESI offers its clients the opportunity to focus on their core
businesses by outsourcing a variety of functions, including business services
and information technology services. The Company has experienced substantial
growth by expanding its service offerings, adding new clients, increasing
business with its existing clients and capitalizing on the growing trend
toward outsourcing. In 1995, the Company had revenues of $45.7 million from
business services outsourcing and $20.2 million from information technology
services, representing six months of operations since the June 1995
acquisition of LANSystems. In the first six months of 1996, the Company's
revenues from business services outsourcing and information technology
services were $26.6 million and $18.6 million, respectively.
DESI commenced its outsourcing operations in 1988 as a provider of
reprographic services and has expanded its service offerings to include
networked and color printing, mailroom and facsimile services, word
processing, desktop publishing and imaging. In June 1995, the Company
broadened its capabilities from managing paper-based information to include
the management of electronic information through the acquisition of
LANSystems, which has provided information technology services since 1983,
including systems integration, consulting and software development. Beginning
in February 1996, the Company began providing systems management outsourcing
services.
For the year ended December 31, 1993, the Company had three clients that
accounted for greater than 10.0% of revenues and, in the aggregate, for
approximately 50.0% of revenues. For the year ended December 31, 1994, one
client accounted for approximately 15.0% of DESI's revenues. For the year
ended December 31, 1995, revenues from the Company's top 20 clients accounted
for 70.4% of revenues, with revenues from the top two clients accounting for
8.9% and 7.3%, respectively. For the six months ended June 30, 1996, the
Company's top 20 clients accounted for approximately 62.4% of the Company's
revenues, with the top two clients accounting for approximately 9.1% and 6.2%
of such revenues, respectively. The Company provided business services to 16
of its top 20 clients for 1995. Nine of the contracts with these clients
expire prior to December 31, 1997, including the contract with the largest
client, which expires in December 1996. Although most of the Company's
business outsourcing contracts are cancellable only for cause, DESI is
generally willing to renegotiate contracts that no longer meet the needs of
its clients.
The Company's revenues are derived primarily from (i) monthly fees under its
business services outsourcing contracts, (ii) fees that are contingent on the
completion of information technology projects, (iii) the resale of hardware or
software products and the provision of subcontracted labor in connection with
the delivery of information technology services and (iv) monthly fees under
information technology maintenance contracts. The Company typically enters
into contracts with its business services clients that have terms ranging from
three to five years. These contracts typically provide for monthly minimum
payments based on the client's historical volumes. Substantially all of the
Company's business services outsourcing contracts are priced on a per unit
basis for each service provided and allow annual increases or decreases of the
unit costs for each of the outsourcing services provided in order to reflect
actual costs of labor and supplies. The majority of the Company's information
technology projects are priced on a fixed-fee basis, although some work is
contracted on a time-and-materials basis. Contracts for information technology
projects typically include scope of work and acceptance criteria for
identifying project completion. The Company typically seeks to obtain an
increase in its fees if a client makes any significant change to the original
scope of a project. Payment terms for these contracts include a down payment,
and invoices are submitted in accordance with the achievement of negotiated
milestones or dates during the projects.
24
<PAGE>
Approximately one-half of the revenues associated with a typical information
technology project are from the resale of hardware or software products. The
Company generally provides such products and labor only as an accommodation to
its clients as required for particular projects. The Company's maintenance
contracts are priced on an annual basis with payments made in advance. The
Company intends to enter into systems management contracts with multi-year
terms, which will be invoiced on a monthly basis.
DESI's cost of revenues associated with business services outsourcing
revenues are comprised of wages, supplies, start-up costs and costs associated
with capital leases of equipment. DESI's cost of revenues associated with its
information technology services are comprised of computer equipment and
software, labor costs, an overhead allocation and purchasing expenses. The
Company's margins on its information technology services are higher than those
associated with its business services. The Company typically enjoys higher
margins on its newer business service offerings (word processing, desktop
publishing and imaging) after an initial start-up period than on its other
document services. These relatively higher margins, however, tend to decline
as competition increases. The Company's margins on resold products are lower
than those for business and information technology services.
DESI's selling expenses are comprised of sales and administrative salaries,
commissions, travel and entertainment and an overhead allocation related to
branch sales offices. Selling expenses as a percentage of revenues for
information technology services are significantly higher than for business
outsourcing services due to the long-term nature of DESI's business
outsourcing contracts.
DESI's research and development activities, the costs of which are included
in general and administrative expenses, consist of software and hardware
product evaluation, trial integration of purchased hardware and software, user
productivity benchmarking and the development of custom integration software.
The Company's results of operations are sensitive to the state of the U.S.
professional service economy, particularly as it affects the Company's target
markets. The volume of services provided by the Company generally are lower in
periods in which activities of the Company's clients are reduced by economic
or other factors. The resulting decline in the Company's revenues from a
particular client affects the Company's net income because a large percentage
of the Company's costs are fixed, although this effect historically has been
more than offset by a growth in revenues from other clients. In addition,
clients have imposed pricing pressures on the Company during periods in which
their activities are reduced because of their own reduced levels of
profitability, thereby adversely affecting the Company's gross margins and
results of operations. Again, these pricing pressures have been offset by a
growth in revenues and the Company's ability to attract new clients who desire
to reduce their expenses by outsourcing certain services to the Company.
Relationship with R.R. Donnelley
DESI has operated as a separate business within R.R. Donnelley. It has
relied on R.R. Donnelley for its financing needs (see further discussion under
"--Liquidity and Capital Resources") and for a number of support services,
including legal, tax, insurance, benefits administration, data processing and
payroll.
As of June 30, 1996, the Company had advances payable to R.R. Donnelley
totaling approximately $17.6 million. The Company estimates that advances
payable to R.R. Donnelley will total approximately $20.7 million as of the
completion of the Offering. The advances payable to R.R. Donnelley were used
to fund operating and investing activities, net of cash advanced to R.R.
Donnelley from operating cash flows generated by the Company and receivables
resulting from certain sales through a subsidiary of R.R. Donnelley. See Note
4 of Notes to the Consolidated Financial Statements of DESI. In July 1996, the
Company declared a dividend of $8.0 million, payable to R.R. Donnelley as the
sole stockholder in the form of the Dividend Note, which is payable upon
demand or the completion of the Offering and bears interest at the prime rate
payable quarterly. A significant portion of the net proceeds received by the
Company from the Offering will be used to repay the aggregate principal amount
of, and interest on, the Dividend Note and such advances and in final payment
of approximately $8.7 million for certain contingent obligations arising from
the acquisition of LANSystems.
25
<PAGE>
The consolidated financial statements discussed below reflect the results of
operations, financial position and cash flows of the Company on a carve-out
basis; that is, the financial statements have been adjusted to reflect certain
expenses and liabilities incurred by R.R. Donnelley on behalf of the Company.
The Company believes that the assumptions underlying all such adjustments are
reasonable; however, the consolidated financial statements do not necessarily
reflect the results of operations, financial position and cash flows of the
Company had the Company operated as a separate entity during the periods
presented. Income taxes reflected in the consolidated financial statements
were determined as if the Company had filed a separate return.
Acquisition of LANSystems
LANSystems was acquired on June 21, 1995 for cash of approximately $16.6
million and certain contingent payment obligations ("earnout"). The
acquisition was accounted for as a purchase, with the excess of the purchase
price over the fair market value of net assets acquired being allocated to
goodwill in the amount of approximately $11.8 million. The goodwill is being
amortized over its estimated useful life of 20 years. LANSystems was acquired
by R.R. Donnelley and, as such, the Company was not required to provide cash
for the acquisition. The earnout provisions provided for contingent payments
of up to $12.9 million payable to former LANSystems shareholders and
management participants based on the achievement of specified financial
targets for the years ended December 31, 1995 through 1998. Payments
aggregating approximately $0.9 million have been made to date in respect of
the earnout. Because immediate payment of the maximum remaining earnout would
be triggered by completion of the Offering in 1996, R.R. Donnelley and DESI
sought to modify the earnout. Earnout participants having the right to
approximately 99% of the earnout have agreed to a modification pursuant to
which they will be entitled to payment on the earlier of completion of the
Offering or October 31, 1996 of approximately $8.7 million in final
satisfaction of the earnout payments due to them under the acquisition
agreement. Earnout participants who have not agreed, and who do not
subsequently agree, to this modification will be entitled to receive the
maximum remaining amount of the earnout, aggregating approximately $100,000,
upon completion of the Offering. Payments made to the earnout participants
will be treated as additional purchase price for LANSystems, resulting in an
increase in goodwill of approximately $8.7 million, which will be amortized
over the remaining useful life (approximately 19 years). See "Unaudited Pro
Forma Consolidated Financial Information."
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of income as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------
1993 1994 1995(1) 1995(1) 1996(1)
----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues
Business services outsourcing........... 100.0% 100.0% 69.3% 100.0% 58.9%
Information technology.................. -- -- 30.7 -- 41.1
----- ----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues.......................... 79.9 80.0 81.7 85.6 78.0
----- ----- ----- ----- -----
Gross profit.......................... 20.1 20.0 18.3 14.4 22.0
Selling expenses.......................... 7.1 6.1 8.4 5.9 10.3
General and administrative expenses....... 5.7 4.4 7.4 5.1 7.8
Amortization of goodwill.................. -- -- 0.5 -- 0.7
----- ----- ----- ----- -----
Earnings from operations.............. 7.3 9.5 2.0 3.4 3.2
Interest expense.......................... 0.8 0.8 0.8 1.1 0.3
----- ----- ----- ----- -----
Earnings before income taxes.......... 6.5 8.7 1.2 2.3 2.9
Income taxes.............................. 2.9 3.7 0.7 1.0 1.5
----- ----- ----- ----- -----
Net income............................ 3.6% 5.0% 0.5% 1.3% 1.4%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) The results of operations of LANSystems are included in DESI's
consolidated statements of income since July 1, 1995.
26
<PAGE>
Six months ended June 30, 1996 compared to six months ended June 30, 1995
Revenues for the six months ended June 30, 1996 totaled $45.2 million, a
114.3% increase over 1995 revenues of $21.1 million. This $24.1 million
increase was comprised of a $5.5 million, or 26.0%, increase in business
services outsourcing revenues and $18.6 million in information technology
services revenues attributable to the June 1995 acquisition of LANSystems.
Business services outsourcing growth was due to a $2.1 million increase in
revenues from new clients and a $3.4 million increase in revenues from
existing clients. Revenues from information technology services for the first
six months of 1996 were comprised of $9.3 million from the resale of hardware
and software products and $9.3 million from services.
Cost of revenues of $35.3 million decreased as a percentage of revenues to
78.0% from 85.6% in 1995 because of the inclusion of LANSystems, which has a
lower cost of revenues as a percentage of revenues, improved margins
associated with business services outsourcing revenues relating to client
sites that were opened in 1995 and implementation of a cost-management plan to
improve the business services cost structure. The cost-management plan
included the controlled reduction of staff at certain client sites and the
discontinuance of the Company's participation in the R.R. Donnelley retiree
medical and group life and pension benefits program effective May 1, 1996.
Selling expenses increased $3.4 million, or 270.9%, from 1995 and as a
percentage of revenues increased to 10.3% in 1996 from 5.9% in 1995. The
increase in selling expenses as a percentage of revenues was primarily due to
the acquisition of LANSystems ($2.8 million), because selling expenses as a
percentage of revenues for information technology services is significantly
higher than for business outsourcing services due to the long-term nature of
business services outsourcing contracts. In addition, the Company recorded
higher selling expenses related to the initiation of systems management
services and an overall increase in the number of sales personnel to support
future revenue growth.
General and administrative expenses grew $2.5 million, or 226.8%, from 1996
and as a percentage of revenues grew to 7.8% in 1996 from 5.1% in 1995. The
increase was primarily due to the inclusion of LANSystems ($1.5 million) and
the hiring of additional personnel to support future revenue growth.
Amortization of goodwill in 1996 was $0.3 million, compared to no such
expense in 1995. The increase was due to the LANSystems acquisition.
Interest expense, all of which related to capital leases, decreased by $0.1
million because the Company had lower average outstanding levels of capital
lease obligations in 1996.
The Company's effective income tax rate increased to 53.4% in 1996 from
43.7% in 1995. The effective tax rate exceeds the U.S. federal statutory rate
primarily due to the effect of nondeductible goodwill amortization and state
taxes. The increase in the effective tax rate in 1996 reflects the effect of
nondeductible goodwill amortization, offset in part by the increase in pretax
income.
Net income increased $0.4 million, or 137.0%, to $0.6 million in 1996 as a
result of the foregoing factors.
Year ended December 31, 1995 compared to year ended December 31, 1994
Revenues for the year ended December 31, 1995 totaled $66.0 million, a 89.8%
increase over 1994 revenues of $34.7 million. This $31.3 million increase was
comprised of a $11.0 million, or 31.5%, increase in business services
outsourcing revenues and $20.2 million in information technology services
revenues attributable to the June 1995 acquisition of LANSystems. Business
services outsourcing growth was due to a $7.6 million increase in revenues
from new clients and a $3.4 million increase in revenues from existing
clients. Revenues from information technology services were comprised of $13.4
million from the resale of hardware and software products and $6.9 million
from services.
27
<PAGE>
Cost of revenues of $53.9 million increased as a percentage of revenues to
81.7% from 80.0% in 1994 because of a reduction in color print volumes,
competitive pressures, start-up costs associated with new business services
outsourcing clients, geographical expansion to the western region of the
United States and higher paper prices in 1995, offset in part by the inclusion
of LANSystems.
Selling expenses increased $3.5 million, or 163.7%, from 1994 and as a
percentage of revenues increased to 8.4% in 1995 from 6.1% in 1994. Selling
expenses as a percentage of revenues increased primarily due to the LANSystems
acquisition ($2.8 million), the annualization of a new office opened in 1994
and the hiring of additional sales personnel to support future revenues
growth.
General and administrative expenses grew $3.3 million, or 216.0%, from 1994
and as a percentage of revenues grew to 7.4% in 1995 from 4.4% in 1994. The
increase was primarily due to the LANSystems acquisition ($2.5 million) and an
investment in personnel to support revenue growth.
Amortization of goodwill was $0.3 million, compared to no such expense in
1994. The increase was due to the LANSystems acquisition.
Interest expense, all of which related to capital leases, increased by $0.2
million because the Company had higher average outstanding levels of capital
lease obligations in 1995, which resulted from additional client sites.
The Company's effective income tax rate increased to 62.0% in 1995 from
42.4% in 1994. The effective tax rate exceeds the U.S. federal statutory rate
due to the effect of nondeductible goodwill amortization and state taxes. The
increase in the effective tax rate in 1995 reflects the effect of
nondeductible goodwill amortization and the decrease in pretax income.
Net income decreased $1.4 million, or 81.4%, to $0.3 million in 1995 as a
result of the foregoing factors.
Year ended December 31, 1994 compared to year ended December 31, 1993
Revenues for the year ended December 31, 1994 totaled $34.7 million, a 47.7%
increase over 1993 revenues of $23.5 million. This $11.2 million increase was
due to a $10.7 million increase in revenues to new clients and a $0.5 million
increase in revenues to existing clients.
Cost of revenues increased in 1994 as a percentage of revenues to 80.0% from
79.9% in 1993, which is not significant.
Selling expenses decreased as a percentage of revenues to 6.1% in 1994 from
7.1% in 1993. The decrease in selling expenses as a percentage of revenues
resulted from the more efficient use of the time and efforts of sales
representatives.
General and administrative expenses grew $0.2 million, or 15.5% from 1993,
and decreased as a percentage of revenues to 4.4% in 1994 from 5.7% in 1993.
The increase in general and administrative expenses was primarily due to the
hiring of additional employees made necessary as a result of revenue growth.
Interest expense, all of which related to capital leases, increased by $0.1
million because the Company had higher average outstanding levels of capital
lease obligations in 1994, which resulted from additional client sites.
The Company's effective income tax rate decreased to 42.4% in 1994 from
44.3% in 1993. The effective tax rate exceeds the U.S. federal statutory rate
primarily due to the effect of state taxes. The decrease in the effective tax
rate in 1994 reflects the increase in pretax income, which reduces the
relative effect of the nondeductible items.
28
<PAGE>
Net income increased $0.9 million, or 101.4%, to $1.7 million in 1994 as a
result of the foregoing factors.
Quarterly operating results
The following table sets forth selected unaudited consolidated statement of
income information for the Company on a quarterly basis for the years ended
December 31, 1993, 1994 and 1995 and for the three months ended March 31 and
June 30, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
1993 1994 1995 1996
--------------------------- --------------------------- ---------------------------- --------------
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business services
outsourcing
revenues........ $5.20 $5.55 $6.03 $6.75 $8.13 $8.39 $8.95 $9.28 $10.88 $10.23 $11.74 $12.84 $12.89 $13.75
Information
technology
revenues........ -- -- -- -- -- -- -- -- -- -- 9.34 10.92 7.56 11.04
----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Total revenues.. 5.20 5.55 6.03 6.75 8.13 8.39 8.95 9.28 10.88 10.23 21.08 23.76 20.45 24.79
Earnings (loss)
from
operations..... 0.29 0.34 0.50 0.60 0.64 0.75 0.79 1.11 0.33 0.37 (0.07) 0.69 0.08 1.38
Net income
(loss)......... $0.14 $0.16 $0.25 $0.31 $0.33 $0.40 $0.42 $0.58 $ 0.10 $ 0.16 $(0.16) $ 0.20 $(0.07) $ 0.69
===== ===== ===== ===== ===== ===== ===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's quarterly operating results have been subject to variation, and
will continue to be subject to variation, depending upon factors such as the
mix of business among the Company's services; the cost of materials, labor and
technology, particularly in connection with the delivery of business services;
the costs associated with initiating new outsourcing contracts or opening new
offices; the economic condition of the Company's target markets; and the costs
of acquiring and integrating new businesses. Although most of the Company's
long-term contracts for the provision of business services provide for pricing
adjustments to reflect the Company's actual labor, material and technology
costs, these adjustments occur annually on a historical basis and therefore may
add to fluctuations in quarterly and annual operating results of the Company.
The Company's revenues derived from individual business services outsourcing
contracts historically have been somewhat seasonal, with the lowest percentage
of revenues being attributed to the third quarter as a result, in part, of
reduced volumes of business service used by clients. Revenues from information
technology services are also seasonal, with the highest percentage of revenues
being attributed to the fourth quarter primarily as a result of clients'
decisions to use funds remaining in their information technology budgets for
projects delayed during the year. The Company experienced net losses in the
third quarter of 1995, resulting primarily from the Company's expansion to the
western region of the United States, new client start-ups and from costs
associated with the acquisition of LANSystems, and in the first quarter of
1996, resulting primarily from continuing start-up expenses.
In connection with the departure of Thomas P. Bradbury, former President,
LANSystems division, the Company has recorded a charge of $300,000 in the third
quarter of 1996. See "Management--Agreement with Former Executive Officer."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations, capital expenditures and acquisitions
through cash flows from operations, amounts advanced interest-free from R.R.
Donnelley and the sale of its business services outsourcing accounts receivable
to a subsidiary of R.R. Donnelley. These receivables were sold without recourse
and the Company was not charged any factoring cost. During the years ended
December 31, 1993, 1994 and 1995, the Company factored $22.1 million, $33.9
million and $44.8 million of receivables, respectively. Factored receivables
that remain uncollected were $6.2 million, $14.6 million and $6.8 million at
December 31, 1994 and 1995, and June 30, 1996, and are excluded from DESI's
consolidated balance sheets. The arrangement pursuant to which the Company sold
such receivables to a subsidiary of R.R. Donnelley will terminate upon
completion of the Offering.
Cash flows from operations decreased 41.1% in 1995 to $3.9 million compared
to $6.7 million in 1994 and $1.4 million in 1993. Capital expenditures
increased $2.0 million to $4.1 million in 1995 from $2.1 million in 1994
primarily due to the Company's expansion to the western region of the United
States. In 1995, the Company had high levels of spending associated with new
client site start-ups.
29
<PAGE>
The Company had a net usage of cash from operating activities of $9.1
million during the six months ended June 30, 1996 primarily due to changes in
working capital. Specifically, unbilled receivables increased by $4.2 million
and customer prepayments decreased by $2.7 million. The increase in unbilled
receivables is primarily due to the timing of the invoicing to business
services outsourcing clients for June services. Customer prepayments decreased
as one client prepaid a significant portion of 1996 services in December 1995.
For the six months ended June 30, 1996, the $11.7 million of cash provided by
financing activities was primarily used to fund the $9.1 million of cash used
in operating activities and the $2.1 million of capital expenditures. The
Company's capital expenditures primarily consisted of equipment at client
sites. For the remainder of 1996, the Company anticipates spending
approximately $2.5 million to $3.0 million.
Advances owed to R.R. Donnelley at June 30, 1996 are payable on demand or
become due and payable immediately upon completion of the Offering. A
significant portion of the net proceeds of the Offering will be used in final
payment of approximately $8.7 million for certain contingent obligations
arising from the acquisition of LANSystems and to repay the advances from R.R.
Donnelley and the Dividend Note. See "Use of Proceeds." The remaining net
proceeds received by the Company in the Offering will be used for general
corporate purposes, including for working capital or acquisitions.
Because the Company's ability to factor receivables to a subsidiary of R.R.
Donnelley and to otherwise receive advances from R.R. Donnelley will be
terminated upon completion of the Offering, the Company expects to enter into
a credit agreement with one or more banks (the "Credit Facility") to provide
it with its financing needs for working capital and general corporate purposes
(including permitted acquisitions). The Company has received a commitment
letter for a facility under which it will be entitled to borrow up to $22.0
million on a revolving credit basis after certain conditions precedent are
satisfied, including the completion of the Offering and the repayment of all
advances the Company owes to R.R. Donnelley and all of the Company's earnout
payment obligations relating to its acquisition of LANSystems. Amounts
available under the Credit Facility will not exceed a percentage of the
Company's billed and unbilled accounts receivable, and borrowings under the
Credit Facility will mature in three years and bear interest (i) at the prime
rate announced by the bank acting as agent under the Credit Facility or (ii)
at the applicable LIBOR rate plus, depending on the Company's fixed charge
coverage ratio, up to 125 basis points per annum. In addition, the Company
will pay a commitment fee of 20 to 30 basis points per annum, depending on its
fixed charge coverage ratio. The Credit Facility will contain customary
financial and other covenants, including requirements to maintain a minimum
consolidated net worth, a minimum fixed charge coverage ratio and a maximum
leverage ratio, and restrictions on liens, investments, dividends,
indebtedness, acquisitions and transactions with affiliates. The Company has
historically not paid interest with respect to the advances it received from
R.R. Donnelley. Therefore, the Company's interest expense, which historically
has related solely to capital leases, will increase as the Company borrows
under the Credit Facility.
The Company believes that, subsequent to the Offering, net proceeds received
by the Company from the Offering, the $22.0 million Credit Facility and cash
flows from operations will be sufficient to fund its ongoing operations during
the term of the Credit Facility and for continued growth and investment. The
Company expects the Credit Facility to be available for seasonal cash needs
and acquisitions.
30
<PAGE>
BUSINESS
Donnelley Enterprise Solutions Incorporated is a single-source provider of
integrated information management services to professional service
organizations, primarily large law firms, investment banks and accounting
firms. DESI offers its clients the opportunity to focus on their core
businesses by outsourcing a variety of functions, including business services
and information technology services. The Company has experienced substantial
growth by expanding its service offerings, adding new clients, increasing
business with its existing clients and capitalizing on the growing trend
toward outsourcing. In 1995, the Company had revenues of $45.7 million from
business services outsourcing and $20.2 million from information technology
services, representing six months of operations following the June 1995
acquisition of LANSystems. In the first six months of 1996, the Company's
revenues from business services outsourcing and information technology
services were $26.6 million and $18.6 million, respectively.
DESI commenced outsourcing operations in 1988 as a provider of reprographic
services and expanded its service offerings to include networked and color
printing, mailroom and facsimile services, word processing, desktop publishing
and imaging. In June 1995, the Company broadened its capabilities from
managing paper-based information to include the management of electronic
information through the acquisition of LANSystems, which has provided
information technology services since 1983, including systems integration,
consulting and software development. Beginning in February 1996, the Company
began providing systems management outsourcing services, which include on-site
management and administration of servers and desktops and operation of the
help-desk function.
Business Services Outsourcing. The Company provides business services
through Company personnel, equipment and systems located at a client's
offices. Among the outsourcing services offered by the Company are the
following:
Document Services. The Company provides reprographic, networked and color
printing, mailroom and facsimile services. The hours during which these
services are provided vary by client, although 24-hour weekday and
scheduled weekend service is common. Client managers are located on-site in
order to ensure quality control, maximize efficiency and coordinate
resources.
Word Processing and Desktop Publishing. DESI provides word processing,
desktop publishing and graphic design services. The proficiency of the
Company's employees with current software applications enables them to
assist clients in generating time-sensitive documents and creating
documents for use in litigation, new-business presentations and other
client proposals. The mission-critical nature of these documents makes
accuracy in their production of paramount importance.
Imaging. The Company provides imaging, database design and litigation
support services. DESI uses a variety of digital storage, indexing and
retrieval technologies that allow clients to eliminate the need for paper
files, identify and retrieve relevant information quickly and generate
paper copies of the desired information. In addition to document scanning
and database creation, the Company delivers electronic images of documents
on a variety of media.
Information Technology Services. DESI assists its clients in the design,
development, procurement, implementation and maintenance of information
systems and offers continuing on-site support and the ability to outsource the
management of such systems. DESI's information technology services include the
following:
Systems Integration. DESI designs, implements and supports computer
networks that facilitate communications over local-area, wide-area and
public networks, both domestically and worldwide. Systems integration
services provided by the Company range from the development of turnkey
networks to periodic system support for end-users in multi-vendor, multi-
protocol environments.
31
<PAGE>
Consulting. DESI provides consulting services which assist its clients in
making technology decisions ranging from strategic to tactical. Primary
areas of expertise include information systems architecture, network
audits, relocation planning, project management and disaster recovery
planning.
Systems Management. DESI offers systems management outsourcing services
that include on-site management and administration of servers and desktops
included in the network, operation of the help-desk function and management
of the network's telecommunications support systems. DESI began providing
systems management outsourcing services in February 1996 to combine its
outsourcing and information technology expertise. See "Risk Factors--
Ability to Grow through Introduction of New Services, including Systems
Management Outsourcing."
Software Development. The Company's software development services include
custom utilities, application and data integration and rapid application
development.
MARKET OVERVIEW
The demand for business services outsourcing and information technology
services is accelerating as more businesses seek outside expertise in the
management of increasingly complex and crucial business and technology
requirements. The challenges posed by the application of distributed
networking strategies to manual, labor-intensive business processes are
driving forces in both the business services outsourcing and information
technology services arenas. Increasing amounts of paper-based information are
available in a variety of electronic formats for sharing and delivery over
distributed networks making it crucial for businesses to manage their flow of
documents and electronic information in an integrated and efficient manner.
There is a growing trend for businesses to establish relationships with
outside experts for both business services and information technology
functions in order to address the changing business environment. This trend is
driven by the need for:
. improved focus on core business competencies;
. access to high-quality employees trained in the latest technologies;
. increased efficiencies through streamlined business processes;
. expedited delivery of new services and leading-edge technologies; and
. greater flexibility over information resources and associated costs.
The Company believes that the trend toward outsourcing will continue. As
reported in InformationWeek, nearly 90% of the multinational firms surveyed by
an independent consulting firm reported they had outsourced some business
services in 1995, compared with fewer than 60% in 1992. Outsourcing business
services such as reprographics, word processing, desktop publishing and
imaging allows firms to transfer fixed capital investments to variable costs
and produce administrative economies of scale.
The Company believes that a number of factors will cause continued growth in
the demand for information technology services involving systems integration,
consulting, systems management outsourcing and software development. These
factors include the need to keep pace with rapidly changing technologies,
focus on longer-term technology plans and supplement internal resources with
highly skilled technical expertise. International Data Corporation, a research
firm, projects outsourcing of network services will grow to approximately
$17.7 billion in 2000 from approximately $7.24 billion in 1995.
Continuing investment in emerging technologies and business-process
improvements is a strategic imperative to the firms in the Company's target
markets, which are composed of highly skilled service professionals whose own
clients demand accurate information delivered in a timely manner. The need of
professional service organizations to focus on their core competencies and to
have
32
<PAGE>
sufficient flexibility and resources to satisfy their clients' changing
requirements is increasingly difficult to meet through in-house information
systems departments. The Company believes that its integrated information
management solutions help clients better align their business and technology
objectives.
COMPETITIVE STRENGTHS
The Company believes that its competitive strengths will enable it to
continue to compete effectively in its markets. These strengths include:
Established Premier Client Base in Target Markets
DESI has well-established relationships with a number of industry leaders in
its target markets. Its relationship with such clients as Sidley & Austin,
Morgan Stanley & Co. Incorporated, Ernst & Young LLP, Shearman & Sterling and
Lehman Brothers Inc. began in 1989, 1990, 1992, 1993 and 1995, respectively.
In 1995, the Company provided services to 30 of the 100 largest law firms and
six of the 10 largest investment banks. These relationships with high-quality
professional service organizations have been an important factor in enabling
the Company to add new clients of similar quality.
Comprehensive Array of Service Offerings
DESI offers a comprehensive array of information management services that
span both paper-based and electronic information. By managing information in
either form, the Company can assist its clients in maximizing the efficiency
and productivity of their professionals. The Company recommends information
infrastructure changes, designs and implements the changes and manages the
resulting system, thereby offering a combination of services usually requiring
multiple providers and procurements. The Company is capable of providing
substantially all of the information management services that a client needs
by providing staff to perform multiple functions, integrating technical and
business processes and providing consistency across the enterprise. This
capability significantly benefits its clients by giving the client one
provider to hold responsible. The Company believes that its comprehensive
service offerings differentiate it from its primary competitors and give it a
significant competitive advantage.
Accumulated Knowledge and Expertise in Target Markets
DESI's focus on marketing its services primarily to large law firms,
investment banks and accounting firms has enabled it to obtain a thorough
understanding of the information management needs of such firms and to develop
successful solutions to meet these needs. The Company has accumulated
knowledge of the best practices to address the unique needs of professional
service organizations, such as construction of complex litigation
documentation, production of client presentation materials and development of
customized desktop interfaces that reflect the work habits of its clients'
professionals. The ability of the Company's clients to provide consistent,
high-quality service is greatly dependent upon their ability to deliver
complex documents under significant time pressure. The Company believes that
its understanding of its clients' needs and expertise in providing solutions
to meet such needs constitute a significant competitive advantage and enhance
the ability of its clients to perform services in a professional and timely
manner.
Proven Quality Driven Processes
DESI has developed proven, cost effective processes for the delivery of
business and information technology services. Through over eight years of
experience of implementing outsourcing services, the Company has refined its
procedures for the important initial stage of transitioning a client to the
Company's business services. The Company has developed a copyrighted
production management system which permits the Company to monitor the client's
needs and the quality of services provided
33
<PAGE>
by tracking use, service levels, turnaround and efficiency. In addition, DESI
has deployed numerous information technology projects using project management
methodologies, including resource and schedule planning, testing and
escalation processes to execute large-scale global integration solutions.
DESI's systems management services can also track system performance
parameters of a network in order to enable the client to anticipate and avoid
problems and address training and software needs of its employees.
Depth, Experience and Expertise of Service Delivery Personnel
The Company has been successful in attracting and retaining talented,
motivated employees in critical positions which involve extensive client
interaction, including the client managers who oversee the performance of the
Company's business services and the technical employees who design, implement
and support computer networks and provide other information technology
services. In business services, the average tenure of the Company's client
managers across the United States is four years. In information technology
services, the Company's approximately 130 technical employees have accumulated
over 150 industry certifications in recognition of their proficiency with
various information technology products supplied by their vendors.
The technological expertise of the Company's employees is evidenced by a
variety of industry distinctions the Company has received, including being a
member of the Microsoft Solutions Advisory Council, which is comprised of 34
companies from a total of over 10,000 Microsoft Solutions providers, and one
of 45 companies selected for Novell Enterprise Consulting Program. The
Microsoft Solutions Advisory Council includes integrators, training companies
and developers who are selected based on their reputation, representation
within different industry sectors and technical expertise. Companies selected
to participate in the Novell Enterprise Consulting Program must have a
national focus, demonstrate proven technical expertise and provide Novell with
volume forecast and quarterly engagement reports. As a result of DESI's
participation in these programs, the Company obtains access to products before
they are released, skills transfer workshops and seminars and project support
services.
STRATEGY
DESI's principal growth strategy is to become the single-source provider of
integrated information management services to the leading firms in its target
markets. Key elements of the Company's strategy include:
Increasing Penetration in Target Markets
DESI seeks to increase its client base by further penetrating the markets it
currently serves. Large law firms, investment banks and accounting firms all
share the characteristic of delivering time-critical professional services
that involve creation and production of complicated documents using computer
networks. The Company believes that there are significant opportunities for
growth within the Company's target markets as many of the firms in such
markets have outsourced very few, if any, of their information management
services. The Company also anticipates expanding its target markets to include
other firms that have similar client needs, such as commercial banks and asset
management companies.
Cross-Selling Services to Existing Clients
DESI believes that there are significant expansion opportunities with its
existing clients as demand for more comprehensive information management
services increases. The Company intends to use its in-depth knowledge of the
workflow and business needs of the firms in its target markets to provide
complete information management solutions. The Company believes that the
cross-selling of services further strengthens the Company's relationship with
its clients and reduces the chances a client will switch service providers.
34
<PAGE>
Attracting and Retaining Outstanding Employees
DESI is committed to maintaining a leadership position in information
management technology by attracting and retaining high-quality technical
personnel and by ensuring that they stay current with state-of-the-art
hardware and software. DESI seeks to achieve this goal by providing a
motivational and interactive work environment that features continuous and
extensive professional development opportunities and bonuses based on client
satisfaction, as well as a decentralized organizational structure that
emphasizes decision-making at the client manager level. In addition, DESI will
use stock options available under its 1996 Stock Incentive Plan to provide
incentives to its employees and increase their identification with the success
of the Company.
Enhancing its Expertise in Information Management Technology
DESI is committed to continuous product research in order to anticipate
technology trends and important market shifts for various technology standards
affecting the businesses of its clients. The Company will continue to evaluate
new products under its policy of "vendor neutrality" in order to identify the
"best of class" products available, thereby permitting it to recommend
information management solutions that are optimal for its clients without
being tied to the hardware or software offerings of a particular vendor. The
Company also intends to continue to participate on the product advisory boards
of various software developers in order to maintain influence and gain insight
into product strategies.
Selectively Acquiring Businesses that Strengthen Service Offerings or Expand
Geographic Presence
DESI will continue to explore selective acquisitions in response to client
feedback and market demands. The Company may make acquisitions in order to
expand the Company's geographic presence, add services to the portfolio
already offered or enhance skills in a particular area. In any such
acquisition, DESI will seek companies with a reputation as a premier service
provider with strong client relationships and a culture complementary to that
of the Company.
SERVICES
Business Services Outsourcing
The Company's outsourcing portfolio encompasses a comprehensive array of
business services, including documents services, word processing and desktop
publishing and imaging services.
Document Services. The Company provides reprographic, networked and color
printing, mailroom and facsimile services through sites located at the
client's offices. Operations are typically 24-hours a day on weekdays with
scheduled weekend services. The reprographic operations typically encompass
black and white copying, electronic print, color print and binding services.
The critical documents produced include legal briefs, wills, contracts,
investment bank pitch books, presentations, tax filings and litigation
documents. The Company's average client site includes 15 document-production
employees, for whom a typical job may entail the reproduction of a 50 page
document with five color inserts, spiral binding and turn-around time of less
than two hours. Monthly volumes per client site range from 500,000 to
10,000,000 pages. Reprographic services are billed monthly on a unit basis,
with a minimum volume requirement.
Mailroom services include sorting and delivery, overnight express and
messenger support. Facsimile services include both manual and electronic fax
transmission and receipt. The Company implements and administers the client's
fax server environment and integrates this capability with the client's
network. Both mail services and facsimile services typically are billed
monthly to the client as a fixed management fee plus overtime expenses.
Word Processing and Desktop Publishing. The Company provides on-site word
processing, proof-reading, desktop publishing and graphics design services.
Documents range from high-volume text,
35
<PAGE>
complex numerical tables and regulatory-compliance documents to client
newsletters, presentations and marketing brochures. Operations are typically
multi-shift, employing between 10 and 25 operators who produce client
documentation within a turnaround period of less than 24 hours. Word
processing services are priced on a per page, per hour or per project basis
with a minimum monthly management fee.
Imaging. The Company provides on-site imaging services and production
support such as scanning, document indexing, storage and retrieval. The
Company provides a complete turnkey service, including integration, database
development, project management and system administration. The Company's
services enable clients to process information more efficiently, store
documents electronically and retrieve information at the desktop or remotely.
A typical operation includes a cross-trained staff of 12 employees performing
each of the imaging tasks, who scan and index 50,000 pages per month. The
Company supplies and networks multiple servers located at the client's offices
as well as at other offices, such as that of a client's co-counsel. Imaging
services are billed monthly on a per unit basis.
Contracts and Pricing. Client engagements typically involve contracts
ranging from three to five years in duration, although the Company has entered
into a limited number of shorter-term contracts at the request of its clients.
The majority of DESI's contracts are cancellable only for cause, but the
Company generally is willing to renegotiate contracts that no longer meet the
needs of its clients. The Company believes that this policy is beneficial in
that it improves client relationships and promotes the efficient use of the
Company's resources. Substantially all of the Company's outsourcing contracts
are priced on a per unit basis for each service provided. Furthermore,
substantially all of the Company's current outsourcing contracts include a
minimum amount of services the client agrees to use, with the minimum
generally related to the historical volumes of the client. The Company is able
to increase or decrease the unit costs for each of the outsourcing services
provided pursuant to a particular contract on the anniversary date of such
contract in order to reflect actual costs of labor and supplies. The typical
outsourcing contract also provides that DESI will supply all of the equipment
necessary for the delivery of its services, the bulk of which the Company
leases from third-party vendors.
Information Technology Services
The Company provides systems integration, consulting, systems management
outsourcing and software development services to clients in its target
markets.
Systems Integration. The Company provides network design, installation,
configuration and on-going maintenance for distributed computing environments.
The project range includes networks consisting of between 250 and 5,000 users,
often in multiple offices connected by a wide-area network. Projects vary in
scope and duration. Projects involving a single office typically are completed
in three to six months while large projects involving major infrastructure,
operating system upgrades and multiple applications in multiple locations,
some of which may be located outside of the United States, typically span 12
to 18 months. Revenues from many projects are derived approximately one-half
from engineering services and one-half from the resale of hardware or software
products and subcontracted labor. The Company also enters into maintenance
contracts on network equipment and servers with a majority of clients for
which the Company has completed a major systems integration project. Many
clients have elected coverage for 24 hours per day, seven days per week.
Consulting. DESI provides consulting services which assist its clients in
making technology decisions ranging from strategic to tactical. Most
engagements lead to follow-on business from implementation projects.
Engagements range from three weeks to one year, with a typical engagement
being completed in eight weeks. Primary areas of expertise include information
systems architecture, network audits, relocation planning, project management
and disaster recovery planning.
Systems Management Outsourcing. The Company offers a complete range of
systems management services, including help-desk support, network management,
server administration, end-
36
<PAGE>
user training, personal computer repair and telephone switch administration.
The functions are performed at the client's offices. DESI uses proactive
monitoring and the best industry practices in providing a reliable computing
environment and responsive end-user assistance. The Company offers its systems
management services pursuant to multi-year contracts, which may include
hardware and software upgrades at the beginning or throughout the contract to
reflect product cycles of computing equipment. The Company began providing
systems management outsourcing services in February 1996 to combine its
business services outsourcing and information technology services expertise.
The Company's systems management outsourcing services have generated minimal
revenues to date primarily from contracts that are limited in duration and
scope. See "Risk Factors--Ability to Grow through Introduction of New
Services, including Systems Management Outsourcing."
Software Development. The Company offers software development services that
include custom utilities, application and data integration and rapid
application development. Custom utilities developed in the C and C++
programming languages are designed to take advantage of system-level features
and enhance program functionality. In the area of application and data
integration, the Company specializes in developing solutions for moving data
from different computing platforms as well as in and out of various
applications. The Company's software development team uses a variety of
programming languages, such as Microsoft Visual Basic and Borland's Delphi, to
facilitate rapid application development in client/server database
environments. In addition, Lotus Notes, Microsoft Exchange Server and Novell,
lnc.'s GroupWise are used to create workflow and groupware solutions.
Contracts and Pricing. The majority of the Company's systems integration
projects are priced on a fixed-fee basis, although some work is contracted on
a time and materials basis. Cost-based pricing is developed using pre-
negotiated purchase prices for computer and network hardware. Contracts
typically include a scope of work and acceptance criteria for identifying
project completion. Payment terms include a downpayment, and invoices are
submitted in accordance with the achievement of negotiated milestones or dates
during the projects. The Company's maintenance contracts are priced on an
annual basis with payments made in advance. Systems management contracts
generally will have multi-year terms and will be invoiced monthly.
CLIENTS
DESI has been successful in establishing strong relationships with a
significant number of the leading firms in its target markets, including the
law firms of Shearman & Sterling and Sidley & Austin, the investment banks of
Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated and the accounting
firm of Ernst & Young LLP. Revenues from these five clients accounted for
approximately 28.9% of the Company's 1995 revenues and approximately 25.4% of
the Company's revenues for the first six months of 1996. In 1995, the Company
provided services to 30 of the 100 largest law firms as ranked by the American
Lawyer for 1995 and six of the 10 largest investment banks ranked by dollar
volume of public debt and equity issuances for 1995 as reported by Securities
Data Corporation. The Company also anticipates targeting firms within the
commercial banking and asset management industries. DESI believes that these
markets, because they consist of sophisticated professional service
organizations for which document and computer processing are critical, can
benefit from the knowledge that the Company has accumulated in its current
markets and will therefore provide an opportunity to expand DESI's potential
client base without compromising its ability to maintain its high-quality
standards and utilize its proven processes and experience. See "Risk Factors--
Dependence on Key Clients," "--Sensitivity to Fluctuations in Professional
Service Economy" and""--Focus on Limited Target Markets."
In the first six months of 1996, approximately 27.3% of DESI's revenues came
from business and information technology services provided to firms outside of
its target markets. As a result of its focus on its target markets, the
Company expects this percentage to decrease in the future.
37
<PAGE>
As of June 30, 1996, DESI provided business services outsourcing under
approximately 50 contracts, at over 40 client office locations, most of which
are located in New York, San Francisco, Chicago, Los Angeles, Washington, D.C.
and certain other major cities in the United States. In the 12 months ended
December 31, 1995, the Company provided information technology services to
approximately 250 clients. The Company has implemented projects in offices
located in many major European and Asian financial centers.
SALES AND MARKETING
The Company markets its services primarily through 24 account executives,
special account managers and sales managers who are responsible for existing
clients as well as future client development. In addition, DESI's senior
management plays an active and ongoing role in the sales process.
The Company targets high-level decision makers within a particular
professional service organization who share a commitment to the delivery of
quality service. The typical contract for business services outsourcing is
signed between six and nine months after discussions begin with a potential
client. The sales cycle with regard to information technology services is
typically between three and six months. The Company believes that it is
important to involve seasoned account executives, as well as its executive
officers, in the sales process.
The Company also employs a variety of business development and direct
marketing techniques in order to augment the work done by its own sales force,
increase industry awareness and generate interest in its services. Targeted
telemarketing, an automated prospect database, regular direct mail initiatives
and regular participation in industry trade shows and conferences in its
target markets have been effective historically. The Company also co-sponsors
executive business briefings and cooperative marketing programs with vendor
partners, such as Microsoft Corporation, Novell, Inc. and PC Docs Inc.
Finally, several of the Company's senior executives serve as industry
spokespersons and frequently author articles on industry trends, service
issues and emerging technologies, as well as contributing to LANSystems'
Research technical publication.
COMPETITION
The Company believes that the primary competitive factors in the business
services outsourcing and information technology services markets include
reputation, a proven track record in industries served, an in-depth knowledge
of clients' businesses, strong technical expertise, project management
experience and an ability to streamline business processes. Although price is
a competitive factor within the Company's markets, it is not the principal
basis on which the Company competes because the Company's strategy is to be a
premier provider of business services outsourcing and information technology
services to firms in its target markets, which depend on high-quality, timely
work product and technical expertise.
The Company competes with the in-house capabilities of those firms in the
Company's target markets that perform their own business services and
information technology functions of the types offered by the Company.
The Company's business services compete with numerous national and regional
companies. The Company's document services compete with several large national
companies, including Pitney Bowes Management Services and Xerox Business
Services, as well as several smaller regional companies, some of whom provide
only certain of such services or focus on a particular geographic region of
the United States. Competition in the Company's target markets for other
business services provided by the Company, such as word processing, desktop
publishing and imaging, is fragmented with numerous competitors providing only
certain of the services. Competitors in these areas include Tascor
Incorporated in word processing and desktop publishing and Quorum Corp., Aspen
Systems Corp., Litigation Information Technologies and Arthur Andersen LLP in
imaging.
38
<PAGE>
The market for the Company's information technology services is subject to
rapid change and is highly competitive. Within this market, the Company
competes with a large number of participants, with no single organization
having a dominant market share of the Company's target markets. Competition
for information technology services comes from a large number of market
participants, including management consulting firms, big six accounting firms,
systems integrators, facilities management companies and the professional
service groups of large computer manufacturers such as International Business
Machines Corp. ("IBM") and Hewlett Packard Co. Within the systems integration
arena, the Company competes primarily with national firms with legal-industry
focus, including Systems Research and Application Corp. and TechLaw Automation
Partners; other national firms that do not focus on the legal market, such as
Entex Information Services, Inc. and Vanstar Corp.; and numerous regional
firms, many of which serve only their respective local markets. The Company's
systems management outsourcing services face competition from traditional
mainframe outsourcing firms such as Electronic Data Systems Corp., Computer
Sciences Corp., IBM's Integrated Systems Solutions Corporation, AT&T Solutions
and MCI Systemhouse.
Many participants in the business services outsourcing and information
technology services markets have significantly greater financial, technical
and marketing resources; greater name recognition; and generate greater
information technology services and outsourcing revenues than does DESI. The
Company believes, however, that its competitive strengths, including its
reputation as a high-quality provider of business services outsourcing and
information technology services and its knowledge and expertise in the markets
that it serves, have enabled it to be successful in persuading firms in its
target markets to use certain services offered by the Company and competing
with its current competitors. See "Risk Factors--Competition."
HUMAN RESOURCES
The Company's business involves the delivery of professional services and is
labor intensive. The Company's performance depends, to a large extent, on the
continued service of its key technical personnel and client management
personnel and its ability to continue to attract, retain and motivate such
personnel. Competition for such personnel is intense, particularly for highly
skilled and experienced technical personnel who perform the Company's
information technology services. The Company provides its employees a
motivational and interactive work environment that features continuous and
extensive professional development opportunities and bonuses based on client
satisfaction, as well as a flat organizational structure that emphasizes
decision-making at the client manager level. See "Risk Factors--Need to
Attract and Retain Key Personnel in Highly Competitive Marketplace."
The Company has a comprehensive recruitment program in place to attract
highly qualified employees for both business services outsourcing and
information technology services. To strengthen its expertise in its target
markets, the Company often recruits individuals with hands-on experience and
proven industry knowledge in the legal, investment banking and accounting
industries. The Company augments ongoing advertisements in national newspapers
and industry-trade publications with a company-wide employee referral program
and regular participation in job fairs and legal-specific trade shows and
conferences. The Company is a member of the On-line Career Center and uses
this vehicle to post jobs and receive resumes via the Internet. The Company
engages in selective recruiting at colleges with strong engineering programs.
In addition, the Company belongs to the Technical Recruiter's Association in
New York and employs the assistance of outside recruitment firms on a limited
basis.
The Company has a diversified training program that includes vendor-specific
certification, review of best practices and an extensive mentor program. As
part of the Company's rigorous in-house training, new employees participate in
a variety of courses such as Customized Workflow Training, Understanding a Law
Firm, Quality Assurance, Problem Resolution and Team Building. In addition,
39
<PAGE>
employees attend mandatory human resources training seminars, including
seminars concerning diversity, sexual harassment and performance leadership.
As of July 1, 1996, the Company had approximately 875 employees.
Approximately 700 persons were dedicated to providing business services,
including approximately 630 engaged in providing on-site services to clients,
of whom approximately 560 were hourly employees. Approximately 160 persons
were dedicated to providing information technology services, including
approximately 130 technical employees. None of the Company's personnel is
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.
FACILITIES
The principal executive offices of the Company are located in Chicago,
Illinois, where the Company leases a 14,000 square foot facility pursuant to a
lease expiring in May 2002. The Company provides its outsourcing services
primarily through locations at its clients' offices. Such locations are
generally provided by the client without a lease and at no cost to the
Company. The Company leases an 11,400 square foot facility in New York, New
York pursuant to a lease expiring in April 2002, and a 7,020 square foot
facility in San Diego, California pursuant to a month-to-month lease, where
the Company houses certain of its managerial and technical employees for its
information technology services. The Company has 13 regional sales offices,
most of which are subject to short-term leases of not more than three years.
The Company believes that its existing facilities are adequate for its current
needs. The Company anticipates that additional space may be required as
business expands and believes that it will be able to obtain such additional
space as needed.
REGULATION
DESI's business is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally.
The results of operations of the Company may be affected, however, by new or
changed federal or state laws or regulations that define the standard work
week, prescribe overtime pay obligations or apply to other employee-related
expenses. While most of the Company's long-term contracts provide for variable
pricing of the Company's labor costs, these adjustments occur annually on a
historical basis and therefore any additional expenses resulting from new or
changed federal or state laws or regulations may not be recovered for one year
after such laws or regulations are enacted. See "Risk Factors--Variability of
Quarterly Results."
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. The Company believes such claims and legal
actions, individually and in the aggregate, will not have a material adverse
effect on the business or financial condition of the Company.
40
<PAGE>
MANAGEMENT
DIRECTORS
The Board of Directors currently consists of four members elected by R.R.
Donnelley. The Board of Directors is divided into three classes serving
staggered terms as follows: Class I, comprised of one person and serving for a
term expiring at the 1997 Annual Meeting of Stockholders; Class II, comprised
of one person and serving for a term expiring at the 1998 Annual Meeting of
Stockholders; and Class III, comprised of two persons and serving for a term
expiring at the 1999 Annual Meeting of Stockholders. Following the expiration
of the initial term, directors will serve for three year terms. The Company
expects that two independent directors will be added to the Board following
the completion of the Offering, and that such directors will serve on the
Audit Committee and the Compensation Committee of the Board of Directors. No
individuals have currently been identified to serve as such independent
directors. Information with respect to those individuals who currently serve
as directors of the Company is set forth below.
<TABLE>
<CAPTION>
INITIAL TERM
NAME AGE EXPIRES (CLASS) POSITION
---- --- --------------- --------
<C> <C> <C> <S>
Rhonda I. Kochlefl 37 1999 (III) Chairman, President and Chief
Executive Officer and Director
Daniel I. Malina 37 1997 (I) Director
Leo S. Spiegel 35 1998 (II) Senior Vice President and Chief
Technology Officer and Director
W. Ed Tyler 43 1999 (III) Director
</TABLE>
Rhonda I. Kochlefl has been the Chairman, President and Chief Executive
Officer of the Company since February 1996. From January 1995 to February
1996, she was the President of DBS, and, from June 1995 to February 1996, she
was the Chairman of LANSystems. From 1993 to January 1995, she was Vice
President, Division Director of DBS. From 1988 to 1991, she was General
Manager for the eastern region of DBS, for which she was responsible for all
sales and operations. Ms. Kochlefl has been a director of the Company since
February 1996.
Daniel I. Malina has been a Vice President, Corporate Development of R.R.
Donnelley since March 1996. He served as Director, Corporate Development of
R.R. Donnelley from November 1994 to March 1996. Mr. Malina joined R.R.
Donnelley in 1994. Prior to joining R.R. Donnelley, he was with Bell & Howell,
an information services company specializing in mail-processing systems,
document management products and electronic database publishing systems, as
Vice President and General Manager of its NB/Microseal Division. Prior to
serving in that capacity, he served at Bell & Howell as Director, Business
Development from January 1991 to January 1994. Mr. Malina has been a director
of the Company since July 1996.
Leo S. Spiegel has served as the Senior Vice President and Chief Technology
Officer of the Company since February 1996. He served as a director and the
co-founder, Chief Technology Officer and Executive Vice President of
LANSystems from May 1991 until its acquisition by R.R. Donnelley in June 1995.
From June 1989 until May 1991, he was a director and the co-founder and
Executive Vice President of Sales and Marketing of LANSystems. Prior to June
1989 he was the founder, Chairman and President of Integrated Analysis, Inc.,
which merged with LANSystems in 1989. Mr. Spiegel has been a director of the
Company since February 1996.
W. Ed Tyler has been Executive Vice President and Sector President,
Information Management Sector of R.R. Donnelley since January 1996. Mr. Tyler
joined R.R. Donnelley in 1974 and has held a number of positions, including
President, Documentation Services and President, Networked Services Sector.
Mr. Tyler has been a director of the Company since February 1996.
41
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee will be responsible for reviewing with management the
financial controls, accounting and audit and reporting activities of the
Company. The Committee will review the qualifications of the Company's
independent auditors, make recommendations to the Board of Directors as to the
selection of independent auditors, review the scope, fees and results of any
audit and review non-audit services and related fees provided by the
independent auditors. The members of the Audit Committee have not yet been
appointed. The Company intends to appoint the two independent directors to
this committee.
The Compensation Committee will be responsible for the administration of all
salary and incentive compensation plans for the officers and key employees of
the Company, including bonuses. The Committee will also administer the
Company's Stock Incentive Plan. The members of the Compensation Committee have
not yet been appointed. The Company intends to appoint the two independent
directors to this committee.
The Board of Directors does not have a nominating committee. The selection
of nominees for the Board of Directors will be made by the entire Board of
Directors.
EXECUTIVE OFFICERS
Information with respect to those individuals who currently serve as
executive officers of the Company is set forth below, except that information
with respect to Rhonda I. Kochlefl and Leo S. Spiegel is set forth above under
"--Directors." The Company and Thomas P. Bradbury, who served as President,
LANSystems division, have announced that Mr. Bradbury left the Company on
October 11, 1996. See "Management--Agreement with Former Executive Officer."
Executive officers of the Company are appointed annually by the Board of
Directors and serve until their successors have been duly elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Rhonda I. Kochlefl 37 Chairman, President and Chief Executive Officer
and Director
Luke F. Botica 46 Senior Vice President and Chief Financial Officer
Leo S. Spiegel 35 Senior Vice President and Chief Technology Officer
and Director
Linda A. Finkel 36 President, DBS division
David J. Shea 40 Senior Vice President and General Manager, Systems
Management division
</TABLE>
Luke F. Botica has been Senior Vice President and Chief Financial Officer of
the Company since April 1996. From July 1995 to March 1996, he served as
Executive Vice President, Chief Financial Officer, Treasurer and Secretary of
Dames & Moore, Inc., an international engineering and professional services
company. From June 1993 to January 1995, he served as the Senior Vice
President--Finance, Chief Financial Officer, Treasurer and Secretary for
Allied Waste Industries, Inc., a solid waste management company. From
September 1990 to April 1993, he served as the Vice President--Finance,
Corporate Development and Planning for Chemical Waste Management, Inc., a
hazardous waste management company.
42
<PAGE>
Linda A. Finkel has been President of the DBS division of DESI since
February 1996. From 1994 to 1996, she served as the Vice President/General
Manager for the central region of DBS. She joined R.R. Donnelley in 1982 and
held various positions with R.R. Donnelley, including that of information
services account executive.
David J. Shea has been Senior Vice President and General Manager of the
Systems Management division of DESI since July 1996. From January 1995 to July
1996, he was the Vice President and General Manager of the eastern region of
DBS and eastern region General Manager of DBS from November 1993 to January
1995. From 1990 to 1993, he was Client Solutions Executive and Consulting
Practice Manager of Integrated Systems Solutions Corporation, a systems
outsourcing subsidiary of IBM.
COMPENSATION OF DIRECTORS
Directors do not currently receive an annual retainer or other compensation
for serving as directors. It is anticipated that, following completion of the
Offering, directors who do not receive compensation as officers or employees
of the Company will be compensated for serving as directors, including an
annual retainer fee and a fee for each meeting of the Board of Directors that
they attend.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the Company's
Chief Executive Officer and the other four most highly compensated executive
officers of the Company serving as such on December 31, 1995. The stock
options reflected in the table represent options to purchase shares of common
stock, par value $1.25 per share, of R.R. Donnelley ("R.R. Donnelley Common
Stock").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ------------
AWARDS
------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
POSITION YEAR ($) ($) ($) SARS (#) $(3)
- ------------------ ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Rhonda I. Kochlefl...... 1995 186,625 45,724 5,925 5,000 --
Chairman, President and
Chief Executive Officer
Leo S. Spiegel.......... 1995 204,470 122,445(2) -- 4,000 356,412
Senior Vice President
and Chief Technology
Officer
Thomas P. Bradbury...... 1995 255,668 156,385(2) -- 4,000 588,712
Former President,
LANSystems division(1)
Linda A. Finkel......... 1995 123,574 26,972 4,787 3,000 --
President, DBS division
David J. Shea........... 1995 126,492 22,136 4,024 3,000 --
Senior Vice President
and General Manager,
Systems Management
division
</TABLE>
- --------
(1) Mr. Bradbury has ceased being President, LANSystems division effective
October 4, 1996. See "Management--Agreement with Former Executive
Officer."
(2) Includes $40,670 and $54,227 paid in March 1996 to Messrs. Spiegel and
Bradbury, respectively, under the provisions of the LANSystems earnout
that relate to achievement in 1995 of specified financial targets.
(3) Amounts shown represent payments made to Messrs. Spiegel and Bradbury (i)
at the closing of the acquisition of LANSystems in June 1995 in respect of
their LANSystems common stock options and (ii) in March 1996 under
provisions of the LANSystems earnout that relate to such options and the
achievement in 1995 of specified financial targets.
43
<PAGE>
OPTION/SAR GRANTS IN 1995
The following table sets forth information for the individuals named in the
Summary Compensation Table regarding grants in 1995 of options to purchase
R.R. Donnelley Common Stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS/SARS GRANTED TO EXERCISE OR GRANT DATE
GRANTED EMPLOYEES BASE PRICE EXPIRATION PRESENT VALUE
NAME (#)(1) IN 1995(2) ($/SH) DATE ($)(3)
- ---- ------------ ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Rhonda I. Kochlefl..... 5,000 0.10 38.0625 12/14/2005 64,950
Leo S. Spiegel......... 4,000 0.08 38.0625 12/14/2005 51,960
Thomas P. Bradbury...... 4,000 0.08 38.0625 12/14/2005 51,960
Linda A. Finkel......... 3,000 0.06 38.0625 12/14/2005 38,970
David J. Shea........... 3,000 0.06 38.0625 12/14/2005 38,970
</TABLE>
- --------
(1) Options become exercisable (at fair market value on the date of grant)
over a four year period, with 20% of the shares becoming exercisable at
the beginning of each of the second, third and fourth years following the
date of grant and with the remaining portion of the option becoming
exercisable at the end of the fourth year, unless the vesting schedule is
accelerated to become fully exercisable upon death, retirement, disability
or a change in control as defined in R.R. Donnelley's 1995 Stock Incentive
Plan.
(2) Represents the percentage of total options to purchase R.R. Donnelley
Common Stock granted in 1995 to employees of R.R. Donnelley and its
subsidiaries.
(3) The Black-Scholes option pricing method has been used to calculate present
value as of date of grant, December 15, 1995. The present value as of the
date of grant, calculated using the Black-Scholes method, is based on
assumptions about future interest rates, stock price volatility and
dividend yield. The Black-Scholes model is a complicated mathematical
formula widely used to value exchange traded options. However, stock
options granted by R.R. Donnelley to its officers and those of its
subsidiaries differ from exchange traded options in three key respects:
options granted by R.R. Donnelley to its officers and those of its
subsidiaries are long-term, non-transferable and subject to vesting
restrictions while exchange traded options are short-term and can be
exercised or sold immediately in a liquid market. The Black-Scholes model
relies on several key assumptions to estimate the present value of
options, including the volatility of and dividend yield on the security
underlying the option, the risk-free rate of return on the date of grant
and the term of the option. In calculating the grant date present values
set forth in the table, a factor of 21.177% has been assigned to the
volatility of the Common Stock; based on daily stock market quotations for
the twelve months preceding the date of grant, the yield on the R.R.
Donnelley Common Stock has been set at 1.89%; and based upon its annual
dividend rate of $.72 per share at the date of grant, the risk-free rate
of return has been fixed at 5.71%, the rate for a ten year U.S. Treasury
Note on the date of grant as reported in the Federal Reserve Statistical
Release, and the exercise of the options has been assumed to occur at the
end of the actual option term of ten years. There is no assurance that
these assumptions will prove to be true in the future. Consequently, the
grant date present values set forth in the table are only theoretical
values and may not accurately determine present value. The actual value,
if any, that may be realized by each individual will depend on the market
price of R.R. Donnelley Common Stock on the date of exercise.
44
<PAGE>
YEAR-END OPTION/SAR VALUES
The following table sets forth certain information for the individuals named
in the Summary Compensation Table regarding their holdings of unexercised
options to purchase R.R. Donnelley Common Stock as of December 31, 1995. None
of such individuals exercised any options to purchase R.R. Donnelley Common
Stock in 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
12/31/95 (#) AT 12/31/95 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Rhonda I. Kochlefl.......... 11,600/16,400 145,200/117,050
Leo S. Spiegel.............. 0/ 4,000 0/ 4,500
Thomas P. Bradbury.......... 0/ 4,000 0/ 4,500
Linda A. Finkel............. 1,000/ 6,000 10,050/ 34,575
David J. Shea............... 600/ 5,400 6,450/ 29,175
</TABLE>
- --------
(1) The value is calculated based on the aggregate amount of the excess of the
average of the high and low prices of R.R. Donnelley Common Stock as
reported in the New York Stock Exchange Composite Transactions Report for
December 29, 1995 over the relevant exercise price(s).
RETIREMENT BENEFIT PLAN
DESI currently does not maintain any defined benefit plans. Prior to May 1,
1996, DESI was a participating employer in R.R. Donnelley's Retirement Benefit
Plan, under which employees who met the eligibility requirements accrued in
1995 and in 1996 through April 30 an annual retirement benefit computed at the
rate of 1.5% on compensation up to "covered compensation," and 2% on
compensation in excess of "covered compensation" but not in excess of $150,000
(the maximum amount of compensation for 1995 on which benefits can accrue
under current law). The compensation covered by the Plan includes wages and
salaries, supplementary compensation and commissions. An employee's "covered
compensation" for a year is the average of the Social Security wage bases for
the 35-year period ending with such year. Benefits are paid monthly after
retirement for the life of the participant (straight life annuity amount) or,
if the participant is married or has elected an optional benefit form, in an
actuarially reduced amount for the life of the participant and the
participant's surviving spouse or other surviving person named as a contingent
member. Benefits under the Retirement Benefit Plan are limited to the extent
required by provisions of the Internal Revenue Code and the Employee
Retirement Income Security Act of 1974. If payment of actual retirement
benefits is limited by such provisions, an amount equal to any reduction in
retirement benefits will be paid as a supplemental benefit under the Unfunded
Supplemental Benefit Plan.
Effective January 1, 1997, the Company intends to offer employees a 401(k)
savings plan with the Company matching a portion of the amounts contributed by
employees.
The following table contains information concerning annual benefits payable
pursuant to the Retirement Benefit Plan on a straight life annuity basis upon
retirement at age 65 for the individuals named in the Summary Compensation
Table. These benefits include the annual benefits to be paid at age 65
computed on service through April 30, 1996. As of April 30, 1996, DESI
employees ceased to accrue any additional benefits under R.R. Donnelley's
Retirement Benefit Plan.
<TABLE>
<CAPTION>
ANNUAL BENEFITS
TO BE PAID AT AGE 65
ON THE BASIS OF
SERVICE THROUGH
INDIVIDUAL APRIL 30, 1996 ($)
- ---------- --------------------
<S> <C> <C> <C>
Rhonda I. Kochlefl................................. $25,233
Leo S. Spiegel..................................... 6,192
Thomas P. Bradbury................................. 7,823
Linda A. Finkel.................................... 19,103
David J. Shea...................................... 6,503
</TABLE>
45
<PAGE>
EMPLOYMENT AGREEMENTS
Ms. Kochlefl has entered into a four-year employment agreement with the
Company commencing on the closing of the Offering. The agreement provides for
an annual base salary of $300,000 with a pro-rated bonus opportunity for 1996
to earn up to 100% of base salary if certain pre-established net income
criteria are met by the Company. Bonus opportunities for 1997 and later years
will be determined by the Board of Directors of the Company or a committee of
the Board. Ms. Kochlefl will be granted, subject to the closing of the
Offering, options to purchase 60,000 shares of Common Stock at a purchase
price equal to the initial public offering price and 5,000 shares of Common
Stock in the form of restricted stock. See "--Stock Plans."
Mr. Spiegel has also entered into a four-year employment agreement with the
Company commencing on the closing of the Offering. The agreement provides for
an annual base salary of $250,000 with a pro-rated bonus opportunity for 1996
to earn up to 80% of base salary if certain pre-established net income
criteria are met by the Company. Bonus opportunities for 1997 and later years
will be determined by the Board of Directors of the Company or a committee of
the Board. Mr. Spiegel will be granted, subject to the closing of the
Offering, options to purchase 40,000 shares of Common Stock at a purchase
price equal to the initial public offering price. See "--Stock Plans."
Each of Ms. Kochlefl's and Mr. Spiegel's employment agreement provides for a
severance payment of up to 45 months' base salary, depending on the date of
severance, where termination is by the Company for any reason other than for
cause or by the executive upon breach by the Company of the agreement or for
good reason. In addition, 100% of all options and restricted stock awards held
by the executive will vest on such termination. A severance payment will not
be payable and options and restricted stock awards will not vest where
termination is by the Company for cause, by the executive for any reason other
than upon breach by the Company of the agreement or for good reason, or by
reason of the executive's retirement or death. In Ms. Kochlefl's case, any
severance payment would be made in a single payment at termination. In Mr.
Spiegel's case, severance payments would be made monthly. Each agreement also
contains customary provisions providing for the non-disclosure of confidential
information and an agreement not to compete with the Company for a period of
24 months after the termination of the agreement.
It is expected that the Company will enter into employment agreements with
each of Mr. Botica and Ms. Finkel commencing on the closing of the Offering.
The Company has included the anticipated costs of such employment agreements
in the unaudited pro forma consolidated statements of income included
elsewhere in this Prospectus.
AGREEMENT WITH FORMER EXECUTIVE OFFICER
The Company and Thomas P. Bradbury, who served as President, LANSystems
division, have announced that Mr. Bradbury left the Company on October 11,
1996. Mr. Bradbury's departure, which was on an amicable basis, resulted in
his responsibilities being assumed by Ms. Kochlefl pending the hiring of his
replacement, which is expected to occur by the end of the year. The Company
and Mr. Bradbury expect to enter into an agreement pursuant to which the
Company will agree to continue to pay Mr. Bradbury his salary through June 21,
1997, pay him a pro-rated bonus for 1996 and permit him to participate in the
Company's employee benefit plans through such date. The Company has recorded a
charge of $300,000 in the third quarter of 1996 in respect of the foregoing
severance arrangement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Both Mr. Spiegel and Mr. Bradbury, in their capacity as officers of LAN
Systems, Inc., played a significant role in the negotiation of the agreement
pursuant to which LANSystems was acquired.
46
<PAGE>
Mr. Spiegel has received, or is expected to receive, the following payments
in respect of such acquisition. At the closing of the acquisition, Mr. Spiegel
received $1,603,500 in respect of his ownership of common stock and options in
LAN Systems, Inc. and $125,000 in partial payment of a noncompetition
agreement included in the employment agreement he entered into with the
Company at such closing. From the closing through June 30, 1996, Mr. Spiegel
received a payment of $92,318 in respect of the earnout obligations included
in the LANSystems purchase agreement and $125,000 as a second installment
related to his noncompetition agreement. Mr. Spiegel is entitled to a final
payment of $250,000 in respect of his noncompetition agreement in January
1997.
Mr. Bradbury has received the following payments in respect of the
acquisition of LANSystems. At the closing of the acquisition, Mr. Bradbury
received $567,500 in respect of his ownership of options in LAN Systems, Inc.
and $250,000 in partial payment of a noncompetition agreement included in the
employment agreement he entered into with the Company at the closing. From the
closing through June 30, 1996, Mr. Bradbury received a payment of $75,439 in
respect of the earnout obligations included in the LANSystems purchase
agreement and $250,000 as a second and final installment related to his
noncompetition agreement.
Messrs. Spiegel and Bradbury are among the representatives of the earnout
participants and have accepted the modification of the earnout obligations
described under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Acquisition of LANSystems" and will receive
$1,386,600 and $1,143,827, respectively, pursuant to that modification.
STOCK PLANS
In connection with the Offering, the Board of Directors of the Company has
adopted the Company's 1996 Stock Incentive Plan and the Company's 1996 Broad-
Based Employee Stock Plan. The Company has reserved for issuance under the
1996 Stock Incentive Plan and the 1996 Broad-Based Employee Stock Plan an
aggregate of 400,000 shares of Common Stock. Options to purchase Common Stock
have been granted under the 1996 Stock Incentive Plan, subject to closing of
the Offering, as follows: 60,000 options to Rhonda I. Kochlefl; 40,000 options
to Leo S. Spiegel; 30,000 options to Luke F. Botica; 30,000 options to Linda
A. Finkel; 15,000 options to David J. Shea; and approximately 118,500 options
to other employees of the Company; and 5,000 shares of restricted Common Stock
have been granted, subject to the closing of the Offering, to Ms. Kochlefl
under the 1996 Stock Incentive Plan. Each such option will have an exercise
price equal to the initial public offering price and will have a 10-year term.
Such options will become exercisable as follows: in respect of officers of the
Company (including the individuals named above), one-quarter of the shares of
Common Stock subject to the option on each of the first four anniversaries of
the closing of the Offering; in respect of certain managers of the Company,
30% of the shares on each of the first two anniversaries of the closing and
the remainder on the third anniversary of the closing; and, in respect of
certain other employees of the Company, one-half of the shares on each of the
first two anniversaries of the closing of the Offering. The shares of
restricted Common Stock will vest with respect to one-quarter of the shares on
each of the first four anniversaries of the closing of the Offering. The
Company expects to grant an aggregate of approximately 30,000 shares of Common
Stock under the 1996 Broad-Based Employee Stock Plan upon closing of the
Offering through the grant of options to purchase 25 shares of Common Stock to
each hourly employee of the Company as of the date of closing. Each such
option will have an exercise price equal to the initial public offering price,
will have a 10-year term and will become exercisable on the second anniversary
of the closing of the Offering.
47
<PAGE>
OWNERSHIP OF CAPITAL STOCK
SECURITY OWNERSHIP OF COMPANY BY MANAGEMENT
Prior to the completion of the Offering, no director or executive officer of
the Company beneficially owns any equity securities of the Company. The
Company has granted, subject to the completion of the Offering, to certain
executive officers and other key employees of the Company, options to purchase
Common Stock under the 1996 Stock Incentive Plan. See "Management--Employment
Agreements" and "--Stock Plans."
SOLE STOCKHOLDER OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership by R.R. Donnelley of the Common Stock (i) immediately prior to the
Offering and (ii) as adjusted to reflect the sale of the shares of Common
Stock offered hereby (assuming the Underwriters' over-allotment option is not
exercised). R.R. Donnelley has or will have sole voting and investment power
with respect to all shares indicated as beneficially owned by R.R. Donnelley.
<TABLE>
<CAPTION>
PRIOR TO OFFERING AFTER OFFERING
------------------ ------------------
PERCENT PERCENT
NAME AND ADDRESS NUMBER OF CLASS NUMBER OF CLASS
---------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
R. R. Donnelley & Sons Company ..... 3,145,000 100% 2,400,000 48.0%
77 West Wacker Drive
Chicago, Illinois 60601
</TABLE>
PRINCIPAL STOCKHOLDERS OF R.R. DONNELLEY
The following table lists the beneficial ownership of R.R. Donnelley Common
Stock with respect to all persons known to the Company to be the beneficial
owner of more than 5% of R.R. Donnelley Common Stock. The information shown
was furnished by Northern Trust Corporation. The percentage of outstanding
R.R. Donnelley Common Stock owned by Northern Trust Corporation is based on
outstanding shares of R.R. Donnelley Common Stock as of December 31, 1995.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- --------
<S> <C> <C>
Northern Trust Corporation............... 16,454,020(1) 10.69%
50 South LaSalle Street
Chicago, Illinois 60675
</TABLE>
- --------
(1) Northern Trust Corporation is the parent holding Company for The Northern
Trust Company and other affiliates and files one Schedule 13G to report
beneficial ownership by all such entities of R.R. Donnelley Common Stock.
Includes shares as to which Northern Trust Corporation has or shares
investment and voting power as follows: sole investment power, 5,143,910
shares (3.34%); shared investment power, 9,735,909 shares (6.32%); sole
voting power, 10,100,383 shares (6.56%); shared voting power, 2,576,123
shares (1.67%).
48
<PAGE>
BENEFICIAL OWNERSHIP OF R.R. DONNELLEY COMMON STOCK BY DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY
The following table sets forth, as of June 30, 1996, the number of shares of
R.R. Donnelley Common Stock beneficially owned by each director of the
Company, each of the individuals named in the Summary Compensation Table and
all directors and executive officers of the Company as a group. Unless
otherwise indicated, the beneficial owner has sole voting and investment power
with respect to the indicated shares. The aggregate amount of all R.R.
Donnelley Common Stock beneficially owned by such directors and executive
officers represents less than one percent of the outstanding R.R. Donnelley
Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP (1)
------------------------ -------------
<S> <C>
Rhonda I. Kochlefl......................................... 13,895
Leo S. Spiegel............................................. 225
Thomas P. Bradbury......................................... 275
Linda A. Finkel............................................ 2,193
David J. Shea.............................................. 1,148
Daniel I. Malina........................................... 2,391
W. Ed Tyler................................................ 148,950
Directors and executive officers as a group (eight
persons).................................................. 169,077
</TABLE>
- --------
(1) Includes shares which could be acquired by exercise of stock options as
follows: Ms. Kochlefl, 11,600 shares; Ms. Finkel, 1,000 shares; Mr. Shea,
600 shares; Mr. Malina, 2,000 shares; and Mr. Tyler, 101,200 shares.
RELATIONSHIP WITH R.R. DONNELLEY
GENERAL
Prior to the Offering, the Company was a wholly owned subsidiary of R.R.
Donnelley. R.R. Donnelley is a world leader in managing, reproducing and
distributing print and digital information for the publishing, retailing,
merchandising and information-technology markets and specializes in the
production of catalogs, inserts, magazines, books, directories and financial
and computer documentation. The Offering is a part of the execution by R.R.
Donnelley of its stated objective to sharpen its strategic focus on U.S.
commercial printing, international growth and digital content management and
distribution infrastructure.
Upon completion of the Offering, R.R. Donnelley will own 2,400,000 shares of
Common Stock, representing 48.0% of the outstanding shares of Common Stock
(40.2%, if the Underwriters exercise their over-allotment option in full), and
will be the Company's largest stockholder. Consequently, R.R. Donnelley will
be able to significantly influence such actions as the election of directors
of the Company, the approval of matters submitted for stockholder approval or
preventing a potential takeover. Currently, two of the four members of the
Board of Directors of the Company are officers of R.R. Donnelley. The Company
anticipates that, following the Offering, the Board of Directors will be
increased to six members and two additional directors who are not affiliated
with R.R. Donnelley or the Company will be elected by the Board of Directors
to fill the vacancies.
Prior to the Offering, the Company funded its operations and capital
expenditures through advances from R.R. Donnelley and by selling certain
accounts receivable to a subsidiary of R.R. Donnelley. A significant portion
of the net proceeds of the Offering to the Company will be used in final
payment of approximately $8.7 million for certain contingent obligations
arising from the acquisition of LANSystems and to repay the Dividend Note and
the advances owed to R.R. Donnelley. See "Use of Proceeds" and Notes 4 and 11
of Notes to Consolidated Financial Statements of DESI.
49
<PAGE>
The Company sells information technology services and products to R.R.
Donnelley. These sales approximated $955,000 and $1,665,000 for the period
July 1, 1995 through December 31, 1995 and the six-month period ended June 30,
1996, respectively. The receivables from R.R. Donnelley related to these sales
are reflected in advances due to related party discussed in Note 8 of the
Notes to Consolidated Financial Statements of DESI.
Prior to the Offering, the Company has funded its operations and capital
expenditures and its acquisition of LANSystems, in part, through amounts
advanced from R.R. Donnelley and the sale of its business services outsourcing
accounts receivable to a subsidiary of R.R. Donnelley. The arrangement
pursuant to which the Company sold certain receivables to a subsidiary of R.R.
Donnelley will terminate upon completion of the Offering and the Company
anticipates satisfying its financing needs through a $22.0 million credit
facility the Company expects to enter into prior to completion of the Offering
and from cash flow from operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." In addition, prior to the Offering, the Company obtained certain
services from R.R. Donnelley, participated in a number of employee benefit
plans maintained by R.R. Donnelley and was included as part of R.R.
Donnelley's federal income tax and certain other tax returns. The Company
entered into certain agreements with R.R. Donnelley relating to these matters.
None of these agreements resulted from "arm's length" negotiations. The
Company estimates that the aggregate amount to be paid by the Company to R.R.
Donnelley under the Transition Services Agreement and the Benefit
Administration Services Agreement described below during the remainder of 1996
following the completion of the Offering will be at least $620,000, which
includes $100,000 for certain services under the Transition Services Agreement
and $520,000 for costs of benefits provided under certain of R.R. Donnelley's
employee benefit plans pursuant to the Benefit Administration Services
Agreement. The Company will no longer participate in any of R.R. Donnelley's
plans after December 31, 1996 and, therefore, it is expected that there will
be no amounts payable in 1997 under the Benefit Administration Services
Agreement. Amounts payable under the Transition Services Agreement in 1997
will be at least $350,000, unless the Company chooses to terminate any of the
available services. Additional amounts may be payable depending on the
Company's usage of the various services being made available by R.R. Donnelley
under such agreements.
The following summary description of the agreements between the Company and
R.R. Donnelley does not purport to be complete and is qualified in its
entirety by reference to the agreements, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part.
TRANSITION SERVICES AGREEMENT
R.R. Donnelley currently provides certain administrative services to the
Company. Charges for these services have been allocated by R.R. Donnelley to
the Company based on various formulas which reasonably approximate the actual
costs incurred. The expenses recorded by the Company for these allocations
were approximately $400,000, $500,000, $650,000 and $381,000 for the years
ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996,
respectively. See Note 4 of Notes to Consolidated Financial Statements of
DESI.
The Company and R.R. Donnelley have entered into the Transition Services
Agreement, pursuant to which R.R. Donnelley or its affiliates have agreed to
perform certain legal, tax, data processing, risk management, credit and
collection, cash management and banking and accounts payable services for the
Company. The Company will be charged fees and expenses for such services that
the Company believes are at least as favorable to it as could be obtained from
unaffiliated parties for comparable services or arrangements. No assurances
can be made, however, that the Company could not obtain such services at lower
prices from a third party. Pursuant to the terms of the Transition Services
50
<PAGE>
Agreement, the Company will indemnify R.R. Donnelley and its affiliates for
certain losses and expenses arising out of or relating to (i) the provision of
services under the Transition Services Agreement, including, in particular,
data center services; (ii) certain guarantees maintained by R.R. Donnelley for
DESI's benefit pursuant to the Transition Services Agreement; (iii) the use by
the Company of certain facilities leased by R.R. Donnelley; or (iv) continuing
obligations of R.R. Donnelley under certain of the Company's business services
outsourcing contracts, provided that the Company need not provide such
indemnity in the case of clauses (i) and (iii) above if such losses and
expenses are finally judicially determined to have resulted from the gross
negligence or willful misconduct of R.R. Donnelley in providing such services.
The Transition Services Agreement will be in effect for the period commencing
upon closing of the Offering and ending on December 31, 1997, except with
respect to tax services and cash management and banking services, the provision
of which will end on January 31, 1998 and March 31, 1997, respectively. The
Company will have the right to terminate certain services provided under the
Transition Services Agreement upon 30 days' notice.
BENEFIT ADMINISTRATION SERVICES AGREEMENT
The Company currently participates in various employee benefit plans which
are sponsored by R.R. Donnelley. These programs include medical, dental, life
insurance and workers compensation. The Company has reimbursed R.R. Donnelley
for its proportionate cost of these programs based on historical experience and
relative headcount. The Company recorded expense related to the reimbursement
of these costs of approximately $636,000, $967,000, $2,000,000 and $1,500,000
in the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1996, respectively. See Note 4 of Notes to Consolidated Financial
Statements of DESI.
The Company also participates in a stock purchase plan for selected managers
and key employees sponsored by R.R. Donnelley. Under the plan, the Company is
required to contribute an amount equal to 70% of participants' contributions
(which are limited to 5% of compensation considered for plan purposes), of
which 50% is applied to the purchase of R.R. Donnelley Common Stock and 20% is
paid in cash. Amounts charged to expense by the Company for this plan were
$56,000, $28,000 and $135,000 for the years ended December 31, 1993, 1994 and
1995, respectively. See Note 4 of Notes to Consolidated Financial Statements of
DESI.
The Company and R.R. Donnelley have entered into the Benefit Administration
Services Agreement. Under this agreement, (i) R.R. Donnelley will permit the
Company to continue to participate in the Donnelley Deferred Compensation and
Voluntary Savings Plan and certain welfare plans of R.R. Donnelley until
December 31, 1996; and (ii) the Company will cease being a participant in all
other R.R. Donnelley plans in which it currently participates, including the
R.R. Donnelley stock purchase plan.
The Benefit Administration Services Agreement also provides that the Company
will reimburse R.R. Donnelley for (1) certain costs of benefits provided under
R.R. Donnelley's employee benefit plans for Company employees during the period
in which the Company continues to participate in such plans following the
Offering and (2) the Company's pro rata share of administration and plan asset
management expenses incurred in the operation of these plans during such
period.
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
The Company is currently included in the consolidated federal income tax
return of R.R. Donnelley and files on a combined basis with R.R. Donnelley in
certain states. Thus, rather than paying income taxes directly in these
jurisdictions, the Company currently makes tax sharing payments to R.R.
Donnelley pursuant to R.R. Donnelley's tax allocation policy. In general, R.R.
Donnelley's tax allocation policy provides that the consolidated or combined
tax liability is allocated among the entities in the
51
<PAGE>
consolidated or combined group based principally upon taxable income, credits,
preferences and other amounts directly related to each entity. Upon completion
of the Offering, the Company will no longer be permitted to be included in
such consolidated and combined tax returns. Instead, it will file its own
federal, state and local income tax returns and pay its own taxes on a
separate Company basis. Pursuant to a Tax Allocation and Indemnification
Agreement entered into by the Company and R.R. Donnelley, however, the Company
remains obligated to pay to R.R. Donnelley any income taxes shown on such
consolidated and combined tax returns, generally to the extent attributable to
the Company, for calendar year 1995 and for the tax period (the "Interim
Period") beginning on January 1, 1996 and ending on the date of the completion
of the Offering (to the extent that it has not previously paid such amounts to
R.R. Donnelley). Under federal regulations, the Company will be subject to
several liability for the consolidated federal income taxes for any tax year
(including the Interim Period) in which it was a member of the R.R. Donnelley
federal consolidated group (whether or not such taxes are attributable to the
Company). R.R. Donnelley has agreed to indemnify the Company against such
liability and any similar liability under state and local law. R.R. Donnelley
has also agreed to indemnify the Company against any increase in the Company's
taxes (whether or not related to taxes paid on a consolidated or combined
basis) for periods ending on or prior to the date of completion of the
Offering that results from an action of a taxing authority or a court (except
to the extent such increase provides tax benefits to the Company for periods
beginning after such date, in which case the sum of such tax benefits will be
retained by R.R. Donnelley or paid by the Company to R.R. Donnelley) to the
extent the aggregate amount of such taxes exceeds $100,000.
DESCRIPTION OF CAPITAL STOCK AND CORPORATE CHARTER
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The following summary
description of the capital stock, First Amended and Restated Certificate of
Incorporation and By-laws of the Company does not purport to be complete and
is qualified in its entirety by reference to the Company's First Amended and
Restated Certificate of Incorporation and By-laws, copies of which are filed
as exhibits to the Registration Statement of which this Prospectus is a part
(see "Available Information"), and to the Delaware General Corporation Law
("DGCL").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. See "Dividend Policy." Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
holders of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in the
Offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future.
PREFERRED STOCK
The Board of Directors has the authority, subject to certain limitations
prescribed by law, without further vote or action by the stockholders, to
issue from time to time the Preferred Stock in one or more
52
<PAGE>
classes or series and to fix or alter the designations, powers, preferences,
rights and any qualifications, limitations or restrictions of the shares of
each such class or series thereof, including the dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund
provisions), liquidation preferences and the number of shares constituting
each such class or series. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions or other corporate
purposes, may have the effect of delaying, deferring or preventing a change of
control of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Company's First Amended and Restated Certificate
of Incorporation and By-laws, summarized in the following paragraphs, may be
considered to have an anti-takeover effect and may delay, deter or prevent a
tender offer, proxy contest or other takeover attempt that a stockholder might
consider to be in such stockholder's best interest, including such an attempt
as might result in payment of a premium over the market price for shares held
by stockholders.
Classified Board of Directors
The Company's First Amended and Restated Certificate of Incorporation
provides for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Board of Directors will be elected each year. Classification of
the Board of Directors expands the time required to change the composition of
a majority of directors and may tend to discourage a proxy contest or other
takeover bid for the Company. Moreover, under the DGCL, in the case of a
corporation having a classified board of directors, the stockholders may
remove a director only for cause. These provisions, when coupled with
provisions of the Company's First Amended and Restated Certificate of
Incorporation authorizing only the Board of Directors to fill vacant
directorships, will preclude stockholders of the Company from removing
incumbent directors without cause and simultaneously gaining control of the
Board of Directors by filling the vacancies with their own nominees.
Special Meetings of Stockholders
The Company's By-laws provide that special meetings of stockholders may be
called by the Chairman of the Board or the President and shall be called by
the President or the Secretary at the request in writing of a majority of the
Board of Directors of the Company.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The Company's By-laws provide that stockholders seeking to bring business
before a meeting of stockholders, or to nominate candidates for election as
directors at a meeting of stockholders, must provide timely notice thereof in
writing. To be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive office of the Company, not less than
60 days nor more than 90 days prior to the scheduled meeting (or, if a special
meeting, not later than the close of business on the tenth day following the
earlier of (i) the day on which such notice of the date of the meeting was
mailed, or (ii) the day on which public disclosure of the date of the special
meeting was made). The By-laws also specify certain requirements pertaining to
the form and substance of a stockholder's notice. These provisions may
preclude some stockholders from making nominations for directors at an annual
or special meeting or from bringing other matters before the stockholders at a
meeting.
53
<PAGE>
No Action by Written Consent of the Stockholders
The Company's First Amended and Restated Certificate of Incorporation does
not allow the stockholders of the Company to take action by written consent if
R.R. Donnelley holds less than 50% of the issued and outstanding Common Stock.
Delaware Takeover Statute
Section 203 of the DGCL ("Section 203") prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (i) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or
(iii) subsequent to such date, the business combination is approved by both
the Board of Directors and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested
stockholder. For these purposes, the term "business combination" includes
mergers, asset sales and other similar transactions with an "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, within the prior three years, did own)
15% or more of the corporation's voting stock. Pursuant to the First Amended
and Restated Certificate of Incorporation, the Company has expressly elected
not to be governed by Section 203.
Limitations of Liability
The Company's First Amended and Restated Certificate of Incorporation
contains a provision that is designed to limit the directors' liability to the
extent permitted by the DGCL and any amendments thereto. Specifically,
directors will not be held liable to the Company or its stockholders for an
act or omission in such capacity as a director, except for liability as a
result of: (i) a breach of the duty of loyalty to the Company or its
stockholders, (ii) actions or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper repurchase of the Company's stock under Section
174 of the DGCL, or (iv) actions or omissions pursuant to which the director
will receive an improper personal benefit. The principal effect of the
limitation of liability provision is that a stockholder is unable to prosecute
an action for monetary damages against a director of the Company unless the
stockholder can demonstrate one of the specified bases for liability. This
provision, however, does not eliminate or limit director liability arising in
connection with causes of action brought under the federal securities laws.
The Company's First Amended and Restated Certificate of Incorporation does not
eliminate its directors' duty of care. The inclusion of this provision in the
Company's First Amended and Restated Certificate of Incorporation may,
however, discourage or deter stockholders or management from bringing a
lawsuit against directors for a breach of their fiduciary duties, even though
such an action, if successful, might otherwise have benefited the Company and
its stockholders. This provision should not affect the availability of
equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
Indemnification
The Company's By-laws also provide that the Company will indemnify its
directors and officers to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, settlements, legal fees and other expenses incurred in
connection with pending or threatened legal proceedings because of the
director's or officer's position with the Company or another entity that the
director or officer serves at the Company's request, subject to certain
conditions, and to advance funds to its directors and officers to enable them
to defend against such proceedings. To receive indemnification, the director
or officer must have been successful in the legal proceedings or acted in good
faith and in what was reasonably believed to be a lawful manner in the
Company's best interest.
54
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
PRINCIPAL AND SELLING STOCKHOLDER
R.R. Donnelley is currently the sole stockholder of the Company. Upon
completion of the Offering, R.R. Donnelley will own approximately 48.0% of the
outstanding Common Stock of the Company (approximately 40.2% if the
Underwriters exercise their over-allotment option in full). See "Ownership of
Capital Stock--Sole Stockholder of the Company."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 5,000,000
shares of Common Stock. Of these shares, the 2,600,000 shares to be sold in
the Offering (2,990,000 shares if the overallotment option granted to the
Underwriters is exercised in full) will be freely tradeable without
restrictions or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except for any shares purchased by an
"affiliate" of the Company which will be subject to the resale limitations of
Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 2,400,000 outstanding shares of Common Stock
(2,010,000 shares if the Underwriters exercise their over-allotment option in
full) are deemed "restricted securities" within the meaning of Rule 144. These
"restricted securities" may not be sold in the absence of registration under
the Securities Act other than in accordance with Rule 144 or another exemption
from registration.
In general, under Rule 144 as currently in effect, a person (including an
"affiliate" (as that term is defined under the Securities Act)) who
beneficially owns shares that are "restricted securities" as to which at least
two years have elapsed since the later of the date of acquisition of such
securities from the issuer or from an affiliate of the issuer, and any
affiliate who owns shares that are not "restricted securities," is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of one percent of the then outstanding shares of Common Stock
(50,000 shares following completion of the Offering) or the average weekly
trading volume in the Common Stock in composite trading on all exchanges
during the four calendar weeks preceding such sale. A person (or persons whose
shares are aggregated) who is not deemed an "affiliate" of the Company and who
has beneficially owned restricted securities as to which at least three years
have elapsed since the later of the date of the acquisition of such securities
from the issuer or from an affiliate of the issuer is entitled to sell such
shares under Rule 144 without regard to the volume limitations described
above. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that market sales of
share of Common Stock, or the availability of such shares for sale, will have
on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. Although R.R. Donnelley in the
future may effect sales or other dispositions of Common Stock that would
reduce its ownership interest in the Company, R.R. Donnelley has advised the
Company it has no plans to do so. See "Relationship with R.R. Donnelley." In
connection with the Offering, subject to certain exceptions, the Company and
R.R. Donnelley have agreed not to offer, sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
or any securities convertible into, or exchangeable for, shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Salomon Brothers Inc. See "Underwriting."
55
<PAGE>
STOCK OPTIONS AND RESTRICTED STOCK
In connection with the Offering, the Company expects to grant certain
employees 5,000 shares of restricted Common Stock and options to acquire up to
an aggregate of approximately 308,000 shares of Common Stock at the initial
public offering price set forth on the cover page of this Prospectus.
Approximately 87,000 additional shares of Common Stock would be available for
future grants under the Company's 1996 Stock Incentive Plan and the 1996
Broad-Based Employee Stock Plan. See "Management--Stock Plans."
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock issuable under
the Company's 1996 Stock Incentive Plan and the 1996 Broad-Based Employee
Stock Plan, and such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company, R.R. Donnelley and the Underwriters (the "Underwriting
Agreement"), the Company and R.R. Donnelley have severally agreed to sell to
each of the Underwriters named below (the "Underwriters"), for whom Salomon
Brothers Inc, Montgomery Securities and J.P. Morgan Securities Inc. are acting
as representatives (the "Representatives"), and each of the Underwriters has
severally agreed to purchase from the Company and R.R. Donnelley, the number
of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Salomon Brothers Inc............................................
Montgomery Securities...........................................
J.P. Morgan Securities Inc......................................
---------
Total....................................................... 2,600,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock offered hereby (other than those subject to the over-
allotment option described below) if any such shares are purchased. In the
event of a default by any Underwriter, the Underwriting Agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company and R.R. Donnelley have been advised by the Representatives that
the several Underwriters propose initially to offer the shares of Common Stock
to the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a
56
<PAGE>
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the public offering, the public offering price
and such concessions may be changed.
R.R. Donnelley has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to an additional 390,000
shares of Common Stock at the initial price to the public set forth on the
cover page of this Prospectus, solely to cover over-allotments. To the extent
that the Underwriters exercise such option, in whole or in part, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase the same proportion of the option shares as the number of shares of
Common Stock to be purchased by such Underwriter in the above table bears to
the total number of shares of Common Stock offered by the Underwriters hereby.
The Underwriting Agreement provides that the Company and R.R. Donnelley,
jointly and severally, will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Underwriters have informed the Company and R.R. Donnelley that they do
not intend to confirm sales to any account over which they exercise
discretionary authority.
The Company and R.R. Donnelley have each agreed with the Underwriters that
they will not offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
or any securities convertible into, or exchangeable for, shares of Common
Stock for a period of 180 days from the date of this Prospectus, without the
prior written consent of Salomon Brothers Inc, except grants of options and
issuances and sales of Common Stock issued pursuant to any employee or
director stock option plan, stock ownership plan or stock purchase plan in
effect on the date the Underwriting Agreement is executed.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock was determined by
negotiation among the Company, R.R. Donnelley and the Representatives. Among
the factors considered in determining the initial public offering price were
the Company's financial and operating history and condition, the future
prospects of the Company and its industry in general, an assessment of the
management of the Company, the general conditions of the securities market at
the time of the Offering and the market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company. There can be no assurance that the prices at which
the Common Stock will sell in the public market after the Offering will not be
lower than the price at which they were sold in the Offering by the
Underwriters.
Montgomery Securities is a client of the Company. Morgan Guaranty Trust
Company of New York, an affiliate of J.P. Morgan Securities Inc., is a client
of the Company and a lender to the Selling Stockholder.
At the request of the Company, the Underwriters have reserved up to 86,700
shares of the shares of Common Stock offered by the Company hereby for sale at
the public offering price set forth on the cover page of this Prospectus to
certain directors, officers and employees of the Company. The number of shares
of Common Stock offered by the Company hereby that are available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares
offered hereby. All purchasers of the shares of Common Stock reserved pursuant
to this paragraph who are also directors or senior officers of the
Company will be required to enter into agreements identical to those described
in the immediately preceding paragraph restricting the transferability of such
shares for a period of 180 days after the date of this Prospectus.
57
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sidley & Austin, Chicago, Illinois. H. Blair White,
Counsel to Sidley & Austin, is a director of R.R. Donnelley, currently the
sole stockholder of the Company. Mr. White beneficially owns 31,600 shares of
R.R. Donnelley Common Stock. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Winston & Strawn,
Chicago, Illinois. Sidley & Austin and Winston & Strawn are both clients of
the Company, with Sidley & Austin being the Company's largest client.
EXPERTS
The (a) consolidated financial statements and financial statement schedule
of the Company as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995, and (b) consolidated financial
statements of LAN Systems, Inc. as of December 31, 1994 and for each of the
two years in the period ended December 31, 1994 and the period from January 1,
1995 through
June 21, 1995, each appearing in this Prospectus and in the Registration
Statement mentioned below, have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their reports thereon
appearing elsewhere in this Prospectus and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of such
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include the amendments, exhibits and schedule
thereto), pursuant to the Securities Act and the rules and regulations
promulgated thereunder, with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted from the Prospectus in accordance with the rules
and regulations of the Commission, and to which reference is hereby made.
After completion of the Offering, the Company will be subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, will be
required to file proxy statements, reports and other information with the
Commission. The Registration Statement, as well as any such report, proxy
statement and other information filed by the Company with the Commission, may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing interim unaudited consolidated financial information.
58
<PAGE>
Statements made in this Prospectus concerning the provisions of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such statement concerning a contract, agreement
or other document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission, reference is made to such exhibit or
other filing for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The following trademarks are mentioned in this Prospectus: Microsoft
Windows, Visual Basic, Microsoft Exchange Server and Windows Solutions, which
are registered trademarks of Microsoft Corporation; Lotus Notes, which is a
registered trademark of Lotus Development Corporation; GroupWise, which is a
registered trademark of Novell, Inc.; PC DOCS, which is a registered trademark
of PC Docs Inc.; and InformationWeek, which is a registered trademark of CMP
Publications, Inc.
59
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Donnelley Enterprise Solutions
Incorporated:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and
unaudited as of June 30, 1996.......................................... F-3
Consolidated Income Statements for the Years Ended December 31, 1993,
1994 and 1995, and unaudited for the Six Months Ended June 30, 1995,
and June 30, 1996...................................................... F-4
Consolidated Statements of Changes in Shareholder's Equity for the Years
Ended December 31, 1993, 1994 and 1995, and unaudited for the Six
Months Ended June 30, 1996............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995, and unaudited for the Six Months Ended June 30,
1995, and June 30, 1996................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
Consolidated Financial Statements of Completed Acquisition:
LAN Systems, Inc. and Subsidiaries:
Report of Independent Public Accountants................................ F-16
Consolidated Balance Sheet as of December 31, 1994...................... F-17
Consolidated Income Statements for the Years Ended December 31, 1993 and
1994, and the Period January 1, 1995 through June 21, 1995............. F-18
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1993 and 1994, and the Period January 1, 1995
through June 21, 1995.................................................. F-19
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993 and 1994, and the Period January 1, 1995 through June 21, 1995.... F-20
Notes to Consolidated Financial Statements.............................. F-21
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Donnelley Enterprise Solutions Incorporated:
We have audited the accompanying consolidated balance sheets of DONNELLEY
ENTERPRISE SOLUTIONS INCORPORATED (a Delaware corporation) as of December 31,
1995 and 1994, and the related consolidated income statements, changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Donnelley Enterprise
Solutions Incorporated as of December 31, 1995 and 1994, and the results of
its operations and cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois,
July 3, 1996
(except for the matters discussed in Note 11,
as to which the date is October 11, 1996)
F-2
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
ASSETS 1994 1995 1996
------ ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and equivalents.............................. $ -- $ 652 $ 298
Accounts receivable, less allowances for doubtful
accounts of $0 in 1994, $607 in 1995 and $538 in
1996............................................. 727 9,674 11,229
Unbilled receivables.............................. 1,024 1,473 5,660
Inventories....................................... 284 3,574 4,451
Prepaid expenses and other current assets......... 207 488 466
Income tax receivable............................. -- 1,188 1,277
Deferred income taxes............................. 127 1,222 978
------ ------- -------
Total current assets............................ 2,369 18,271 24,359
Property and equipment, net, at cost................ 7,192 9,075 9,129
Deferred income taxes............................... 252 780 791
Goodwill, net....................................... -- 11,511 11,999
Other noncurrent assets............................. -- 59 61
------ ------- -------
Total assets.................................... $9,813 $39,696 $46,339
====== ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Capital lease obligations, current portion........ $1,301 $ 1,347 $ 1,169
Advances due to related party..................... 191 4,672 17,637
Accounts payable.................................. 1,344 6,321 5,430
Accrued salary and benefits....................... 1,219 3,046 2,406
Accrued other expenses............................ 120 1,652 1,080
Customer prepayments.............................. 3,094 3,538 793
Deferred revenues................................. -- 1,332 753
------ ------- -------
Total current liabilities....................... 7,269 21,908 29,268
------ ------- -------
Noncurrent Liabilities:
Capital lease obligations......................... 2,544 1,778 1,314
Other noncurrent liabilities...................... -- 253 --
------ ------- -------
Total noncurrent liabilities.................... 2,544 2,031 1,314
------ ------- -------
Shareholder's equity:
Common stock--DESI, $.01 par value, 15,000,000
authorized shares; 3,145,000 issued and
outstanding at December 31, 1995 and June 30,
1996............................................. -- 31 31
Preferred stock--DESI, $.01 par value, 1,000,000
authorized shares; none issued and outstanding... -- -- --
Additional paid-in capital........................ -- 15,726 15,726
Retained earnings................................. -- -- --
------ ------- -------
Total shareholder's equity...................... -- 15,757 15,757
------ ------- -------
Total liabilities and shareholder's equity...... $9,813 $39,696 $46,339
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $23,527 $34,745 $65,944 $21,108 $45,243
Cost of revenues........................ 18,800 27,800 53,900 18,077 35,309
------- ------- ------- ------- -------
Gross profit........................ 4,727 6,945 12,044 3,031 9,934
Selling expenses........................ 1,665 2,110 5,563 1,249 4,633
General and administrative expenses..... 1,333 1,540 4,866 1,082 3,536
Amortization of goodwill................ -- -- 295 -- 306
------- ------- ------- ------- -------
Earnings from operations............ 1,729 3,295 1,320 700 1,459
Interest expense........................ 184 283 522 230 126
------- ------- ------- ------- -------
Earnings before income taxes........ 1,545 3,012 798 470 1,333
Income taxes............................ 684 1,277 495 208 712
------- ------- ------- ------- -------
Net income.......................... $ 861 $ 1,735 $ 303 $ 262 $ 621
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......... $-- $ -- $ -- $ --
Current-year earnings............... -- -- 861 861
Repayments to related party......... -- -- (861) (861)
---- ------- ------ -------
Balance at December 31, 1993.......... -- -- -- --
Current-year earnings............... -- -- 1,735 1,735
Repayments to related party......... -- -- (1,735) (1,735)
---- ------- ------ -------
Balance at December 31, 1994.......... -- -- -- --
Current-year earnings............... -- -- 303 303
Contribution of LANSystems from
related party...................... 31 15,726 -- 15,757
Repayments to related party......... -- -- (303) (303)
---- ------- ------ -------
Balance at December 31, 1995.......... 31 15,726 -- 15,757
Current-period earnings
(unaudited)........................ -- -- 621 621
Dividend to related party
(unaudited)........................ -- -- (621) (621)
---- ------- ------ -------
Balance at June 30, 1996 (unaudited).. $ 31 $15,726 $ -- $15,757
==== ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------ ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used
in) operating activities:
Net income................... $ 861 $ 1,735 $ 303 $ 262 $ 621
Depreciation and
amortization................ 1,516 2,297 3,446 1,528 2,109
Amortization of goodwill..... -- -- 295 -- 306
Net changes in assets and
liabilities................. (989) 2,653 (109) (3,053) (12,135)
------ ------- -------- -------- --------
Net cash provided by
(used in) operating
activities.............. 1,388 6,685 3,935 (1,263) (9,099)
------ ------- -------- -------- --------
Cash flows used in investing
activities:
Capital expenditures......... (787) (2,081) (4,084) (1,007) (2,139)
Acquisition of LANSystems by
related party............... -- -- (16,633) (16,633) (794)
------ ------- -------- -------- --------
Net cash used in
investing activities.... (787) (2,081) (20,717) (17,640) (2,933)
------ ------- -------- -------- --------
Cash flows (used for) provided
by financing activities:
Advances from (to) related
parties, net................ 731 (1,990) 4,481 4,007 12,965
Repayments/dividend to
related party............... (861) (1,735) (303) (262) (621)
Contribution of LANSystems
from related party.......... -- -- 15,757 15,757 --
Principal payments on capital
leases...................... (471) (879) (1,301) (599) (666)
Principal payments on
borrowings.................. -- -- (1,200) -- --
------ ------- -------- -------- --------
Net cash (used for)
provided by financing
activities.............. (601) (4,604) 17,434 18,903 11,678
------ ------- -------- -------- --------
Net increase (decrease) in cash
and equivalents............... $ -- $ -- $ 652 $ -- $ (354)
Cash and equivalents, at
beginning of period........... -- -- -- -- 652
------ ------- -------- -------- --------
Cash and equivalents, at end of
period........................ $ -- $ -- $ 652 $ -- $ 298
====== ======= ======== ======== ========
The changes in assets and
liabilities, net of balances
assumed through acquisitions,
were as follows:
Decrease (increase) in
assets--
Receivables, net........... $ (510) $ (964) $ (1,667) $ (2,277) $ (5,742)
Inventories................ (36) (62) 543 82 (877)
Prepaid expenses and other. (178) (5) (24) -- 22
Income tax receivable...... -- -- (196) -- (89)
Deferred income taxes...... (133) (120) (496) (79) 233
Other noncurrent assets.... -- -- (3) -- (2)
Increase (decrease) in
liabilities--
Accounts payable........... 166 385 671 752 (891)
Accrued salary and
benefits.................. 70 368 1,081 46 (640)
Accrued other expenses..... (368) (43) 1,214 644 (572)
Customer prepayments....... -- 3,094 444 (164) (2,745)
Deferred revenues.......... -- -- (1,917) (2,307) (579)
Other noncurrent
liabilities............... -- -- 241 250 (253)
------ ------- -------- -------- --------
Net change in assets and
liabilities............. $ (989) $ 2,653 $ (109) $ (3,053) $(12,135)
====== ======= ======== ======== ========
Cash paid during the period
for:
Interest..................... $ 184 $ 283 $ 522 $ 230 $ 126
Income taxes................. -- -- 86 -- 246
====== ======= ======== ======== ========
Supplemental non-cash investing
and financing activities:
Capital leases............... $1,939 $ 2,052 $ 581 $ 486 $ 24
====== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Donnelley Business Services ("DBS") was an unincorporated business unit of
R. R. Donnelley & Sons Company ("R.R. Donnelley") from its organization in
1988 through December 31, 1995. On June 21, 1995, R.R. Donnelley acquired LAN
Systems, Inc. ("LANSystems") in a business combination accounted for as a
purchase (see Note 10 for further discussion). Following the acquisition,
LANSystems was a wholly owned subsidiary of R.R. Donnelley and was operated
together with DBS. Effective January 1, 1996, R.R. Donnelley contributed the
assets and liabilities of DBS to LANSystems and LANSystems changed its name to
Donnelley Enterprise Solutions Incorporated ("DESI"). The accompanying
financial statements have been restated to reflect the consolidation of
entities under common control by R.R. Donnelley since the date of acquisition
of LANSystems. LANSystems is included in the results of operations of the
accompanying financial statements since July 1, 1995. DESI and its wholly
owned subsidiaries are collectively referred to herein as the "Company."
The Company is a single-source provider of integrated information management
services to professional service providers, primarily large law firms,
investment banking firms and accounting firms. The Company operates entirely
within the information management services segment. Within this segment, the
Company offers two general categories of services: business services
outsourcing and information technology services. The Company's business
services outsourcing offerings include document services, such as
reprographic, networked and color printing, mailroom and facsimile services;
word processing and desktop publishing; and imaging. The Company's information
technology services include systems integration, consulting, systems
management outsourcing and software development.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include all accounts of the Company.
All material intercompany balances and transactions are eliminated in
consolidation.
Unaudited Financial Statements
The unaudited consolidated income statements and cash flows for the six
months ended June 30, 1995 and 1996, the unaudited consolidated balance sheet
as of June 30, 1996, and the unaudited consolidated statement of changes in
shareholder's equity for the six months ended June 30, 1996 include, in the
opinion of management, all adjustments necessary to present fairly the
Company's consolidated financial position, results of operations and cash
flows. In the opinion of management, all these adjustments are of a normal and
recurring nature. Operating results for the six months ended June 30, 1996,
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1996.
Revenue Recognition and Deferred Revenues
Business Services Outsourcing--The Company recognizes revenues related to
its outsourcing business upon rendering of service. All outsourcing contracts
are billed on a monthly basis. At December 31, 1994 and 1995, and June 30,
1996, unbilled revenues amounted to $1,024,000, $150,000 and $3,892,000,
respectively.
Information Technology Services--For material information technology
projects with a duration of three months or longer that require installation,
system design and integration, the Company recognizes revenue under the
percentage-of-completion method, using labor costs incurred to date in
F-7
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
relation to estimated total labor costs of the contracts to measure stage of
completion. The cumulative effects of revisions of estimated total labor costs
and revenues are recorded in the period in which the facts requiring the
revision become known. When a loss is anticipated on a contract, the full
amount thereof is provided currently. Claims, including change orders, are
reflected at estimated recoverable amounts. At December 31, 1995 and June 30,
1996, estimated revenue in excess of billings on uncompleted contracts
amounted to $1,323,000 and $1,768,000, respectively.
For all other information technology projects, the Company recognizes
revenue upon substantial completion of the project.
Amounts billed for systems maintenance contracts are recorded as deferred
revenue and recognized in revenue over the term of the contract on a straight-
line basis.
Inventories
Inventories consist of materials and supplies and are carried at the lower
of weighted average cost or market.
Property and Equipment--Capitalization and Depreciation
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on useful lives of 2 to 5 years. Maintenance
and repair costs are charged to expense as incurred. When properties are
retired or disposed, the costs and related depreciation reserves are
eliminated and the resulting profit or loss is recognized in income.
Leasehold improvements are amortized over the life of the related lease.
Leased capitalized assets are depreciated over the life of the related lease
or the normal useful life of the asset, whichever is lower.
Goodwill--Capitalization and Amortization
Goodwill consists of the excess of purchase price over the fair market value
of net assets acquired as a result of the acquisition of LANSystems on June
21, 1995. The goodwill is amortized over its estimated useful life of 20
years. Accumulated amortization at December 31, 1995, and June 30, 1996, was
$295,000 and $601,000, respectively.
Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121--"Accounting for the Impairment of Long-Lived Assets" effective January 1,
1995. In accordance with the requirements of SFAS No. 121, the Company
periodically assesses whether events or circumstances have occurred that may
indicate the carrying value of its long-lived assets may not be recoverable.
When such events or circumstances indicate the carrying value of an asset may
be impaired, the Company uses an estimate of the future undiscounted cash
flows to be derived from the asset over the remaining useful life of the asset
to assess whether or not the asset is recoverable. If the future undiscounted
cash flows to be derived over the life of the asset do not exceed the asset's
net book value, the Company recognizes an impairment loss for the amount by
which the net book value of the asset exceeds its estimated fair market value.
The Company has not recognized any material impairment losses for the year
ended December 31, 1995 and the six month period ended June 30, 1996.
F-8
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development
Research and development expenditures are charged to earnings as incurred
and amounted to $863,000, $895,000, $1,274,000, $342,000 and $520,000 for the
years ended December 31, 1993, 1994 and 1995, and the six months ended June
30, 1995 and 1996, respectively. These costs are reflected in the Company's
consolidated statements of income as general and administrative expenses.
Income Taxes
For all periods presented, the Company is included in the consolidated
federal income tax return of R.R. Donnelley. The consolidated tax provision is
presented as if the Company filed a separate tax return. Deferred taxes are
provided when tax laws and financial accounting standards differ with respect
to the amount of income calculated in a given year and the bases of assets and
liabilities, in accordance with SFAS No. 109--"Accounting for Income Taxes."
Income taxes are paid by R.R. Donnelley on behalf of the Company.
Effective January 1, 1993, the Company adopted SFAS No. 109. The impact of
the adoption was not material to the Company's financial position or results
of operations.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SIGNIFICANT CLIENTS:
A majority of the Company's revenues are attributable to clients operating
in the professional services industry. For the year ended December 31, 1993,
there were three clients that accounted for greater than 10% of revenues.
Individually, these clients accounted for approximately 27%, 12% and 11% of
the Company's revenues for such year. For the year ended December 31, 1994,
one client accounted for approximately 15% of the Company's revenues. For the
year ended December 31, 1995 and the six months ended June 30, 1996, no
clients accounted for greater than 10% of the Company's revenues.
4. TRANSACTIONS WITH R. R. DONNELLEY & SONS COMPANY:
Related-party transactions with R.R. Donnelley not disclosed elsewhere in
the financial statements are as follows:
Accounts Receivable Sold Without Recourse
The Company sells certain accounts receivable, without recourse, to R.R.
Donnelley Receivables, Inc. ("DRI"), a wholly owned subsidiary of R.R.
Donnelley. The amount of the receivables sold was directly offset against the
advances due to related party. The Company was not charged for any factoring
costs related to these receivables and, therefore, the financial statements do
not include any charge for factoring costs. During the years ended December
31, 1993, 1994 and 1995, the Company factored $22.1 million, $33.9 million and
$44.8 million of receivables to DRI, respectively. Factored receivables that
remain uncollected by DRI were $6.2 million, $14.6 million and $6.8 million at
December 31, 1994 and 1995, and June 30, 1996, and are excluded from the
accompanying consolidated balance sheets.
F-9
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Benefit Programs
The Company's employees participate in various employee benefit programs
that are sponsored by R.R. Donnelley, including those employees acquired in
connection with the acquisition of LANSystems who began participating in all
such programs other than the defined benefit pension plan as of January 1,
1996 and, with respect to the defined benefit pension plan, as of June 21,
1995. The employee benefit programs sponsored by R.R. Donnelley include
medical, dental and life insurance, workers' compensation and a defined
benefit pension plan. The Company reimburses R.R. Donnelley for its
proportionate cost of these programs based on historical experience and
relative headcount. The Company recorded expense related to the reimbursement
of these costs of approximately $0.6 million, $0.9 million and $1.9 million in
the years ended December 31, 1993, 1994 and 1995, respectively. The costs are
charged to cost of revenues, selling expense and general and administrative
expense based on the number of employees in each of these categories. The
Company believes its allocation of the proportionate cost is reasonable. R.R.
Donnelley is liable for all payments under these programs and, thus, no
liability for these benefits has been reflected on the accompanying
consolidated balance sheet.
The weighted average discount rate used in determining the actuarial present
value of the benefit obligation for the defined benefit pension plan was 7.5%,
8.5% and 7.25% for the years ended December 31, 1993, 1994 and 1995,
respectively. The rate of increase in future compensation levels assumed was
5% for 1993 and 4% for 1994 and 1995. The expected long-term rate of return on
plan assets was 9.5% for all three years.
On May 1, 1996, the Company terminated its participation in the R.R.
Donnelley defined benefit pension plan. R.R. Donnelley has retained all assets
and liabilities related to the plan.
Effective January 1, 1997, the Company intends to offer employees a 401(k)
savings plan with the Company matching a portion of the amounts contributed by
employees.
Postretirement Medical and Life Insurance Benefits
The Company's employees participate in a postretirement benefit program
sponsored by R.R. Donnelley, including those employees acquired in connection
with the acquisition of LANSystems, who began participating as of January 1,
1996. This plan provides certain postretirement medical and life insurance
benefits. The Company reimburses R.R. Donnelley for its proportionate cost of
these programs based on an estimation of the proportionate costs attributable
to its employees. The Company recorded expense related to the reimbursement of
these costs of approximately $36,000, $67,000 and $101,000 in the years ended
December 31, 1993, 1994 and 1995, respectively. R.R. Donnelley is liable for
all payments under these programs and, thus, no liability for these benefits
has been reflected on the accompanying consolidated balance sheet.
On May 1, 1996, the Company terminated its participation in the R.R.
Donnelley postretirement medical and life insurance benefits plan. R.R.
Donnelley has retained all liabilities related to the plan.
Corporate Services
R.R. Donnelley provides certain support services to the Company including
legal, tax, benefits administration, data processing, internal audit and
payroll services. These charges are allocated by R.R. Donnelley to the Company
based on various formulas which reasonably approximate the actual costs
incurred. The corporate assessments recorded by the Company for these
allocations in the
F-10
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accompanying consolidated income statements were approximately $400,000,
$500,000 and $650,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. The amounts allocated by R.R. Donnelley are not necessarily
indicative of the actual costs which may have been incurred had the Company
operated as an entity unaffiliated with R.R. Donnelley. However, the Company
believes that the allocation is reasonable and in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 55.
Sales Through R.R. Donnelley
The Company sells services to clients who are also clients of R.R.
Donnelley. For some of these sales, an R.R. Donnelley salesman will assist the
Company in making the initial client contact and executing the transaction. To
compensate for these services, the Company pays a commission fee to the
respective R.R. Donnelley salesman. Management believes these commission fees
approximate the actual costs which may have been incurred had the Company
operated as an entity unaffiliated with R.R. Donnelley. Total commissions
expense related to these sales approximated $0, $77,000 and $65,000 for the
years ended December 31, 1993, 1994 and 1995, respectively. The sales for
which these commissions relate approximated $0, $5,653,000 and $6,027,000,
respectively. The Company sells information technology services and products
to R.R. Donnelley. These sales approximated $955,000 and $1,665,000 for the
period July 1, 1995 through December 31, 1995 and the six-month period ended
June 30, 1996, respectively. The receivables from R.R. Donnelley related to
these sales are reflected in the advances due to related party discussed in
Note 8.
Stock Purchase Plan
The Company participates in a stock purchase plan for selected managers and
key staff employees which is sponsored by R.R. Donnelley. Under the plan, the
Company is required to contribute an amount equal to 70% of participants'
contributions, of which 50% is applied to the purchase of R.R. Donnelley
common stock and 20% is paid in cash. Amounts charged to expense by the
Company for this plan were $56,000, $28,600 and $135,000 for the years ended
December 31, 1993, 1994 and 1995, respectively. Effective July 1, 1995,
employees acquired in connection with the acquisition of LANSystems
participate in these stock purchase plan benefits. Concurrent with an initial
public offering of the Company's stock this plan will be terminated.
Impact of Operating as a Stand-Alone Entity
The accompanying financial statements reflect the Company's costs of doing
business, including expenses incurred by R.R. Donnelley on the Company's
behalf in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 55. However, the Company estimates it would have incurred
increased expenses as a stand-alone company as well as other incremental
public company expenses. The estimated pro forma impact of all of the above
adjustments would have reduced pretax income by approximately $1,039,000 and
$47,000 for the year ended December 31, 1995 and the six months ended June 30,
1996, respectively.
F-11
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment..................... $ 6,369 $10,722 $ 12,607
Capital leases.............................. 6,134 6,715 6,739
Leasehold improvements...................... 424 757 762
------- ------- --------
Total property and equipment............ 12,927 18,194 20,108
Accumulated depreciation and amortization... (5,735) (9,119) (10,979)
------- ------- --------
Net property and equipment.............. $ 7,192 $ 9,075 $ 9,129
======= ======= ========
</TABLE>
Depreciation and amortization expense of property and equipment included in
the accompanying consolidated income statements was $1,516,000, $2,297,000,
$3,446,000, $1,528,000 and $2,109,000 for the years ended December 31, 1993,
1994 and 1995, and the six months ended June 30, 1995 and 1996, respectively.
6. LEASE OBLIGATIONS:
The Company leases office space and various office equipment. These leases
are mainly accounted for as operating leases. Rental costs under operating
lease agreements approximated $2,690,000, $3,928,000 and $6,065,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
The Company leases a significant amount of equipment used at its business
services outsourcing sites. The leases are mainly accounted for as capital
leases. The gross amounts of property and equipment representing capital
leases in the accompanying consolidated balance sheets at December 31, 1994
and 1995 and June 30, 1996 were approximately $6,134,000, $6,715,000 and
$6,739,000, respectively. Similar amounts for accumulated amortization were
$2,471,000, $3,831,000 and $4,490,000 respectively. Amortization of capital
lease assets is included in depreciation and amortization expense of property
and equipment.
Minimum future lease obligations at December 31, 1995, are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Period ending December 31--
1996.................................................. $1,328 $1,591
1997.................................................. 955 1,086
1998.................................................. 628 602
1999.................................................. 500 291
2000 and thereafter................................... 974 14
------ ------
Total minimum payments.............................. $4,385 $3,584
======
Less: Amount representing interest...................... 459
------
Present value of minimum lease payments................. $3,125
======
</TABLE>
F-12
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
The Company is party to certain litigation arising in the ordinary course of
business which, in the opinion of management, will not have a material adverse
effect on the operations or financial position of the Company.
8. ADVANCES DUE TO A RELATED PARTY:
Advances due to related party represent advances from R.R. Donnelley to fund
operating and investing activities, net of cash advanced to R.R. Donnelley
from operating cash flows generated by the Company. Advances owed to R.R.
Donnelley are non-interest bearing and are payable on demand or become due and
payable immediately upon completion of an initial public offering of the
Company's Common Stock.
9. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ------------
1993 1994 1995 1995 1996
---- ------ ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal--
Current..................................... $657 $1,133 $ 884 $ 229 $ 464
Deferred.................................... (97) (87) (478) (58) 120
State--
Current..................................... 160 264 107 58 15
Deferred.................................... (36) (33) (18) (21) 113
---- ------ ----- ----- -----
Total provision........................... $684 $1,277 $ 495 $ 208 $ 712
==== ====== ===== ===== =====
</TABLE>
A reconciliation of the effective tax rate from the statutory U.S. federal
income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- ------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal rate.................................... 34.0% 34.0% 34.0% 34.0% 34.0%
State taxes, net of federal benefit............. 8.0 7.7 11.2 7.9 9.6
Goodwill amortization........................... -- -- 11.3 -- 6.3
Meals and entertainment......................... 2.3 0.7 5.4 1.8 3.4
Other........................................... -- -- 0.1 -- 0.1
---- ---- ---- ----- -----
Effective tax rate.......................... 44.3% 42.4% 62.0% 43.7% 53.4%
==== ==== ==== ===== =====
</TABLE>
F-13
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax asset,
which is classified between current and long-term in the accompanying
consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vacation liability............................ $ 86 $ 50 $ 234
Payroll and related liabilities............... 17 442 188
Allowance for doubtful accounts............... -- 252 223
Inventory..................................... -- 396 485
Percentage of completion...................... -- (33) (339)
Miscellaneous, other.......................... 24 115 187
----- ------- ------
Total net current deferred tax asset...... 127 1,222 978
----- ------- ------
Accumulated depreciation...................... 252 573 688
Reserves and accruals not deductable until
paid......................................... -- 213 124
Miscellaneous, other.......................... -- (6) (21)
----- ------- ------
Total net noncurrent deferred tax asset... 252 780 791
----- ------- ------
Total..................................... $ 379 $ 2,002 $1,769
===== ======= ======
</TABLE>
The Company has not provided a valuation allowance for deferred tax assets
because, although realization is not assured, the Company believes it is more
likely than not that such tax assets will be recognized through reversals of
taxable timing differences and taxable income in future periods.
Taxes payable are included in advances due to R.R. Donnelley.
10. ACQUISITION OF LANSYSTEMS:
As discussed in Note 1, LANSystems was acquired on June 21, 1995 for cash of
approximately $16.6 million and certain contingent payment obligations
("earnout"). The acquisition was accounted for as a purchase, with the excess
of the purchase price over the fair market value of net assets acquired being
allocated to goodwill in the amount of approximately $11.8 million. The
goodwill is being amortized over its estimated useful life of 20 years.
The earnout provisions provided for contingent payments of up to $12.9
million payable to former LANSystems shareholders and management participants
based on the achievement of specified financial targets for the years ended
December 31, 1995 through 1998. In the six months ended June 30, 1996,
$794,000 was recorded as additional goodwill related to the 1995 earnout.
The following unaudited pro forma income statements were prepared to
illustrate the estimated effects of the acquisition as if it had occurred on
January 1, 1994. The pro forma adjustments are based on the available
information and upon certain assumptions the Company believes are reasonable.
The pro forma income statements do not purport to represent what the Company's
income statements would actually have been if such transaction in fact had
occurred on January 1, 1994, or to project the Company's income statements for
any future period. The information below reflects an
F-14
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adjustment for the amortization of goodwill based on the new cost basis of the
Company, as well as an adjustment to the income tax provision to reflect the
tax effect of the aforementioned adjustment.
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues............................................... $65,326 $79,545
Cost of revenues....................................... 48,799 64,336
------- -------
Gross profit....................................... 16,527 15,209
Selling expenses....................................... 6,501 7,918
General and administrative expenses.................... 4,728 7,096
Amortization of goodwill............................... 1,065 1,065
------- -------
Earnings (loss) from operations.................... 4,233 (870)
Interest expense....................................... 335 543
------- -------
Earnings (loss) before income taxes................ 3,898 (1,413)
Income taxes........................................... 2,139 (63)
------- -------
Net income (loss).................................. $ 1,759 $(1,350)
======= =======
</TABLE>
11. SUBSEQUENT EVENTS:
Effective January 1, 1996, R.R. Donnelley contributed the assets and
liabilities of DBS into LANSystems and this wholly owned subsidiary was
renamed Donnelley Enterprise Solutions Incorporated. This contribution between
entities under R.R. Donnelley's common control resulted in the historical
costs bases of DBS (prior to the contribution) being carried over to DESI with
no gain or loss recognized as a result of the transaction.
In July 1996, the Company declared a dividend of $8.0 million paid in the
form of a promissory note to R.R. Donnelley, which is payable on demand or an
initial public offering of the Company's Common Stock and bears interest at
the prime rate per annum payable quarterly.
In July 1996, R.R. Donnelley and DESI sought to modify the LANSystems
earnout because immediate payment of the maximum remaining earnout would be
triggered by completion of an initial public offering of DESI's common stock
in 1996. Earnout participants having the right to approximately 99% of the
earnout have agreed to a modification pursuant to which they will be entitled
to payment on the earlier of completion of such a public offering or October
31, 1996 of approximately $8.7 million in final satisfaction of the earnout
payments due under the acquisition agreement. Earnout participants who have
not agreed, and who do not subsequently agree, to this modification will be
entitled to receive the maximum remaining amount of the earnout, aggregating
approximately $100,000, upon completion of such offering. Payments made to the
earnout participants will be treated as additional purchase price for
LANSystems, resulting in an increase in goodwill, which will be amortized over
the remaining useful life (approximately 19 years).
In August 1996, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering of the
Company's Common Stock.
In September 1996, each outstanding share of Common Stock, par value $1.00
per share, of DESI was reclassified into 31,450 shares of Common Stock, par
value $.01 per share; the authorized number of Common Stock was increased from
1,000 to 15,000,000; and 1,000,000 shares of Preferred Stock, $.01 par value
per share, were authorized. The reclassification has been retroactively
reflected in the accompanying financial statements.
F-15
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company and Thomas P. Bradbury, who served as President, LANSystems
division, have announced that Mr. Bradbury left the Company on October 11,
1996. The Company and Mr. Bradbury expect to enter into an agreement pursuant
to which the Company will agree to continue to pay Mr. Bradbury his salary
through June 21, 1997, pay him a pro-rated bonus for 1996 and permit him to
participate in the Company's employee benefit plans through such date. The
Company has recorded a charge of $300,000 in the third quarter of 1996 in
respect of the foregoing severance arrangement.
The Company has received a commitment letter for a facility under which it
will be entitled to borrow up to $22.0 million on a revolving credit basis
after certain conditions precedent are satisfied, including the completion of
the Offering and the repayment of all advances the Company owes to
R.R. Donnelley and all of the Company's earnout payment obligations relating
to its acquisition of LANSystems. Amounts available under such facility will
not exceed a percentage of the Company's billed and unbilled accounts
receivable, and borrowings will mature in three years and bear interest (i) at
the prime rate announced by the bank acting as agent under the facility or
(ii) at the applicable LIBOR rate plus, depending on the Company's fixed
charge coverage ratio, up to 125 basis points per annum. In addition, the
Company will pay a commitment fee of 20 to 30 basis points per annum,
depending on its fixed charge coverage ratio. The facility will contain
customary financial and other covenants, including requirements to maintain a
minimum consolidated net worth, a minimum fixed charge coverage ratio and a
maximum leverage ratio, and restrictions on liens, investments, dividends,
indebtedness, acquisitions and transactions with affiliates.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of
LAN Systems, Inc.:
We have audited the accompanying consolidated balance sheet of LAN Systems,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the two years then ended and for the period from January 1, 1995
through June 21, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LAN Systems, Inc. and
subsidiaries as of December 31, 1994, and the results of their operations and
their cash flows for each of two years then ended and for the period from
January 1, 1995 through June 21, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 5 to the consolidated financial statements effective
January 1, 1993, the Company changed its method of accounting for income
taxes.
Arthur Andersen LLP
New York, New York
March 19, 1996
F-17
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and equivalents............................................. $ 3,355,819
Accounts receivable, less allowance for doubtful accounts of
$200,000........................................................ 6,554,922
Inventories...................................................... 3,634,949
Prepaid expenses and other current assets........................ 168,971
Deferred income taxes............................................ 484,974
-----------
Total current assets........................................... 14,199,635
Property and equipment, net, at cost............................... 930,812
Deferred income taxes.............................................. 135,539
Other noncurrent assets............................................ 55,734
-----------
Total assets....................................................... $15,321,720
===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Accounts payable................................................. $ 5,052,325
Accrued salary and benefits...................................... 978,462
Accrued other expenses........................................... 1,384,767
Deferred revenue................................................. 2,970,906
-----------
Total current liabilities...................................... 10,386,460
-----------
Long-term debt..................................................... 250,000
Other noncurrent liabilities....................................... 19,821
Redeemable preferred stock......................................... 5,670,156
Shareholders' equity:
Preferred and common stock warrants.............................. 28,939
Common stock, par value $.001; authorized 2,500,000 shares....... 962
Accumulated deficit.............................................. (1,033,618)
Common stock in treasury, at cost................................ (1,000)
-----------
Total shareholders' equity..................................... (1,004,717)
-----------
Total liabilities and shareholders' equity..................... $15,321,720
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD ENDED JUNE 21, 1995
<TABLE>
<CAPTION>
JANUARY 1,
1995 TO
JUNE 21,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................. $28,824,870 $30,580,638 $13,601,355
Cost of revenues......................... 20,867,991 20,998,774 10,436,355
----------- ----------- -----------
Gross profit......................... 7,956,879 9,581,864 3,165,000
Selling expenses......................... 4,036,937 4,390,725 2,354,995
General and administrative expenses...... 2,886,705 3,188,222 2,229,715
----------- ----------- -----------
Earnings (loss) from operations...... 1,033,237 2,002,917 (1,419,710)
Interest expense (income), net........... (17,667) 51,867 21,010
----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle................ 1,050,904 1,951,050 (1,440,720)
Income taxes (benefit) provision......... 492,226 858,000 (534,000)
----------- ----------- -----------
Income (loss) before cumulative
effect of a change in accounting
principle........................... 558,678 1,093,050 (906,720)
Cumulative effect of a change in
accounting principle.................... 104,830 -- --
----------- ----------- -----------
Net income (loss).................... $ 663,508 $ 1,093,050 $ (906,720)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD ENDED JUNE 21, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN TREASURY ACCUMULATED
WARRANTS SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
-------- --------- ------ ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... $ 2,645 960,086 $ 960 $ -- $(1,000) $(1,208,164) $(1,205,559)
Net income.............. -- -- -- -- -- 663,508 663,508
Exercise of stock
options................ -- 380 -- 380 -- -- 380
Accretion of dividends
on preferred stock..... -- -- -- (380) -- (816,566) (816,946)
Reclassification of
preferred stock
redeemed in 1994....... -- -- -- -- -- -- --
------- --------- ------ -------- ------- ----------- -----------
Balance, December 31,
1993................... 2,645 960,466 960 -- (1,000) (1,361,222) (1,358,617)
Net income.............. -- -- -- -- -- 1,093,050 1,093,050
Exercise of stock
options................ -- 1,270 2 1,358 -- -- 1,360
Accretion of dividends
on preferred stock..... -- -- -- (1,358) -- (765,446) (766,804)
Dividends on preferred
stock redeemed in 1994. -- -- -- -- -- -- --
Redemptions of preferred
stock.................. -- -- -- -- -- -- --
Issuance of common stock
warrants............... 26,294 -- -- -- -- -- 26,294
------- --------- ------ -------- ------- ----------- -----------
Balance, December 31,
1994................... 28,939 961,736 962 -- (1,000) (1,033,618) (1,004,717)
Net loss................ -- -- -- -- -- (906,720) (906,720)
Exercise of stock
options................ -- 53,500 53 106,047 -- -- 106,100
Accretion of dividends
on preferred stock..... -- -- -- (106,047) -- (248,025) (354,072)
------- --------- ------ -------- ------- ----------- -----------
Balance, June 21, 1995.. $28,939 1,015,236 $1,015 $ -- $(1,000) $(2,188,363) $(2,159,409)
======= ========= ====== ======== ======= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD ENDED JUNE 21, 1995
<TABLE>
<CAPTION>
JANUARY 1,
1995 TO
1993 1994 JUNE 21, 1995
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows (used in) from operating
activities:
Net (loss) income.................... $ 663,508 $ 1,093,050 $ (906,720)
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization...... 348,488 405,246 589,933
Provision for allowance for
doubtful accounts................. -- 60,000 14,000
(Increase) decrease in deferred
income taxes...................... 114,267 (201,806) (240,870)
Cumulative effect of a change in
accounting principle.............. (104,830) -- --
Changes in assets and liabilities-
Increase in accounts receivable.. (2,560,725) (765,583) (1,187,832)
Increase in inventories.......... (428,721) (1,343,054) (197,545)
(Increase) decrease in prepaid
expenses and other current
assets.......................... 189,478 (94,900) (383,838)
(Increase) decrease in other
noncurrent assets............... (283) 1,538 (344)
(Decrease) increase in accounts
payable......................... 626,588 1,586,804 (746,066)
(Decrease) increase in accrued
salary and benefits............. 344,423 192,273 (232,405)
(Decrease) increase in accrued
other expenses.................. 382,586 233,585 (765,063)
Increase in deferred revenue..... 1,189,875 757,216 277,613
Decrease in other noncurrent
liabilities..................... (16,380) (16,380) (8,190)
----------- ----------- -----------
Net cash (used in) provided by
operating activities.......... 748,274 1,907,989 (3,787,327)
----------- ----------- -----------
Cash flows used in investing
activities:
Purchase of property and equipment..... (414,850) (452,147) (323,202)
----------- ----------- -----------
Net cash used in investing
activities.................... (414,850) (452,147) (323,202)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of long-term debt........... -- 750,000 --
Proceeds from short-term borrowings.. -- 700,000 1,200,000
Payments on borrowings............... (44,835) (915,363) (551,390)
Redemption of preferred stock........ -- (1,055,168) --
Issuance of common stock warrants.... -- 26,294 --
Proceeds from exercise of stock
options............................. 380 1,360 106,100
----------- ----------- -----------
Net cash provided by (used in)
financing activities.......... (44,455) (492,877) 754,710
----------- ----------- -----------
Net (decrease) increase in
cash.......................... 288,969 962,965 (3,355,819)
Cash, beginning of year................ 2,103,885 2,392,854 3,355,819
----------- ----------- -----------
Cash, end of period.................... $ 2,392,854 $ 3,355,819 $ --
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for-
Interest........................... $ 4,751 $ 61,356 $ 37,175
Income taxes....................... 175,009 502,051 434,337
Supplemental Schedule of Noncash
Investing and Financing Activities:
Accretion of dividends on preferred
stock............................... 816,946 766,804 354,072
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD ENDED JUNE 21, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
LAN Systems, Inc. ("LANSystems") provides information technology services
comprised of systems integration, consulting and software development
services. LANSystems operates in a marketplace characterized by rapid
technological developments and discoveries which often result in partial or
total obsolescence of computer based products, including software.
Principles of Consolidation
The consolidated financial statements included herein are for the two years
as of and ended December 31, 1993 and 1994 and for the period from January 1,
1995 through June 21, 1995 (hereafter referred to as "the period").
The consolidated financial statements include the accounts of LANSystems and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
Revenue Recognition
For material projects with a duration of three months or longer that require
installation, system design and integration, LANSystems records revenue under
the percentage-of-completion method, using labor costs incurred to date in
relation to estimated total labor costs of the contracts to measure the stage
of completion. The cumulative effects of revisions of estimated total labor
costs and revenues are recorded in the period in which the facts requiring the
revision become known. When a loss is anticipated on a contract, the full
amount thereof is provided currently. Claims, including change orders, are
reflected at estimated recoverable amounts. At December 31, 1994, estimated
revenue in excess of billings on uncompleted contracts amounts to
approximately $153,000.
For all other projects, LANSystems records revenue upon substantial
completion of the project.
Amounts billed for maintenance contracts are credited to deferred revenue
and recognized in revenue over the term of the contract on a straight-line
basis.
Cash
As of December 31, 1994, LANSystems has $125,000 of restricted cash which
serves as collateral for an irrevocable letter of credit issued in lieu of a
cash security deposit for certain leased office facilities.
Inventories
Inventory is valued at the lower of cost (weighted average) or market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. These assets are depreciated using the straight-line method over
three to five years. Leasehold improvements are amortized over the life of the
related lease.
F-22
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development
Research and development expenditures are charged to earnings as incurred
and amounted to $520,200, $434,176 and $236,594, for the years ended December
31, 1993 and 1994, and the period from January 1, 1995 through June 21, 1995,
respectively. These costs are reflected in LANSystem's consolidated statements
of income as general and administrative expenses.
Utilization of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PREFERRED STOCK AND WARRANTS
LANSystems issued two classes of preferred stock with detachable warrants,
each with a $1.00 par value, and 500,000 shares authorized. At December 31,
1994 and June 21, 1995 the Company had 550,189 shares of Preferred Stock
outstanding. In December 1988, LANSystems issued 337,500 shares of Class A
Preferred Stock for $1,350,000. In October 1989, LANSystems issued 322,727
shares of Class B Preferred Stock for $1,775,645. (The Class A Preferred Stock
and Class B Preferred Stock are referred to, collectively, as the "Preferred
Stock".) The Preferred Stock, which accrues dividends at a rate of 15% per
annum, has voting rights equivalent to those provided to common shareholders
and is convertible at the option of the holder into common stock on a one-for-
one basis.
A detachable warrant to purchase one share of Preferred Stock was issued for
every five shares of Preferred Stock purchased. The exercise prices for the
warrants are $4 per share for Class A Preferred Stock and $5.50 per share for
the Class B Preferred Stock. All warrants expire ten years from the date of
issuance, or the day prior to the conversion or redemption of all of the
Preferred Stock, whichever is earlier.
The Preferred Stock may be redeemed, at the option of the holder, at an
amount equal to the greater of (a) the liquidation amount, as defined by the
agreement, or (b) fifteen times the average after tax earnings per common
share of LANSystems for the prior two years. The redemption of Preferred Stock
was limited to a maximum of one-third of the total shares in 1994, two-thirds
of the then outstanding shares in 1995 and, if redeemed after January 1, 1996,
the total amount of shares outstanding. As of December 31, 1994, the
liquidation amount per share of Class A Preferred Stock and Class B Preferred
Stock is $9.25 and $11.41, respectively.
On March 15, 1994, LANSystems and the preferred stockholders entered into an
agreement to modify the original terms of redemption. On that date, LANSystems
redeemed 56,250 shares of Class A and 53,788 shares of Class B Preferred Stock
for $8.24 and $11 per share, respectively. The preferred stockholders waived
their rights to any additional redemptions until January 1, 1996, at which
time all outstanding shares may be redeemed based on the redemption
calculation discussed in the preceding paragraph. In exchange for the waiver
of redemption rights, LANSystems issued warrants to the preferred stockholders
to purchase 175,000 shares of common stock at an exercise price of $3.50 per
share, subject to adjustments as defined in the agreement. The warrants expire
on March 1, 1999 and contain certain antidilution provisions.
F-23
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1994, preferred stock, which has been classified as a
liability on the accompanying balance sheet, consists of the following:
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- ----------
<S> <C> <C>
Original issuance price............................ $1,125,000 $1,479,165
Accumulated dividend accretion..................... 1,476,562 1,589,429
---------- ----------
$2,601,562 $3,068,594
========== ==========
</TABLE>
As discussed in Note 10, subsequent to June 21, 1995 LANSystems was acquired
by R. R. Donnelley & Sons Company ("R.R. Donnelley") whereby the outstanding
preferred stock and preferred stock warrants were converted into rights to
receive a fixed cash payment.
3. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
LANSystems had a $1,500,000 working capital credit agreement with a bank
which originally extended through April 5, 1996. This credit agreement was
terminated at the date of acquisition of LANSystems by R.R. Donnelley.
Borrowings under the line bear interest at the prime rate plus 1.5% and are
secured by all assets of LANSystems. The agreement requires that LANSystems,
among other things, maintain certain financial ratios. As of December 31,
1994, LANSystems had no borrowings under the line of credit.
In connection with the redemption of preferred stock in March 1994,
LANSystems borrowed $750,000 from a bank bearing interest at the prime rate
plus 2.0% payable in thirty equal monthly installments from April 1994 through
September 1996.
As of December 31, 1994, long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to bank............................................. $550,000
Other............................................................ 1,390
--------
551,390
Less--Current portion............................................ 301,390
--------
$250,000
========
</TABLE>
As of December 31, 1994, long-term debt matures as follows:
<TABLE>
<S> <C>
1995............................................................. $301,390
1996............................................................. 250,000
</TABLE>
For the years ended December 31, 1993 and 1994, and the period ended June
21, 1995 total interest expense was $68,774, $4,751 and $37,428, respectively.
On June 21, 1995, LANSystems paid the outstanding long-term debt balance.
Subsequent to June 21, 1995 LANSystems paid off all amounts outstanding under
the working capital credit agreement.
4. COMMITMENTS
LANSystems leases office facilities under noncancelable operating leases
which expire at various dates through 2002. Future minimum lease payments
under operating leases as of June 21, 1995 are:
<TABLE>
<S> <C>
Period ended December 31, 1995................................ $ 349,727
Year ending December 31:
1996........................................................ 669,382
1997........................................................ 500,525
1998........................................................ 384,786
1999........................................................ 364,038
Thereafter.................................................. 645,439
----------
$2,913,897
==========
</TABLE>
F-24
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for operating leases for the years ended December 31, 1993 and
1994, and the period ended June 21, 1995 was $639,672, $720,843 and $338,215,
respectively.
5. INCOME TAXES
Effective January 1, 1993, LANSystems changed its method of accounting for
income taxes from the deferred method to the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). As permitted under SFAS No. 109, LANSystems adopted
this method of accounting via a cumulative effect of a change in accounting
principle.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The components of the (benefit) provision for taxes for the years ended
December 31, 1993 and 1994, and the period ended June 21, 1995 are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
------------------- PERIOD ENDED
1993 1994 JUNE 21, 1995
--------- --------- -------------
<S> <C> <C> <C>
Federal................................. $ 258,278 $ 623,000 $(377,000)
State................................... 233,948 235,000 (157,000)
--------- --------- ---------
Total tax (benefit) provision....... $ 492,226 $ 858,000 $(534,000)
========= ========= =========
</TABLE>
The current and deferred portions of the income tax (benefit) provision are
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
------------------- PERIOD ENDED
1993 1994 JUNE 21, 1995
-------- ---------- -------------
<S> <C> <C> <C>
Current................................ $377,959 $1,059,806 $(290,253)
Deferred............................... 114,267 (201,806) (243,747)
-------- ---------- ---------
Total tax (benefit) provision...... $492,226 $ 858,000 $(534,000)
======== ========== =========
</TABLE>
A reconciliation of the effective tax rate from statutory U.S. federal
income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
-------------------- PERIOD ENDED
1993 1994 JUNE 21, 1995
--------- --------- -------------
<S> <C> <C> <C>
Federal rate.......................... 34.0% 34.0% (34.0)%
State taxes, net of federal benefit... 9.7 8.0 (7.2)
Meals and entertainment............... 0.9 1.8 1.3
Other................................. 2.2 0.2 2.9
--------- --------- -----
Effective tax rate................ 46.8% 44.0% (37.0)%
========= ========= =====
</TABLE>
F-25
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1994, total current and noncurrent deferred tax assets
(liabilities) are as follows:
<TABLE>
<S> <C>
Allowance for doubtful accounts................................. $ 83,094
Inventory....................................................... 290,679
Vacation liability.............................................. 8,461
Payroll and related liabilities................................. 83,094
Miscellaneous, other............................................ 19,646
--------
Total net current deferred tax asset........................ 484,974
Accumulated depreciation........................................ 135,539
--------
Total net noncurrent deferred tax asset..................... 135,539
--------
$620,513
========
</TABLE>
LANSystems has not provided a valuation allowance for deferred tax assets.
Although realization is not assured, LANSystems believes it is more likely
than not that such tax assets will be recognized through reversals of taxable
timing differences and taxable income in future periods.
6. STOCK OPTIONS
In January 1990, the Board of Directors approved the 1990 Stock Plan (the
"Plan") which enables directors, officers, and employees of LANSystems to be
granted stock options, to be provided awards of common stock, and to make
direct purchases of common stock. Depending upon the type of option issued,
options expire up to ten years and one day from the date of grant and are
fully exercisable on the date of grant or in such installments as the Stock
Plan Committee may specify. In the opinion of management, all options issued
have an exercise price equal to or greater than the fair market value of
LANSystems' common stock on the date of the grant:
Transactions under the Plan are summarized below:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Balance, December 31, 1992........................ 373,740 $1.00-$2.00
Options granted................................. 116,700 1.00- 1.50
Options exercised............................... (380) 1.00
Options canceled................................ (8,580) 1.00- 1.50
-------
Balance, December 31, 1993........................ 481,480 1.00- 2.00
Options granted................................. 69,900 1.50- 2.00
Options exercised............................... (1,270) 1.00- 1.50
Options canceled................................ (15,790) 1.00- 2.00
-------
Balance, December 31, 1994........................ 534,320 1.00- 2.00
=======
</TABLE>
As of December 31, 1994, the aggregate number of shares which may be issued
pursuant to the Plan is 710,000, of which 118,610 are available for issuance.
Options exercisable as of December 31, 1994, were 325,020.
As discussed in Note 10, subsequent to June 21, 1995, common stock options
were converted into the right to receive fixed and contingent cash payments.
F-26
<PAGE>
LAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMON STOCK AND WARRANTS
In connection with the issuance of common stock warrants to preferred
stockholders in March 1994, a common stockholder exercised antidilution rights
and purchased warrants to purchase 9,291 shares of common stock for $26,294.
The warrants have an exercise price of $3.50 per share, subject to adjustment
as defined in the agreement, and expire on March 1, 1999.
As of December 31 ,1994, common stock of LANSystems was reserved as follows:
<TABLE>
<S> <C>
Class A and Class B Preferred Stock (for conversion).......... $ 682,234
Stock options................................................. 652,930
Common stock warrants......................................... 184,291
----------
$1,519,455
==========
</TABLE>
As discussed in Note 10, subsequent to June 21, 1995, common stock and
warrants were converted into the right to receive fixed and contingent cash
payments.
8. RELATED PARTY TRANSACTIONS
LANSystems maintains a total of $4,000,000 of insurance on the lives of two
officers for which LANSystems is the beneficiary.
9. MAJOR CUSTOMERS
For the year ended December 31, 1993, one client accounted for 10% of
LANSystems' revenues. For the year ended December 31, 1994 and the period
ended June 21, 1995, no single client accounted for more than 10% of
LANSystems' revenues.
10. SUBSEQUENT EVENT
On June 21, 1995, R.R. Donnelley acquired LANSystems for cash and certain
contingent payment obligations ("earnout"), pursuant to a merger of a
subsidiary of R.R. Donnelley with and into LANSystems. The agreement by which
R.R. Donnelley acquired LANSystems provides for earnout payments of up to
$12.9 million payable to former shareholders and certain management
participants based on the achievement of specified earnings targets for the
period ended December 31, 1995 and for the years ended December 31, 1996
through 1998. The earnout payment may be accelerated up to the maximum earnout
upon the occurrence of a change of control, as defined in the agreement.
F-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than the underwriting discount) payable in connection
with the sale of the Common Stock offered hereby (including the Common Stock
which may be issued pursuant to an over-allotment option) are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee........................................... $ 27,838
NASD filing fee................................................ 8,573
Nasdaq National Market fee..................................... 44,500
Printing and engraving expenses................................ 150,000*
Legal fees and expenses........................................ 250,000*
Accounting fees and expenses................................... 200,000*
Directors' and Officers' insurance............................. 127,000
Blue Sky fees and expenses (including legal fees and expenses). 20,000*
Transfer agent and registrar fees and expenses................. 25,000*
Miscellaneous.................................................. 47,089*
--------
Total...................................................... $900,000*
========
</TABLE>
- --------
* Estimated.
The Registrant will pay all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 145 ("Section 145") of General Corporation Law
of the State of Delaware (the "Delaware GCL") which provides for
indemnification of directors and officers in certain circumstances.
In accordance with Section 102(b)(7) of the Delaware GCL, the Registrant's
First Amended and Restated Certificate of Incorporation provides that
directors shall not be personally liable for monetary damages for breaches of
their fiduciary duty as directors except for (i) breaches of their duty of
loyalty to the Registrant or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or knowing violations of
law, (iii) certain transactions under Section 174 of the Delaware GCL
(unlawful payment of dividends) or (iv) transactions from which a director
derives an improper personal benefit.
The First Amended and Restated Certificate of Incorporation of the
Registrant provides for indemnification of directors and officers to the full
extent provided by the Delaware GCL, as amended from time to time. It states
that the indemnification provided therein shall not be deemed exclusive. The
Registrant may maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Registrant, or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Registrant would have the power
to indemnify such person against such expense, liability or loss, under the
provisions of the Delaware GCL.
The underwriting agreement provides for indemnification of directors and
officers of the Registrant by the Underwriters against certain liabilities.
Pursuant to Section 145, the Registrant maintains directors' and officers'
liability insurance coverage.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Registrant has not issued any securities that were not registered under the
Securities Act of 1933, as amended. In September 1996, the Registrant filed
its First Amended and Restated Certificate of Incorporation with the Delaware
Secretary of State, pursuant to which each of the issued and outstanding
shares of Common Stock, par value $1.00 per share, of the Registrant have been
reclassified into 31,450 shares of Common Stock, par value $.01 per share, of
the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1* First Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* By-laws of the Registrant.
5.1 Opinion of Sidley & Austin.
10.1 Transition Services Agreement dated as of October 25, 1996
between the Registrant and R.R. Donnelley.
10.2 Benefit Administration Services Agreement dated as of Oc-
tober 23, 1996 between the Registrant and R.R. Donnelley.
10.3 Tax Allocation and Indemnification Agreement dated as of
October 25, 1996 between the Registrant and R.R.
Donnelley.
10.4 Employment Agreement dated October 2, 1996 between Rhonda
I. Kochlefl and the Registrant.
10.5 Employment Agreement dated October 4, 1996 between Leo S.
Spiegel and the Registrant.
10.6 Form of Severance Agreement dated as of October 4, 1996
between Thomas P. Bradbury and the Registrant.
10.7 1996 Stock Incentive Plan.
10.8 1996 Broad-Based Employee Stock Plan.
10.9* Agreement of Merger dated as of May 29, 1995 among R.R.
Donnelley & Sons Company, Donnelley DBS, Inc. and LAN Sys-
tems, Inc.
10.10 Form of Credit Agreement among the Registrant, as Borrow-
er, and the Banks named therein.
21.1* Subsidiaries of the Registrant.
23.1 Consents of Arthur Andersen LLP.
23.2 Consent of Sidley & Austin (included in Exhibit 5.1).
24.1* Powers of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES:
The following financial statement schedule is included as part of this
Registration Statement immediately following the signature page:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1993, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to provisions described in Item
14 above, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT AMENDMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN CHICAGO, ILLINOIS ON
OCTOBER 28, 1996.
Donnelley Enterprise Solutions Incorporated
/s/ Rhonda I. Kochlefl
By: _________________________________
Name: Rhonda I. Kochlefl
Title: Chairman, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AMENDMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ Rhonda I. Kochlefl Chairman, President and October 28, 1996
____________________________________ Chief Executive Officer
Rhonda I. Kochlefl and Director (principal
executive officer)
* Senior Vice President and October 28, 1996
____________________________________ Chief Financial Officer
Luke F. Botica (principal financial and
accounting officer)
* Senior Vice President and October 28, 1996
____________________________________ Chief Technology Officer
Leo S. Spiegel and Director
* Director October 28, 1996
____________________________________
Daniel I. Malina
* Director October 28, 1996
____________________________________
W. Ed Tyler
</TABLE>
/s/ Rhonda I. Kochlefl
*By: __________________________
Rhonda I. Kochlefl
Attorney-in-Fact
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Donnelley Enterprise Solutions
Incorporated included in this registration statement and have issued our
report thereon dated July 3, 1996 (except for the matters discussed in Note 11
as to which the date is October 11, 1996). Our audit was made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
schedules listed in the accompanying index above are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
July 3, 1996
S-1
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS--
ADDITIONS WRITE-OFFS
BALANCE ----------------------- OF TRADE BALANCE
AT THE CHARGES TO RECEIVABLES, AT END
ALLOWANCES FOR DOUBTFUL BEGINNING CHARGES TO OTHER NET OF OF
ACCOUNTS OF PERIOD EXPENSES(1) ACCOUNTS(2) RECOVERIES PERIOD
----------------------- --------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1993...... -- -- -- -- --
For the Year Ended
December 31, 1994...... -- -- -- -- --
For the Year Ended
December 31, 1995...... -- $413 $217 $(23) $607
</TABLE>
- --------
(1) These amounts represent provisions for doubtful accounts that are included
in general and administrative expenses.
(2) These amounts represent additions to the reserve resulting from the
purchase of LAN Systems, Inc. by R. R. Donnelley & Sons Company in 1995.
S-2
<PAGE>
EXHIBIT 1.1
Donnelley Enterprise Solutions Incorporated
2,600,000 Shares*
Common Stock
($.01 par value)
Underwriting Agreement
New York, New York
October __, 1996
Salomon Brothers Inc
Montgomery Securities
J.P. Morgan Securities Inc.
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs and Mesdames:
Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company"), proposes to issue and sell to the underwriters named in
Schedule I hereto (the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), 1,855,000 shares of Common Stock, $.01
par value (the "Common Stock"), of the Company and R. R. Donnelley & Sons
Company, a Delaware corporation (the "Selling Stockholder"), proposes to sell to
the Underwriters 745,000 shares of Common Stock (said shares to be issued and
sold by the Company and shares to be sold by the Selling Stockholder
collectively being hereinafter called the "Underwritten Securities"). Upon the
terms and conditions more fully set forth herein, the Selling Stockholder also
proposes to grant to the Underwriters an option to purchase up to 390,000
additional shares of Common Stock (the "Option Securities"; the Option
Securities, together with the Underwritten Securities, being hereinafter called
the "Securities").
- --------------------
* Plus an option to purchase up to 390,000 additional shares from the
Selling Stockholder to cover over-allotments.
<PAGE>
1. Representations and Warranties.
------------------------------
(a) The Company and the Selling Stockholder, jointly and severally,
represent and warrant to, and agree with, each Underwriter that:
(i) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (file number 333-10127) on Form
S-1, including a related preliminary prospectus, for the registration under
the Securities Act of 1933, as amended (the "Act"), of the offering and
sale of the Securities. The Company may have filed one or more amendments
thereto, including the related preliminary prospectuses, each of which has
previously been furnished to you. The Company will next file with the
Commission either, (A) prior to effec tiveness of such registration
statement, a further amendment thereto (including the form of final pro
spectus) or (B) after effectiveness of such registration statement, a final
prospectus in accordance with Rules 430A and 424(b). In the case of clause
(B), the Company has included in such registration statement, as amended at
the Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules and regulations thereunder to be included
in the Prospectus with respect to the Securities and the offering thereof.
As filed, such amendment and form of final prospectus, or such final
prospectus, shall include all Rule 430A Information and, except to the
extent the Representatives shall agree in writing to a modification (which
agreement shall not be unreasonably withheld), shall be in all substantive
respects in the form last furnished to you prior to the Execution Time or,
to the extent not completed at the Execution Time, shall contain only such
specific additional information and other changes (beyond that contained in
the latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
The terms which follow, when used in this Agreement, shall have the
meanings indicated. The term "the Effective Date" shall mean each date that
the Registration Statement and any post-effective amendment or amendments
thereto became or become effective. "Execution Time" shall mean the date
and time that this Agreement is executed delivered by the parties
hereto. "Preliminary Prospectus" shall mean any preliminary prospectus
referred to in the preceding paragraph and any preliminary prospectus
included in the
2
<PAGE>
Registration Statement at the Effective Date that omits Rule 430A
Information. "Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the Execution
Time or, if no filing pursuant to Rule 424(b) is required, shall mean the
form of final prospectus relating to the Securities included in the
Registration Statement at the Effective Date. "Registration Statement"
shall mean the registration statement referred to in the preceding
paragraph, including exhibits and financial statements and schedule, in the
form in which it has or shall become effective and, in the event any post-
effective amendment thereto becomes effective prior to the Closing Date (as
hereinafter defined) or settlement date pursuant to Section 3 hereof, shall
also mean such registration statement as so amended on such date. Such term
shall include a registration statement, if any, filed pursuant to Rule
462(b) under the Act increasing the size of the offering registered under
the Act and Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 424," "Rule 430A" and "Rule
462(b)" refer to such rules under the Act. "Rule 430A Information" means
information with respect to the Securities and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A. "Knowledge of the Company", "Company's
knowledge" or words of similar import shall mean the collective knowledge
of the Company and the Selling Stockholder.
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the applicable requirements of the Act and the rules and
regulations thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that no representations or warranties are made as to the
information contained in or omitted from any Preliminary Prospectus in
reliance upon and in conformity with information furnished in writing to
the Company or the Selling Stockholder by or on behalf of any Underwriter
through the Representatives specifically for inclusion therein.
3
<PAGE>
(iii) On the Effective Date, the Registration Statement did or will,
and when the Prospectus is first filed (if required) in accordance with
Rule 424(b), on the Closing Date and on any settlement date pursuant to
Section 3 hereof, the Prospectus (and any supplements thereto) will, comply
in all material respects with the applicable requirements of the Act and
the rules thereunder; on the Effective Date, the Registration Statement did
not or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; and, on the Effective Date,
the Prospectus, if not filed pursuant to Rule 424(b), did not or will not,
and on the date of any filing pursuant to Rule 424(b), on the Closing Date
and on any settlement date pursuant to Section 3 hereof, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that no
representations or warranties are made as to the information contained in
or omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company or the Selling Stockholder by or on
behalf of any Underwriter through the Representatives specifically for
inclusion therein.
(iv) The performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default under, any
statute, any indenture, mortgage, deed of trust, credit agreement or other
material agreement or instrument to which the Company is a party or by
which the Company is bound or to which any of the property of the Company
is subject, the Company's certificate of incorporation or by-laws, or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its properties; no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the issuance
or sale of the Securities except such as may be required by the National
Association of Securities Dealers, Inc. or under the Act or state
securities laws.
4
<PAGE>
(v) Except as described in the Prospectus, the Company is not in
violation of any term of its certificate of incorporation or by-laws, and
the Company is not in violation of any term of any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to it which violation or violations could reasonably be expected
to individually or in the aggregate result in a material adverse effect on
the Company or the offering of the Securities contemplated by the
Prospectus (the "Offering").
(vi) Except as described in the Prospectus, the Company is operating
in compliance in all material respects with all material franchises,
grants, authorizations, licenses, permits, easements, consents,
certificates and orders of any governmental or regulatory body required for
the conduct of its businesses, and it owns or possesses all material
patents, trademarks, service marks, trade names, copyrights and licenses,
and rights with respect to the foregoing, necessary for the conduct of its
businesses as now conducted and as proposed to be conducted, without any
known conflict with the rights of others.
(vii) All contracts, agreements, instruments, leases and licenses
required to be described in the Registration Statement or the Prospectus
and/or to be filed as an exhibit to the Registration Statement have been so
described in all material respects and/or filed.
(viii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth
or contemplated in the Prospectus, (i) the Company has not incurred any
material liabilities or obligations, direct or contingent, nor entered into
any material transactions not in the ordinary course of business, and (ii)
there has not been any material adverse change in the condition (financial
or otherwise), earnings, business or operations of the Company, or any
change in the capital stock or material increase in the long-term debt or
advances due to related party of the Company.
(ix) The financial statements, together with the related notes and
schedule set forth in the Prospectus and elsewhere in the Registration
Statement, fairly present in all material respects, on the basis stated in
the Registration Statement, the financial position and
5
<PAGE>
the results of operations and cash flows of the entities covered thereby at
the respective dates or for the respective periods therein specified. Such
financial statements and related notes and schedule have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the respective periods involved. The selected
historical financial data set forth in the Prospectus under the captions
"Summary Consolidated Financial Data," "Risk Factors," "Capitalization,"
"Selected Consolidated Financial Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," taken together
with the other information in the Prospectus fairly presents in all
material respects, on the basis stated in the Registration Statement, the
information set forth therein. The pro forma consolidated statements of
income and balance sheet set forth in the Prospectus under the caption
"Unaudited Pro Forma Consolidated Financial Information" fairly presents in
all material respects the information shown therein, has been prepared in
all material respects in accordance with the Commission's rules and
guidelines with respect to pro forma information, have been properly
compiled on the pro forma basis described therein, and, in the opinion of
the Company, the assumptions used in the preparation thereof are reasonable
and the adjustments used therein are appropriate under the circumstances.
No financial statements other than those included in the Registration
Statement are required by Form S-1 or otherwise under the Act to be
included in the Registration Statement or the Prospectus.
(x) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged; the Company
has not been refused any insurance coverage sought or applied for; and the
Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or operations
of the Company, except as described in or contemplated by the Prospectus.
(xi) Arthur Andersen LLP, who have certified the consolidated
financial statements of the Company, and the
6
<PAGE>
related schedule included in the Registration Statement, are, and during
the periods covered by their reports included in the Registration Statement
were, independent public accountants with respect to the Company as
required by the Act and the applicable rules and regulations thereunder.
(xii) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware. The
Company is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business makes
such qualification necessary, except for those failures to be so qualified
or in good standing that will not in the aggregate have a material adverse
effect on the Company. The Company has all requisite power and authority,
and all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and operate
its properties and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus, except for
those consents, approvals, authorizations, orders, registrations,
qualifications, licenses or permits the failure of which to hold will not,
in the aggregate, have a material adverse effect on the Company.
(xiii) None of the Company's subsidiaries, considered in the
aggregate as a single subsidiary, would constitute a significant subsidiary
as defined in Rule 1-02(w) of Regulation S-X under the Act.
(xiv) As of the date of this Agreement, the Company has an authorized
and outstanding capitalization as set forth under the heading "Pro Forma"
beneath the caption "Capitalization" in the Prospectus and immediately
following the purchase of the Underwritten Securities hereunder, the
Company will have an authorized and outstanding capitalization as set forth
under the heading "Pro Forma As Adjusted" beneath the caption
"Capitalization" in the Prospectus; the issued shares of Common Stock of
the Company conform in all material respects to the description thereof in
the Prospectus under the caption "Description of Capital Stock and
Corporate Charter" and have been duly authorized and validly issued and are
fully paid and nonassessable and
7
<PAGE>
were not issued in violation of or subject to any preemptive rights; on the
Closing Date, the stockholders of the Company will have no preemptive
rights with respect to any shares of capital stock of the Company; and, as
of the Execution Time, all outstanding shares of the Company are owned
directly by the Selling Stockholder. There is no commitment, plan or
arrangement to issue, and no outstanding option, warrant, or other right
calling for the issuance of, any share of capital stock of the Company, or
any security or other instrument which by its terms is convertible into or
exercisable or exchangeable for capital stock of the Company, except as
described in the Prospectus. Except as described in the Prospectus, there
is outstanding no security or other instrument which by its terms is
convertible into or exercisable or exchangeable for capital stock of the
Company. The Securities to be sold by the Company to the Underwriters
hereunder, when delivered and sold in accordance with this Agreement, will
be duly and validly issued and outstanding, fully paid and nonassessable,
and will not have been issued in violation of or subject to any preemptive
rights.
(xv) Except as described in the Prospectus, to the knowledge of the
Company and the Selling Stockholder there are no legal or governmental
proceedings or other actions, suits, proceedings or investigations pending
before any court or before or by any public, regulatory or governmental
agency or body (including, without limitation, any state regulatory agency,
board or department) to which the Company is a party or of which any
property of the Company is the subject, which, if determined adversely to
the Company would have a material adverse effect on the Company or the
Offering; and to the knowledge of the Company and the Selling Stockholder,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(xvi) The Company has the full corporate power and authority to enter
into this Agreement and to perform the obligations to be performed by it
hereunder and this Agreement has been duly and validly authorized, executed
and delivered by the Company.
(xvii) The Company has good and marketable title in fee simple
absolute to all real properties and good title to all other properties and
assets that the Prospectus indicates are owned by it, free and clear of all
liens, security interests, pledges, charges, encumbrances and
8
<PAGE>
mortgages (except as described in the Prospectus or such as in the
aggregate do not now have and will not in the future have a material
adverse effect on the Company or the Offering).
(xviii) The Company has filed all necessary federal and state income
and franchise tax returns and has paid all taxes shown as due thereon, and
there is no tax deficiency that has been asserted against the Company or
any of its properties or assets that could reasonably be expected to have a
material adverse effect on the Company.
(xix) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement or otherwise.
(xx) The Securities have been approved for quotation on the Nasdaq
National Market subject to notice of issuance or sale, as the case may be.
(xxi) To the knowledge of the Company and the Selling Stockholder and
except as would not, individually or in the aggregate, have a material
adverse effect on the Company (a) the Company is not in violation of any
Federal, state or local laws and regulations relating to pollution
(including regulations relating to noise) or protection of human health or
the environmental (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata), including, without
limitation, laws and regulations relating to emissions, discharges,
releases or threatened releases of toxic or hazardous substances, materials
or wastes, or petroleum and petroleum products ("Materials of Environmental
Concern"), or otherwise relating to the storage, disposal, transport or
handling of Materials of Environmental Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations issued
in respect of any Environmental Laws; (b) the Company has not received any
communication (written or oral), whether from a governmental authority or
otherwise, alleging any such violation or noncompliance; and (c) there is
no pending or threatened claim, action, investigation or notice (written or
oral) by any person or entity alleging potential liability for
investigatory, cleanup, or governmental response costs, or natural
resources or property damages, or personal
9
<PAGE>
injuries, attorneys' fees or penalties relating to (x) the presence, or
release into the environment, of any Material of Environmental Concern at
any location owned or operated by the Company, now or in the past, or (y)
circumstances forming the basis of any violation, or alleged violation, of
any Environmental Law.
(xxii) The Company is not involved in any labor dispute nor, to the
knowledge of the Company and the Selling Stockholder, is any labor dispute
with respect to the Company imminent, other than routine disciplinary and
grievance matters, which would have a material adverse effect on the
Company.
(xxiii) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Act and the rules and regulations
thereunder), has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or otherwise in stabilization or manipulation of the
price of any security of the Company, to facilitate the sale or resale of
the Securities.
(xxiv) The Company is not an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940, as amended.
(xxv) The Company is in compliance with Florida blue sky law relating
to disclosure of issuers doing business with Cuba. The Company is not
currently doing business with the government of Cuba or with any person or
affiliate located in Cuba and the Company will notify the Florida
Department of Banking and Finance, Division of Securities and Investor
Protection, if the Company commences doing business with the government of
Cuba or any person or affiliate located in Cuba.
(b) The Selling Stockholder represents and warrants to, and agrees with,
each Underwriter that:
(i) The Selling Stockholder has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware.
(ii) The Selling Stockholder, on the Closing Date, will have good
title to the Securities to be sold and delivered by it hereunder and upon
sale and delivery of,
10
<PAGE>
and payment for, such Securities, as provided herein, the Selling
Stockholder will convey good title to such Securities, free and clear of
all liens, encumbrances, pledges, equities and claims whatsoever.
(iii) The Selling Stockholder has the full corporate power and
authority to enter into and deliver this Agreement, to sell and deliver the
Securities to be sold and delivered by it hereunder and to otherwise
perform the obligations to be performed by it hereunder, and this Agreement
has been duly and validly authorized, executed and delivered by the Selling
Stockholder.
(iv) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Exchange
Act or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities
and has not effected any sales of shares of Common Stock which, if effected
by the Company, would be required to be disclosed in response to Item 701
of Regulation S-K.
(v) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution and delivery by
the Selling Stockholder of this Agreement and for the consummation by such
Selling Stockholder of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required by the
National Association of Securities Dealers, Inc. or under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters and such other approvals as have been
obtained.
(vi) None of the sale of the Securities being sold by the Selling
Stockholder, the execution and delivery by the Selling Stockholder of this
Agreement nor the consummation of any other of the transactions
contemplated herein by the Selling Stockholder or the fulfillment of the
terms hereof by the Selling Stockholder will conflict with, result in a
breach of, or constitute a default under, the certificate of incorporation
or by-laws of the Selling Stockholder, or the terms of any indenture or
other material agreement or instrument to which the Selling Stockholder is
a party or bound, or any order or regulation applicable to the Selling
Stockholder of any court, regulatory body,
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administrative agency, governmental body or arbitrator having jurisdiction
over the Selling Stockholder.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
and the Selling Stockholder agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to purchase
from the Company and the Selling Stockholder, at a purchase price of
$[__________] per share, the amount of the Underwritten Securities set forth
opposite such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Selling Stockholder hereby
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 390,000 shares of the Option Securities, all at the same purchase
price per share as the Underwriters shall pay for the Underwritten Securities.
Said option may be exercised only to cover over-allotments in the sale of the
Underwritten Securities by the Underwriters. Said option may be exercised in
whole or in part at any time (but not more than once) on or before the 30th day
after the date of the Prospectus upon written or facsimile notice by the
Representatives to the Company and the Selling Stockholder setting forth the
number of shares of the Option Securities as to which the several Underwriters
are exercising the option and the settlement date. Delivery of certificates for
the shares of Option Securities by the Selling Stockholder, and payment therefor
to the Selling Stockholder, shall be made as provided in Section 3 hereof. The
number of shares of the Option Securities to be purchased by each Underwriter
shall be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Securities, subject to such adjustments as you in
your absolute discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the second business day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on [ ],
1996, or such later date (not later than [ ], 1996) as the
Representatives shall designate, which date and time may be postponed by
agreement among the Representatives, the Company and the Selling Stockholder or
as provided in Section 9 hereof (such date and time of delivery and payment for
the Securities being herein called the "Closing Date"). Delivery of the
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several
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Underwriters through the Representatives of the aggregate purchase price of the
Securities being sold by the Company and the Selling Stockholder to or upon the
order of the Company and the Selling Stockholder, by wire transfer of
immediately available funds. Delivery of the Underwritten Securities and the
Option Securities shall be made at such location as the Representatives shall
reasonably designate at least one business day in advance of the Closing Date
and the closing of the sale of the Underwritten Securities shall occur at the
offices of Sidley & Austin, One First National Plaza, Chicago, Illinois.
Certificates for the Securities shall be registered in such names and in such
denominations as the Representatives may request not less than two full business
days in advance of the Closing Date.
The Company and the Selling Stockholder agree to have the Securities
available for inspection, checking and packaging by the Representatives in New
York, New York, not later than 1:00 PM on the business day prior to the Closing
Date.
The Selling Stockholder will pay all applicable state transfer taxes, if
any, involved in the transfer to the several Underwriters of the Securities to
be purchased by them from the Selling Stockholder and the respective
Underwriters will pay any additional stock transfer taxes involved in further
transfers.
If the option provided for in Section 2(b) hereof is exercised after the
second business day prior to the Closing Date, the Selling Stockholder will
deliver (at the expense of the Selling Stockholder) to the Representatives, at
such location as the Representatives shall reasonably designate, on the date
specified by the Representatives (which shall be within three business days
after exercise of said option), certificates for the Option Securities in such
names and denominations as the Representatives shall have requested against
payment of the purchase price therefore to or upon the order of the Selling
Stockholder by wire transfer of immediately available funds. If settlement for
the Option Securities occurs after the Closing Date, the Company and the Selling
Stockholder will deliver to the Representatives on the settlement date for the
Option Securities, and the obligation of the Underwriters to purchase the Option
Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof and all
references in this Agreement to "Closing Date" shall be deemed to be a reference
to such settlement date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
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5. Agreements.
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the Execution
Time, to become effective. Prior to the termination of the Offering, the
Company will not file any amendment of the Registration Statement or
supplement to the Prospectus without your prior consent. Subject to the
foregoing sentence, if the Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Prospectus is otherwise
required under Rule 424(b), the Company will file the Prospectus, properly
completed, pursuant to Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to the Representatives of such timely
filing. The Company will promptly advise the Representatives (A) when the
Registration Statement shall have become effective, (B) when the
Prospectus, and any supplement thereto, shall have been filed (if required)
with the Commission pursuant to Rule 424(b), (C) when, prior to the
termination of the Offering, any amendment to the Registration Statement
shall have been filed or become effective, (D) of any request by the
Commission for any amendment of the Registration Statement or supplement to
the Prospectus or for any additional information, (E) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding
for that purpose and (F) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose. The Company will use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, or if it shall be
necessary to supplement the Prospectus to comply with the Act or the
14
<PAGE>
rules and regulations thereunder, the Company promptly will prepare and
file with the Commission, subject to paragraph (a) of this Section 5, an
amendment or supplement which will correct such statement or omission or
effect such compliance.
(iii) As soon as practicable, the Company will, make generally
available to its security holders and to the Representatives an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the
Act.
(iv) The Company will furnish to the Representatives and counsel for
the Underwriters, without charge, four (4) signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Act, as many copies of the
Prospectus and each Preliminary Prospectus and any supplements thereto as
the Representatives may reasonably request. The Company will furnish or
cause to be furnished to the Representatives copies of all reports on Form
SR required by Rule 463 under the Act.
(v) The Company will arrange for the qualification of the Securities
for sale under the laws of such jurisdictions as the Representatives may
designate and will maintain such qualifications in effect so long as
required for the distribution of the Securities; provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in
any jurisdiction or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. The
Company will also pay the fee of the National Association of Securities
Dealers, Inc., in connection with its review of the Offering.
(vi) The Company and the Selling Stockholder agree, severally and not
jointly, to not, for a period of 180 days following the Execution Time,
without the prior written consent of Salomon Brothers Inc, on behalf of the
Underwriters, offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce the offering of, any other shares of
Common Stock or any securities convertible into, or exercisable or
15
<PAGE>
exchangeable for, shares of Common Stock; provided, however, that (A) the
Company may issue and sell Common Stock, or securities convertible into, or
exercisable or exchangeable for, shares of Common Stock, pursuant to the
Company's 1996 Stock Incentive Plan or 1996 Broad-Based Employee Stock
Plan, which are described in the Prospectus, and the Company may issue
Common Stock issuable upon the conversion, exercise or exchange of
securities that have been granted as of the date of the Prospectus under
the 1996 Stock Incentive Plan or 1996 Broad-Based Employee Stock Plan and
(B) the Selling Stockholder may sell any or all of the Option Securities in
accordance with the terms of this Agreement.
(vii) To the extent required by law, the Company will furnish to its
stockholders annual reports containing financial statements certified by
independent public accountants and with quarterly summary financial
information in reasonable detail which may be unaudited. During the period
of five years from the date hereof, the Company will promptly deliver to
the Representatives and, upon request, to each of the other Underwriters,
(A) copies of each annual report of the Company containing financial
statements certified by independent public accountants and each other
report furnished by the Company to its stockholders, (B) as soon as they
are available, copies of any other reports (financial or other) that the
Company shall publish or otherwise make available to any of its security
holders as such, and (C) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the Commission
or any national securities exchange.
(viii) The Company will use its best efforts to obtain and maintain
the quotation of the Securities to be sold hereunder on the Nasdaq National
Market, unless the Company's Board of Directors determines otherwise.
(ix) The Company will promptly deliver to the Representatives copies
of all correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Securities under the
Act.
(x) The Company will not become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
16
<PAGE>
(xi) Prior to the Closing Date, the Company will issue no press
release or other communication directly or indirectly and hold no press
conference with respect to the Company, or with respect to the condition,
results of operations, business, properties, assets or liabilities of the
Company, or the Offering, without your prior consent, which consent shall
not be unreasonably withheld.
(xii) To document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, the Company agrees to deliver to you prior to or at the
Closing Date a properly completed and executed United States Treasury
Department Form W-9 of the Selling Stockholder (or other applicable
form or statement specified by Treasury Department regulations in lieu
thereof).
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholder contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholder made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholder of their respective obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement shall have become effective not later than
(i) 6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM New York City time on the
business day following the day on which the public offering price was
determined, if such determination occurred after 3:00 PM New York City time
on such date; if filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b), the Prospectus shall have been filed in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted
or threatened.
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<PAGE>
(b) The Company and the Selling Stockholder shall have furnished to the
Representatives the opinion of Sidley & Austin, counsel for the Company and the
Selling Stockholder, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with full corporate power and authority to own its properties and conduct
its business as described in the Registration Statement and the Prospectus,
to execute and deliver this Agreement and to perform the obligations to be
performed by it hereunder;
(ii) this Agreement has been duly authorized, executed and delivered
by the Company;
(iii) the authorized capital stock of the Company is as set forth in
the Prospectus under the heading "Capitalization";
(iv) (A) the Securities being sold by the Company have been duly and
validly authorized and, when issued and delivered in accordance with the
terms of this Agreement, will be fully paid and non-assessable and (B)
except as described in the Prospectus and to the knowledge of such counsel,
there are no outstanding rights, subscriptions, warrants, calls,
registration rights, preemptive rights, options or other arrangements of
any kind with respect to the capital stock of the Company;
(v) the capital stock of the Company, including the Securities,
conforms in all material respects to the description thereof contained in
the Registration Statement and the Prospectus under the caption
"Description of Capital Stock and Corporate Charter;" and the certificates
for the Securities are in due and proper form;
(vi) all consents, approvals, authorizations or orders of, or filings
with, any court or governmental agency or body required in connection with
consummation by the Company of the transactions contemplated in this
Agreement have been obtained, except such counsel need express no opinion
as to any necessary qualification in connection with the purchase and
distribution of the Securities by the Underwriters (A) under the securities
18
<PAGE>
or blue sky laws of any jurisdiction; or (B) with the National Association
of Securities Dealers, Inc.;
(vii) neither the execution, delivery and performance of this
Agreement by the Company, nor the consummation by the Company of the
transactions contemplated hereby, will conflict with or result in any
breach of, or constitute a default under (or constitute any event which
with notice, lapse of time, or both, would constitute a breach of or
default under), any provisions of the certificate of incorporation or by-
laws of the Company;
(viii) the statements in the Registration Statement under the captions
"Risk Factors - Antitakeover Matters," "Management - Employment Agreements
and -Stock Plans," "Relationship with R.R. Donnelley," "Shares Eligible for
Future Sale" and "Description of Capital Stock and Corporate Charter," in
each case, insofar as such statements constitute summaries of the legal
matters or documents described therein, fairly summarize in all material
respects the matters purported to be summarized;
(ix) the Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) have been made in the manner and within the time
period required by Rule 424(b); to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or
threatened; and the Registration Statement and the Prospectus (and any
supplements thereto) (other than the financial statements and schedule and
other financial and statistical information contained therein as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations thereunder;
(x) to the knowledge of such counsel, there are no contracts,
licenses, agreements, leases or documents of a character which are required
to be filed as exhibits to the Registration Statement or to be described in
the Prospectus which have not been so filed or described;
(xi) the Company is not an "investment company" or a person
"controlled by" an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
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<PAGE>
(xii) the Selling Stockholder has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware;
(xiii) the delivery by the Selling Stockholder to the several
Underwriters of the certificate or certificates for the Securities being
sold hereunder by the Selling Stockholder against payment therefor as
provided herein will convey good title to such Securities to the several
Underwriters, free and clear of all liens, encumbrances, equities and
claims whatsoever (assuming the Underwriters are purchasing such Securities
in good faith and without knowledge of any such lien, encumbrance, equity
or claim);
(xiv) all consents, approvals, authorizations or orders of, or
filings with, any court or government agency or body required in connection
with the consummation by the Selling Stockholder of the transactions
contemplated in this Agreement have been obtained, except such counsel need
express no opinion as to the necessity of receiving any qualification under
(A) the securities or blue sky laws of any jurisdiction in connection with
the purchase and distribution of the securities by the Underwriters or (B)
from the National Association of Securities Dealers, Inc.;
(xv) neither the execution, delivery and performance of this
Agreement by the Selling Stockholder, nor the consummation by the Selling
Stockholder of the transactions contemplated hereby will conflict with,
result in a breach of, or constitute a default under, the certificate of
incorporation or by-laws of the Selling Stockholder.
In addition, such counsel shall state that in the course of the preparation
of the Registration Statement and the Prospectus, such counsel has considered
the information set forth therein in light of the matters required to be set
forth therein and that such counsel has participated in conferences with
officers and representatives of the Selling Stockholder and the Company,
including the Company's independent public accountants, and representatives of
and counsel for the Underwriters, during the course of which the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel shall not have independently checked the accuracy or
completeness of, or otherwise verified, and accordingly are not passing upon,
and shall not assume responsibility for, the accuracy,
20
<PAGE>
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus, and, except as set forth in paragraphs (v) and
(viii) above, and has relied as to factual aspects of materiality, to the extent
it may reasonably do so in the discharge of its professional responsibility,
upon the judgment of officers and representatives of the Company and the Selling
Stockholder; however, as a result of such consideration and participation,
nothing has come to the attention of such counsel which causes such counsel to
believe that the Registration Statement, as of the time the Registration
Statement became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein, or necessary to
make the statements therein not misleading or that the Prospectus, as of its
date or the date of such opinion, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (except in each case such counsel need express no
comment with respect to the financial statements and schedule and other
financial and statistical data included in the Registration Statement or the
Prospectus or statements made in the exhibits to the Registration Statement).
In rendering such opinion, such counsel may (A) state that such opinion is
limited to the laws of the States of Illinois and New York, the Federal laws of
the United States and the Delaware General Corporation Law, and (B) as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company, the Selling Stockholder and public officials.
(c) The Company and the Selling Stockholder shall have furnished to the
Representatives the opinion of Monica M. Fohrman, Vice President, Law and
Assistant General Counsel of the Selling Stockholder, dated the Closing Date, to
the effect that:
(i) the Company is duly qualified or licensed to do business as a
foreign corporation by, and is in good standing in, each jurisdiction in
which its ownership, leasing, licensing or use of property and assets or
the conduct of its business makes such qualification necessary, except in
those jurisdictions where the failure, individually or in the aggregate, to
be so licensed or qualified or in good standing would not have a material
adverse effect on the Company;
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<PAGE>
(ii) to the knowledge of such counsel, neither the execution,
delivery and performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated hereby will
conflict with or result in any breach of, or constitute a default under (or
constitute any event which with notice, lapse of time, or both, would
constitute a breach of or default under), any provision of any indenture,
mortgage, deed or trust, credit agreement or other material agreement or
instrument to which the Company is a party or by which the Company or its
properties may be bound or affected, or, to the knowledge of such counsel,
under any federal, state, local or foreign law, rule, regulation, judgment,
order or decree applicable to the Company, except for any conflict, breach
or default that would not have a material adverse effect on the Company or
the Offering;
(iii) except as described in the Prospectus, to the knowledge of such
counsel, there are no proceedings or other actions, suits or investigations
pending before any court or before or by any public, regulatory or
government agency or body, or, to the knowledge of such counsel, threatened
against the Company or any of its properties, of a character that are
required to be described in the Registration Statement and the Prospectus
but are not so described or which, if determined adversely to the Company,
could have a material adverse effect on the Company;
(iv) this Agreement has been duly authorized, executed and delivered
by the Selling Stockholder, and the Selling Stockholder has the corporate
power and authority to sell, transfer and deliver in the manner provided in
this Agreement the Securities being sold by it hereunder;
(v) to the knowledge of such counsel, none of the execution, delivery
and performance of this Agreement by the Selling Stockholder, the sale of
the Securities being sold by the Selling Stockholder nor the consummation
of any other of the transactions contemplated in this Agreement by the
Selling Stockholder or the fulfillment of the terms hereof by the Selling
Stockholder will conflict with, result in a breach of, or constitute a
default under, the terms of any indenture or other material agreement or
instrument to which the Selling Stockholder is a party or bound, or, to the
knowledge of such counsel, any order or regulation applicable to the
Selling Stockholder of any court, regulatory body,
22
<PAGE>
administrative agent, governmental body or arbitrator having jurisdiction
over the Selling Stockholder.
In addition, such counsel shall state that in the course of the preparation
of the Registration Statement and the Prospectus, such counsel has considered
the information set forth therein in light of the matters required to be set
forth therein and that such counsel has participated in conferences with
officers and representatives of the Selling Stockholder and the Company,
including the Company's independent public accountants, and representatives of
and counsel for the Underwriters, during the course of which the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel shall not have independently checked the accuracy or
completeness of, or otherwise verified, and accordingly is not passing upon, and
shall not assume responsibility for, the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the Prospectus, and
has relied as to factual aspects of materiality, to the extent she may
reasonably do so in the discharge of her professional responsibility, upon the
judgment of officers and representatives of the Company and the Selling
Stockholder; however, as a result of such consideration and participation,
nothing has come to the attention of such counsel which causes such counsel to
believe that the Registration Statement, as of the time the Registration
Statement became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein, or necessary to
make the statements therein not misleading or that the Prospectus, as of its
date or the date of such opinion, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (except in each case such counsel need express no
comment with respect to the financial statements and schedule and other
financial and statistical data included in the Registration Statement or the
Prospectus or statements made in the exhibits to the Registration Statement).
In rendering such opinion, such counsel may (A) state that such opinion is
limited to the laws of the States of Illinois, the Federal laws of the United
States and the Delaware General Corporation Law, and (B) as to matters of fact,
to the extent such counsel deems proper, on certificates of responsible officers
of the Company and the Selling Stockholder and public officials.
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<PAGE>
(d) The Representatives shall have received from Winston & Strawn, counsel
for the Underwriters, such opinion or opinions, dated the Closing Date, with
respect to the issuance and sale of the Securities, the Registration Statement,
the Prospectus and other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(e) The Company shall have furnished to the Representatives a certificate
of the Company, signed on behalf of the Company by the chief executive officer
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct on and as of the Closing Date with the same
effect as if made on the Closing Date and the Company has complied with all
the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) subsequent to the date of the most recent financial statements
included in the Registration Statement and the Prospectus (exclusive of any
supplement thereto), and except as set forth or contemplated in the
Prospectus (exclusive of any supplement thereto), (A) the Company has not
incurred any material liabilities or obligations, direct or contingent, nor
entered into any material transactions not in the ordinary course of
business, and (B) there has not been any material adverse change in the
condition (financial or otherwise), earnings, business or operations of the
Company, or any change in the capital stock or material increase in the
long-term debt or advances due to related party of the Company.
(f) The Selling Stockholder shall have furnished to the Representatives a
certificate of the Selling Stockholder, signed on behalf of the Selling
Stockholder by an executive
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officer of the Selling Stockholder dated the Closing Date, to the effect that
the signer of such certificate has carefully examined the Registration
Statement, the Prospectus, any supplement to the Prospectus and this Agreement
and that the representations and warranties of the Selling Stockholder in this
Agreement are true and correct on and as of the Closing Date with the same
effect as if made on the Closing Date;
(g) At the Execution Time and at the Closing Date, Arthur Andersen LLP
shall have furnished to the Representatives a letter or letters, dated
respectively as of the date of this Agreement and as of the Closing Date, in
form and substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the applicable
published rules and regulations thereunder and stating in effect that:
(i) in their opinion the audited financial statements and financial
statement schedule included in the Registration Statement and the
Prospectus and reported on by them comply in form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company; their limited review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited interim financial information
for the six-month period ended June 30, 1996, and as at June 30, 1996;
carrying out certain specified procedures (but not an audit in accordance
with generally accepted auditing standards) which would not necessarily
reveal matters of significance with respect to the comments set forth in
such letter; a reading of the minutes of the meetings of the stockholders
and directors of the Company; and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters of the
Company, as to transactions and events subsequent to December 31, 1995,
nothing came to their attention which caused them to believe that:
(1) the unaudited financial statements included in the
Registration Statement and the Prospectus do not comply in form in all
material respects with applicable accounting requirements of the Act
and with the published rules and regulations of the Commission with
respect to
25
<PAGE>
registration statements on Form S-1; and said unaudited financial
statements are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration
Statement and the Prospectus; and
(2) with respect to the period subsequent to June 30, 1996,
there were any changes, at a specified date not more than five
business days prior to the date of the letter, in the long-term debt
or advances to related parties of the Company or preferred or common
stock of the Company or decreases in the shareholder's investment in
the Company as compared with the amounts shown on the June 30, 1996
consolidated balance sheet included in the Registration Statement and
the Prospectus, or for the period from July 1, 1996 to such specified
date there were any decreases, as compared with the corresponding
period in the preceding year, in revenues or earnings (loss) from
operations or in total or per share amounts of net income (loss)(for
both primary earnings and fully diluted earnings) of the Company,
except in all instances for changes or decreases set forth in such
letter, in which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof unless said
explanation is not deemed necessary by the Representatives;
(iii) on the basis of reading the unaudited pro forma financial
statement data included in the Registration Statement and the Prospectus,
carrying out specified procedures, inquiries of certain officials of the
Company who have responsibility for financial and accounting matters, and
proving the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the pro forma financial statement
data, nothing came to their attention which caused them to believe that the
pro forma financial statement data does not comply in form in all material
respects with the applicable accounting requirements of Rule 11-02 of
Regulation S-X under the Act or that the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of such
statements; and
26
<PAGE>
(iv) they have performed certain other specified procedures as a
result of which they determined that certain information specified by the
Representatives of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived from
the general accounting records of the Company) set forth in the
Registration Statement and the Prospectus agrees with the accounting
records of the Company, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (g) include any supplements
thereto at the date of the letter.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall not have been (i) any
change or decrease specified in the letter or letters referred to in paragraph
(g) of this Section 6 or (ii) any change, or any development involving a
prospective change, in or affecting the business or properties of the Company
the effect of which, in any case referred to in clause (i) or (ii) above, is, in
the judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or delivery of
the Securities as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto).
(i) At the Execution Time, the Company shall have furnished to the
Representatives a letter from each executive officer and director of the Company
addressed to the Representatives, in which each such person agrees not to offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly, or
announce an offering of, any shares of Common Stock beneficially owned by such
person or any securities convertible into, or exercisable or exchangeable for,
shares of Common Stock for a period of 180 days following the Execution Time
without the prior written consent of Salomon Brothers Inc, on behalf of the
Underwriters, other than shares of Common Stock disposed of as bona fide gifts.
(j) Prior to the Closing Date, the Company and the Selling Stockholder
shall have furnished to the Representatives such further information,
certificates and documents as the Representatives may reasonably request.
27
<PAGE>
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and its counsel, this Agreement and all
obligation of the Underwriters hereunder may be canceled at, or at any time
prior to, the Closing Date by the Representatives. Notice of such cancellation
shall be given to the Company in writing or by telephone or telegraph confirmed
in writing.
7. Expenses; Reimbursement of Underwriters' Expenses.
-------------------------------------------------
(a) The Company and the Selling Stockholder covenant and agree with
one another and with the several Underwriters that the Company will be
liable for the payment of and will pay or cause to be paid the following:
(i) the fees, disbursements and expenses of the Company's counsel and
accountants and the Selling Stockholder's counsel in connection with the
registration of the Securities under the Act and the sale of the Securities
and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost
of printing, producing or distributing this Agreement, the Blue Sky
Memorandum and any other documents in connection with the offering,
purchase, sale and delivery of the Securities; (iii) all expenses in
connection with the qualification of the Securities for offering and sale
under state securities laws as provided in Section 5(a)(v) hereof,
including the fees and disbursements of counsel for the Underwriters in
connection with such qualification; (iv) all expenses in connection with
authorizing the Securities for trading on the Nasdaq National Market; (v)
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the
Securities, including the fees and disbursements of counsel for the
Underwriters in connection therewith; (vi) the cost of preparing stock
certificates; (vii) the cost and charges of any transfer agent or
registrar; and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise
specifically provided for in this Section.
(b) If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters
set forth in Section 6 hereof is not
28
<PAGE>
satisfied, because of any termination pursuant to Section 10 hereof or
because of any refusal, inability or failure on the part of the Company or
the Selling Stockholder to perform any agreement herein or comply with any
provision hereof other than by reason of a default by any of the
Underwriters, the Company and the Selling Stockholder, jointly and
severally, agree to reimburse the Underwriters severally upon demand for
all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities.
8. Indemnification and Contribution.
--------------------------------
(a) The Company and the Selling Stockholder, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person who
controls any Underwriter within the meaning of the Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or
any of them may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement for the registration of the Securities as originally filed or in
any amendment thereof, or in any Preliminary Prospectus or the Prospectus,
or in any amendment thereof or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified
party, as incurred, for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that (i) neither the
Company nor the Selling Stockholder will be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives specifically for
inclusion therein, and (ii) such indemnity with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) from whom the person asserting any such loss,
claim, damage or liability purchased the Securities which are the subject
thereof if such person did not receive a copy of
29
<PAGE>
the Prospectus (or the Prospectus as supplemented) at or prior to the
confirmation of the sale of such Securities to such person in any case
where such delivery is required by the Act and the untrue statement or
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as supplemented) included in
the Registration Statement at the time it was declared effective by the
Commission and it is finally judicially determined that such delivery was
required to be made under the Act and was not so made. This indemnity
agreement will be in addition to any liability which the Company and the
Selling Stockholder may otherwise have.
Without limiting the full extent of the Company's agreement to
indemnify each Underwriter, as herein provided, the Selling Stockholder
shall be liable under the indemnity agreements contained in paragraph (a)
of this Section 8 only for an amount not exceeding the sum of (i) the
proceeds received by the Selling Stockholder from the sale of Shares
hereunder and (ii) the aggregate amount of proceeds paid or payable by the
Company to the Selling Stockholder, or any affiliate thereof, as
contemplated in the Prospectus.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of the Act and the Selling Stockholder, to the same extent as the
foregoing indemnity from the Company and the Selling Stockholder to each
Underwriter, but only with reference to written information relating to
such Underwriter furnished to the Company by or on behalf of such
Underwriter through the Representatives specifically for inclusion in the
preparation of the documents referred to in the foregoing indemnity. This
indemnity agreement will be in addition to any liability which any
Underwriter may otherwise have. The Company and the Selling Stockholder
acknowledge that the statements set forth in the last paragraph of the
cover page and under the heading "Underwriting" in the Prospectus and in
any Preliminary Prospectus constitute the only information furnished in
writing by or on behalf of the several Underwriters for inclusion in the
Registration Statement, and any amendment thereto, or the Prospectus or in
any Preliminary Prospectus, and you, as the Representatives, confirm that
such statements are correct.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is
30
<PAGE>
to be made against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof,
the indemni fying party will be entitled to appoint counsel satisfactory to
such indemnified party to represent the indemnified party in such action;
provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available
to it and/or other indemnified parties that are different from or
additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to defend such action on behalf of
such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to appoint
counsel to defend such action and approval by the indemnified party of such
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently in
curred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses
of more than one separate counsel (plus any local counsel) approved by the
Representatives in the case of paragraph (a) of this Section 8,
representing the indemnified parties under such paragraph (a) who are
parties to such action), (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized
the employment of counsel for the indemnified party at the expense of the
indemnifying party; and except that, if clause (i) or (iii) is applicable,
such liability shall be only in respect of the counsel referred to in such
clause (i) or (iii).
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Selling Stockholder,
jointly and severally, and the Underwriters agree to contribute to the
aggregate losses, claims, damages and liabilities (including
31
<PAGE>
legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the
Company, the Selling Stockholder and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholder on the one
hand and by the Underwriters on the other from the offering of the
Securities; provided, however, that in no case shall any Underwriter
(except as may be provided in any agreement among underwriters relating to
the offering of the Securities) be responsible for any amount in excess of
the underwriting discount or commission applicable to the Securities
purchased by such Underwriter hereunder. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, the Company
and the Selling Stockholder, jointly and severally, and the Underwriters
shall contribute in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and the
Selling Stockholder on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such Losses
as well as any other relevant equitable considerations. Benefits received
by the Company and the Selling Stockholder shall be deemed to be equal to
the total net proceeds from the Offering (before deducting expenses), and
benefits received by the Underwriters shall be deemed to be equal to the
total underwriting discount, in each case as set forth on the cover page of
the Prospectus. Relative fault shall be determined by reference to whether
any alleged untrue statement or omission relates to information provided by
the Company, the Selling Stockholder or the Underwriters. The Company, the
Selling Stockholder and the Underwriters agree that it would not be just
and equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 8, each person who controls an Underwriter within
the meaning of either the Act or the Exchange Act and each director,
officer, employee and agent of an Underwriter shall have the same rights to
contribution as such Underwriter, and each person who controls the Company
or the Selling Shareholder within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to
32
<PAGE>
contribution as the Company, subject in each case to the applicable terms
and conditions of this paragraph (d).
9. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Selling Stockholder or the Company. In the event of a default by any Underwriter
as set forth in this Section 9, the Closing Date shall be postponed for such
period, not exceeding seven days, as the Representatives shall determine in
order that the required changes in the Registration Statement and the Prospectus
or in any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability, if
any, to the Company, the Selling Stockholder and any nondefaulting Underwriter
for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in
the absolute discretion of the Representatives, by notice given to the Company
and the Selling Stockholder prior to delivery of and payment for the Securities,
if prior to such time (i) trading in the Company's Common Stock shall have been
suspended by the Commission or trading in securities generally on the New York
Stock Exchange or the Nasdaq National Market shall have been suspended or
limited or minimum prices shall have been established on either of such Exchange
or Market, (ii) a banking moratorium shall have been declared either by Federal
or New York State authorities or (iii) there shall have occurred any outbreak or
escalation of hostilities, declaration by the United States of a national
emergency or war or other calamity or crisis the effect of which on financial
markets is such as to make it, in the judgment of the Representatives,
impracticable to market the Securities.
33
<PAGE>
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of the Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
the Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, (a) if sent to the Representatives, will be
mailed, delivered or telegraphed and confirmed to them, care of Salomon Brothers
Inc, at Seven World Trade Center, New York, New York, 10048, Fax (212) 783-7000,
with a copy to Montgomery Securities, 600 Montgomery Street, San Francisco,
California 94111, Fax (415) 249-5802, J.P. Morgan Securities, Inc., 60 Wall
Street, New York, New York 10260-0060, Fax (212) 648-5951, and Robert F. Wall,
Esq., Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois 60601, Fax (312)
558-5700; or (b) if sent to the Company, will be mailed, delivered or
telegraphed and confirmed to it at Donnelley Enterprise Solutions Incorporated,
161 North Clark Street, Suite 2400, Chicago, Illinois 60601-3221, Fax (312) 419-
7668, attention: President, or if sent to the Selling Stockholder, will be
mailed, delivered or telegraphed and confirmed to it at R. R. Donnelley & Sons
Company, 77 West Wacker Drive, Chicago, Illinois 60601-1696, Fax (312) 326-7156,
attention: General Counsel, with a copy in each instance to Dennis V. Osimitz,
Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, Fax (312)
853-7036.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York.
[signature page follows]
34
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, the Selling Stockholder and the several Underwriters.
Very truly yours,
DONNELLEY ENTERPRISE SOLUTIONS
INCORPORATED
By:_____________________________
[TITLE]
R. R. DONNELLEY & SONS COMPANY
By:____________________________
[TITLE]
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc
Montgomery Securities
J.P. Morgan Securities Inc.
By: Salomon Brothers Inc
By:______________________________
Vice President
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
35
<PAGE>
SCHEDULE I
Number of Shares of
Underwritten Securities
Underwriters To Be Purchased
- ------------ -----------------------
Salomon Brothers Inc . . . . . . . .
Montgomery Securities . . . . . . .
J.P. Morgan Securities Inc. . . . .
---------
Total . . . . . . . . . . . . . . .
=========
<PAGE>
EXHIBIT 5.1
SIDLEY & AUSTIN
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
DALLAS One First National Plaza WASHINGTON, D.C.
------ Chicago, Illinois 60603 ------
LOS ANGELES Telephone 312 853 7000 LONDON
------ Facsimile 312 853 7036 ------
NEW YORK SINGAPORE
Founded 1866 ------
TOKYO
October 28, 1996
Donnelley Enterprise Solutions Incorporated
161 North Clark Street, Suite 2400
Chicago, Illinois 60601
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1 (File No. 333-10127)
(the "Registration Statement") filed by Donnelley Enterprise Solutions
Incorporated, a Delaware corporation (the "Company"), with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), on August 14, 1996, as amended by: Amendment No.
1 filed with the Commission on September 30, 1996; Amendment No. 2 filed with
the Commission on October 11, 1996; and Amendment No. 3 being filed with the
Commission on the date hereof (collectively, and as the same may be further
amended, the "Registration Statement"), relating to the registration of
2,990,000 shares of Common Stock, $.01 par value (the "Shares"), of the Company,
consisting of 1,855,000 Shares (the "Primary Shares") to be issued and sold by
the Company and 745,000 Shares (the "Secondary Shares") to be sold by R. R.
Donnelley & Sons Company, a Delaware corporation and the current sole
stockholder of the Company (the "Selling Stockholder).
We are familiar with the proceedings to date with respect to the proposed
sale of the Shares contemplated by the Registration Statement and have examined
such records, documents and questions of law, and satisfied ourselves as to such
matters of fact, as we have considered relevant and necessary as a basis for
this opinion.
1
<PAGE>
SIDLEY & AUSTIN CHICAGO
Donnelley Enterprise Solutions Incorporated
October 28, 1996
Page 2
Based on the foregoing, we are of the opinion that the Secondary Shares are
legally issued, fully paid and nonassessable; and the Primary Shares will be
legally issued, fully paid and nonassessable when (i) the Registration
Statement, as finally amended, shall have become effective under the Securities
Act; (ii) the Company's Board of Directors or a duly authorized committee
thereof shall have duly adopted final resolutions authorizing the issuance and
sale of the Primary Shares as contemplated by the Registration Statement; and
(iii) certificates representing the Primary Shares shall have been duly
executed, countersigned and registered and duly delivered to the purchasers
thereof against payment of the agreed consideration therefor.
We do not find it necessary for the purposes of this opinion to cover, and
accordingly we express no opinion as to, the application of the securities or
blue sky laws of the various states or the District of Columbia to the sale of
the Shares, as contemplated by the Registration Statement.
This opinion is limited to the General Corporation Law of the State of
Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our Firm included in or made a
part of the Registration Statement. In giving such consent, we do not thereby
admit that we are within the category of persons for whom consent is required by
Section 7 of the Securities Act or the related rules promulgated by the
Commission thereunder.
Very truly yours,
/s/ Sidley & Austin
2
<PAGE>
Exhibit 10.1
TRANSITION SERVICES AGREEMENT
TRANSITION SERVICES AGREEMENT dated as of October 25, 1996 (this
"Agreement") by and between R. R. Donnelley & Sons Company, a Delaware
corporation ("R.R. Donnelley"), and Donnelley Enterprise Solutions Incorporated,
a Delaware corporation (the "Company").
W I T N E S S E T H
WHEREAS, R.R. Donnelley is currently the owner of all outstanding shares of
common stock of the Company;
WHEREAS, the Company intends to make a public offering (the "Offering") of
shares of its common stock in a transaction that, upon closing of the Offering
(the "Closing Date"), will result in R.R. Donnelley owning less than a majority
of the outstanding shares of common stock of the Company;
WHEREAS, R.R. Donnelley has heretofore provided certain services to the
Company, and the Company desires that R.R. Donnelley continue to provide certain
services to the Company for a period of time following the Closing Date;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
Section 1. Definitions. The following terms have the meanings specified or
referred to in this Section 1 and shall be equally applicable to the singular
and plural forms.
"Affiliate" means, with respect to either the Company or R.R. Donnelley,
any individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust or unincorporated organization
which directly or indirectly controls, is controlled by or is under common
control with the Company or R.R. Donnelley, respectively. For the purposes of
this Agreement, the Company and its subsidiaries shall not be considered
Affiliates of R.R. Donnelley and R.R. Donnelley and its subsidiaries shall not
be considered Affiliates of the Company.
"Business" means the business of the Company and its subsidiaries as
conducted immediately prior to the Closing Date.
<PAGE>
"Cash Management Services" means those Services set forth under the heading
"Cash Management/Banking" in Exhibit 1 hereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expenses" has the meaning set forth in Section 11(a).
"Indemnifying Party" means a person who is obligated under this Agreement
to provide indemnification.
"Indemnitee" means a person who may seek indemnification under this
Agreement.
"Losses" has the meaning set forth in Section 11(a).
"Other Agreements" means the Tax Allocation and Indemnification Agreement
dated the date hereof between R.R. Donnelley and the Company and the Benefit
Administration Services Agreement dated the date hereof between R.R. Donnelley
and the Company.
"Other Company Indemnified Parties" shall mean and include (i) the
Company's Affiliates, (ii) the respective directors, officers, agents and
employees of and counsel to the Company and its Affiliates, (iii) each other
person, if any, controlling the Company or any of its Affiliates (other than
R.R. Donnelley) and (iv) the successors, assigns, heirs and personal
representatives of any of the foregoing.
"Other R.R. Donnelley Indemnified Parties" shall mean and include (i) R.R.
Donnelley's Affiliates, (ii) the respective directors, officers, agents and
employees of and counsel to R.R. Donnelley and its Affiliates, (iii) each other
person, if any, controlling R.R. Donnelley or any of its Affiliates and (iv) the
successors, assigns, heirs and personal representatives of any of the foregoing.
"person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization or a government or any
department or agency thereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Tax Services" means those Services set forth under the heading "Taxes" in
Exhibit 1 hereto.
-2-
<PAGE>
"Transition Period" means (i) for all Services other than Tax Services and
Cash Management Services the period commencing on the Closing Date and ending on
December 31, 1997, (ii) for Tax Services the period commencing on the Closing
Date and ending on January 31, 1998 and (iii) for Cash Management Services the
period commencing on the Closing Date and ending on March 31, 1997; unless the
Transition Period is extended as provided in Section 13(a).
Section 2. Performance of Services by R.R. Donnelley. (a) Subject to the
terms and conditions set forth herein, from the Closing Date hereof until the
end of the Transition Period, R.R. Donnelley shall provide and cause to be
provided to the Company and its subsidiaries, with respect to the Business, the
services described in Exhibit 1 hereto (the "Services"). Notwithstanding the
foregoing, at any time after the Closing Date, the Company may terminate from
time to time any category or categories of Services listed in Exhibit 1 by
identifying which category or categories of Services it elects to terminate by
written notice to R.R. Donnelley received by R.R. Donnelley at least 30 days
prior to the effective date of any such termination.
(b) Unless otherwise expressly agreed to in writing by the parties hereto,
the Services will be provided to the Company and its subsidiaries at a level and
in a manner consistent with the level at which such Services are currently
provided by R.R. Donnelley and its subsidiaries in connection with the operation
of the Business. Notwithstanding the foregoing, R.R. Donnelley shall have no
obligation to provide or cause to be provided any particular Service if R.R.
Donnelley reasonably determines that (i) due to any change in circumstances or
new developments affecting the Business after the date hereof, the provision of
all or any portion of such Service would unreasonably interfere with the conduct
of R.R. Donnelley's or any of its Affiliates' business activities or (ii) the
provision of the Services would cause R.R. Donnelley or any of its Affiliates to
be in violation of any software license or other similar agreement under which
R.R. Donnelley or any of its Affiliates is a party or otherwise bound. R.R.
Donnelley and the Company shall cooperate in planning the scope and timing of
the Services provided by R.R. Donnelley under this Agreement so as to lessen or
eliminate any such interference or violation, and R.R. Donnelley shall notify
the Company of any determination that it has made pursuant to the preceding
sentence and cooperate with the Company and its subsidiaries, to lessen
disruption that might occur to the Company by reason of R.R. Donnelley's not
providing a particular Service following such determination. Neither R.R.
Donnelley nor any of its Affiliates will be obligated to provide any services to
the Company and its subsidiaries (including, without limitation, the providing
of any financing or credit facility or
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the making of any guaranties), except to the extent described in this Section 2
or as provided in the Other Agreements.
(c) The Services shall be provided hereunder on an as needed basis in a
manner consistent with past practice; provided, that with respect to Services
not performed in the daily operations of the Business in the ordinary course
consistent with past practice, the Company shall specifically request such
services in writing. The Services shall be provided hereunder in a time frame
consistent with R.R. Donnelley's past practice and such that the Services
respond to new developments in a timely manner, consistent with R.R. Donnelley's
past practice. R.R. Donnelley and its Affiliates may reasonably supplement,
modify, substitute or otherwise alter the Services from time to time in a manner
consistent with supplements, modifications, substitutions or alterations made
with respect to similar services provided or otherwise made available by R.R.
Donnelley to its operating divisions or subsidiaries, so long as R.R. Donnelley
provides the Company with reasonable advance notice of such modifications,
substitutions or alterations, to enable the Company to obtain replacement
services therefor. R.R. Donnelley and its Affiliates shall include the Company
and its affected subsidiaries in planning the scope and timing of any such
supplement, modifica tion, substitution or alteration of Services so as to
lessen, to the extent practicable, the interference or disruption that might
occur by reason thereof.
(d) The Company and R.R. Donnelley acknowledge and agree that the scope and
duration of the Services may vary throughout the term of this Agreement,
provided, that the level at which any Services are provided hereunder shall not
increase materially except in accordance with Section 3(c). At any time, and
from time to time, during the term of this Agreement, the Company may, by
providing written notice to R.R. Donnelley, elect to reduce the scope and
duration of the any of the Services; provided, that except upon termination as
provided in the last sentence of Section 2(a), the fees referenced in Section
3(a) will not be adjusted as the result of such a reduction to Services.
Section 3. Payment for Services. (a) The fee to be paid by the Company to
R.R. Donnelley for each of the Services provided hereunder shall be the amount
listed in Exhibit 1 for each category; provided, that in the event the Company
terminates any group of Services listed in Exhibit 1, the fee for such Services
shall no longer be payable following the effective date of such termination. The
Company shall also pay to R.R. Donnelley any and all reasonable out-of-pocket
costs and expenses of R.R. Donnelley incurred for the services of outside
advisers and consultants provided in connection with the Services provided
hereunder consistent with past practice, provided that, except as
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contemplated in Exhibit 1, R.R. Donnelley will not engage any such advisor or
consultant without prior approval of the Company.
(b) R.R. Donnelley shall on a monthly basis submit to the Company for
payment its billing invoice setting forth the amount of fees for Services
rendered as described in subsection (a) above not theretofore paid by the
Company. Payment by the Company to R.R. Donnelley in respect of any such invoice
shall be made within 15 days after the date of receipt of such invoice; provided
that as long as the Services being provided by R.R. Donnelley include those
described on Exhibit 1 under Accounts Payable, the Company shall be deemed in
compliance with this sentence if it has authorized R.R. Donnelley to make such
payment within such 15 day period and funds sufficient to make such payment are
in the Company's accounts from which such payments are made.
(c) The Company acknowledges that time is of the essence with respect to
all payments under this Section and agrees to pay interest on the balance of any
amount payable hereunder unpaid when due at an annual rate of 15% from the date
an invoice with respect to which such payment obligation related was received by
the Company until the date of payment.
(d) In the event that the Company and its subsidiaries so expand their
operations during the Transition Period through the acquisition of new
businesses or companies, or growth in the Company's business materially
exceeding budgeted growth, that the services required by the Company and its
subsidiaries with respect to the Business exceed the scope or extent of the
Services provided hereunder, then R.R. Donnelley shall consider providing such
extra services, and to the extent R.R. Donnelley agrees to provide such
services, R.R. Donnelley and the Company shall negotiate in good faith an
adjustment to the fees payable pursuant to Section 3(a) which is proportionate
to the increase in the scope and extent of Services provided hereunder.
Section 4. Staffing Plans. Neither the Company nor any of its Affiliates
shall be precluded from obtaining any of the Services from providers other than
R.R. Donnelley; provided that the Company has given R.R. Donnelley not less than
30 days prior written notice of the discontinuance of such Services; and
provided that, except upon termination as set forth in the last sentence of
Section 2(a), the fees referenced in Section 3(a) will not be adjusted as the
result of Services being provided by third party providers. The Company shall
use reasonable efforts to keep R.R. Donnelley generally informed of its plans in
this regard in order for R.R. Donnelley to make any appropriate adjustments in
R.R. Donnelley's staffing and hiring plans.
Section 5. Disclaimer. Neither R.R. Donnelley nor any of its Affiliates
makes any representation or warranty, express
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or implied, as to whether the Services to be provided hereunder are sufficient
for the operation of the Business on or after the Closing Date, and neither R.R.
Donnelley nor any of its Affiliates nor any employees of R. R. Donnelley or any
of its Affiliates shall have any liability to the Company or its Affiliates for
the Services provided hereunder except to the extent caused by the gross
negligence or willful misconduct of R.R. Donnelley, its employees, agents,
assigns or Affiliates.
Section 6. Confidentiality. R.R. Donnelley agrees to hold, and to use
reasonable efforts commensurate with the nature of the information being
furnished to cause its employees, agents, Affiliates and representatives to
hold, in strict confidence all information (whether written or oral) concerning
the Company and its Affiliates which is in the possession of R.R. Donnelley or
its employees, agents, Affiliates or representatives as of the date hereof or is
hereafter furnished to or obtained by R.R. Donnelley or its employees, agents,
Affiliates or representatives in the course of providing the Services
contemplated hereby to the Company and its Affiliates and which, in any case, is
marked "Confidential" (except to the extent that such information has been (A)
in the public domain through no fault of R.R. Donnelley or (B) lawfully acquired
by R.R. Donnelley from sources other than the Company and its Affiliates), and
R.R. Donnelley shall not disclose or release any such confidential information
to any person, except its employees, representatives and agents who have a need
to know such information in connection with R.R. Donnelley's performance
hereunder, unless (i) such disclosure or release is compelled by the judicial or
administrative process, (ii) in the opinion of counsel to R.R. Donnelley, such
disclosure or release is necessary in light of other requirements of law or the
requirements of any governmental entity including, without limitation,
disclosure requirements under the Securities Act of 1934, as amended, or (iii)
in the opinion of R.R. Donnelley, such disclosure and release is appropriate and
customary for the proper administration of R.R. Donnelley's and its Affiliates'
responsibilities and duties in respect of matters of foreign, federal, state or
local taxation.
Section 7. Guaranties. The Company acknowledges that R.R. Donnelley has
heretofore delivered, and may prior to the Closing Date deliver, guaranties of
payment or performance of certain obligations of the Company or one of its
Affiliates (the "Guaranteed Obligations"). R.R. Donnelley agrees to maintain all
of the guaranties that it delivered with respect to the Guaranteed Obligations
prior to the Closing Date but only to the extent provided in the guaranties of
the Guaranteed Obligations delivered prior to the Closing Date. The Company
agrees not to amend or modify the terms of any agreement or instrument that
evidences a Guaranteed Obligation in such a manner that increases the potential
liability of R.R. Donnelley without the written
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consent of R.R. Donnelley, which consent may be withheld in the sole discretion
of R.R. Donnelley.
Section 8. Non-Solicitation of Employees. (a) For a period of one year
following the Closing Date, neither R.R. Donnelley nor any of its Affiliates
will, without the prior written approval of the Company, directly or indirectly
solicit, induce or attempt to persuade any person who is an employee of the
Company or any of its subsidiaries on the date hereof or at any time hereafter
to terminate his or her employment with the Company or such subsidiary of the
Company, except R.R. Donnelley or any of its Affiliates may hire employees who
respond to general advertisements or who otherwise make initial contact with
them.
(b) For a period of one year following the Closing Date, neither the
Company nor any of its Affiliates will, without the prior written approval of
R.R. Donnelley, directly or indirectly solicit, induce or attempt to persuade
any person who is an employee of R.R. Donnelley or any of its subsidiaries on
the date hereof or at any time hereafter to terminate his or her employment with
R.R. Donnelley or such subsidiary of R.R. Donnelley, except the Company or any
of its Affiliates may hire employees who respond to general advertisements or
who otherwise make initial contact with them.
Section 9. Use of Real Estate. (a) As of the date hereof, the Company is
using office space in the facilities leased by R.R. Donnelley that are listed in
Exhibit 2 hereto (the "Shared Facilities"). R.R. Donnelley agrees to permit the
Company to continue to use the portion of each Shared Facility used by the
Company as of the date hereof (including common areas) until the date set forth
for each Shared Facility under the heading "Expiration Date" in Exhibit 2. In
consideration for such agreement, the Company agrees to pay to R.R. Donnelley
(1) in the case of the Shared Facility in Dallas (i) for each month until the
earlier of (a) if the Company ceases to use such Shared Facility on or before
December 6, 1996, December 31, 1996, (b) 30 days after the date upon which the
Company ceases to use such Shared Facility or (c) the date set forth for such
Shared Facility under the heading "Expiration Date" in Exhibit 2, an amount (the
"Company's Base Rent") equal to the product of (A) the amount payable by R.R.
Donnelley as monthly rent for such Shared Facility (including taxes, utilities
and other additional rent required under the particular lease), as adjusted from
time to time, times (B) a fraction, the numerator of which is the number set
forth in Exhibit 2 under the heading "RSF (Company)" for such Shared Facility
and the denominator of which is the total square footage of such Shared Facility
and (ii) for each three-month period or portion thereof that the Company is
obligated under the Agreement to pay the Company's Base Rent, an amount in
respect of the cost of operating such Shared Facility,
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including, but not limited to, telephone, reception, utility and cafeteria
services (the "Services Amount"), equal to the product of (A) the total amount
payable by R.R. Donnelley for those services used by the Company at such a
Shared Facility, times (B) a fraction, the numerator of which is the average
number of employees of the Company using space at such Shared Facility during
such three-month period or portion thereof and the denominator of which is the
average total number of persons using space at such Shared Facility during such
three-month period or portion thereof; and (2) in the case of the Shared
Facility in New York, the amount of $17,467 per month (the "New York Rent").
(b) R.R. Donnelley shall (i) on a monthly basis submit to the Company for
payment its billing invoice setting forth the Company's Base Rent and the New
York Rent not theretofore paid by the Company and (ii) on a quarterly basis
submit to the Company for payment its billing invoice setting forth the Services
Amount not theretofore paid by the Company. Payment by the Company to R.R.
Donnelley in respect of any such invoice shall be made within 15 days after the
date of such invoice; provided that as long as the Services being provided by
R.R. Donnelley include those described on Exhibit 1 under Accounts Payable, the
Company shall be deemed in compliance with this sentence if it has authorized
R.R. Donnelley to make such payment within such 15 day period and funds
sufficient to make such payment are in the Company's accounts from which such
payments are made.
(c) The Company acknowledges that time is of the essence with respect to
all payments under this Section and agrees to pay interest on the balance of any
amount payable hereunder unpaid when due at an annual rate of 15% from the date
an invoice with respect to which such payment obligation related was received by
the Company until the date of payment.
Section 10. Financial and Other Information. (a) Equity Accounting Period.
The Company agrees that, during any period in which R.R. Donnelley owns at least
20% of the voting power of the capital stock of the Company then outstanding or
20% of the capital stock of the Company then outstanding, or in which R.R.
Donnelley is required to account for its investment in the Company under the
equity method of accounting (determined in accordance with generally accepted
accounting principles consistently applied):
(i) Maintenance of Books and Records. The Company shall, and shall cause
each of its consolidated subsidiaries to, maintain a system of internal
accounting controls that shall provide reasonable assurance that: (1) the
Company's and such subsidiaries' books, records and accounts fairly reflect
transactions and dispositions of assets, and (2) the specific objectives of
accounting control are achieved.
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(ii) Monthly Financial Information. As soon as practicable, but in any
event within five business days after the end of each month in each fiscal year
of the Company, the Company shall deliver to R.R. Donnelley its pre- and after-
tax net income for the month and the year to date period for the Company and its
subsidiaries.
(iii) Unaudited Quarterly Financial Statements. As soon as practicable, but
in any event within 35 days after the end of each of the first three fiscal
quarters in each fiscal year of the Company, the Company shall deliver to R.R.
Donnelley drafts of (1) the consolidated financial statements of the Company and
its subsidiaries (and notes thereto) for such periods and for the period from
the beginning of the current fiscal year to the end of such quarter, setting
forth in each case in comparative form for each such fiscal quarter of the
Company the consolidated figures (and notes thereto) for the corresponding
quarter and periods of the previous fiscal year and all in reasonable detail and
prepared in accordance with Article 10 of Regulation S-X of the General Rules
and Regulations under the Securities Act ("Regulation S-X"), and (2) a
discussion and analysis by management of the Company's and it subsidiaries'
financial condition and results of operations for such fiscal period, including,
without limitation, an explanation of any material adverse change, all in
reasonable detail and prepared in accordance with Item 303(b) of Regulation S-K
of the General Rules and Regulations under the Securities Act ("Regulation S-
K"). The foregoing requirement may be satisfied by the delivery of a draft
Quarterly Report on Form 10-Q. The information set forth in (1) and (2) above is
herein referred to as the "Quarterly Financial Statements." The Company shall
deliver to R.R. Donnelley all revisions to such drafts as soon as any such
revisions are prepared or made. No later than two business days prior to the
date the Company publicly files the Quarterly Financial Statements with the SEC
or otherwise, the Company shall deliver to R.R. Donnelley the final form of the
Quarterly Financial Statements to be filed with the SEC.
(iv) Audited Annual Financial Information. As soon as is practicable, but
in any event within 60 days after the end of each fiscal year of the Company,
the Company shall deliver to R.R. Donnelley drafts of (1) the consolidated
financial statements of the Company (and notes thereto) for such year, setting
forth in comparative form the consolidated figures (and notes thereto) for the
previous fiscal year and all in reasonable detail and prepared in accordance
with Regulation S-X and (2) a discussion and analysis by management of the
Company's and its subsidiaries' financial condition and results of operations
for such year, including, without limitation, an explanation of any material
adverse change, all in reasonable detail and prepared in accordance with item
303(a) of Regulation S-K. The foregoing requirement may be satisfied by the
delivery of a draft Annual
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Report on Form 10-K. The information set forth in (1) and (2) above is herein
referred to as the "Annual Financial Statement." The Company shall deliver to
R.R. Donnelley all revisions to such drafts as soon as any such revisions are
prepared or made. The Company shall deliver to R.R. Donnelley, within 90 days
after the end of each fiscal year of the Company, the final form of the Annual
Financial Statements accompanied by a report thereon by the Company's
independent certified public accountants.
(v) Public Information and SEC Reports. Except as more particularly
described in paragraphs (iii) and (iv) above, the Company and each of its
subsidiaries that files information with the SEC shall deliver to R.R. Donnelley
(to the attention of its Corporate Secretary) as soon as substantially final
drafts are prepared all reports, notices and proxy and information statements to
be sent or made available by the Company or any of its subsidiaries to their
securityholders and all regular, periodic and other reports filed under Section
13, 14 and 15 of the Exchange Act (including Reports on Forms 10-K, 10-Q and 8-K
and Annual Reports to Shareholders), and all registration statements and
prospectuses to be filed by the Company or any of its subsidiaries with the SEC
or any securities exchange pursuant to the listed company manual (or similar
requirements) of such exchange (collectively, the "Company Public Documents"),
and, as soon as practicable, but in no event later than one business day prior
to the date the same are printed, sent or filed, whichever is earliest, final
copies of all Company Public Documents.
No later than immediately prior to issuance, the Company shall deliver to
R.R. Donnelley copies of all press releases and other statements to be made
available by the Company or any of its subsidiaries to the public relating to
information concerning material developments in the business, properties,
results of operations, financial condition or prospects of the Company or any of
its subsidiaries. Unless otherwise required by law, rule or regulation, no
report, registration, information or proxy statement, prospectus or other
document that refers, or contains information with respect, to R.R. Donnelley
shall be filed with the SEC or otherwise made public by the Company or any of
its subsidiaries without notice to and the consent (written or oral) of R.R.
Donnelley with respect to those portions of such document that contain
information with respect to R.R. Donnelley, which consent will not be
unreasonably withheld, delayed or conditioned, provided, however, that the
Company need not obtain the consent of R.R. Donnelley for descriptions of
intercompany agreements between itself and R.R. Donnelley to the extent that
such descriptions are substantially identical to the descriptions contained in
the registration statement relating to the Offering.
(vi) Earnings Releases. R.R. Donnelley agrees that, unless required by law,
rule or regulation or unless the Company shall have consented thereto, R.R.
Donnelley shall not release
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any financial information of the Company (other than the quarterly and annual
financial reports described below) or any of its subsidiaries under any
circumstances and R.R. Donnelley shall not release to the general public any
quarterly or annual financial information of the Company or any of its
subsidiaries (the "Company Information") delivered to R.R. Donnelley pursuant to
this Section 10 prior to the time that the Company publicly releases financial
information of the Company for the relevant period. The Company and R.R.
Donnelley shall consult on the timing of their annual and quarterly earnings
releases and shall give each other an opportunity to review the information
therein relating to the Company and its subsidiaries and to comment thereon,
unless otherwise prohibited by law, rule or regulation. In the event that R.R.
Donnelley is required by law to publicly release such Company Information prior
to the public release of R.R. Donnelley's financial information, R.R. Donnelley
shall give the Company notice of such release of Company Information as soon as
practicable but in no event later than immediately prior to such release of
Company Information.
(vii) R.R. Donnelley Public Filings. The Company shall cooperate fully with
R.R. Donnelley to the extent reasonably requested by R.R. Donnelley in the
preparation of R.R. Donnelley's public earnings releases, quarterly reports on
Form 10-Q, Annual Reports to Shareholders, Annual Reports on Form 10-K, any
Current Reports on Form 8-K and any other proxy, information and registration
statements, reports, notices, prospectuses and any other filings made by R.R.
Donnelley with the SEC, any national securities exchange or otherwise made
publicly available (collectively, "R.R. Donnelley Public Filings"). The Company
agrees to provide to R.R. Donnelley such information concerning the Company as
R.R. Donnelley reasonably requests in writing in connection with any such R.R.
Donnelley Public Filings. Following request by R.R. Donnelley, such information
concerning the Company shall be provided by the Company in a timely manner to
enable R.R. Donnelley to prepare, print and release such R.R. Donnelley Public
Filings on such date as R.R. Donnelley shall have determined and notified the
Company thereof. If and to the extent reasonably requested in advance by R.R.
Donnelley, the Company shall review all drafts of such R.R. Donnelley Public
Filings prior to any printing or public release thereof, and certify (through an
appropriate executive officer) that the information relating to the Company in
such R.R. Donnelley Public Filing is accurate in all material respects. R.R.
Donnelley shall reimburse the Company for any and all out-of-pocket costs and
expenses of outside advisors incurred by the Company in connection with such
review and providing such certificate.
(viii) Coordination of Auditors' Opinions. For so long as each party hereto
maintains its fiscal year end as it exists on the date hereof, the Company shall
use its reasonable
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efforts to enable its independent certified public accountants (the "Company's
Auditors") to complete their audit such that they will date their opinion on the
Company's audited annual financial statements (the "Company Annual Financial
Statements") (1) within 31 days of the end of the Company's fiscal year or (2)
within five business days of the date that R.R. Donnelley's independent
certified public accountants ("R.R. Donnelley's Auditors") date their opinion on
R.R. Donnelley's audited annual financial statements (together with R.R.
Donnelley's Annual Report to Shareholders, the "R.R. Donnelley Annual
Statements"), whichever is earlier, and to enable R.R. Donnelley to meet its
timetable for the printing, filing and public dissemination of the R.R.
Donnelley Statements.
(ix) Cooperation in Preparation of R.R. Donnelley Annual Statements. The
Company shall provide to R.R. Donnelley on a timely basis all information that
R.R. Donnelley reasonably needs to meet its schedule for the preparation,
printing, filing and public dissemination of the R.R. Donnelley Annual
Statements. In this respect, the Company shall provide all required financial
information with respect to the Company and its consolidated subsidiaries to the
Company's Auditors in a sufficient and reasonable time and in reasonably
sufficient detail to permit the Company's Auditors to take all steps and perform
all review necessary to provide sufficient assistance to R.R. Donnelley's
Auditors with respect to information to be included or contained in the R.R.
Donnelley Annual Statements, such assistance to R.R. Donnelley's Auditors to be
in conformity with current and past practices.
(x) Access to Personnel and Working Papers. The Company shall authorize the
Company's Auditors to make available to R.R. Donnelley's Auditors, at R.R.
Donnelley's expense, both the personnel who performed or are performing the
annual audit of the Company and work papers related to the annual audit of the
Company, in all cases within a reasonable time after the Company's Auditors'
opinion date, so that R.R. Donnelley's Auditors are able to perform the
procedures they consider reasonably necessary to take responsibility for the
work of the Company's Auditors as it relates to R.R. Donnelley's Auditors'
report on R.R. Donnelley's statements, all within sufficient time to enable R.R.
Donnelley to meet its timetable for the printing, filing and public
dissemination of the R.R. Donnelley Annual Statements.
(xi) Use of Information. R.R. Donnelley hereby acknowledges that it is
aware that the United States securities laws prohibit any person who has
material, non-public information concerning a company from purchasing or selling
securities of that company or from communicating such information to any other
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell such securities.
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(b) Ten Percent Period. The Company agrees that, during any period in which
R.R. Donnelley holds at least 10% but less than 20% of the voting power of the
capital stock of the Company then outstanding, the Company shall furnish to R.R.
Donnelley as soon as publicly available, copies of all financial statements,
reports, notices and proxy statements sent by the Company in a general mailing
to all its shareholders, of all reports on Forms 10-K, 10-Q and 8-K and of all
final prospectuses filed pursuant to Rule 424 under the Securities Act.
Section 11. Indemnification. (a) The Company hereby agrees to indemnify and
hold harmless R.R. Donnelley and each of the Other R.R. Donnelley Indemnified
Parties, to the fullest extent lawful, from and against any and all losses,
claims, damages or liabilities (collectively, "Losses") and reasonable expenses
(including all fees and expenses of R.R. Donnelley's and each of the Other
Indemnified Parties' counsel, investigators, expert witnesses, accountants and
other professionals, reasonable travel and other out-of-pocket expenses)
incurred at the Company's request or otherwise incurred in connection with the
investigation of any pending or threatened claims or preparation for any pending
or threatened litigation or other proceedings or the renegotiation of any
license agreements relating to Data Center Services, (collectively, "Expenses")
arising out of or relating to (i) the provision of the Services hereunder by
R.R. Donnelley or any of the Other R.R. Donnelley Indemnified Parties; (ii) any
Guaranteed Obligation, (iii) the use by the Company of the Shared Facilities;
(iv) the provision of Data Center Services to the Company pursuant to the Data
Agreement (as defined in Exhibit 1 hereto) or (v) contracts relating to the
operations of the Company to which RR Donnelley is a party; provided, however,
that the Company shall have no obligation to indemnify and hold harmless R.R.
Donnelley or any of the Other R.R. Donnelley Indemnified Parties (A) under
clauses (i) and (iii) above in respect of Losses or Expenses which are finally
judicially determined to have resulted primarily from the gross negligence or
willful misconduct of R.R. Donnelley or any of the Other R.R. Donnelley
Indemnified Parties in providing any Services hereunder or (B) under clause (iv)
above in respect of Expenses relating to the Computer Associates Agreements (as
defined in Exhibit 1 hereto) to the extent that the aggregate amount of such
Expenses exceeds $38,000.
(b) R.R. Donnelley hereby agrees to indemnify and hold harmless the Company
and each of the Other Company Indemnified Parties, to the fullest extent lawful,
from and against any and all Losses and Expenses arising out of or relating to
(i) the provision of the Services hereunder by R.R. Donnelley or any of the
Other R.R. Donnelley Indemnified Parties which Losses and/or Expenses are
judicially determined to have resulted primarily from the gross negligence or
willful misconduct of R.R. Donnelley
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or any of the Other R.R. Donnelley Indemnified Parties; (ii) the use by R.R.
Donnelley or any of the Other R.R. Donnelley Indemnified Parties of the Shared
Facilities; (iii) the provision of Data Center Services to the Company pursuant
to the Data Agreement which Losses and/or Expenses are judicially determined to
have resulted primarily from the gross negligence or willful misconduct of R.R.
Donnelley or any of the Other R.R. Donnelley Indemnified Parties; or (iv)
Expenses relating to the Computer Associates Agreements to the extent that the
aggregate amount of such Expenses exceeds $38,000.
(c) If any Indemnitee receives notice of the assertion of any third-party
claim with respect to which an Indemnifying Party is obligated under this
Agreement to provide indemnification, such Indemnitee shall give such
Indemnifying Party notice thereof promptly after becoming aware of such third-
party claim; provided, however, that the failure of any Indemnitee to give
notice as provided in this Section 11(c) shall not relieve any Indemnifying
Party of its obligations under this Section 11, except to the extent that such
Indemnifying Party is actually prejudiced by such failure to give notice. Such
notice shall describe such third-party claim in reasonable detail.
(d) An Indemnifying Party, at such Indemnifying Party's own expense and
through counsel chosen by such Indemnifying Party (which counsel shall be
reasonably satisfactory to the Indemnitee), may elect to defend any third-party
claim. If an Indemnifying Party elects to defend a third-party claim, then,
within ten business days after receiving notice of such third-party claim (or
sooner, if the nature of such third-party claim so requires), such Indemnifying
Party shall notify the Indemnitee of its intent to do so, and such Indemnitee
shall cooperate in the defense of such third-party claim. Such Indemnifying
Party shall pay such Indemnitee's reasonable out-of-pocket expenses incurred in
connection with such cooperation. After notice from an Indemnifying Party to an
Indemnitee of its election to assume the defense of a third-party claim, such
Indemnifying Party shall not be liable to such Indemnitee under this Section 11
for any legal or other expenses subsequently incurred by such Indemnitee in
connection with the defense thereof other than those expenses referred to in the
preceding sentence; provided, however, that such Indemnitee shall have the right
to employ one law firm as counsel to represent such Indemnitee (which firm shall
be reasonably acceptable to the Indemnifying Party) if, in such Indemnitee's
reasonable judgment, either a conflict of interest between such Indemnitee and
such Indemnifying Party exists in respect to such claim or there may be defenses
available to such Indemnitee which are different from or in addition to those
available to such Indemnifying Party, and in that event (I) the reasonable fees
and expenses of such separate counsel shall be paid by such Indemnifying Party
(it being understood, however, that the Indemnifying Party shall not
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be liable for the expenses of more than one separate counsel with respect to any
third-party claim, (even if against multiple Indemnitees)) and (II) each of such
Indemnifying Party and such Indemnitee shall have the right to conduct its own
defense in respect of such claim. If an Indemnifying Party elects not to defend
against a third-party claim, or fails to notify an Indemnitee of its election as
provided in this Section 11(c) within the period of ten business days described
above, such Indemnitee may defend, compromise and settle such third-party claim;
provided, however, that no such Indemnitee may compromise or settle any such
third-party claim without the prior written consent of the Indemnifying Party,
which consent shall not be withheld unreasonably. Notwithstanding the foregoing,
the Indemnifying Party shall not, without the prior written consent of the
Indemnitee, (i) settle or compromise any third-party claim or consent to the
entry of any judgment which does not include as an unconditional term thereof
the delivery by the claimant or plaintiff to the Indemnitee of a written release
from all liability in respect of such third-party claim or (ii) settle or
compromise any third-party claim in any manner that may adversely affect the
Indemnitee.
(e) If for any reason the foregoing indemnification is unavailable to an
Indemnified Party under (a) or (b) above or is insufficient to hold it or them
harmless, then the Indemnifying Party shall contribute to the amount paid or
payable by the Indemnitee(s) as a result of such Loss and Expense in such
proportion as is appropriate to reflect not only the relative benefits received
by the Indemnifying Party, on the one hand, and the Indemnitee(s) on the other
hand, but also the relative fault of the Indemnifying Party and the
Indemnitee(s), as well as any relevant equitable considerations.
(f) The reimbursement, indemnity and contribution obligations of the
parties hereunder shall be in addition to any liability which the parties may
otherwise have.
(g) The Company shall provide to R.R. Donnelley a Certificate of Insurance
evidencing coverage for comprehensive general liability, including contractual
liability, in an amount of at least $2 million per occurrence for bodily injury
and property damage naming R.R. Donnelley as an additional insured. The Company
agrees to keep such insurance in full force and effect for as long as the
Company is using any Shared Facility.
Section 12. Set-Off. Notwithstanding anything herein to the contrary,
including, without limitation, any indemnification provided for under Section 11
hereof, R.R. Donnelley and the Company shall each have the right to set-off, at
any time and from time to time, against any amount owing by the other in
connection with any cause, matter or thing arising under or in connection with
(i) any provision of this Agreement
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or (ii) any provision of any of the Other Agreements, any amount from time to
time owing by R.R. Donnelley to the Company, or by the Company to R.R.
Donnelley, as the case may be, in connection with any cause, matter or thing
arising under or in connection with (y) any provision of this Agreement or (z)
any provision of any Other Agreement.
Section 13. Extension of Transition Period; Termination. (a) In the event
that the Company desires to negotiate with R.R. Donnelley for the continuance of
any Services beyond the end of the Transition Period, the Company shall notify
R.R. Donnelley of such desire not later than 45 days prior to the termination of
such Service. Neither R.R. Donnelley nor any of its Affiliates shall be
obligated to provide Services on behalf of the Company following the expiration
of this Agreement except to the extent the Company and R.R. Donnelley have
executed and delivered an extension of this Agreement or a separate agreement
which provides the terms and conditions of the performance of such Services.
Notwithstanding the foregoing, the Company may extend the Transition Period as
it relates to Tax Services for one year, provided that the Company requests such
renewal in writing not later than November 1, 1997 and R.R. Donnelley does not
reject such request within 15 days of receipt thereof. In the event that the
Company extends the Transition Period as it relates to Tax Services as provided
in the preceding sentence, the fee to be paid by the Company to R.R. Donnelley
for such Tax Services shall be that set forth for the "Renewal Period" in
Exhibit 1.
(b) This Agreement shall terminate with respect to the Services upon the
expiration of the Transition Period, unless earlier terminated pursuant to this
Section. Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated at any time:
(i) by the mutual consent of the Company and R.R. Donnelley;
(ii) by the Company in the event of any material breach or default by
R.R. Donnelley of any of R.R. Donnelley's agreements, representations, or
warranties contained herein and the failure of R.R. Donnelley to cure such
breach or default within ten (10) business days after receipt of written
notice from the Company requesting such breach or default to be cured;
(iii) by R.R. Donnelley in the event of any material breach or default
by the Company of any of the Company's agreements, representations, or
warranties contained herein and the failure of the Company to cure such
breach or default within ten (10) business days after receipt of
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notice from R.R. Donnelley requesting such breach or default to be cured;
or
(iv) by the Company, in the event of the occurrence of a force majeure
event described in Section 25; provided that the Company shall not be
permitted to terminate this Agreement with respect to a Shared Facility
prior to the expiration date with respect to such facility set forth in
Exhibit 2 unless R.R. Donnelley has the right and elects to terminate the
lease agreement pertaining to such Shared Facility on account of such force
majeure event.
Section 14. Access to Information.
(a) Provision of Corporate Records. As promptly as practicable after the
Closing Date, R.R. Donnelley shall use reasonable efforts to accommodate the
Company with respect to the delivery to the Company of all corporate books and
records of the Company in the possession of R.R. Donnelley and originals or
copies of all corporate books and records of R.R. Donnelley in the possession of
R.R. Donnelley primarily relating to the Business or the assets or liabilities
of the Company, including in each case copies of all active agreements, active
litigation files and government filings.
(b) Access to Information. From and after the Closing Date, each of R.R.
Donnelley and the Company shall afford to the other, and shall cause their
respective employees, agents and Affiliates to so afford, reasonable access and
duplicating rights during normal business hours to all information within such
party's possession relating to such other party's businesses, assets or
liabilities, insofar as such access is reasonably required by such other party.
Without limiting the foregoing, information may be requested under this Section
14(b) for audit, accounting, claims, litigation and tax purposes, as well as for
purposes of fulfilling disclosure and reporting obligations.
(c) Retention of Records. Except as otherwise required by law or agreed in
writing, each of R.R. Donnelley and the Company shall use reasonable efforts to
accommodate the other with respect to retention and provision of copies of any
significant information in such party's possession or under its control relating
to the business, assets or liabilities of the other party.
Section 15. Certain Agreements and Indemnities to Survive Termination of
Agreement. The provisions of Sections 5, 6, 8, 10, 11 and 14 hereof shall
survive any termination of this Agreement.
Section 16. Assignment; Right of R.R. Donnelley to Assign to Subsidiaries.
This Agreement and all the provisions
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hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assignable or
transferable by either party (except by operation of law in connection with a
merger involving, or sale of substantially all of the assets of, such party)
without the prior written consent of the other party hereto; provided, however,
that R.R. Donnelley, at all times, without regard to the foregoing requirement
to obtain the prior written consent of the Company, may assign any or all of its
rights, duties, responsibilities and obligation hereunder to one or more of its
Affiliates provided that R.R. Donnelley guarantees the performance of such
Affiliate.
Section 17. Complete Agreement; Construction. This Agreement and the
Exhibit attached hereto shall constitute the entire agreement between the
parties with respect to the subject matter hereof and shall supersede all
previous negotiations, commitments and writings with respect to such subject
matter (it being understood, however, that the Other Agreements set forth
certain additional understandings between R.R. Donnelley and the Company
regarding their relationship after the Closing Date).
Section 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois, without regard
to the principles of conflicts of laws thereof.
Section 19. Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed given or delivered
when delivered personally or when sent by registered or certified mail or by
private courier addressed as follows:
to R.R. Donnelley:
R.R. Donnelley & Sons Company
77 West Wacker Drive
Chicago, IL 60601
Attention: Legal Department
to the Company:
Donnelley Enterprise Solutions Incorporated
161 N. Clark Street, Suite 2400
Chicago, IL 60601
Attention: Chief Financial Officer
Section 20. Amendments. This Agreement may not be modified or amended
except by an agreement in writing signed by the parties.
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Section 21. Waivers. The failure of any party hereto at any time to require
strict performance by the other party hereto of any provision hereof shall not
waive or diminish such party's right to demand strict performance thereafter of
that or any other provision hereof.
Section 22. No Third Party Beneficiaries. Except for the provisions of
Sections 5 and 11 hereof, this Agreement is solely for the benefit of the
parties and does not confer upon third parties any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
Section 23. Titles and Headings. Titles and headings to sections herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 24. Partial Invalidity. Wherever possible, each provision hereof
shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such invalid, illegal or unenforceable provision or provisions
or any other provisions hereof, unless such a construction would be
unreasonable.
Section 25. Force Majeure. R.R. Donnelley shall be excused from performance
hereunder for any period and to the extent that it is prevented from performing
any services pursuant hereto, in whole or in part, as a result of delays caused
by the other party or an act of God, war, civil disturbance, court order, labor
dispute or other cause beyond its reasonable control and such nonperformance
shall not be a default hereunder or a ground for termination hereof. In the
event that R.R. Donnelley is excused from performance hereunder pursuant to this
Section, then R.R. Donnelley shall take all reasonable actions to resume
performance of its obligations hereunder as soon as feasible; provided, however,
that nothing in this Section will be construed to require the settlement of any
strike, walkout or other labor dispute on terms which, in the reasonable
judgment of R.R. Donnelley, are contrary to its interest. It is understood that
the settlement of a strike, walkout or other labor dispute will be entirely
within the discretion of R.R. Donnelley. In the event that R.R. Donnelley is
excused from performance hereunder with respect to any Service for any period
pursuant to this Section, then the fees to be paid by the Company for such
Service hereunder shall be reduced to reflect such reduction for such period.
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Section 26. Relationship of Parties; R.R. Donnelley Employees. (a) Nothing
herein contained shall be deemed or construed by the Company or R.R. Donnelley
or for any other party as creating the relationship of principal and agent or of
a partnership or joint venture among the parties hereto.
(b) All employees and representatives of R.R. Donnelley providing Services
hereunder to the Company and its subsidiaries during the term of this Agreement
shall be deemed for purposes of all compensation and employee benefits to be
employees or representatives solely of R.R. Donnelley or its Affiliates and not
to be employees or representatives of the Company or any of its Affiliates or to
be independent contractors thereof. In performing their respective duties
hereunder, all such employees and representatives of R.R. Donnelley or its
Affiliates shall be under the direction, control and supervision of R.R.
Donnelley (and not of the Company or its Affiliates) and R.R. Donnelley shall
have the sole right to exercise all authority with respect to the employment
(including termination of employment), assignment and compensation of such
employees and representatives.
Section 27. Execution in Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
instrument, but all of which shall be considered one and the same agreement, and
shall become binding when one or more counterparts have been signed by the each
of the parties hereto and delivered to each of R.R. Donnelley and the Company.
* * * * * * * * *
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
R.R. DONNELLEY & SONS COMPANY
By: /s/ W. Ed Tyler
-------------------------
Name: W. Ed Tyler
Title: Executive Vice President
DONNELLEY ENTERPRISE
SOLUTIONS INCORPORATED
By: /s/ Rhonda I. Kochlefl
-------------------------
Name: Rhonda I. Kochlefl
Title: Chairman, President and
Chief Executive Officer
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Exhibit 10.2
================================================================================
BENEFIT ADMINISTRATION SERVICES AGREEMENT
DATED AS OF OCTOBER 23, 1996
BETWEEN
R. R. DONNELLEY & SONS COMPANY
AND
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
DEFINITIONS.......................................................... 2
ARTICLE 2
EMPLOYEE BENEFITS.................................................... 5
Section 2.1. Provision of Employee Benefits........................ 5
Section 2.2. Corporate Action...................................... 5
Section 2.3. Legal Requirements.................................... 5
Section 2.4. Donnelley's Right to Amend Plans...................... 6
ARTICLE 3
SAVINGS PLAN......................................................... 6
Section 3.1. Participation in Donnelley Savings Plan............... 6
Section 3.2. Transfer of Account Balances from Donnelley Savings
Plan to DESI Savings Plan............................. 7
ARTICLE 4
WELFARE BENEFITS.................................................... 8
Section 4.1. Welfare Benefits Provided Under Donnelley Plans....... 8
Section 4.2. DESI's Participation in Donnelley Cafeteria Plan...... 9
Section 4.3. Payment of Welfare Plan Costs......................... 9
ARTICLE 5
MISCELLANEOUS PLANS AND AGREEMENTS.................................. 11
Section 5.1. Stock Purchase Plan................................... 11
Section 5.2. DonnelleyShares Plan.................................. 12
Section 5.3. Workers' Compensation................................. 12
Section 5.4. Monthly Investment Plan............................... 13
Section 5.5. Donnelley Pension Plan and Tax Credit Stock
Ownership Plan........................................ 13
Section 5.6. Vacation Pay Policy................................... 14
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Section 5.7. SERP.................................................. 14
Section 5.8. DESI's Use of Certain Systems and Vendors............. 14
Section 5.9. Savings and Loan...................................... 14
ARTICLE 6
ADMINISTRATION OF PLANS............................................. 15
Section 6.1. Plan Administration................................... 15
Section 6.2. Information to Be Provided to Donnelley............... 15
Section 6.3. Expenses.............................................. 16
Section 6.4. Indemnification....................................... 17
Section 6.5. Consulting Advice by Donnelley........................ 19
Section 6.6. Timely Payment........................................ 19
Section 6.7. Dispute Resolution.................................... 20
ARTICLE 7
TERMINATION OF DESI'S PARTICIPATION IN DONNELLEY PLANS............... 20
ARTICLE 8
MISCELLANEOUS........................................................ 21
Section 8.1. No Rights............................................. 21
Section 8.2. Corporate Action; Delegation of Authority............. 21
Section 8.3. Notices............................................... 21
Section 8.4. Survival of Agreement................................. 22
Section 8.5. Binding Effect........................................ 23
Section 8.6. Governing Law......................................... 23
Section 8.7. Waivers; Amendment.................................... 23
Section 8.8. Severability.......................................... 23
Section 8.9. Counterparts.......................................... 23
</TABLE>
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BENEFIT ADMINISTRATION SERVICES AGREEMENT
THIS BENEFIT ADMINISTRATION SERVICES AGREEMENT (this "Agreement"), dated as
of October 23, 1996, is by and between Donnelley (as hereinafter defined) and
DESI (as hereinafter defined) (collectively the "Parties").
RECITALS
--------
WHEREAS, Donnelley is currently the owner of all outstanding shares of
common stock of DESI; and
WHEREAS, DESI intends to make a public offering of shares of its common
stock in a transaction that, upon closing of such offering, will result in
Donnelley owning less than a majority of the outstanding shares of common stock
of DESI (the "IPO"); and
WHEREAS, the Parties intend that certain employee benefits be provided to
certain employees of DESI under certain Donnelley employee benefit plans or
programs following the date on which DESI is no longer a member of the Donnelley
Group (as hereinafter defined); and
WHEREAS, Donnelley and DESI intend to cause certain of their respective
plans to transfer accrued liabilities and assets relating to such liabilities
between such plans; and
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WHEREAS, Donnelley and DESI wish to enter into this Agreement in order to
effect such intentions.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other valuable consideration, the sufficiency of which is acknowledged, the
Parties agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement the following terms shall have the following
meanings (all terms defined in this Article I or in other provisions of this
Agreement in the singular to have the same meanings when used in the plural and
vice versa):
"Affected DESI Employee" means any person whose relationship with DESI is,
as of the IPO Date, under common law that of an employee.
"Agreement" means this Agreement.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended, and any applicable state law requiring continuation coverage under a
medical plan.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"DESI" means Donnelley Enterprise Solutions Incorporated, a Delaware
corporation, and any corporation which shall succeed to substantially all of the
business of such corporation.
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"DESI Group" means DESI and (a) any corporation which is a member of the
same controlled group of corporations (within the meaning of section 414(b) of
the Code) as DESI, (b) a trade or business (whether or not incorporated) under
common control (within the meaning of section 414(c) of the Code) with DESI, (c)
any organization (whether or not incorporated) which is a member of an
affiliated service group (within the meaning of section 414(m) of the Code)
which includes DESI, a corporation described in clause (a) of this definition or
a trade or business described in clause (b) of this definition, or (d) any other
entity which is required to be aggregated with DESI pursuant to regulations
promulgated under section 414(o) of the Code.
"DESI Indemnified Parties" shall mean any DESI Group member (other than
Donnelley and any subsidiaries of Donnelley other than DESI), its officers,
directors, agents and employees, each of DESI's employee benefit plans and any
contract administrator or service provider for any DESI employee benefit plan
(and the agents and employees of such administrators and providers).
"DESI Medical Plans" shall mean the medical and dental plans established by
DESI which provide benefits which are comparable to the benefits provided under
the R. R. Donnelley & Sons Company Comprehensive Medical Plan (excluding the
portion which provides post-retirement medical benefits) and the Donnelley
Dental Benefit Plan.
"DESI Savings Plan" means the Donnelley Enterprise Solutions Incorporated
Savings Plan.
"DESI Welfare Plans" means the welfare benefit plans established by DESI
which correspond to benefits provided under the Donnelley Welfare Plans.
"Donnelley" means R. R. Donnelley & Sons Company, a Delaware corporation,
and any corporation which shall succeed to substantially all of the business of
such corporation.
"Donnelley Cafeteria Plans" means the Donnelley Health Care Flexible
Spending Arrangement and the Donnelley Dependent Care Assistance Plan.
"Donnelley Group" means Donnelley and (a) any corporation which is a member
of the same controlled group of corporations (within the meaning of section
414(b) of the Code) as Donnelley, (b) a trade or business (whether or not
incorporated) under common control (within the meaning of section 414(c) of the
Code) with Donnelley, (c) any organization (whether or not incorporated) which
is a member of an affiliated service group (within the meaning of
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section 414(m) of the Code) which includes Donnelley, a corporation described in
clause (a) of this definition or a trade or business described in clause (b) of
this definition, or (d) any other entity which is required to be aggregated with
Donnelley pursuant to regulations promulgated under section 414(o) of the Code.
"Donnelley Indemnified Parties" means any Donnelley Group member (other
than DESI), its officers, directors, agents and employees, each Donnelley Plan
and any contract administrator or service provider for any Donnelley Plan (and
the agents and employees of such administrators and providers).
"Donnelley Plan" means any employee benefit plan or program maintained by
Donnelley.
"Donnelley Retiree Welfare Plan" means the post-retirement medical portion
of the R. R. Donnelley & Sons Company Comprehensive Medical Plan and the post-
retirement life insurance portion of the Donnelley Basic Survivor Optional Life
AD&D and Dependent Life Plan.
"Donnelley Savings Plan" means the Donnelley Deferred Compensation and
Voluntary Savings Plan.
"Donnelley Stock" means common stock of Donnelley.
"Donnelley Welfare Plans" means the R. R. Donnelley & Sons Company
Comprehensive Medical Plan (excluding the portion which provides post-retirement
medical benefits), Donnelley Dental Benefit Plan, Donnelley Basic Survivor
Optional Life AD&D and Dependent Life Plan (excluding the portion which provides
post-retirement life insurance benefits), Donnelley Travel Accident Insurance
Plan, Long Term Disability Income Plan of R. R. Donnelley & Sons Company, R. R.
Donnelley & Sons Company Sick Benefit Plan, R. R. Donnelley & Sons Company
Separation Pay Plan, Employee Assistance Plan and Educational Assistance Plan.
"Effective Date" means the date as of which this Agreement is dated.
"ERISA" means the Employee Retirement Income Security Act of 1974 as
amended.
"IPO" shall have the meaning set forth in the recitals.
"IPO Date" means the date on which DESI ceases to be a member of the
Donnelley Group.
"Losses" means all losses, claims, damages, liabilities, costs and expenses
(including reasonable legal
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fees and reasonable costs and expenses incurred to defend against any claim,
suit or action).
"Party" means Donnelley or DESI.
ARTICLE 2
EMPLOYEE BENEFITS
SECTION 2.1. PROVISION OF EMPLOYEE BENEFITS. The employee benefits
described in Articles 3, 4 and 5 of this Agreement shall be provided by
Donnelley for the time periods provided in such articles to any person who on or
after the IPO Date is or becomes an employee of DESI subject to such employee's
satisfaction of each Donnelley Plan's eligibility requirements, the terms and
conditions of each such plan and the terms and conditions of such articles.
SECTION 2.2. CORPORATE ACTION. Donnelley and DESI shall each take all
action necessary, pursuant to the terms of the Donnelley Plans or otherwise, to
cause DESI to continue as a participating employer in the Donnelley Plans, and
permit the participation by employees of DESI in such plans, to the extent
described in this Agreement.
SECTION 2.3. LEGAL REQUIREMENTS. Notwithstanding any other provision of
this Agreement to the contrary, Donnelley may restrict any employee of DESI from
participating in or may limit such employee's benefits under any Donnelley Plan
if Donnelley determines in good faith that such restriction or limitation is
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reasonably necessary to preserve the tax-favored status of such plan or to
maintain such plan's compliance with ERISA or any other applicable legal
requirement (including any non-discrimination requirement). Donnelley shall
promptly notify DESI if Donnelley is considering any such action.
SECTION 2.4. DONNELLEY'S RIGHT TO AMEND PLANS. Except to the extent
limited by law, nothing contained in this Agreement shall preclude Donnelley
from amending any Donnelley Plans. Donnelley shall provide notice to DESI if
Donnelley adopts any material amendment to any Donnelley Plan during the period
in which DESI is a participating employer in such plan and where such amendment
applies to employees of DESI.
ARTICLE 3
SAVINGS PLAN
SECTION 3.1. PARTICIPATION IN DONNELLEY SAVINGS PLAN. For the period
beginning on the IPO Date and ending on December 31, 1996, DESI shall continue
to be a participating employer in the Donnelley Savings Plan. DESI shall take
all action necessary to establish the DESI Savings Plan (including, but not
limited to, all action necessary to enable DESI to administer such plan and to
obtain a favorable determination letter from the Internal Revenue Service with
respect to such plan) as soon as administratively practicable. Effective on
January 1, 1997, DESI shall no longer be a participating employer in the
Donnelley
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Savings Plan and shall take all action necessary to effectuate its withdrawal as
a participating employer under the terms of the Donnelley Savings Plan.
SECTION 3.2. TRANSFER OF ACCOUNT BALANCES FROM DONNELLEY SAVINGS PLAN TO
DESI SAVINGS PLAN. Subject to applicable law and the provisions of the
Donnelley Savings Plan, effective as of the first day of the calendar month
following the calendar month in which DESI establishes and is able to administer
the DESI Savings Plan, or effective as of any other date as agreed to in writing
by the plan administrator for the Donnelley Savings Plan and the plan
administrator for the DESI Savings Plan, the account balances (including,
without limitation, outstanding loans) of all Donnelley Savings Plan
participants who are (a) Affected DESI Employees or (b) DESI employees who
become participants in the Donnelley Savings Plan after the IPO Date and prior
to January 1, 1997 shall be spun off from the Donnelley Savings Plan and merged
into the DESI Savings Plan; provided, however, that if any person described in
clause (a) or (b) above terminates employment prior to January 1, 1997, such
person shall be treated as a terminated participant under the Donnelley Savings
Plan and shall not have his or her account balance transferred to the DESI
Savings Plan.
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ARTICLE 4
WELFARE BENEFITS
SECTION 4.1. WELFARE BENEFITS PROVIDED UNDER DONNELLEY PLANS. During the
period beginning on the IPO Date and ending on December 31, 1996, DESI shall
continue to be a participating employer in the Donnelley Welfare Plans. DESI
shall take all action necessary to terminate its participation in and to
withdraw as a participating employer under all of the Donnelley Welfare Plans as
of December 31, 1996.
Effective January 1, 1997, DESI shall establish the DESI Medical Plans and
any other benefit plans required to provide benefits coverage agreed to in this
Agreement. Any DESI employee who is covered under the R. R. Donnelley & Sons
Company Comprehensive Medical Plan and/or the Donnelley Dental Benefit Plan on
December 31, 1996 shall not be excluded from coverage under the DESI Medical
Plans due to a preexisting condition limitation under such plans to the extent
such limitation would entitle such employee to elect COBRA coverage under the R.
R. Donnelley & Sons Company Comprehensive Medical Plan and/or the Donnelley
Dental Benefit Plan.
Donnelley shall amend the Donnelley Retiree Welfare Plan prior to the IPO
to provide that no person who, as of April 30, 1996, had satisfied the age and
service requirements for
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receiving benefits under such plan shall be eligible to commence receipt of such
benefits under such plan while employed by DESI, a member of the DESI Group or a
member of the Donnelley Group.
SECTION 4.2. DESI'S PARTICIPATION IN DONNELLEY CAFETERIA PLANS. DESI
shall continue to be a participating employer in the Donnelley Cafeteria Plans
during the period beginning on the IPO Date and ending on December 31, 1996.
DESI shall take all action necessary to withdraw as a participating employer in
the Donnelley Cafeteria Plans effective December 31, 1996. Donnelley shall
receive all amounts deducted from DESI participants' paychecks for the Donnelley
Cafeteria Plans, and such amounts shall be applied as provided in the Donnelley
Cafeteria Plans.
SECTION 4.3. PAYMENT OF WELFARE PLAN COSTS. (a) With respect to each
DESI employee who participates in the Donnelley Welfare Plans and the Donnelley
Cafeteria Plans, DESI shall pay Donnelley the costs described in Section 6.3.
DESI shall pay all costs associated with the provision of long-term disability
benefits to any DESI employee who (1) is receiving or who satisfies the criteria
for receiving sick benefits on December 31, 1996 and (2) who after such date
becomes entitled to receive long-term disability benefits. DESI shall not pay
Donnelley any amount with respect to the provision of benefits under its or
Donnelley's Sick Benefit Plan, Separation Pay Plan or Educational
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Assistance Plan, but instead shall pay directly the cost to provide such
benefits.
DESI shall pay all costs associated with the provision of benefits to any
dependent of any employee or former employee to the extent DESI is required to
pay costs associated with the provision of welfare benefits to such employee or
former employee. Donnelley shall pay all costs associated with the provision of
benefits to any dependent of any employee or former employee to the extent
Donnelley is required to pay costs associated with the provision of welfare
benefits to such employee or former employee.
(b) Notwithstanding the foregoing:
(1) Donnelley shall pay all claims under the R. R. Donnelley & Sons
Company Comprehensive Medical Plan and the Donnelley Dental Benefit
Plan which as of December 31, 1996 have been incurred but not reported
relating to DESI employees, but only if claims for such costs are
submitted in written form to Donnelley during the six-month period
beginning on January 1, 1997.
(2) Donnelley shall pay all costs associated with the provision of
benefits under the terms of the Donnelley Retiree Welfare Plan for all
persons who
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are listed on Exhibit B. To the extent caused by Donnelley's gross
negligence or intentional misconduct, Donnelley shall indemnify and
hold harmless the DESI Indemnified Parties for all Losses relating to
the provision of benefits under the Donnelley Retiree Welfare Plan to
those persons listed on Exhibit B.
(3) Donnelley shall pay all costs associated with the provision of
benefits to any employee or former employee of DESI who as of December
31, 1996 is receiving long-term disability benefits under the Long
Term Disability Income Plan of R. R. Donnelley & Sons Company.
(c) DESI shall not have the right to receive any assets held, received by
or in any other way attributable (either before, on or after the IPO Date) to
the R. R. Donnelley & Sons Company Welfare Benefit Trust or the R. R. Donnelley
& Sons Company Post-Retirement Medical Benefit Trust.
ARTICLE 5
MISCELLANEOUS PLANS AND AGREEMENTS
SECTION 5.1. STOCK PURCHASE PLAN. On the IPO Date, DESI shall cease
being a participating employer in the R. R. Donnelley & Sons Company Stock
Purchase Plan, and after such
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date, DESI employees shall no longer be eligible to purchase Donnelley Stock
under the terms of such plan.
SECTION 5.2. DONNELLEYSHARES PLAN. Each Affected DESI Employee who has
been granted under the DonnelleyShares Stock Option Plan options to acquire
Donnelley Stock, which options vest after the IPO Date shall receive within a
reasonable period of time after the IPO Date a cash payment equal to the excess,
if any, of the Fair Market Value (as hereinafter defined) of the shares subject
to such options over the exercise price of such options. For purposes of the
preceding sentence, Fair Market Value shall be the greater of (1) the average of
the high and low transaction prices (as reported in the New York Stock Exchange-
Composite Transactions) in trading of Donnelley Stock on the IPO Date, and (2)
the average of the closing prices (as reported in the New York Stock Exchange-
Composite Transactions) in trading of Donnelley Stock during the 30 calendar day
period ending on the IPO Date. The cost of this cash payment shall be borne by
Donnelley.
SECTION 5.3. WORKERS' COMPENSATION. (a) Donnelley shall retain the
responsibility for all workers' compensation claims relating to DESI employees
and former DESI employees relating to incidents occurring up to but not
including the IPO Date (including, but not limited to, claims which are filed
after the IPO Date but which relate to incidents occurring prior to the IPO
Date). Any amount by which actual claims expenses vary from
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the reserve established by Donnelley for such expenses for periods prior to the
IPO Date shall be retained by Donnelley.
(b) DESI shall assume responsibility for all workers' compensation claims
relating to DESI employees and former employees relating to incidents beginning
on the IPO Date. DESI shall take all action necessary to effect timely return
to work for all DESI employees and former DESI employees who are on a leave of
absence from employment during which they were entitled to receive workers'
compensation (including, but not limited to, persons with respect to whom
Donnelley has the liability to pay workers' compensation claims).
SECTION 5.4. MONTHLY INVESTMENT PLAN. As of the first payroll occurring
after the IPO Date, DESI shall cease deducting amounts from compensation on
behalf of its employees for the purchase of Donnelley Stock under the Donnelley
Monthly Investment Plan. Amounts deducted prior to the IPO Date shall be
applied in accordance with the terms of such plan.
SECTION 5.5. DONNELLEY PENSION PLAN AND TAX CREDIT STOCK OWNERSHIP PLAN.
Each Affected DESI Employee shall be treated as having terminated employment
with an "Employer" as defined in the Donnelley Tax Credit Stock Ownership Plan
and the Retirement Benefit Plan of R. R. Donnelley & Sons Company as of the IPO
Date.
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SECTION 5.6. VACATION PAY POLICY. After the IPO Date, it is expected
that DESI shall maintain for its employees a vacation pay policy. DESI shall be
responsible for costs incurred to provide vacation pay to DESI employees whether
incurred before, on or after the IPO Date.
SECTION 5.7. SERP. No amounts shall be transferred between the Parties
(or between any plans maintained by either Party) with respect to any amounts
accrued by any person under any supplemental employee retirement programs
maintained by either Party.
SECTION 5.8. DESI'S USE OF CERTAIN SYSTEMS AND VENDORS. For the period
beginning on the IPO Date and ending on December 31, 1996, DESI shall continue
to use PeopleSoft, the HR and Benefits Administration System, the Donnelley
Payroll System and CobraServ (a division of Applied Benefits Research, Inc.);
DESI shall be responsible for any costs associated therewith which are imposed
by third parties and shall take all action necessary to enter into any contracts
needed in order to effect continuing use of such systems.
SECTION 5.9. SAVINGS AND LOAN. DESI shall continue to deduct amounts from
compensation on behalf of its employees and shall forward such amounts from each
payroll period to the Lakeside Press Savings and Loan Association for the
repayment of loans while such loans remain outstanding. In the case of any
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employee who terminates employment, DESI shall, to the extent permitted by law,
deduct any amount, up to 100% of final pay, which is necessary to pay any
outstanding loan balance and shall forward such amount to the Lakeside Press
Savings and Loan Association for the repayment of such outstanding loan.
Notwithstanding anything herein to the contrary, (a) DESI does not guarantee the
payment of any such loan, and (b) the Parties agree that no DESI employee shall
be eligible to take out new loans from the Lakeside Press Savings and Loan
Association following the filing of the Form S-1 with the Securities and
Exchange Commission with respect to the IPO.
ARTICLE 6
ADMINISTRATION OF PLANS
SECTION 6.1. PLAN ADMINISTRATION. DESI shall provide whatever assistance
is appropriate for an employer participating in the Donnelley Plans. Nothing in
this Agreement shall obligate Donnelley to undertake any additional
administrative responsibilities with respect to the provision of benefits to
DESI employees other than the administrative responsibilities which it routinely
performs for its subsidiaries which have adopted its benefit plans or which it
provided prior to the IPO Date with respect to the DESI employees.
SECTION 6.2. INFORMATION TO BE PROVIDED TO DONNELLEY. To the extent not
contrary to law, DESI shall provide any
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information which Donnelley may reasonably request to permit it to administer
the Donnelley Plans for the benefit of DESI employees as provided herein,
including but not limited to information relating to dates of termination of
employment, in order to provide benefits to any eligible DESI employee under the
terms and conditions described herein and under the applicable Donnelley Plans.
Any such information relating to an employee's termination of employment shall
be provided by DESI to Donnelley as soon as available to DESI. Notwithstanding
anything herein to the contrary, Donnelley shall not be responsible for the
payment of benefits to the extent DESI does not disclose any information needed
by Donnelley to provide such benefits until Donnelley receives such information.
SECTION 6.3. EXPENSES. DESI shall pay the amounts set forth on Exhibit A
to cover (1) all ordinary claims costs that Donnelley incurs in providing
benefits after the IPO Date under any Donnelley Plan for the employees of DESI,
and (2) DESI's pro rata share of ordinary administration and plan asset
management expenses incurred in the operation of all employee benefits plans
with respect to the period after the IPO Date in which DESI is a participating
employer in such plans. In addition to paying the amounts set forth in Exhibit
A, DESI shall pay any extra-ordinary costs, expenses or liabilities reasonably
incurred by Donnelley in connection with Donnelley's administration of the
Donnelley Plans on behalf of DESI, including, but not limited to, costs of
amending plans to reflect coverage of the employees of DESI, any
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conversion of any Donnelley Plan to multiple employer plan status, costs of
preparing any extra-ordinary communications to DESI employees concerning their
employee benefits, costs of determining DESI's share of plan contributions and
running DESI's average deferral and average contribution percentage tests under
the Donnelley Savings Plan. Whether any extra-ordinary costs, expenses or
liabilities are reasonably incurred shall be determined taking into account the
size and complexity of Donnelley and the Donnelley Plans.
SECTION 6.4. INDEMNIFICATION. (a) Unless exclusively caused by
Donnelley's arbitrary and capricious administration of the plans or a breach of
fiduciary duty by Donnelley, DESI shall indemnify and hold harmless the
Donnelley Indemnified Parties for all Losses sustained in connection with the
benefits provided or the actions taken or omitted to be taken in connection with
this Agreement, or otherwise relating to the provision of employee benefits to
employees or former employees of DESI, their beneficiaries, alternate payees or
any other person claiming benefits through them (except to the extent such
Losses are specifically allocated to Donnelley pursuant to Section 6.4(b) or
(c)), including without limitation Losses allocated to DESI under Section 5.3 or
arising in connection with (1) DESI's reduction, elimination or failure to
provide any benefit previously provided to its employees, (2) the provision of
benefits to DESI employees under the R. R. Donnelley & Sons Company
Comprehensive Medical Plan, (3) the transfer of account balances from the
Donnelley
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Savings Plan to the DESI Savings Plan where such Losses are incurred as a result
of (i) any act or omission by DESI (or DESI's representative) or (ii) a
determination by the Internal Revenue Service that the DESI Savings Plan is not
a tax-qualified plan, or (4) any Donnelley Plan becoming a multiple employer
plan due to DESI's continued participation in such plan following the IPO Date
(including, but not limited to, any Donnelley Plan becoming a multiple employer
welfare arrangement); provided however, that DESI shall have no obligation to
indemnify and hold harmless the Donnelley Indemnified Parties in respect of any
Losses to the extent such Losses are finally judicially determined to have
resulted from the gross negligence or willful misconduct of any of the Donnelley
Indemnified Parties.
(b) Donnelley shall indemnify and hold harmless the DESI Indemnified
Parties for all Losses which are exclusively caused by Donnelley's arbitrary and
capricious administration of the plans or a breach of fiduciary duty by
Donnelley and which are sustained in connection with or relate to the provision
of employee benefits to employees of DESI on or prior to the IPO Date or to
persons who, as of the IPO Date were former employees of DESI, and any of their
beneficiaries, alternate payees or any other person claiming benefits through
them (except to the extent such Losses are specifically allocated to DESI
pursuant to Section 6.4(a) or (c)), including without limitation Losses which
are so exclusively caused by Donnelley in the provision of such benefits and
which (i) are allocated to Donnelley under Section
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5.3 or (ii) arise in connection with (1) Donnelley's reduction, elimination or
failure to provide any benefit previously provided to such employees (2) a
determination by the Internal Revenue Service that the Donnelley Savings Plan is
not a tax-qualified plan, or (3) any Donnelley Plan becoming a multiple employer
plan.
(c) In the event that any Party retains the services of an attorney to
enforce any term of this Agreement, or to obtain a remedy for a breach of this
Agreement, the prevailing Party shall be entitled to recover its reasonable
costs and attorney fees, including the costs and attorney fees on appeal, if
any.
SECTION 6.5. CONSULTING ADVICE BY DONNELLEY. In the event that Donnelley
provides advice as a consultant to DESI on or after the IPO Date regarding the
establishment or administration of DESI's benefit plans, DESI shall pay
Donnelley a reasonable fee for such consulting advice and shall reimburse
Donnelley for all actual expenses incurred by Donnelley in providing such
advice.
SECTION 6.6. TIMELY PAYMENT. Each Party shall be required to pay any
amount due to the other Party pursuant to this Agreement in a timely manner on
the date on which such payment is due, and if no due date is specified, within
30 days
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after the date on which the Party to whom payment is owed makes written demand
for such payment from the other Party.
SECTION 6.7. DISPUTE RESOLUTION. The Parties agree to attempt to resolve
any dispute, controversy or claim between the Parties relating to the
implementation or administration of this Agreement or any obligations or related
services to be provided hereunder in good faith. In the event that any such
dispute, controversy or claim can not be resolved by the Parties'
representatives initially involved in the dispute, senior management of the
Parties shall confer to resolve such dispute, controversy or claim.
ARTICLE 7
TERMINATION OF DESI'S PARTICIPATION IN
DONNELLEY PLANS
Notwithstanding anything herein to the contrary, Donnelley (1) may
terminate any Donnelley Plan, or (2) may terminate the participation of DESI,
and any or all of DESI's employees in any Donnelley Plan, to the extent
necessary to comply with any applicable law. Donnelley shall inform DESI of
such termination as soon as practicable.
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ARTICLE 8
MISCELLANEOUS
SECTION 8.1. NO RIGHTS. This Agreement shall not give any employee
or any person any right to continued employment or to any employee benefits.
This Agreement shall not give any person other than a Party any rights,
including in particular any third-party beneficiary or other right to enforce
any provision of this Agreement or to receive damages for a breach of any such
provision. Nothing in this Agreement shall obligate Donnelley, DESI or any of
their respective direct or indirect subsidiaries to assist any DESI employee to
enforce any rights such employee may have with respect to any of the employee
benefits described in this Agreement.
SECTION 8.2. CORPORATE ACTION; DELEGATION OF AUTHORITY. Any action
taken by an officer at the level of Vice-President or above shall be considered
to be action taken by either Donnelley or DESI for purposes of this Agreement.
Without limiting the foregoing, the Chief Executive Officer of Donnelley or DESI
may delegate in writing to any other person the authority to act on behalf of
Donnelley or DESI, respectively, with respect to actions required under the
terms of this Agreement.
SECTION 8.3. NOTICES. Any written notice or communication to any
Party required or permitted under this Agreement shall be deemed to have been
duly given and received
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(1) on the date of service, if served personally or sent by telex or telecopier
transmission to the Party to whom notice is to be given with oral confirmation
of receipt, (2) on the fourth day after mailing, if mailed by first class
registered or certified mail, postage prepaid and return receipt requested, and
addressed to the Party to whom notice is to be given at the address stated
opposite its name below or at the most recent address specified by written
notice given to the other Parties, or (3) on the next day if sent by a
nationally recognized courier for next day service and so addressed and if there
is evidence of acceptance by receipt. Such notices or other communications
shall be sent to the following addresses:
Party Address
----- -------
Donnelley R. R. Donnelley & Sons Company
77 West Wacker Drive
Chicago, IL 60601
Attention: Assistant General
Counsel
DESI Donnelley Enterprise
Solutions Incorporated
161 North Clark Street
Chicago, IL 60601
Attention: Chief Executive
Officer
SECTION 8.4. SURVIVAL OF AGREEMENT. All provisions of this Agreement
shall be considered to have been relied upon by the Parties and shall survive
and remain in full force and effect, notwithstanding the initial public offering
of common stock of DESI. All provisions of this Agreement which by their
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nature should survive termination of this Agreement shall so survive.
SECTION 8.5 BINDING EFFECT. This Agreement shall become effective
when it shall have been executed by each Party, and thereafter shall be binding
upon and inure to the benefit of such persons and their respective successors,
permitted assigns and legal representatives.
SECTION 8.6. GOVERNING LAW. The Parties hereby agree that, to the
extent not preempted by ERISA, this Agreement shall be construed in accordance
with and governed by the internal laws of the State of Illinois.
SECTION 8.7. WAIVERS; AMENDMENT. Neither this Agreement nor any
provision hereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing executed by both Parties.
SECTION 8.8. SEVERABILITY. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
SECTION 8.9. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall
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constitute an original but all of which, when taken together, shall constitute
but one contract.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed by their respective authorized officers as of the date first set forth
above.
R. R. DONNELLEY & SONS COMPANY
By /s/ W. Ed Tyler
-------------------------------
Name: W. Ed Tyler
-------------------------
Title: Executive Vice President
------------------------
DONNELLEY ENTERPRISE
SOLUTIONS INCORPORATED
By /s/ Ken Goldstein
-------------------------------
Name: Ken Goldstein
-------------------------
Title: Vice President of
Human Resources
------------------------
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Exhibit 10.3
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
--------------------------------------------
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT dated as of October 25, 1996
(this "Agreement") between R.R. Donnelley & Sons Company, a Delaware corporation
("RRD"), and Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company").
W I T N E S E T H:
- - - - - - - - -
WHEREAS, RRD is the owner of all of the issued and outstanding capital
stock of the Company;
WHEREAS, RRD and the Company are members of an "affiliated group" (as
defined in Section 1504(a) of the Code) of which RRD is the common parent;
WHEREAS, as a result of the initial public offering of the Common Stock of
the Company pursuant to the Underwriting Agreement among the Company, Salomon
Brothers Inc, Montgomery Securities and J.P. Morgan Securities Inc. (the
"Underwriting Agreement"), it is expected that RRD and the Company will no
longer be members of an affiliated group; and
WHEREAS, RRD and the Company desire to set forth their rights and
obligations with respect to certain tax liabilities;
NOW, THEREFORE, in consideration of the agreements and mutual covenants
contained herein, the parties hereto agree as follows:
Section 1. Definitions. As used in this Agreement, the following terms
shall have the following meaning:
"Affiliate" shall mean, with respect to any entity, any other
individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust or unincorporated
organization which directly or indirectly controls, is controlled by or is
under common control with such entity.
"Balance Sheet" shall mean the balance sheet of the Company and the
Subsidiaries as of the Closing Date prepared in a manner consistent with the
balance sheet of June 30, 1996, included in Amendment No. 3 to the
Registration Statement on Form S-1 filed by the Company with the Securities
and Exchange Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Combined Group" shall mean the "affiliated group" (as defined in
Section 1504(a) of the Code) of which RRD is the common parent and any other
group of corporations that, at any time on or before the Closing Date, files
or has
<PAGE>
filed Tax Returns on a combined, consolidated or unitary basis with the
Company or the Subsidiaries (other than such a group which includes or has
included the Company and/or one or more of the Subsidiaries, but no other
corporation).
"Company Group Member" shall mean the Company and the Subsidiaries (and,
after the Closing Date, any Affiliate thereof) and their respective successors
and assigns.
"Closing Date" shall mean the date of the closing of the initial public
offering of the Common Stock of the Company pursuant to the Underwriting
Agreement.
"RRD Group Member" shall mean RRD and any Affiliates of RRD (other than
the Company and the Subsidiaries) and their respective successors and assigns.
"Subsidiaries" shall mean Integrated Analysis, Inc. and LANSystems
(U.K.) Ltd.
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") shall mean
any federal, state, local or foreign income, gross receipts, property, sales,
use, license, excise, franchise, employment, payroll, withholding, alternative
or add-on minimum, ad valorem, value added, transfer or excise tax, or any
other tax, custom, duty, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest or penalty, imposed by any
governmental authority.
"Tax Package" has the meaning set forth in Section 3(c).
"Tax Return" shall mean any return, report or similar statement required
to be filed with respect to any Tax (including any attached schedules),
including, without limitation, any information return, claim for refund,
amended return or declaration of estimated Tax.
Section 2. Liability for Taxes. (a) RRD shall be liable for, and indemnify
each Company Group Member against, all (i) Taxes imposed on the Company or any
Subsidiary solely as a result of being a member of a Combined Group pursuant to
Treas. Reg. (S) 1.1502-6 or similar provisions of state and local law and (ii)
Taxes imposed on the Company or any Subsidiary, or for which the Company or any
Subsidiary may otherwise be liable, for any taxable year or period (or portion
thereof) that ends on or before the Closing Date; provided, however, that RRD
shall not be liable for, and shall not indemnify any Company Group Member
against, (A) any Taxes shown as a liability or reserve on the Balance Sheet and
(B) up to $100,000 of Taxes described in clause (ii) of this Section 2(a) that
are not shown as a liability or reserve on the Balance Sheet (Taxes described in
this proviso,
2
<PAGE>
"Excluded Taxes"). Except to the extent shown as an asset on the balance sheet,
RRD shall be entitled to any refund of (or credit for) Taxes attributable to RRD
or any of its Affiliates (including the Company and each of the Subsidiaries)
allocable to any taxable year or period (or portion thereof) that ends on or
before the Closing Date, and the Company agrees to remit any such refund paid to
it to RRD.
(b) The Company shall be liable for, and indemnify each RRD Group Member
against, all Taxes imposed on the Company or any Subsidiary, or for which the
Company or any Subsidiary may otherwise be liable (including, without
limitation, Excluded Taxes); provided, however, that the Company shall not be
liable for, and shall not indemnify any RRD Group Member against, any Taxes for
which RRD is expressly liable pursuant to Section 2(a) of this Agreement.
Except as provided in Section 2(a) or 2(d) of this Agreement, the Company shall
be entitled to any refund of (or credit for) Taxes attributable to the Company
or any Subsidiary for any taxable year or period (or portion thereof).
(c) For purposes of Sections 2(a) and 2(b) of this Agreement, the
allocation of Taxes of a Combined Group to the Company and the Subsidiaries for
the taxable year or period (or portion thereof) ending on the Closing Date shall
be determined consistent with RRD's current tax sharing arrangement. Further,
whenever it is necessary to determine the liability for Taxes of the Company or
any Subsidiary for a partial taxable year or period (including a partial period
ending on the Closing Date), the determination of the Taxes of the Company or
such Subsidiary for the portion of such period shall be determined on a "closing
of the books basis" by assuming that the books of the Company or such Subsidiary
were closed at the close of such period, except that Taxes (such as property
Taxes) imposed on a periodic basis shall be allocated on a daily basis and
deductions (such as depreciation) allowable on a periodic basis shall be
allocated on a daily basis.
(d) Notwithstanding Section 2(a) of this Agreement, if, as a result of any
action, suit, investigation, audit, claim, assessment or amended Tax Return,
there is any change after the Closing Date in an item of income, gain, loss,
deduction, credit or amount of Tax that results in an increase in a Tax
liability for which RRD would otherwise be liable pursuant to Section 2(a), and
such change results in a potential decrease (the "Decrease Amount") in the Tax
liability of the Company, any Subsidiary or any Affiliate thereof for any
taxable year or period (or portion thereof) beginning after the Closing Date,
then RRD shall be entitled to the full amount of such Decrease Amount (whether
through (i) a retention by RRD of any Tax refund, reduction in Taxes, Tax
credit, or other benefit equal to such Decrease Amount; (ii) a payment by the
Company of an amount equal to the Decrease Amount; (iii) an offset by RRD of
amounts otherwise payable by RRD to the Company; (iv) a combination of the
3
<PAGE>
foregoing; or (v) other means). The Decrease Amount shall be determined by
assuming that (i) the Company, any Subsidiary or any Affiliate thereof is
subject to Tax at the highest marginal rate in effect for all affected taxing
jurisdictions at the time the Decrease Amount is determined, and (ii) the
potential decrease in Tax liability will be recognized by the Company, any
Subsidiary or any Affiliate thereof immediately.
(e) The Company shall pay, and shall indemnify RRD against, any real
property transfer or gains Tax, sales Tax, use Tax, stamp Tax, stock transfer
Tax, or other similar Tax imposed on the transactions contemplated by this
Agreement.
Section 3. Tax Returns. (a) RRD shall file or cause to be filed when due
all Tax Returns of any Combined Group and shall remit or cause to be remitted
any Taxes due in respect of such Tax Returns. The Company shall file or cause
to be filed when due all Tax Returns that are required to be filed after the
Closing Date by or with respect to the Company and each Subsidiary (other than
the Tax Returns of any Combined Group) and shall remit or cause to be remitted
any Taxes due in respect of such Tax Returns (it being understood that the
Company may cause such Tax Returns to be filed and such Taxes to be remitted
through RRD pursuant to the Transition Services Agreement dated as of the date
hereof). RRD or the Company shall pay the other party for the Taxes for which
RRD or the Company, respectively, is liable pursuant to Sections 2(a), 2(b), or
2(e) of this Agreement but which are payable with any Tax Return to be filed by
the other party pursuant to this Section 3(a) upon the written request of the
party entitled to payment, setting forth in detail the computation of the amount
owed by RRD or the Company, as the case may be, but in no event earlier than 10
days prior to the due date for the payment of such Taxes. All Tax Returns which
the Company is required to file or cause to be filed in accordance with this
Section 3(a) shall be prepared and filed in a manner consistent with past
practice and, on such Tax Returns, no position shall be taken, election made or
method adopted that is inconsistent with positions taken, elections made or
methods used in preparing and filing similar Tax Returns in prior periods.
(b) None of the Company, any Subsidiary or, after the Closing Date, any
Affiliate thereof shall (or shall cause or permit the Company or any Subsidiary
to) amend, refile or otherwise modify any Tax Return relating in whole or in
part to the Company or any Subsidiary with respect to any taxable year or period
ending on or before the Closing Date without the prior written consent of RRD,
which consent may be withheld in the sole discretion of RRD.
(c) The Company shall promptly prepare (and cause each Subsidiary to
prepare) and provide to RRD a package of Tax information materials, including,
without limitation, schedules
4
<PAGE>
and work papers (the "Tax Package") required by RRD to enable RRD to prepare and
file all Tax Returns required to be prepared and filed by it pursuant to Section
3(a). The Tax Package shall be completed in accordance with past practice,
including past practice as to providing such information and as to the method of
computation of separate taxable income or other relevant measure of income of
the Company. The Company shall cause the Tax Package to be delivered to RRD
within 60 days after requested by RRD.
Section 4. Contest Provisions. RRD shall have the sole right to represent
the Company's and each Subsidiary's interests in any Tax audit or administrative
or court proceeding relating to taxable periods ending on or before or including
the Closing Date, and to employ counsel of its choice at its expense. None of
the Company or any of its Affiliates may settle any Tax claim for any taxable
year or period ending on or before or including the Closing Date which may be
the subject of indemnification by RRD under Section 2(a) of this Agreement
without the prior written consent of RRD, which consent may be withheld in the
sole discretion of RRD.
Section 5. Assistance and Cooperation. After the Closing Date, each of
RRD and the Company shall (and cause their respective Affiliates to):
(a) assist the other party in preparing any Tax Returns which such other
party is responsible for preparing and filing in accordance with Section 3(a)
of this Agreement;
(b) cooperate fully in preparing for any audits of, or disputes with taxing
authorities regarding, any Tax Returns of the Company and each Subsidiary;
(c) make available to the other and to any taxing authority as reasonably
requested all information, records, and documents relating to Taxes of the
Company and each Subsidiary;
(d) provide timely notice to the other in writing of any pending or
threatened Tax audits or assessments of the Company and each Subsidiary for
taxable periods for which the other may have a liability under this Agreement;
(e) furnish the other with copies of all correspondence received from any
taxing authority in connection with any Tax audit or information request with
respect to any such taxable period; and
(f) timely sign and deliver such certificates or forms as may be necessary
or appropriate to establish an exemption from (or otherwise reduce), or file
Tax Returns or other
5
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reports with respect to, Taxes described in Section 2(e) of this Agreement
(relating to sales, transfer and similar Taxes).
Section 6. General Provisions.
(a) Effectiveness. This Agreement will be effective from and after the
Closing Date.
(b) Entire Agreement; Binding Effect. This Agreement (i) constitutes the
entire agreement and supersedes all other agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof
and (ii) shall not be assigned by either party (by operation of law or
otherwise) without the prior written consent of the other party.
(c) Severability. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof will not in any way be affected or impaired
thereby.
(d) Applicable Law. This Agreement shall be governed by and be construed
in accordance with the laws of the State of Illinois, without giving effect to
the principles thereof relating to conflicts of laws.
(e) Notices. All notices, requests and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, if
telecopied (only if confirmed), if sent by FedEx or other overnight courier or
delivery service or if mailed by registered or certified mail (postage prepaid,
return receipt requested) to the parties at the following addresses or facsimile
numbers:
(a) If to RRD:
R.R. Donnelley & Sons Company
77 West Wacker Drive
Chicago, IL 60601
Facsimile No.: (312) 326-8708
Attention: Paul F. Grossman, Director
Federal & International Taxes
(b) If to the Company:
Donnelley Enterprise Solutions, Incorporated
161 North Clark Street, Suite 2400
Chicago, Illinois 60601
Facsimile No.: (312) 419-7668
Attention: President
The address or facsimile number of a party, for the purposes of this Section
6(e), may be changed by giving written notice to the
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other party of such change in the manner provided herein for giving notice.
Unless and until such written notice is received, the addresses and facsimile
numbers provided herein shall be deemed to continue in effect for all purposes
hereunder.
(f) Amendment and Waiver. No amendment of any provision of this Agreement
shall in any event be effective, unless the same shall be in writing and signed
by the parties hereto. Any failure of any party to comply with any obligation,
agreement or condition hereunder may only be waived in writing by the other
party, but such waiver shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. No failure by any party to take any
action against any breach of this Agreement or default by the other party shall
constitute a waiver of such party's right to enforce any provision hereof or to
take any such action.
(g) Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and, subject to the Section 6(b)
hereof, their respective successors and assigns, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
(h) Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(i) Headings; Pronouns and Conjunctions. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Unless otherwise
indicated herein or the context otherwise requires, the singular shall include
the plural and the plural shall include the singular. The word "or" shall not be
deemed inclusive.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
R.R. DONNELLEY & SONS COMPANY
By: /s/ W. Ed Tyler
--------------------------------
Name: W. Ed Tyler
Title: Executive Vice President
DONNELLEY ENTERPRISE SOLUTIONS
INCORPORATED
By: /s/ Luke F. Botica
--------------------------------
Name: Luke F. Botica
Title: Senior Vice President and
Chief Financial Officer
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of October 2, 1996 by and among
Donnelley Enterprise Solutions Incorporated, a Delaware corporation (the
"Company"), and Rhonda I. Kochlefl (the "Executive").
WHEREAS, the Company has filed a Registration Statement on Form S-1 under
which it proposes to complete an initial public offering of its common stock;
and
WHEREAS, following the closing of its initial public offering of common
stock the Company desires to employ the Executive as its Chairman, President and
Chief Executive Officer, and the Executive desires to accept such employment,
for the term and upon the conditions set forth in this Agreement.
Agreement
---------
Now, therefore, the parties hereto hereby agree as follows:
1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Company offers and the Executive hereby accepts employment,
effective as of the time of the closing of the Company's initial public offering
of its common stock ("Common Stock") (the date of such closing being referred to
herein as the "Effective Date"); provided, however, that should the Effective
Date be on or after July 1, 1997, this Agreement shall be void ab initio, and of
no further force and effect.
2. Term. Subject to earlier termination as hereafter provided, the
Executive shall be employed hereunder for an original term commencing on the
Effective Date and ending at 5:00 p.m., Chicago time, on the fourth anniversary
of the Effective Date, or such later date to which the parties may agree. The
term of this Agreement is hereafter referred to as "the term of this Agreement"
or "the term hereof".
3. Capacity and Performance.
------------------------
3.1. Offices. During the term hereof and for the compensation
described in Section 4 below, the Executive shall serve as a member of the
Company's Board of Directors (the "Board"), and the Company's Chairman,
President and Chief Executive Officer. The Executive shall be subject to
the direction of, and shall have such other powers, duties and
responsibilities consistent with the Executive's position as Chairman,
President and Chief Executive Officer as may from time to time be
<PAGE>
prescribed by the Board of Directors. In addition, for so long as the
Executive is employed by the Company and, unless otherwise determined by
the Company's Board, without further compensation, the Executive shall
serve as a director of one or more of the Company's subsidiaries if so
elected or appointed from time to time. In furtherance of the foregoing,
during the term hereof, the Company will recommend the Executive for the
Board and will place the Executive's name on management's list of nominees
for the Board in the Company's proxy statements.
3.2. Performance. During the term hereof, the Executive shall be
employed by the Company and shall perform and discharge (faithfully,
diligently and to the best of the Executive's ability) such duties and
responsibilities on behalf of the Company and its subsidiaries as may be
designated from time to time by the Board and which are consistent with the
Executive's position as Chairman, President and Chief Executive Officer.
During the term hereof, the Executive shall devote the Executive's full
business time and attention to the advancement of the business and
interests of the Company and its subsidiaries and to the discharge of the
Executive's duties and responsibilities hereunder. Nothing contained herein
shall be construed to prohibit or restrict the Executive from (a) serving
in various capacities in community, civic, religious or charitable
organizations, (b) serving as a member of the boards of non-affiliated
entities provided such entities do not compete with the Company and such
service does not create a conflict of interest as determined by the Board,
or (c) attending to personal business and investment matters. It is
expressly agreed that any such service or activity permitted by the
previous sentence shall not unreasonably interfere with the performance of
the Executive's duties and, if so, the Executive, after consultation with
the Board, will comply with the reasonable requests to cease or limit the
service or activity. It is agreed that to the extent the Executive
determines it to be consistent with the proper performance of the
Executive's duties hereunder, the Executive may continue to perform the
Executive's duties from the Executive's home for up to one (1) day per
week.
4. Compensation and Benefits. As compensation for all services performed by
the Executive under this Agreement and performance of the Executive's duties and
of the obligations to the Company and its subsidiaries, pursuant to this
Agreement or otherwise and subject to Section 5 hereof:
4.1. Base Salary. During the term hereof, the Company shall pay the
Executive a base salary at the rate of $300,000 per year, payable in
accordance with the payroll practices of the Company for its executives but
no less than monthly and subject to increase at any time or from time to
time by the Board in its sole discretion. Such
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base salary, as from time to time increased, is hereafter referred to as
the "Base Salary". The Base Salary payable to the Executive in 1996 shall
be prorated for the period from the Effective Date through December 31,
1996 and for any subsequent period of service less than one full year.
4.2. Bonus Compensation. During the term hereof, the Company from time
to time shall pay the Executive an annual bonus (the "Bonus"). The Bonus in
respect of 1996 (the "1996 Bonus") will be calculated and payable in
accordance with and based on the following factors:
(1) If the Company's net income for 1996, as set forth in the Company's
audited financial statements (the "1996 Net Income"), is less than
$1,604,250 (the "Minimum Target"), the 1996 Bonus shall equal zero;
(2) If the 1996 Net Income is equal to or greater than the Minimum Target
but less than $2,139,000 (the "Base Target"), the 1996 Bonus shall equal
the sum of (i) 25% of the Executive's Base Salary as of the Effective Date
plus (ii) the number obtained by multiplying 25% of the Executive's Base
Salary as of the Effective Date by a fraction (which shall not be greater
than one), the numerator of which is the difference between the 1996 Net
Income and the Minimum Target and the denominator of which is the amount
determined by subtracting the Minimum Target from the Base Target;
(3) If the 1996 Net Income is equal to or greater than the Base Target but
less than $3,208,500 (the "Maximum Target"), the 1996 Bonus shall equal the
sum of (i) 50% of the Executive's Base Salary as of the Effective Date plus
(ii) the number obtained by multiplying 50% of the Executive's Base Salary
as of the Effective Date by a fraction (which shall not be greater than
one), the numerator of which is the difference between the 1996 Net Income
and the Base Target and the denominator of which is the amount determined
by subtracting the Base Target from the Maximum Target; or
(4) If the 1996 Net Income is equal to or greater than the Maximum Target,
the 1996 Bonus shall equal 100% of the Executive's Base Salary as of the
Effective Date.
Any compensation paid to the Executive as Bonus shall be in addition to the
Base Salary. The 1996 Bonus, if any, shall be pro-rated by multiplying (x)
the amount of the 1996 Bonus by (y) a fraction, the numerator of which is
the lesser of (I) the number of days from and including the Effective Date
through and including December 31, 1996 and (II) the number of days from
and including the Effective Date through and including the date of the
Executive's termination of employment, and the denominator
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of which is 366. Except with respect to the 1996 Bonus, any Bonus payable
to the Executive shall be pro-rated for any period of service less than a
full year by multiplying (x) the amount of the Bonus calculated for such
year by (y) a fraction, the numerator of which is the number of days from
and including January 1 of such year through and including the effective
date of the Executive's termination of employment and the denominator of
which is 365. All bonus and benefit plans are subject to annual review and
change by the Board relative to key strategic objectives for the year.
4.3. Stock Options and Restricted Stock.
----------------------------------
4.3.1. The Company shall establish the 1996 Stock Incentive Plan
(the "Plan") for management/employees of the Company. As of the
Effective Date, the Company shall grant to the Executive, pursuant to
the Plan, options to purchase a total of 60,000 shares of Common Stock
at an exercise price equal to the initial public offering price (the
"Options"). Subject to the termination of employment provisions
contained in the agreement evidencing the Options, the Options will
become exercisable in four cumulative annual installments on the one
year (25%), two year (25%), three year (25%) and four year (25%)
anniversaries of the Effective Date, subject to acceleration of
vesting in accordance with the terms of the agreement evidencing the
Options.
4.3.2. As of the Effective Date, the Company shall grant to the
Executive, pursuant to the Plan, 5,000 shares of Common Stock in the
form of restricted stock (the "Restricted Stock"). Subject to the
termination of employment provisions contained in the agreement
evidencing the Restricted Stock, the Restricted Stock will vest in
four annual installments on the one year (25%), two year (25%), three
year (25%) and four year (25%) anniversaries of the Effective Date,
subject to acceleration of vesting in accordance with the terms of the
agreement evidencing the Restricted Stock. On the date that any
Restricted Stock vests or as soon as reasonably practicable
thereafter, all legends will be removed and fully registered and
freely transferable stock certificates for the shares for which the
restrictions have lapsed shall be delivered to the Executive.
4.3.3. Within three months after the Effective Date the Company
shall cause all shares subject to the Options and the Restricted Stock
to be registered on Form S-8.
4.4. Vacations. During the term hereof, the Executive shall be
entitled to six
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(6) weeks of vacation per annual vacation period of the Company (currently
March 1 of each year through the last day of February of the following
year), such vacation to be taken at such times and intervals as shall be
determined by the Executive in the Executive's reasonable discretion,
provided, that, for the annual vacation period commencing on March 1, 1996
and ending on February 28, 1997, the Executive's number of vacation days
for the period commencing on the Effective Date and ending on February 28,
1997 shall be reduced by the number of vacation days taken by the Executive
(whether as an employee of R. R. Donnelley & Sons Company or the Company)
during the period commencing on March 1, 1996 and ending on the day prior
to the Effective Date. The Executive may not accumulate or carry over from
one calendar year to another any unused, accrued vacation time, unless the
Executive determines that business demands require deferral and carry over
of vacation from any year into up to the first six (6) months of the
succeeding year. The Executive shall not be entitled to compensation for
vacation time not taken, except that upon termination of employment, the
Executive shall be paid for all vacation time accrued but not taken.
4.5. Other Benefits. During the term hereof and subject to any
contribution therefor generally required of executives of the Company, the
Executive shall be entitled to participate in all employee benefit plans
and other programs (including, but not limited to, any medical, dental,
retirement, disability, life insurance, sick leave and other benefits) from
time to time adopted by the Board and in effect for executives of the
Company generally, except to the extent such plans are in a category of
benefit otherwise already provided to the Executive. Such participation
shall be subject to (i) the terms of the applicable plan documents, (ii)
generally applicable Company policies and (iii) the discretion of the Board
or any administrative or other committee provided for in or contemplated by
such plan. The Company may alter, modify, add to or delete its employee
benefit plans at any time as the Board, in its sole judgment, determines to
be appropriate.
4.6. Business Expenses. The Company shall pay or reimburse the
Executive for all reasonable business expenses incurred or paid by the
Executive in the performance of the Executive's duties and responsibilities
hereunder, subject to (i) any expense policy of the Company set by the
Board from time to time, and (ii) such reasonable substantiation and
documentation requirements as may be specified by the Board from time to
time.
4.7. Severance. In the event the Executive's employment with the
Company is (i) terminated by the Company other than for Cause in accordance
with Section 5.4 or (ii) terminated by the Executive in accordance with
Section 5.5, the Executive will be
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<PAGE>
entitled to receive in a lump sum payment an amount equal to the product of
(A) the sum of (x) the difference of (I) 21 minus (II) that number of
months which have elapsed from the Effective Date to the date of
termination up to a maximum of 21 months plus (y) 24, times (B) the
Executive's then applicable Base Salary calculated on a monthly basis at
the time of such termination (i.e., 1/12th of the Base Salary).
5. Termination of Employment and Severance Benefits. Notwithstanding the
provisions of Section 2 hereof, the Executive's employment hereunder shall
terminate prior to the expiration of the term of this Agreement under the
following circumstances:
5.1. Retirement or Death. In the event of the Executive's retirement
or death during the term hereof, the Executive's employment hereunder shall
immediately and automatically terminate. In the event of the Executive's
retirement after the age of sixty-five, age fifty-five with the prior
consent of the Board or death during the term hereof, the Company shall pay
to the Executive (or in the case of death, the Executive's designated
beneficiary or, if no beneficiary has been designated by the Executive, to
the Executive's estate) (i) Base Salary earned but unpaid through and
including the date of such retirement or death, (ii) any amount payable
pursuant to Section 4.6, (iii) any unpaid portion of any Bonus for any
fiscal year preceding the year in which such retirement or death occurs
that was earned but had not previously been paid and (iv) at the times the
Company pays its executives bonuses in accordance with its general payroll
policies, any Bonus which would have been paid had such retirement or death
not occurred during the fiscal year of such retirement or death (pro-rated
based on a formula, the numerator of which shall be the number of days
during the fiscal year of such retirement or death in which the Executive
was employed by the Company and the denominator of which shall be 365 or
366, as the case may be).
5.2. Disability.
----------
5.2.1. The Company may terminate the Executive's employment
hereunder, upon written notice to the Executive, in the event that the
Executive becomes disabled during the Executive's employment hereunder
through any illness, injury, accident or condition of either a
physical or psychological nature and, as a result, is unable to
perform substantially all of the Executive's duties and
responsibilities hereunder for an aggregate of one hundred eighty
(180) days during any period of three hundred and sixty-five (365)
consecutive calendar days.
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5.2.2. The Board may designate another employee to act
temporarily in the Executive's place during any period of the
Executive's disability. Notwithstanding any such designation, the
Executive shall continue to receive the Base Salary in accordance with
Section 4.1 and to receive benefits in accordance with Section 4.5, to
the extent permitted by the then current terms of the applicable
benefit plans, until the Executive becomes eligible for disability
income benefits under any disability income plan maintained by the
Company or until the termination of the Executive's employment,
whichever shall first occur. Upon becoming so eligible, or upon such
termination, whichever shall first occur, the Company shall pay to the
Executive (i) Base Salary earned but unpaid through and including the
date of such eligibility or termination, (ii) any amount payable
pursuant to Section 4.6, (iii) any unpaid portion of any Bonus for any
fiscal year preceding the year in which such eligibility or
termination occurs that was earned but had not previously been paid
and (iv) at the times the Company pays its executives bonuses in
accordance with its general payroll policies, any Bonus which would
have been paid had disability not occurred during the fiscal year in
which such eligibility or termination occurs (pro-rated based on a
formula, the numerator of which shall be, as applicable, (i) the
number of days from and including January 1 of the fiscal year in
which such eligibility occurs to but excluding the date of such
eligibility or (ii) the number of days on which the Executive was
employed by the Company during the fiscal year in which such
termination occurs and the denominator of which shall be 365 or 366,
as the case may be).
5.2.3. Except as provided in Section 5.2.2, while receiving
disability income payments under any disability income plan maintained
by the Company, the Executive shall not be entitled to receive any
Base Salary under Section 4.1 or Bonus payments under Section 4.2 but
shall continue to participate in the Company's benefit plans in
accordance with Section 4.5 and the terms of such plans, until the
termination of the Executive's employment. During the eighteen-month
period from and including the date of termination, the Company shall
pay for the cost of the Executive's participation in the Company's
group medical and dental plans, provided that the Executive is
entitled to continue such participation under applicable law and the
terms of such plan.
5.2.4. If any question shall arise as to whether during any
period the Executive is disabled through any illness, injury, accident
or condition of either a physical or psychological nature so as to be
unable to perform substantially all of the Executive's duties and
responsibilities hereunder, the Executive may, and at the request of
the Company shall, submit to a medical examination by a
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<PAGE>
physician either (i) mutually selected by the Company and the
Executive or the Executive's duly appointed guardian or (ii) failing
mutual agreement, a physician selected by each of a physician selected
by the Company and a physician selected by the Executive, to determine
whether the Executive is so disabled and such determination shall for
the purposes of this Agreement be conclusive of the issue. If such
question shall arise and the Executive shall fail to submit to such
medical examination, the Board's determination of the issue shall be
binding on the Executive.
5.3. By the Company for Cause. The Company may terminate the
Executive's employment hereunder for Cause as provided in Section 11.2. If
the Executive's employment hereunder is terminated for Cause, the Company
shall have no further obligation or liability to the Executive relating to
the Executive's employment hereunder, or the termination thereof, except
that the Company shall pay to the Executive (i) Base Salary earned but
unpaid through and including the date of termination, (ii) any amount
payable pursuant to Section 4.6, and (iii) any other amounts accrued by the
Executive but unpaid through and including the date of termination (it
being understood that a Bonus does not accrue until December 31 of the year
on which such Bonus is based).
5.4. By the Company other than for Cause. The Company may terminate
the Executive's employment hereunder other than for Cause at any time after
the Effective Date upon two weeks prior written notice to the Executive. In
the event of such termination, then the Company shall pay the Executive (i)
Base Salary earned but unpaid through and including the date of
termination, (ii) any amount payable pursuant to Section 4.6, (iii) the
amounts specified in Section 4.7, (iv) any unpaid portion of any Bonus for
any fiscal year preceding the year in which such termination occurs that
was earned but had not previously been paid, (v) at the times the Company
pays its executives bonuses in accordance with its general payroll
policies, any Bonus which would have been paid had termination not occurred
during the fiscal year in which such termination occurs (pro-rated based on
a formula, the numerator of which shall be the number of days during the
fiscal year in which such termination occurs the Executive was employed by
the Company and the denominator of which shall be 365 or 366, as the case
may be), and (vi) any other amounts accrued by the Executive but unpaid
through and including the date of termination. In addition, (i) 100% of the
number of shares of Common Stock subject to each option, including the
Options, held by the Executive on the date of such termination and which
are then unexercisable shall become exercisable as of the date of such
termination, and such Options may be exercised for a period up to ninety
(90) days following termination of the Executive's
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employment, and (ii) 100% of the shares of Restricted Stock granted to the
Executive as of the date of such termination which are then unvested shall
become vested as of the date of such termination.
5.5. By the Executive upon Breach or for Good Reason. The Executive
may terminate the Executive's employment hereunder (i) in the event that
the Company fails to perform, in any material respect, its obligations
under this Agreement, after written notice to the Company setting forth in
reasonable detail the nature of such breach if such breach remains uncured
for a period of 30 days following such written notice to the Company
provided that said notice shall not be required in the event of repeated,
intentional or willful failure to perform by the Company, (ii) there is a
material diminution in the responsibilities, duties and powers of the
Executive, including, but not limited to the failure of the Board or the
shareholders to elect the Executive to the Board, and to the positions of
Chairman of the Board and/or Chief Executive Officer of the Company, (iii)
the Executive's offices are moved from their present location to a location
outside of the Chicago, Illinois Metropolitan Area, or (iv) the Executive
becomes subject to the direction of any person other than the Board of
Directors of the Company. In the event of termination in accordance with
this Section 5.5, then the Company shall pay to the Executive (i) Base
Salary earned but unpaid through and including the date of termination,
(ii) any amount payable pursuant to Section 4.6, (iii) the amounts
specified in Section 4.7, (iv) any unpaid portion of any Bonus for any
fiscal year preceding the year in which such termination occurs that was
earned but had not previously been paid, (v) at the times the Company pays
its executives bonuses in accordance with its general payroll policies, any
Bonus which would have been paid had termination not occurred during the
fiscal year in which such termination occurs (pro-rated based on a formula,
the numerator of which shall be the number of days during the fiscal year
in which such termination occurs the Executive was employed by the Company
and the denominator of which shall be 365 or 366, as the case may be), and
(vi) any other amounts accrued by the Executive but unpaid through and
including the date of termination. In addition, (i) 100% of the number of
shares of Common Stock subject to each option, including the Options, held
by the Executive on the date of such termination and which are then
unexercisable shall become exercisable as of the date of such termination,
and such Options may be exercised for a period up to ninety (90) days
following termination of the Executive's employment, and (ii) 100% of the
shares of Restricted Stock granted to the Executive as of the date of such
termination which are then unvested shall become vested as of the date of
such termination.
5.6. By the Executive Other than upon Breach or for Good Reason. The
Executive may terminate the Executive's employment hereunder at any time
upon
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ninety (90) days' written notice to the Company. In the event of
termination of the Executive pursuant to this Section 5.6, the Board may
elect to waive the period of notice, or any portion thereof, and, whether
or not the Board so elects, the Company shall pay to the Executive (i) Base
Salary for the full notice period, (ii) any amount payable pursuant to
Section 4.6, (iii) at the times the Company pays its executives bonuses in
accordance with its general payroll policies, any Bonus which would have
been paid had termination not occurred during the fiscal year in which such
termination occurs (pro-rated as set forth in Section 5.5 above), and (iv)
any other amounts accrued by the Executive but unpaid through and including
the date of termination.
5.7. Post-Agreement Employment. In the event the Executive remains in
the employ of the Company or any of its Affiliates following termination of
this Agreement, by the expiration of the term hereof or otherwise, then
such employment shall be at will, unless otherwise agreed in writing.
6. Effect of Termination. The provisions of this Section 6 shall apply in
the event of termination due to the expiration of the term of this Agreement,
pursuant to Section 5 or otherwise.
6.1. Receipt of Certain Benefits. It is the mutual intention of the
Company and the Executive that the Executive receive the full benefit of
the compensation and benefits provided to the Executive during the term
hereof which compensation and benefits may be payable over periods beyond
the particular year of employment. The Executive shall not be obligated to
seek other employment by way of mitigation of the amounts due to the
Executive nor shall the Executive's earnings after termination reduce the
Company's obligations hereunder. Nothing in this Section 6.1 is intended or
shall be construed to affect the rights and obligations of the Company and
its Affiliates, on the one hand, and the Executive, on the other, with
respect to any loans, stock pledge arrangements, option plans or other
agreements to the extent said rights or obligations survive termination of
employment under the provisions of the documents relating thereto.
6.2. Termination of Health and Welfare Benefits. Except for medical
and dental insurance coverage continued pursuant to Sections 5.2 hereof and
any right of continuation of health coverage to the extent provided by
Sections 601 through 608 of ERISA, health and welfare benefits shall
terminate pursuant to the terms of the applicable benefit plans based on
the date of termination of the Executive's employment without regard to any
continuation of Base Salary or other payments to the Executive following
such date of termination pursuant to Section 5.
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6.3. Survival of Certain Provisions. Provisions of this Agreement
shall survive any termination if so provided herein or if necessary or
desirable fully to accomplish the purposes of such provision, including,
without limitation, the obligations of the Executive under Sections 7 and 8
hereof. The obligation of the Company to make payments to or on behalf of
the Executive under Sections 4.7, 5.4 or 5.5 hereof is expressly
conditioned upon the Executive's continued full performance of obligations
under Sections 7 and 8 hereof. The Executive recognizes that, except as
expressly provided in Section 4.7, 5.4 or 5.5, no compensation is earned
after termination of employment.
7. Confidential Information; Intellectual Property.
7.1. Confidentiality. The Executive acknowledges that the Company and
its Affiliates continually develop Confidential Information, that the
Executive may develop Confidential Information for the Company or its
Affiliates and that the Executive may learn of Confidential Information
during the course of employment. The Executive will comply with the
policies and procedures of the Company for protecting Confidential
Information and shall never disclose to any Person (except as required by
applicable law or for the proper performance of the Executive's duties and
responsibilities to the Company and its Affiliates), or use for the
Executive's own benefit or gain or otherwise use in a manner adverse to the
interests of the Company and its Affiliates, any Confidential Information
obtained by the Executive incident to the Executive's employment or other
association with the Company or any of its Affiliates. The Executive
understands that this restriction shall continue to apply after the
Executive's employment terminates, regardless of the reason for such
termination. Notwithstanding the foregoing, the Executive's covenant not to
disclose Confidential Information does not apply to information which (i)
becomes generally available to the public or otherwise becomes known
through sources other than the Executive, (ii) is subsequently disclosed to
the Executive by a source other than the Company who was under no duty of
confidence or (iii) is required to be disclosed by the Executive through
discovery in litigation or by order of a court or otherwise as required by
law.
7.2. Return of Documents. All documents, records, tapes and other
media of every kind and description relating to the business, present or
otherwise, of the Company or its Affiliates and any copies, in whole or in
part, thereof (the "Documents"), whether or not prepared by the Executive,
shall be the sole and exclusive property of the Company and its Affiliates,
provided, however, that Executive shall in all cases be entitled to retain
copies of documents relating to the Executive's employment rights,
compensation, benefits or other obligations of the
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Company to the Executive and the Executive to the Company. The Executive
shall safeguard all Documents and shall surrender to the Company at the
time the Executive's employment terminates, or at such earlier time or
times as the Board or its designee may specify, all Documents then in the
Executive's possession or control.
7.3. Assignment of Rights to Intellectual Property. The Executive
shall promptly and fully disclose all Intellectual Property to the Company.
The Executive hereby assigns and agrees to assign to the Company (or as
otherwise directed by the Company) the Executive's full right, title and
interest in and to all Intellectual Property. The Executive agrees to
execute any and all applications for domestic and foreign patents,
copyrights or other proprietary rights and to do such other acts (including
without limitation the execution and delivery of instruments of further
assurance or confirmation) requested by the Company to assign the
Intellectual Property to the Company and to permit the Company to enforce
any patents, copyrights or other proprietary rights to the Intellectual
Property. The Executive will not charge the Company for time spent in
complying with these obligations. All copyrightable works that the
Executive creates shall be considered "work made for hire".
8. Agreement not to Compete with the Business. The Executive agrees that
during the term of the Executive's employment hereunder and for a period of
twenty-four (24) months following the date of termination thereof (the "Non-
Competition Period"), the Executive will not, directly or indirectly (a) own,
manage, operate, control or participate in any manner in the ownership,
management, operation or control of, or be connected as an officer, employee,
partner, director, principal, consultant, agent or otherwise with, or have any
financial interest in, or aid or assist anyone else in the conduct of, any
business, venture or activity which competes with the business of the Company,
or any group, division or subsidiary of the Company, as described in the
Company's Registration Statement on Form S-1 relating to the Company's initial
public offering of Common Stock or, beginning with the Company's Annual Report
on Form 10-K for the year ending December 31, 1996, the Company's most recent
Annual Report on Form 10-K filed with the Securities and Exchange Commission
prior to the date (the "Date of Termination") the Executive's employment under
this Agreement is terminated (hereinafter, "Competitive Business") in the United
States or any other geographic area where such Competitive Business is being
conducted at the Date of Termination or (b) recruit or otherwise seek to induce
any employees of the Company or any of its subsidiaries to terminate their
employment or violate any agreement with or duty to the Company or any of its
subsidiaries. It is understood and agreed that, for the purposes of the
foregoing provisions of this Section 8, (i) no business, venture or activity
shall be deemed to be a Competitive Business unless not less than five percent
of the Company's consolidated gross sales or operating income is derived from,
or not less than five percent of the Company's consolidated
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assets are devoted to, such business, venture or activity; and (ii) no business,
venture or activity conducted by any entity by which the Executive is employed
or in which the Executive is interested or with which the Executive is connected
or associated shall be deemed to be a Competitive Business unless it is one from
which five percent or more of such entity's consolidated gross sales or
operating income is derived, or to which five percent or more of such entity's
consolidated assets are devoted; provided, however, that if the actual gross
sales or operating income or assets of such entity derived from or devoted to
such business, venture or activity is equal to or in excess of 10% of the most
nearly comparable figure for the Company, such business, venture or activity of
such entity shall be deemed to be a Competitive Business. Further, ownership of
not more than five percent of the voting stock of any publicly held corporation
shall not, of itself, constitute a violation of this Section 8.
9. Enforcement of Covenants. The Executive acknowledges that the Executive
has carefully read and considered all the terms and conditions of this
Agreement, including without limitation the restraints imposed upon the
Executive pursuant to Sections 7 and 8 hereof. The Executive agrees that said
restraints are necessary for the reasonable and proper protection of the Company
and its Affiliates and that the restraints are reasonable as to the definition
of Competitive Business and length of time. The Executive further acknowledges
that, were the Executive to breach any of the covenants or agreements contained
in Sections 7 or 8 hereof, the damage to the Company could be irreparable. The
Executive therefore agrees that the Company, in addition to any other remedies
available to it, shall be entitled to preliminary and permanent injunctive
relief against any breach or threatened breach by the Executive of any of said
covenants or agreements. The parties further agree that in the event that any
provision of Section 7 or 8 hereof shall be determined by any Court of competent
jurisdiction to be unenforceable by reason of its being extended over too great
a time, too large a geographic area or too great a range of activities, such
provision shall be deemed to be modified to permit its enforcement to the
maximum extent permitted by law.
10. Conflicting Agreements. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of the Executive's
obligations hereunder will not breach or be in conflict with any other agreement
to which or by which the Executive is a party or is bound and that the Executive
is not now subject to any covenants against competition or similar covenants
that would affect the performance of the Executive's obligations hereunder. The
Executive will not disclose to or use on behalf of the Company or any of its
Affiliates any proprietary information of a third party without such party's
consent.
11. Definitions. Terms defined elsewhere in this Agreement are used herein
as so defined. In addition, the following terms shall have the following
meanings:
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11.1. Affiliates. "Affiliates" means all persons and entities
directly or indirectly controlling, controlled by or under common control
with the Company.
11.2. Cause. The following events or conditions shall constitute
"Cause" for termination: (i) the willful refusal of the Executive to
substantially perform the Executive's duties to the Company (other than any
refusal resulting from the Executive's incapacity due to physical or mental
illness), including the Executive's obligations under this Agreement or
(ii) a willful and material breach by the Executive of Section 7.1, 7.3 or
8 or (iii) a conviction for fraud, embezzlement or other act of dishonesty
by the Executive that causes material injury to the Company or any of its
Affiliates or (iv) conviction of, or plea of nolo contendere to, any felony
involving dishonesty or moral turpitude.
For purposes of this Section 11.2, no act or failure to act on the
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by the Executive not in good faith and without reasonable belief that
the actions or omissions were in the best interest of the Company.
Notwithstanding and with respect to clause (i) only in the immediately
preceding paragraph, the Executive shall not be deemed terminated for Cause
unless and until there shall have been delivered to the Executive a copy of
a resolution duly adopted by the affirmative vote of not less than 75% of
the entire membership of the Board (excluding the Executive if the
Executive is a member of the Board) at a meeting of the Board called and
held for such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board and after the Executive has been provided with a
period of not less than 30 days within which to correct the situation)
finding that in the opinion of the Board the Executive engaged in the
conduct set forth in such clause (i) and specifying the particulars in
reasonable detail.
11.3. Confidential Information. "Confidential Information" means any
and all information of the Company and its Affiliates that is not generally
known by others with whom they compete or do business, or with whom they
plan to compete or do business and any and all information the disclosure
of which would otherwise be adverse to the interests of the Company or any
of its Affiliates. Confidential Information includes without limitation
such information relating to (i) the services or products sold or offered
by the Company or any of its Affiliates, (ii) the costs, sources of supply,
financial performance and strategic plans of the Company and its
Affiliates, (iii) the identity and special needs of the customers of the
Company and its Affiliates and (iv) the people and organizations with whom
the Company and its Affiliates have business relationships and those
relationships. Confidential Information also includes
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comparable information that the Company or any of its Affiliates have
received belonging to others or which was received by the Company or any of
its Affiliates with any understanding that it would not be disclosed.
11.4. ERISA. "ERISA" means the federal Employee Retirement Income
Security Act of 1974 or any successor statute, and the rules and
regulations thereunder, and in the case of any referenced section thereof
any successor section thereto, collectively and as from time to time
amended and in effect.
11.5. Intellectual Property. "Intellectual Property" means
inventions, discoveries, developments, methods, processes, compositions,
works, concepts and ideas (whether or not patentable or copyrightable or
constituting trade secrets) conceived, made, created, developed or reduced
to practice by the Executive (whether alone or with others, whether or not
during normal business hours or on or off Company premises) during the
Executive's employment that relate to either the business of the Company or
any of its Affiliates or any prospective activity of the Company or any of
its Affiliates.
11.6. Person. "Person" means an individual, a corporation, an
association, a partnership, a limited liability company, an estate, a trust
and any other entity or organization.
12. Withholding. All payments made by the Company under this Agreement
shall be reduced by any tax or other amounts required to be withheld by the
Company under applicable law.
13. Miscellaneous.
13.1. Assignment. Neither the Company nor the Executive may make any
assignment of this Agreement or any interest herein (provided, however,
that nothing contained herein shall be construed to place any limitation or
restriction on the transfer of the Common Stock in addition to any
restrictions set forth in any agreement applicable to such shares) without
the prior written consent of the other. This Agreement shall inure to the
benefit of and be binding upon the Company and the Executive, and their
respective successors, executors, administrators, heirs and permitted
assigns.
13.2. Severability. If any portion or provision of this Agreement
shall to any extent be declared illegal or unenforceable by a court of
competent jurisdiction, then
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the application of such provision in such circumstances shall be deemed
modified to permit its enforcement to the maximum extent permitted by law,
and both the application of such portion or provision in circumstances
other than those as to which it is so declared illegal or unenforceable and
the remainder of this Agreement shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to
the fullest extent permitted by law.
13.3. Waiver; Amendment. No waiver of any provision hereof shall be
effective unless made in writing and signed by the waiving party. The
failure of either party to require the performance of any term or
obligation of this Agreement, or the waiver by either party of any breach
of this Agreement, shall not prevent any subsequent enforcement of such
term or obligation or be deemed a waiver of any subsequent breach. This
Agreement may be amended or modified only by a written instrument signed by
the Executive and the Company.
13.4. Notices. Any and all notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall
be effective when delivered in person or two business days after being
deposited in the United States mail, postage prepaid, registered or
certified, and addressed (a) in the case of the Executive, to Rhonda I.
Kochlefl at Donnelley Enterprise Solutions Incorporated, 161 North Clark
Street, Suite 2400, Chicago, Illinois 60601 or, (b) in the case of the
Company, at its principal place of business and to the attention of Board
of Directors; or to such other address as either party may specify by
notice to the other.
13.5. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the terms and conditions of
the Executive's employment and, except as otherwise provided herein,
supersedes all prior communications, agreements and understandings, written
or oral, with the Company with respect to the terms and conditions of the
Executive's employment, including the Original Agreement.
13.6. Headings. The headings and captions in this Agreement are for
convenience only and in no way define or describe the scope or content of
any provision of this Agreement.
13.7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which together
shall constitute one and the same instrument.
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13.8. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic substantive laws of the State of
Illinois without giving effect to any choice or conflict of laws provision
or rule that would cause the application of the domestic substantive laws
of any other jurisdiction.
13.9. Legal Fees. In any action brought by the Executive to enforce
her rights hereunder, DESI shall reimburse, indemnify and hold harmless the
Executive from her fees and reasonable expenses of counsel; provided,
however, that such indemnification shall not extend to any action brought
by the Executive in bad faith or without a reasonable likelihood of success
under the terms of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been executed by the Company, by its
duly authorized representative, and by the Executive, as of the date first above
written.
THE COMPANY: DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
By:/s/Deborah M. Regan
----------------------------------------
Name: Deborah M. Regan
Title: Secretary
THE EXECUTIVE: /s/ Rhonda I. Kochlefl
-------------------------------------------
Rhonda I. Kochlefl
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of October 4, 1996 by and among
Donnelley Enterprise Solutions Incorporated, a Delaware corporation (the
"Company"), and Leo S. Spiegel (the "Executive").
WHEREAS, the Company currently employs the Executive pursuant to the terms
of an Agreement dated May, 1995, as amended February 29, 1996 (such Agreement,
as amended, hereinafter referred to as the "Original Agreement");
WHEREAS, the Company has filed a Registration Statement on Form S-1 under
which it proposes to complete an initial public offering of its common stock;
and
WHEREAS, following the closing of its initial public offering of common
stock the Company desires to employ the Executive as its Senior Vice President
and Chief Technology Officer, and the Executive desires to accept such
employment, for the term and upon the conditions set forth in this Agreement.
Agreement
Now, therefore, the parties hereto hereby agree as follows:
1. Employment; Termination of Original Agreement. Subject to the terms
and conditions set forth in this Agreement, the Company offers and the Executive
hereby accepts employment, effective as of the time of the closing of the
Company's initial public offering of its common stock ("Common Stock") (the date
of such closing being referred to herein as the "Effective Date"). As of the
Effective Date, the Original Agreement shall cease to be effective and shall
terminate in its entirety except for (i) rights and obligations of the parties
accrued prior to the Effective Date, (ii) the right of the Executive to receive
and the Company to make the $250,000 payment if not previously made to the
Executive under Paragraph 5(d) of the Original Agreement, which payment shall be
made no later than October 31, 1996, and (iii) the right of the Executive to
receive and the Company to make the payments required under Paragraph 6(f) of
the Original Agreement.
2. Term. Subject to earlier termination as hereafter provided, the
Executive shall be employed hereunder for an original term commencing on the
Effective Date and ending at 5:00 p.m., Chicago time, on the fourth anniversary
of the Effective Date, or such later date to which the parties may agree. The
term of this Agreement is hereafter referred to as "the term of this Agreement"
or "the term hereof". If the closing of the Company's initial public
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offering of its Common Stock is not consummated on or before December 31, 1996,
this Agreement shall automatically terminate and be without further force or
effect.
3. Capacity and Performance.
3.1. Offices. During the term hereof, the Executive shall serve as a
member of the Company's Board of Directors (the "Board") and as the
Company's Senior Vice President and Chief Technology Officer. The Executive
shall be subject to the direction of, and shall have such other powers,
duties and responsibilities consistent with those of the Executive
immediately prior to the Effective Date unless the Chief Executive Officer,
with the consent of the Executive determines to assign greater duties to
the Executive extending to a wider scope of responsibilities. In addition,
for so long as the Executive is employed by the Company and, without
further compensation unless otherwise determined by the Board, the
Executive shall serve as a director of one or more of the Company's
subsidiaries if so elected or appointed from time to time. In furtherance
of the foregoing, during the term hereof, the Company will support and
recommend the Executive for the Board and will place the Executive's name
on management's list of nominees for the Board in the Company's proxy
statements.
3.2. Performance. During the term hereof, the Executive shall be
employed by the Company and shall perform and discharge (faithfully,
diligently and to the best of the Executive's ability) such duties and
responsibilities on behalf of the Company and its subsidiaries as may be
designated from time to time by the Chief Executive Officer and which are
consistent with the Executive's position as Senior Vice President and Chief
Technology Officer. During the term hereof, the Executive shall devote the
Executive's full business time and attention to the advancement of the
business and interests of the Company and its subsidiaries and to the
discharge of the Executive's duties and responsibilities hereunder. Nothing
contained herein shall be construed to prohibit or restrict the Executive
from (a) serving in various capacities in community, civic, religious or
charitable organizations, or (b) attending to personal business and
investment matters. Further, the Executive shall be permitted to (i) serve
as a member of the scientific or technology board or committee or on the
Board of Directors of or as a consultant to, other entities, that do not
directly compete with the Company, and (ii) be the author of and publish
and present articles, abstracts and manuscripts on technological issues,
whether or not relating to the business of the Company, and in each case
upon the prior approval of the Board of the Company, which approval shall
not be unreasonably withheld provided that such participation is not deemed
in conflict with the best interests of the Company and its affiliates
(collectively, together with the activities permitted pursuant to the
immediately preceding sentence, "Permitted
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Activities"). The Executive shall own all rights in (x) the results of the
Permitted Activities described in (i) above, and (y) materials written
other than materials written on Company time or using material Company
resources (the "Executive Publications") and shall receive and retain any
and all remunerations in respect of the Executive Publications and the
Permitted Activities described in (i) herein, without diminution or set
off, or abatement of any amounts payable to the Executive by the Company or
its affiliates. It is expressly agreed that any such service or activity
permitted by the previous sentences shall not unreasonably interfere with
the performance of the Executive's duties and, if so, the Executive, after
consultation with the Chief Executive Officer, will comply with the
reasonable requests to cease or limit the service or activity.
3.3. Location. The Company agrees to employ the Executive in an
office located in San Diego, California, and reporting directly to the
Chief Executive Officer of the Company. The Company shall provide for the
Executive's use an office and secretarial support at its Corporate
headquarters in Chicago, Illinois, but the Executive shall not be required
to work in a substantially full-time or continuous basis (whether for full
weeks or otherwise) at such headquarters. The Company will continue to
provide the Executive with an office and secretarial services in San Diego,
California, comparable to those enjoyed prior to the Effective Date, at the
Company's expense.
4. Compensation and Benefits. As compensation for all services performed
by the Executive under this Agreement and performance of the Executive's duties
and of the obligations to the Company and its subsidiaries, pursuant to this
Agreement or otherwise and subject to Section 5 hereof:
4.1. Base Salary. During the term hereof, the Company shall pay the
Executive a base salary at the rate of $250,000 per year, payable in
accordance with the payroll practices of the Company for its executives and
subject to increase at any time or from time to time by the Board in its
sole discretion. Such base salary, as from time to time increased, is
hereafter referred to as the "Base Salary". The Base Salary payable to the
Executive in 1996 shall be prorated for the period from the Effective Date
through December 31, 1996 and for any subsequent period of service less
than one full year.
4.2. Bonus Compensation. During the term hereof, the Company from
time to time shall pay the Executive an annual bonus (the "Bonus"). The
Bonus in respect of 1996 (the "1996 Bonus") will be calculated and payable
in accordance with and based on the following factors:
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(1) If the Company's net income for 1996, as set forth in the Company's audited
financial statements (the "1996 Net Income"), is less than $1,604,250 (the
"Minimum Target"), the 1996 Bonus shall equal zero;
(2) If the 1996 Net Income is equal to or greater than the Minimum Target but
less than $2,139,000 (the "Base Target"), the 1996 Bonus shall equal the sum of
(i) 20% of the Executive's Base Salary as of the Effective Date plus (ii) the
number obtained by multiplying 20% of the Executive's Base Salary as of the
Effective Date by a fraction (which shall not be greater than one), the
numerator of which is the difference between the 1996 Net Income and the Minimum
Target and the denominator of which is the amount determined by subtracting the
Minimum Target from the Base Target;
(3) If the 1996 Net Income is equal to or greater than the Base Target but less
than $3,208,500 (the "Maximum Target"), the 1996 Bonus shall equal the sum of
(i) 40% of the Executive's Base Salary as of the Effective Date plus (ii) the
number obtained by multiplying 40% of the Executive's Base Salary as of the
Effective Date by a fraction (which shall not be greater than one), the
numerator of which is the difference between the 1996 Net Income and the Base
Target and the denominator of which is the amount determined by subtracting the
Base Target from the Maximum Target; or
(4) If the 1996 Net Income is equal to or greater than the Maximum Target, the
1996 Bonus shall equal 80% of the Executive's Base Salary as of the Effective
Date.
Any compensation paid to the Executive as Bonus shall be in addition to the Base
Salary. The 1996 Bonus, if any, shall be pro-rated by multiplying (x) the
amount of the 1996 Bonus by (y) a fraction, the numerator of which is the lesser
of (I) the number of days from and including the Effective Date through and
including December 31, 1996 and (II) the number of days from and including the
Effective Date through and including the date of the Executive's termination of
employment, and the denominator of which is 365. Except with respect to the
1996 Bonus, any Bonus payable to the Executive shall be pro-rated for any period
of service less than a full year by multiplying (x) the amount of the Bonus
calculated for such year by (y) a fraction, the numerator of which is the number
of days from and including January 1 of such year through and including the
effective date of the Executive's termination of employment and the denominator
of which is 365. All bonus and benefit plans are subject to annual review and
change by the Board prior to the commencement of such year relative to key
strategic objectives for the year, although it is the current intention of the
Company and the Company shall recommend to the Board that the bonus for 1997 be
calculated on the same basis as that for 1996, adjusted for projected 1997 net
income targets.
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4.3. Stock Options.
4.3.1. The Company shall establish the 1996 Stock Incentive Plan (the
"Plan") for management/employees of the Company. As of the Effective Date,
the Company shall grant to the Executive, pursuant to the Plan, options to
purchase a total of 40,000 shares of Common Stock at an exercise price
equal to the initial public offering price (the "Options"). Subject to the
termination of employment provisions contained in the agreement evidencing
the Options, the Options will become exercisable in four annual
installments on the one year (25%), two year (25%), three year (25%) and
four year (25%) anniversaries of the Effective Date, subject to
acceleration of vesting in accordance with the terms of the agreement
evidencing the Options.
4.3.2. Within three months after the Effective Date the Company shall
cause all shares subject to the Options to be registered on Form S-8.
4.4. Vacations. During the term hereof, the Executive shall be entitled
to five (5) weeks of vacation per annual vacation period of the Company
(currently March 1 of each year through the last day of February of the
following year), such vacation to be taken at such times and intervals as shall
be determined by the Executive in the Executive's reasonable discretion,
provided, that, for the annual vacation period commencing on March 1, 1996 and
ending on February 28, 1997, the Executive's number of vacation days for the
period commencing on the Effective Date and ending on February 28, 1997 shall be
reduced by the number of vacation days taken by the Executive (whether as an
employee of LANSystems, Inc. or the Company) during the period commencing on
March 1, 1996 and ending on the day prior to the Effective Date. The Executive
may not accumulate or carry over from one calendar year to another any unused,
accrued vacation time, unless the Chief Executive Officer of the Company
determines that business demands require deferral and carry over of vacation
from any year into up to the first six (6) months of the succeeding year. The
Executive shall not be entitled to compensation for vacation time not taken.
4.5. Other Benefits. During the term hereof and subject to any
contribution therefor generally required of executives of the Company, the
Executive shall be entitled to participate in all employee benefit plans and
other programs (including, but not limited to, any medical, dental, retirement,
disability, life insurance, sick leave and other benefits) from time to time
adopted by the Board and in effect for executives of the Company generally,
except to the extent such plans are in a category of benefit otherwise already
provided to the Executive. Such participation shall be subject to (i)
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the terms of the applicable plan documents, (ii) generally applicable Company
policies and (iii) the discretion of the Board or any administrative or other
committee provided for in or contemplated by such plan. The Company may alter,
modify, add to or delete its employee benefit plans at any time as the Board, in
its sole judgment, determines to be appropriate.
4.6. Business Expenses. The Company shall pay or reimburse the Executive
for all reasonable business expenses incurred or paid by the Executive in the
performance of the Executive's duties and responsibilities hereunder, subject to
(i) any expense policy of the Company set by the Board from time to time, and
(ii) such reasonable substantiation and documentation requirements as may be
specified by the Board from time to time.
4.7. Severance. In the event the Executive's employment with the Company
is (i) terminated by the Company other than for Cause in accordance with Section
5.4 or (ii) terminated by the Executive in accordance with Section 5.5, the
Executive will be entitled to that number of monthly severance payments equal to
(x) 21 minus (y) that number of months which have elapsed from the Effective
Date to the date of termination up to a maximum of 21 months plus (z) 24. Each
monthly severance payment shall be in an amount equal to the Executive's then
applicable Base Salary calculated on a monthly basis at the time of such
termination (i.e., 1/12th of the Base Salary) and shall be paid on the last day
of a calendar month.
4.8. Company Automobile. It is understood that as of the Effective Date,
the Company is providing to the Executive an automobile for his use and at the
expense of the Company (including the cost of insurance of such automobile),
pursuant to Paragraph 6 (f) of the Original Agreement. The Company shall
continue to provide the Executive with such automobile throughout the remaining
term of the lease covering such automobile, including the payment of related
insurance expenses, and will reimburse the Executive for his business use of
such automobile at the per mile rate established by the Company for all its
employees from time-to-time. At such time as the lease for the automobile
provided by the Company expires by its own terms, the Company shall either, at
the election of the Executive, (i) exercise the option to purchase the leased
automobile, pay all amounts due under the terms of the lease, and transfer title
to such automobile to the Executive free and clear of all liens and
encumbrances, or (ii) pay to the Executive an amount equal to the cost of
exercising the option described in (i) hereof. Furthermore, other than as set
forth herein, following the termination of the lease, the Company shall be under
no obligation to continue to provide any vehicle or vehicle allowance to the
Executive.
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5. Termination of Employment and Severance Benefits. Notwithstanding the
provisions of Section 2 hereof, the Executive's employment hereunder shall
terminate prior to the expiration of the term of this Agreement under the
following circumstances:
5.1. Retirement or Death. In the event of the Executive's retirement
or death during the term hereof, the Executive's employment hereunder shall
immediately and automatically terminate. In the event of the Executive's
retirement after the age of sixty-five, age fifty-five with the prior
consent of the Board or death during the term hereof, the Company shall pay
to the Executive (or in the case of death, the Executive's designated
beneficiary or, if no beneficiary has been designated by the Executive, to
the Executive's estate) (i) Base Salary earned but unpaid through and
including the date of such retirement or death, (ii) any amount payable
pursuant to Section 4.6, (iii) any unpaid portion of any Bonus for any
fiscal year preceding the year in which such retirement or death occurs
that was earned but had not previously been paid, (iv) at the times the
Company pays its executives bonuses in accordance with its general payroll
policies, any Bonus which would have been paid had such retirement or death
not occurred during the fiscal year of such retirement or death (pro-rated
based on a formula, the numerator of which shall be the number of days
during the fiscal year of such retirement or death in which the Executive
was employed by the Company and the denominator of which shall be 365 or
366, as the case may be), (v) any non-compete payment not previously made
to the Executive under Paragraph 5(d) of the Original Agreement, and (vi)
any other amounts accrued by the Executive but unpaid through and including
the date of such retirement or death, as the case may be.
5.2. Disability.
5.2.1. The Company may terminate the Executive's employment
hereunder, upon written notice to the Executive, in the event that the
Executive becomes disabled during the Executive's employment hereunder
through any illness, injury, accident or condition of either a
physical or psychological nature which is expected to continue
indefinitely and, as a result, is incapable of performing the material
portion of the services contemplated hereby (as confirmed by competent
medical evidence), for an aggregate of one hundred eighty (180) days
during any period of three hundred and sixty-five (365) consecutive
calendar days.
5.2.2. The Board may designate another employee to act
temporarily in the Executive's place during any period of the
Executive's disability. Notwithstanding any such designation, the
Executive shall continue to receive
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the Base Salary in accordance with Section 4.1 and to receive benefits
in accordance with Section 4.5, to the extent permitted by the then
current terms of the applicable benefit plans, until the Executive
becomes eligible for disability income benefits under any disability
income plan maintained by the Company or until the termination of the
Executive's employment, whichever shall first occur. Upon becoming so
eligible, or upon such termination, whichever shall first occur, the
Company shall pay to the Executive (i) Base Salary earned but unpaid
through and including the date of such eligibility or termination,
(ii) any amount payable pursuant to Section 4.6, (iii) any unpaid
portion of any Bonus for any fiscal year preceding the year in which
such eligibility or termination occurs that was earned but had not
previously been paid, (iv) at the times the Company pays its
executives bonuses in accordance with its general payroll policies,
any Bonus which would have been paid had disability not occurred
during the fiscal year in which such eligibility or termination occurs
(pro-rated based on a formula, the numerator of which shall be, as
applicable, (i) the number of days from and including January 1 of the
fiscal year in which such eligibility occurs to but excluding the date
of such eligibility or (ii) the number of days on which the Executive
was employed by the Company during the fiscal year in which such
termination occurs and the denominator of which shall be 365 or 366,
as the case may be), (v) any non-compete payment not previously made
to the Executive under Paragraph 5(d) of the Original Agreement, and
(vi) any other amounts accrued by the Executive but unpaid through and
including the date of becoming so eligible or termination, as the case
may be.
5.2.3. Except as provided in Section 5.2.2, while receiving
disability income payments under any disability income plan maintained
by the Company, the Executive shall not be entitled to receive any
Base Salary under Section 4.1 or Bonus payments under Section 4.2 but
shall continue to participate in the Company's benefit plans in
accordance with Section 4.5 and the terms of such plans, until the
termination of the Executive's employment. During the eighteen-month
period from and including the date of termination, the Company shall
pay for the cost of the Executive's participation in the Company's
group medical and dental plans, provided that the Executive is
entitled to continue such participation under applicable law and the
terms of such plan.
5.2.4. If any question shall arise as to whether during any
period the Executive is disabled through any illness, injury, accident
or condition of either a physical or psychological nature so as to be
unable to perform substantially all
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of the Executive's duties and responsibilities hereunder, the
Executive may, and at the request of the Company shall, submit to a
medical examination by a physician selected by the Company to whom the
Executive or the Executive's duly appointed guardian, if any, has no
reasonable objection to determine whether the Executive is so disabled
and such determination shall for the purposes of this Agreement be
conclusive of the issue. If such question shall arise and the
Executive shall fail to submit to such medical examination, the
Board's determination of the issue shall be binding on the Executive.
5.3. By the Company for Cause. The Company may terminate the
Executive's employment hereunder for Cause as provided in Section 11.2. If
the Executive's employment hereunder is terminated for Cause, the Company
shall have no further obligation or liability to the Executive relating to
the Executive's employment hereunder, or the termination thereof, except
that the Company shall pay to the Executive (i) Base Salary earned but
unpaid through and including the date of termination, (ii) any amount
payable pursuant to Section 4.6, (iii) any other amounts accrued by the
Executive but unpaid through and including the date of termination (it
being understood that a Bonus does not accrue until December 31 of the year
on which such Bonus is based), (iv) any non-compete payment not previously
made to the Executive under paragraph 5(d) of the Original Agreement except
that Executive shall not be entitled to receive such non-compete payment in
the event that his employment is terminated due to a breach of his
obligations under Section 8 of this Agreement, and (v) any other amounts
accrued by the Executive but unpaid through and including the date of
becoming so eligible or termination, as the case may be.
5.4. By the Company other than for Cause. The Company may terminate
the Executive's employment hereunder other than for Cause at any time after
the Effective Date upon two weeks prior written notice to the Executive. In
the event of such termination, then the Company shall pay the Executive (i)
Base Salary earned but unpaid through and including the date of
termination, (ii) any amount payable pursuant to Section 4.6, (iii) the
amounts specified in Section 4.7, (iv) any unpaid portion of any Bonus for
any fiscal year preceding the year in which such termination occurs that
was earned but had not previously been paid, (v) at the times the Company
pays its executives bonuses in accordance with its general payroll
policies, any Bonus which would have been paid had termination not occurred
during the fiscal year in which such termination occurs (pro-rated based on
a formula, the numerator of which shall be the number of days during the
fiscal year in which such termination occurs the Executive was employed by
the Company and the denominator of which shall be 365 or 366, as the case
may be), (vi) any non-compete payment not previously made to the Executive
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under paragraph 5(d) of the Original Agreement, and (vii) any other amounts
accrued by the Executive but unpaid through and including the date of
termination. In addition, 100% of the number of shares of Common Stock
subject to each option, including the Options, held by the Executive on the
date of such termination shall become immediately and fully vested.
5.5. By the Executive upon Breach or for Good Reason. The Executive
may terminate the Executive's employment hereunder (and such termination
shall be deemed termination by the Company without Cause but subject only
to the provisions of this Section 5.5 and not subject to the provisions of
Section 5.4 above) (i) in the event that the Company fails to perform, in
any material respect, its obligations under this Agreement, after written
notice to the Company setting forth in reasonable detail the nature of such
breach if such breach remains uncured for a period of 30 days following
such written notice to the Company, (ii) there is a material diminution in
the responsibilities, duties and powers of the Executive, (iii) the
Executive's offices are moved from their present location to a location
outside of the San Diego, California, Metropolitan Area, or (iv) the
Executive fails to be elected to the Board, fails to be elected as a Senior
Vice President of the Company, or becomes subject to the direction of any
person other than the Chief Executive Officer. In the event of termination
in accordance with this Section 5.5, then the Company shall pay to the
Executive (i) Base Salary earned but unpaid through and including the date
of termination, (ii) any amount payable pursuant to Section 4.6, (iii) the
amounts specified in Section 4.7, (iv) any unpaid portion of any Bonus for
any fiscal year preceding the year in which such termination occurs that
was earned but had not previously been paid and (v) at the times the
Company pays its executives bonuses in accordance with its general payroll
policies, any Bonus which would have been paid had termination not occurred
during the fiscal year in which such termination occurs (pro-rated based on
a formula, the numerator of which shall be the number of days during the
fiscal year in which such termination occurs the Executive was employed by
the Company and the denominator of which shall be 365 or 366, as the case
may be), (vi) any non-compete payment not previously made to the Executive
under paragraph 5(d) of the Original Agreement, and (vii) any other amounts
accrued by the Executive but unpaid through and including the date of
termination. In addition, 100% of the number of shares of Common Stock
subject to each option, including the Options, held by the Executive on the
date of such termination shall become immediately and fully vested.
5.6. By the Executive Other than upon Breach or for Good Reason. The
Executive may terminate the Executive's employment hereunder at any time
upon ninety (90) days' written notice to the Company. In the event of
termination of the
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Executive pursuant to this Section 5.6, the Board may elect to waive the
period of notice, or any portion thereof, and, whether or not the Board so
elects, the Company shall pay to the Executive (i) Base Salary for the full
notice period and (ii) any amount payable pursuant to Section 4.6, and
(iii) at the times the Company pays its executives bonuses in accordance
with its general payroll policies, any Bonus which would have been paid had
termination not occurred during the fiscal year in which such termination
occurs (pro-rated as set forth in Section 5.5 above).
5.7. Post-Agreement Employment. In the event the Executive remains
in the employ of the Company or any of its Affiliates following termination
of this Agreement, by the expiration of the term hereof or otherwise, then
such employment shall be at will, unless otherwise agreed in writing.
6. Effect of Termination. The provisions of this Section 6 shall apply in
the event of termination due to the expiration of the term of this Agreement,
pursuant to Section 5 or otherwise.
6.1. Receipt of Certain Benefits. It is the mutual intention of the
Company and the Executive that the Executive receive the full benefit of
the compensation and benefits provided to the Executive during the term
hereof which compensation and benefits may be payable over periods beyond
the particular year of employment. The Executive shall not be obligated to
seek other employment by way of mitigation of the amounts due to the
Executive nor shall the Executive's earnings after termination reduce the
Company's obligations hereunder. Nothing in this Section 6.1 is intended or
shall be construed to affect the rights and obligations of the Company and
its Affiliates, on the one hand, and the Executive, on the other, with
respect to any loans, stock pledge arrangements, option plans or other
agreements to the extent said rights or obligations survive termination of
employment under the provisions of the documents relating thereto.
6.2. Termination of Benefits. Except for medical and dental
insurance coverage continued pursuant to Sections 5.2 hereof and any right
of continuation of health coverage to the extent provided by applicable
law, benefits shall cease to accrue under the terms of the applicable
benefit plans based on the date of termination of the Executive's
employment without regard to any continuation of Base Salary or other
payments to the Executive following such date of termination pursuant to
Section 5.
6.3. Survival of Certain Provisions. Provisions of this Agreement
shall survive any termination if so provided herein or if necessary or
desirable fully to accomplish the purposes of such provision, including,
without limitation, the obligations of the Executive under Sections 7 and 8
hereof. The obligation of the Company to make payments to or on behalf of
the Executive under Sections 4.7, 5.4 or 5.5 hereof is
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expressly conditioned upon the Executive's continued full performance of
obligations under Sections 7 and 8 hereof. The Executive recognizes that,
except as expressly provided in Section 4.7, 5.4 or 5.5, no compensation is
earned after termination of employment.
7. Confidential Information; Intellectual Property.
7.1. Confidentiality. The Executive acknowledges that the Company
and its Affiliates continually develop Confidential Information, that the
Executive may develop Confidential Information for the Company or its
Affiliates and that the Executive may learn of Confidential Information
during the course of employment. The Executive will comply with the
policies and procedures of the Company for protecting Confidential
Information and shall never disclose to any Person (except as required by
applicable law or for the proper performance of the Executive's duties and
responsibilities to the Company and its Affiliates), or use for the
Executive's own benefit or gain or otherwise use in a manner adverse to the
interests of the Company and its Affiliates, any Confidential Information
obtained by the Executive incident to the Executive's employment or other
association with the Company or any of its Affiliates. The Executive
understands that this restriction shall continue to apply after the
Executive's employment terminates, regardless of the reason for such
termination. Notwithstanding the foregoing, the Executive's covenant not to
disclose Confidential Information does not apply to information which (i)
becomes generally available to the public or otherwise becomes known
through sources other than the Executive, (ii) is subsequently disclosed to
the Executive by a source other than the Company who was under no duty of
confidence or (iii) is required to be disclosed by the Executive through
discovery in litigation or by order of a court or otherwise as required by
law.
7.2. Return of Documents. All documents, records, tapes and other
media of every kind and description relating to the business, present or
otherwise, of the Company or its Affiliates and any copies, in whole or in
part, thereof (the "Documents"), whether or not prepared by the Executive,
shall be the sole and exclusive property of the Company and its Affiliates.
The Executive shall safeguard all Documents and shall surrender to the
Company at the time the Executive's employment terminates, or at such
earlier time or times as the Board or its designee may specify, all
Documents then in the Executive's possession or control.
7.3. Assignment of Rights to Intellectual Property. The Executive
shall promptly and fully disclose all Intellectual Property to the Company.
The Executive hereby assigns and agrees to assign to the Company (or as
otherwise directed by the
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Company) the Executive's full right, title and interest in and to all
Intellectual Property other than (a) the results of the Permitted
Activities described in (i) of Section 3.2 above and (b) the Executive
Publications. The Executive agrees to execute any and all applications for
domestic and foreign patents, copyrights or other proprietary rights and to
do such other acts (including without limitation the execution and delivery
of instruments of further assurance or confirmation) requested by the
Company to assign the Intellectual Property to the Company and to permit
the Company to enforce any patents, copyrights or other proprietary rights
to the Intellectual Property. The Executive will not charge the Company for
time spent in complying with these obligations. All copyrightable works
that the Executive creates shall be considered "work made for hire" other
than copyrightable works which are (x) the result of a Permitted Activity
described in (i) of Section 3.2 above, or (y) Executive Publications.
8. Agreement not to Compete with the Business. The Executive agrees that
during the term of the Executive's employment hereunder and for a period of
twenty-four (24) months following the date of termination thereof (the "Non-
Competition Period"), the Executive will not, directly or indirectly (a) own,
manage, operate, control or participate in any manner in the ownership,
management, operation or control of, or be connected as an officer, employee,
partner, director, principal, consultant, agent or otherwise with, or have any
financial interest in, or aid or assist anyone else in the conduct of, any
business, venture or activity which competes with the business in the target
markets of the Company, or any group, division or subsidiary of the Company, as
described in the Company's Registration Statement on Form S-1 relating to the
Company's initial public offering of Common Stock or, beginning with the
Company's Annual Report on Form 10-K for the year ending December 31, 1996, the
Company's most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission prior to the date (the "Date of Termination") the
Executive's employment under this Agreement is terminated (hereinafter,
"Competitive Business") in the United States or any other geographic area where
such Competitive Business is being conducted at the Date of Termination or (b)
recruit or otherwise seek to induce any employees of the Company or any of its
subsidiaries to terminate their employment or violate any agreement with or duty
to the Company or any of its subsidiaries. It is understood and agreed that, for
the purposes of the foregoing provisions of this Section 8, (i) no business,
venture or activity shall be a "Competitive Business" if less than five percent
of the Company's consolidated gross sales or operating income is derived from,
or less than five percent of the Company's consolidated assets are devoted to,
such business, venture or activity; (ii) no business, venture or activity
conducted by any entity by which the Executive is employed or in which the
Executive is interested or with which the Executive is connected or associated
shall be a "Competitive Business" if it is one from which five percent or less
of such entity's consolidated gross sales or operating income is derived, or to
which five percent or less of such entity's consolidated
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assets are devoted; provided, however, that if the actual gross sales or
operating income or assets of such entity derived from or devoted to such
business, venture or activity is equal to or in excess of 10% of the most nearly
comparable figure for the Company, such business, venture or activity of such
entity shall be a Competitive Business; and (iii) the Executive's engaging on
behalf of a business, venture or activity which is a manufacturer, publisher or
other distributor of products which products do not compete in the market
against products developed by or otherwise owned by the Company (in contrast to
a reseller or value-added reseller of competitive products) in selling or
licensing the products so manufactured, published or otherwise provided by such
business, venture or activity, or in consulting or other activities described as
Permitted Activities pursuant to the provisions of Section 3.2 above, shall not
be considered participation in an activity which competes with the business of
the Company or any group, division or subsidiary of the Company. Further,
ownership of not more than five percent of the voting stock of any publicly held
corporation shall not, of itself, constitute a violation of this Section 8.
9. Enforcement of Covenants. The Executive acknowledges that the
Executive has carefully read and considered all the terms and conditions of this
Agreement, including without limitation the restraints imposed upon the
Executive pursuant to Sections 7 and 8 hereof. The Executive agrees that said
restraints are necessary for the reasonable and proper protection of the Company
and its Affiliates and that the restraints are reasonable as to the definition
of Competitive Business and length of time. The Executive further acknowledges
that, were the Executive to breach any of the covenants or agreements contained
in Sections 7 or 8 hereof, the damage to the Company could be irreparable. The
Executive therefore agrees that the Company, in addition to any other remedies
available to it, shall be entitled to preliminary and permanent injunctive
relief against any breach or threatened breach by the Executive of any of said
covenants or agreements. The parties further agree that in the event that any
provision of Section 7 or 8 hereof shall be determined by any Court of competent
jurisdiction to be unenforceable by reason of its being extended over too great
a time, too large a geographic area or too great a range of activities, such
provision shall be deemed to be modified to permit its enforcement to the
maximum extent permitted by law.
10. Conflicting Agreements. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of the Executive's
obligations hereunder will not breach or be in conflict with any other agreement
to which or by which the Executive is a party or is bound and that the Executive
is not now subject to any covenants against competition or similar covenants
that would affect the performance of the Executive's obligations hereunder. The
Executive will not disclose to or use on behalf of the Company or any of its
Affiliates any proprietary information of a third party without such party's
consent.
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11. Definitions. Terms defined elsewhere in this Agreement are used
herein as so defined. In addition, the following terms shall have the following
meanings:
11.1. Affiliates. "Affiliates" means all persons and entities
directly or indirectly controlling, controlled by or under common control
with the Company.
11.2. Cause. The following events or conditions shall constitute
"Cause" for termination: (i) the willful refusal of by the Executive to
substantially perform the Executive's duties to the Company (other than any
such refusal resulting from the Executive's incapacity due to physical or
mental illness) properly assigned pursuant to Section 3.1 above, including
the Executive's obligations under this Agreement or (ii) a willful and
material breach by the Executive of Section 7.1, 7.3 or 8 or (iii) a
conviction for fraud, embezzlement or other act of dishonesty by the
Executive that causes material injury to the Company or any of its
Affiliates or (iv) conviction of, or plea of nolo contendere to, any felony
involving dishonesty or moral turpitude.
For purposes of this Section 11.2, no act or failure to act on the
Executive's part shall be deemed "willful" unless done, or omitted to be
done, by the Executive not in good faith and without reasonable belief that
the actions or omissions were in the best interest of the Company.
Notwithstanding and with respect to clause (i) only in the immediately
preceding paragraph, the Executive shall not be deemed terminated for Cause
unless and until there shall have been delivered to the Executive a copy of
a resolution duly adopted by the affirmative vote of not less than 75% of
the entire membership of the Board (excluding the Executive if the
Executive is a member of the Board) at a meeting of the Board called and
held for such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board and after the Executive has been provided with a
period of not less than 30 days within which to correct the situation)
finding that in the opinion of the Board the Executive engaged in the
conduct set forth in such clause (i) and specifying the particulars in
reasonable detail.
11.3. Confidential Information. "Confidential Information" means any
and all information of the Company and its Affiliates that is not generally
known by others with whom they compete or do business, or with whom they
plan to compete or do business and any and all information the disclosure
of which would otherwise be adverse to the interests of the Company or any
of its Affiliates. Confidential Information includes without limitation
such information relating to (i) the services or products sold or offered
by the Company or any of its Affiliates, (ii) the costs, sources of supply,
financial performance and strategic plans of the Company and its
Affiliates,
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(iii) the identity and special needs of the customers of the Company and
its Affiliates and (iv) the people and organizations with whom the Company
and its Affiliates have business relationships and those relationships.
Confidential Information also includes comparable information that the
Company or any of its Affiliates have received belonging to others or which
was received by the Company or any of its Affiliates with any understanding
that it would not be disclosed.
11.4. ERISA. "ERISA" means the federal Employee Retirement Income
Security Act of 1974 or any successor statute, and the rules and
regulations thereunder, and in the case of any referenced section thereof
any successor section thereto, collectively and as from time to time
amended and in effect.
11.5. Intellectual Property. "Intellectual Property" means
inventions, discoveries, developments, methods, processes, compositions,
works, concepts and ideas (whether or not patentable or copyrightable or
constituting trade secrets) conceived, made, created, developed or reduced
to practice by the Executive (whether alone or with others, whether or not
during normal business hours or on or off Company premises) during the
Executive's employment that relate to either the business of the Company or
any of its subsidiaries or any prospective activity of the Company or any
of its subsidiaries.
11.6. Person. "Person" means an individual, a corporation, an
association, a partnership, a limited liability company, an estate, a trust
and any other entity or organization.
12. Withholding. All payments made by the Company under this Agreement
shall be reduced by any tax or other amounts required to be withheld by the
Company under applicable law.
13. Miscellaneous.
13.1. Assignment. Neither the Company nor the Executive may make any
assignment of this Agreement or any interest herein (provided, however,
that nothing contained herein shall be construed to place any limitation or
restriction on the transfer of the Common Stock in addition to any
restrictions set forth in any agreement applicable to such shares), by
operation of law or otherwise, without the prior written consent of the
other; provided, however, that the Company may assign its rights and
obligations under this Agreement without the consent of the Executive in
the event that the Company shall hereafter effect a reorganization,
consolidate with, or merge into,
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any other Person or transfer all or substantially all of its properties or
assets to any other Person, in which event such other Person shall be
deemed the "Company" hereunder for all purposes. The Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would
be required to perform if the succession had not taken place. This
Agreement shall inure to the benefit of and be binding upon the Company and
the Executive, and their respective successors, executors, administrators,
heirs and permitted assigns.
13.2. Severability. If any portion or provision of this Agreement
shall to any extent be declared illegal or unenforceable by a court of
competent jurisdiction, then the application of such provision in such
circumstances shall be deemed modified to permit its enforcement to the
maximum extent permitted by law, and both the application of such portion
or provision in circumstances other than those as to which it is so
declared illegal or unenforceable and the remainder of this Agreement shall
not be affected thereby, and each portion and provision of this Agreement
shall be valid and enforceable to the fullest extent permitted by law.
13.3. Waiver; Amendment. No waiver of any provision hereof shall be
effective unless made in writing and signed by the waiving party. The
failure of either party to require the performance of any term or
obligation of this Agreement, or the waiver by either party of any breach
of this Agreement, shall not prevent any subsequent enforcement of such
term or obligation or be deemed a waiver of any subsequent breach. This
Agreement may be amended or modified only by a written instrument signed by
the Executive and the Company.
13.4. Notices. Any and all notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall
be effective when delivered in person or two business days after being
deposited in the United States mail, postage prepaid, registered or
certified, and addressed (a) in the case of the Executive, to Leo S.
Spiegel at Donnelley Enterprise Solutions Incorporated, 4660 La Jolla
Village Drive, Suite 1020, San Diego, CA 92122 or, (b) in the case of the
Company, at its principal place of business and to the attention of Board
of Directors; or to such other address as either party may specify by
notice to the other.
13.5. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the terms and conditions of
the Executive's employment and, except as otherwise provided herein,
supersedes all prior
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communications, agreements and understandings, written or oral, with the
Company with respect to the terms and conditions of the Executive's
employment, including the Original Agreement.
13.6. Headings. The headings and captions in this Agreement are for
convenience only and in no way define or describe the scope or content of
any provision of this Agreement.
13.7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which together
shall constitute one and the same instrument.
13.8. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic substantive laws of the State of
Illinois without giving effect to any choice or conflict of laws provision
or rule that would cause the application of the domestic substantive laws
of any other jurisdiction.
13.9. Consent to Jurisdiction. Each of the Company and the
Executive, by its or the Executive's execution hereof, (i) hereby
irrevocably submits to the exclusive jurisdiction of the state courts of
the State of Illinois for the purpose of any claim or action arising out of
or based upon this Agreement or relating to the subject matter hereof, (ii)
hereby waives, to the extent not prohibited by applicable law, and agrees
not to assert by way of motion, as a defense or otherwise, in any such
claim or action, any claim that it is not subject personally to the
jurisdiction of the above-named courts, that any such proceeding brought in
the above-named courts is improper, or that this Agreement or the subject
matter hereof may not be enforced in or by such court, and (iii) hereby
agrees not to commence any claim or action arising out of or based upon
this Agreement or relating to the subject matter hereof other than before
the above-named courts or any applicable governmental agency nor to make
any motion or take any other action seeking or intending to cause the
transfer or removal of any such claim or action to any court other than the
above-named courts whether on the grounds of inconvenient forum or
otherwise. Each of the Company and the Executive hereby consents to service
of process in any such proceeding in any manner permitted by Illinois law,
and agrees that service of process by registered or certified mail, return
receipt requested, at its address specified pursuant to Section 13.4 hereof
is reasonably calculated to give actual notice.
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IN WITNESS WHEREOF, this Agreement has been executed by the Company, by its
duly authorized representative, and by the Executive, as of the date first above
written.
THE COMPANY: DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
By: /s/Rhonda I. Kochlefl
-------------------------------------
Name: Rhonda I. Kochlefl
Title: Chairman, President and Chief
Executive Officer
THE EXECUTIVE: /s/ Leo S. Spiegel
---------------------------------------
Leo S. Spiegel
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Exhibit 10.6
LETTERHEAD OF
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
October 4, 1996
Mr. Thomas Bradbury
Donnelley Enterprise Solutions Incorporated
300 Park Avenue South
New York, NY 10010
Dear Tom:
The purpose of this letter is to confirm discussions with you concerning
termination of the Employment Agreement dated May, 1995, as amended March 1,
1996 (the "Employment Agreement") between you and Donnelley Enterprise Solutions
Incorporated ("DESI" or "Company"), as successor in interest to R. R. Donnelley
& Sons Company. Due to changes occurring at the Company, the Company believes it
to be beneficial for your duties to cease immediately and the parties agree that
such cessation be deemed "without cause".
Therefore, as we have discussed, and in consideration of the mutual promises and
agreements set forth below, DESI and you agree as follows:
1. You will perform no more duties for the Company and the Employment
Agreement shall terminate effective with the close of business on October
11, 1996. Effective October 12, 1996, you shall not be bound by any of the
restrictions set forth in Paragraph 5(a) of the Employment Agreement,
notwithstanding any payment previously made to you in consideration
thereof. You shall continue to be bound by the provisions of that certain
Agreement Regarding Confidential Information, Intellectual Property and
Non-Solicitation of Employees signed by you in June, 1995, or any later
dated copy thereof (the "Confidentiality Agreement") except to the extent
that such Confidentiality Agreement is inconsistent with the termination of
the restrictions set forth in Paragraph 5(a) of the Employment Agreement,
and specifically the provisions of Paragraph 10 of the Confidentiality
Agreement shall also terminate and be of no further force and effect on or
after October 12, 1996.
2. From October 11, 1996 through June 21, 1997 (the "Severance Period"). DESI
will pay you semi-monthly during the Severance Period an amount equal to
your current base salary of $22,916.67 per month. Further, you will
continue to receive medical and dental benefits under DESI benefit plans as
they exist from time to time or their equivalent on the same basis as
<PAGE>
Mr. Thomas Bradbury
Donnelley Enterprise Solutions Incorporated
300 Park Avenue South
New York, NY 10010
Page 2
continuing employees of DESI, and any deductions required to be made for
benefit plans, withholding taxes or other lawful deductions will be made
from the payments due you. Your continued receipt of payments from DESI
shall in no way restrict your ability to accept or perform employment with
a third party or on your own behalf, and no such payments shall be
diminished by any amounts earned by you during the Severance Period.
3. As soon as practicable after February 28, 1997, DESI will pay you your
bonus, if any, under the terms of the incentive compensation plan or
program in which you are currently participating (prorated based on the
period of your employment during 1996 through October 11, but not including
any of the Severance Period) on the same basis as continuing employees, and
calculated as described in Exhibit A hereto. DESI will make appropriate
deductions for tax withholding from this payment. You will receive no bonus
for 1997 or subsequent years.
4. You shall receive payment as soon after October 11, 1996, as practicable,
for all vacation days accrued and untaken as of such date. No further
vacation will accrue after October 11, 1996. As of October 9, 1996, DESI's
records indicate that such payment will cover two (2) weeks of accrued
vacation.
5. Your R. R. Donnelley & Sons Company stock options will continue to vest
through June 21, 1997.
6. If any prospective employers request a reference, the Company will provide
them with only the fact that you worked for the Company, the positions you
held, and the fact that the Employment Agreement was terminated without
cause. No further information will be provided unless we receive a written
release or unless the Company is required to do so by law.
7. DESI will provide you with executive outplacement assistance in New York
City provided that the total expense incurred by DESI for such outplacement
assistance shall not exceed $10,000. Arrangements for such outplacement
will be coordinated between you and Ken Goldstein, Vice President, Human
Resources, for DESI. Should you elect not to utilize outplacement services,
or should you utilize services at a total expense of less than $10,000,
DESI shall reimburse you for expenditures incurred by you (as evidenced by
invoices received) for secretarial support and office space, provided that
the total obligation of DESI under this paragraph, whether for outplacement
or otherwise, shall not exceed a total of $10,000 and further provided that
DESI's obligation to reimburse you for expenses shall only include expenses
incurred prior to December 31, 1997.
<PAGE>
Mr. Thomas Bradbury
Donnelley Enterprise Solutions Incorporated
300 Park Avenue South
New York, NY 10010
Page 3
8. You currently have in your home a laptop computer and printer, and software
installed thereon (the "Computer Equipment") belonging to DESI. Effective
October 12, 1996, such Computer Equipment shall become your sole property,
without payment or obligation to DESI.
9. You agree that performance of the foregoing constitutes full satisfaction
of DESI's obligations arising from or relating to your employment with DESI
or R. R. Donnelley & Sons Company, including those arising under the
Employment Agreement, except as specifically set forth herein and except
for benefits vested under employee benefit, retirement or welfare plans of
or contributed to by DESI or R. R. Donnelley & Sons Company. You, and
anyone claiming through you, agree to release from and not to sue DESI
(including current and former employees, fiduciaries, directors, agents,
divisions, parents, subsidiaries, affiliates, attorneys or other related
entities) for all known or unknown claims which you have, had or may have
against DESI or them related to the terms, conditions and obligations under
your employment with DESI or R. R. Donnelley & Sons Company, except as
specifically set forth herein. Without limiting the generality of the
foregoing, this release applies to all claims relating in any way to your
employment with DESI, including, but not limited to, claims which could
have been asserted under any fair employment, contract or tort law, or any
other federal, state or local law, regulation or ordinance, such as Title
VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the
Employee Retirement Income Security Act, the Age Discrimination in
Employment Act, the Older Workers Benefit and Protection Act, the Americans
with Disabilities Act, the Rehabilitation Act, the Family and Medical Leave
Act, or under any compensation, bonus, severance, retirement or other
benefit plan, and all claims for wrongful or retaliatory discharge,
defamation, intentional infliction of emotional distress, negligence, and
breach of contract, but does not constitute a release as to (i) any claim
you might bring to enforce the terms of this Agreement, or (ii) any claim
you might have or bring to enforce the terms of an agreement between you
and DESI requiring the payment to you on or before October 31, 1996 of
$1,143,826.94 in satisfaction of any and all future obligations in respect
of the Business Earnout, I/S Outsourcing Earnout, Synergy Earnout and
Management Earnout described in the Agreement of Merger among R. R.
Donnelley & Sons Company, Lan Systems, Inc. and Donnelley DBS, Inc. dated
as of May 29, 1995 (the "Merger Agreement").
10. Neither DESI nor any affiliate thereof shall, without your prior written
approval, make any press release or other public announcement concerning
your employment or other matters contemplated by this Agreement, except
<PAGE>
Mr. Thomas Bradbury
Donnelley Enterprise Solutions Incorporated
300 Park Avenue South
New York, NY 10010
Page 4
as and to the extent that any such party shall be so obligated under
federal securities laws or the rules of any stock exchange, in which case
DESI shall, prior to any such release or other announcement, submit to you
for your approval a copy of the proposed release or announcement.
Similarly, DESI shall prepare and submit to you for your approval a
prospectus and related registration statement for DESI reflecting the
termination of the Employment Agreement (and related provisions of the
Confidentiality Agreement) as herein provided and your ceasing to be an
executive officer of DESI. All parties shall use their reasonable best
efforts to cause a mutually agreeable release, announcement or amendment to
be issued and filed; provided that no such disclosure, announcement or
amendment shall attribute or imply any reason for such termination or any
information not included in this letter without your prior written
approval.
11. The annual benefit payable to you under the R. R. Donnelley & Sons Company
Retirement Plan on a straight line annuity basis upon your retirement at
age 65, including service through April 30, 1996, is $7,823. After April
30, 1996, you and other DESI employees ceased to participate in such
Retirement Plan.
12. You will, as soon as practicable after October 11, 1996, return all of your
files, keys, credit cards, records or equipment that you have, including
documents, hardware, software or other materials acquired during the course
of your employment at DESI, except for the Computer Equipment described in
Paragraph 8 above. You will submit by October 30, 1996, all expense account
records and vouchers relating to your employment with DESI. DESI will pay
said expenses within fifteen (15) days of receipt.
13. This Agreement embodies the entire agreement and understanding of the
parties with regard to the matters described in this Agreement and the
Employment Agreement, and supersedes any and all prior or contemporaneous
agreements and understandings, oral or written, between you and DESI.
Nothing herein shall alter, supersede or otherwise affect your entitlement
to receive a lump sum payment of $1,143,827 on or before October 31, 1996,
pursuant to a letter agreement dated July 24, 1996, between R. R. Donnelley
& Sons Company and you relating to the Earn-Out Payments described in the
Merger Agreement, which payment shall be made without regard to either your
continuing employment or the actual results of operations of DESI.
14. You will continue to have coverage under or equal to the DESI medical and
dental plans on the same basis as continuing employees, until June 21,
1997. You acknowledge that DESI has advised you that, pursuant to the
<PAGE>
Mr. Thomas Bradbury
Donnelley Enterprise Solutions Incorporated
300 Park Avenue South
New York, NY 10010
Page 5
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), you have
a right to elect continued coverage under DESI's group health plans, at
your own expense, for a period of eighteen (18) months from June 21, 1997.
15. This Agreement shall be governed by and construed in accordance with the
internal laws (as opposed to the conflict of law provisions) and decisions
of the State of Illinois, as applied to agreements executed in and to be
fully performed within Illinois.
16. In signing below, you expressly acknowledge that you have read this
Agreement carefully, that you fully understand its terms and conditions,
that you have been advised of your rights and have been advised to consult
an attorney prior to executing this Agreement. You intend to be legally
bound by it.
17. You acknowledge that you have had the opportunity to have at least twenty-
one (21) days within which to decide whether or not to sign this Agreement.
You further acknowledge that you have been given the right to revoke this
Agreement by serving, within a seven (7) day period after signing, a
written notice of revocation. The Agreement shall become effective on the
eighth day following its execution by you. If you revoke the Agreement,
DESI shall have no obligation under it.
Very truly yours,
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
By: /s/ W. Ed Tyler
--------------------------
W. Ed Tyler
Its: Executive Vice President
-------------------------
Agreed and Accepted this
4th day of October, 1996:
/s/ Thomas P. Bradbury
- -----------------------------
Thomas P. Bradbury
<PAGE>
EXHIBIT 10.7
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
1996 STOCK INCENTIVE PLAN
October 1, 1996
I. GENERAL
1. Plan. To provide incentives to management through rewards based upon the
ownership or performance of the common stock of Donnelley Enterprise Solutions,
Inc. (the "Company"), the Committee hereinafter designated, may grant cash or
bonus awards, stock options, or combinations thereof, to eligible persons, on
the terms and subject to the conditions stated in the Plan. For purposes of the
Plan, references to employment by the Company also mean employment by [a
majority-owned subsidiary of the Company and employment by any other entity
designated by the Board or the Committee in which the Company has a direct or
indirect equity interest].
2. Eligibility. Officers and other key management employees of, agents of,
consultants to and advisors to, the Company, its majority-owned subsidiaries,
and any other entity designated by the Board or the Committee in which the
Company has a direct or indirect equity interest, shall be eligible, upon
selection by the Committee, to receive cash or bonus awards or stock options,
either singly or in combination, as the Committee, in its discretion, shall
determine.
3. Limitation on Shares to be Issued. Subject to adjustment as provided in
Section 5 of this Article I, 400,000 shares of common stock ("common stock")
shall be available under the Plan, reduced by (i) the aggregate number of shares
of common stock which become subject to outstanding stock options under the
terms of the Donnelley Enterprise Solutions Incorporated 1996 Broad-Based
Employee Stock Plan, and (ii) the aggregate number of shares of common stock
which become subject to outstanding bonus awards and stock options under this
Plan. Shares subject to a grant or award under either the Donnelley Enterprise
Solutions Incorporated 1996 Broad-Based Employee Stock Plan or this Plan which
for any reason are not issued or delivered, including by reason of the
expiration, termination, cancellation or forfeiture of all or a portion of the
grant or award or by reason of the delivery or withholding of shares to pay all
or a portion of the exercise price or to satisfy tax withholding obligations,
shall again be available for future grants and awards hereunder. For the purpose
of complying with Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), and the rules and regulations thereunder, the maximum
number of shares of common stock with respect to which options may be granted
during any three-year period to any person shall be 150,000, subject to
adjustment as provided in Section 5 of this Article I. The maximum number of
shares of common stock with respect to which fixed awards in the form of
restricted stock may be granted hereunder is 100,000 in the aggregate, subject
to adjustment as provided in Section 5 of this Article I.
Shares of common stock to be issued may be authorized and unissued shares
of common stock, treasury stock or a combination thereof.
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<PAGE>
4. Administration of the Plan. The Plan shall be administered by a Committee
designated by the Board of Directors (the "Committee"). Each member of the
Committee shall be (i) an "outside director" within the meaning of Section
162(m) of the Code and (ii) a "Non-Employee Director" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee shall, subject to the terms of the Plan, select eligible
persons for participation; determine the form of each grant and award, either as
cash, a bonus award or stock options or a combination thereof; and determine the
number of shares or units subject to the grant or award, the fair market value
of the common stock or units when necessary, the time and conditions of vesting,
exercise or settlement, and all other terms and conditions of each grant and
award, including, without limitation, the form of instrument evidencing the
grant or award. The Committee may establish rules and regulations for the
administration of the Plan, interpret the Plan, and impose, incidental to a
grant or award, conditions with respect to competitive employment or other
activities not inconsistent with the Plan. All such rules, regulations,
interpretations and conditions shall be conclusive and binding on all parties.
Each grant and award shall be evidenced by a written instrument and no grant or
award shall be valid until an agreement is executed by the Company and the
recipient thereof and, upon execution by each party and delivery of the
agreement to the Company, such grant or award shall be effective as of the
effective date set forth in the agreement.
The Committee may delegate some or all of its power and authority hereunder
to the Chairman or other executive officer of the Company as the Committee deems
appropriate; provided, however, that the Committee may not delegate its power
and authority with regard to (i) the selection for participation in the Plan of
(A) an employee who is a "covered employee" within the meaning of Section 162(m)
of the Code or who, in the Committee's judgment, is likely to be a covered
employee at any time during the period a grant or award hereunder to such
employee would be outstanding or (B) an officer or other person subject to
Section 16 of the Exchange Act or (ii) decisions concerning the timing, pricing
or amount of a grant or award to such an employee, officer or other person.
A majority of the Committee shall constitute a quorum. The acts of the
Committee shall be either (i) acts of a majority of the members of the Committee
present at any meeting at which a quorum is present or (ii) acts approved in
writing by all of the members of the Committee without a meeting.
5. Adjustments. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of common stock other than a regular cash
dividend, the number and class of securities available under the Plan, the
number and class of securities subject to each outstanding bonus award, the
number and class of securities subject to each outstanding stock option and the
purchase price per security shall be appropriately adjusted by the Committee,
such adjustments to be made in the case of outstanding stock options without a
change in the aggregate purchase price. If any such adjustment would result in a
fractional security being (i) available under the Plan, such
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<PAGE>
fractional security shall be disregarded, or (ii) subject to an outstanding
grant or award under the Plan, the Company shall pay the holder thereof, in
connection with the first vesting, exercise or settlement of such grant or award
in whole or in part occurring after such adjustment, an amount in cash
determined by multiplying (i) the fraction of such security (rounded to the
nearest hundredth) by (ii) the excess, if any, of (A) the fair market value on
the date of such vesting, exercise or settlement over (B) the exercise price, if
any, of such grant or award.
6. Effective Date and Term of Plan. The Plan shall be submitted to the sole
stockholder of the Company for approval and, if approved, shall become effective
as of the closing date of the Company's initial public offering of common stock.
The Plan shall terminate when shares of common stock are no longer available
under the Plan unless terminated prior thereto by action of the Board. No
further grants or awards shall be made under the Plan after termination, but
termination shall not affect the rights of any participant under any grants or
awards made prior to termination.
7. Amendments. The Plan may be amended or terminated by the Board in any
respect except that no amendment may be made without stockholder approval if
stockholder approval is required by applicable law, rule or regulation,
including Section 162(m) of the Code, or such amendment would increase (subject
to Section 5 of this Article I) the maximum number of shares available under the
Plan. No amendment may impair the rights of a holder of an outstanding grant or
award without the consent of such holder.
II. BONUS AWARDS
1. Form of Award. Bonus awards, whether performance awards or fixed awards,
may be made to eligible persons in the form of (i) cash, whether in an absolute
amount or as a percentage of compensation, (ii) stock units, each of which is
substantially the equivalent of a share of common stock but for the power to
vote and, subject to the Committee's discretion, the entitlement to an amount
equal to dividends or other distributions otherwise payable on a like number of
shares of common stock, (iii) shares of common stock issued to the eligible
person but forfeitable and with restrictions on transfer in any form as
hereinafter provided or (iv) any combination of the foregoing.
2. Performance Awards. Awards may be made in terms of a stated potential
maximum dollar amount, percentage of compensation or number of units or shares,
with the actual such amount, percentage or number to be determined by reference
to the level of achievement of corporate, sector, business unit, division,
individual or other specific objectives over a performance period of not less
than one nor more than ten years, as determined by the Committee. No rights or
interests of any kind shall be vested in an individual receiving a performance
award until the conclusion of the performance period and the determination of
the level of achievement specified in the award, and the time of vesting, if
any, thereafter shall be as specified in the award.
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<PAGE>
3. Fixed Awards. Awards may be made which are not contingent on the
achievement of specific objectives, but are contingent on the participant's
continuing in the Company's employ for a period specified in the award.
4. Rights with Respect to Restricted Shares. If shares of restricted common
stock are subject to an award, the participant shall have the right, unless and
until such award is forfeited or unless otherwise determined by the Committee at
the time of grant, to vote the shares and to receive dividends thereon from the
date of grant and the right to participate in any capital adjustment applicable
to all holders of common stock; provided, however, that a distribution with
respect to shares of common stock, other than a regular quarterly cash dividend,
shall be deposited with the Company and shall be subject to the same
restrictions as the shares of common stock with respect to which such
distribution was made.
During the restriction period, a certificate or certificates representing
restricted shares shall be registered in the holder's name and may bear a
legend, in addition to any legend which may be required under applicable laws,
rules or regulations, indicating that the ownership of the shares of common
stock represented by such certificate is subject to the restrictions, terms and
conditions of the Plan and the agreement relating to the restricted shares. All
such certificates shall be deposited with the Company, together with stock
powers or other instruments of assignment (including a power of attorney), each
endorsed in blank with a guarantee of signature if deemed necessary or
appropriate, which would permit transfer to the Company of all or a portion of
the shares of common stock subject to the award in the event such award is
forfeited in whole or in part. Upon termination of any applicable restriction
period, including, if applicable, the satisfaction or achievement of applicable
objectives, and subject to the Company's right to require payment of any taxes,
a certificate or certificates evidencing ownership of the requisite number of
shares of common stock shall be delivered to the holder of such award.
5. Rights with Respect to Stock Units. If stock units are credited to a
participant pursuant to an award, then, subject to the Committee's discretion,
amounts equal to dividends and other distributions otherwise payable on a like
number of shares of common stock after the crediting of the units (unless the
record date for such dividends or other distributions precedes the date of grant
of such award) shall be credited to an account for the participant and held
until the award is forfeited or paid out. Interest shall be credited on the
account annually at a rate equal to the return on five year U.S. Treasury
obligations.
6. Vesting and Resultant Events. The Committee may, in its discretion,
provide for early vesting of an award in the event of the participant's death,
permanent and total disability or retirement, or such other circumstances as the
Committee may specify. At the time of vesting, (i) the award, if in units, shall
be paid to the participant either in shares of common stock equal to the number
of units, in cash equal to the fair market value of such shares, or in such
combination thereof as the Committee shall determine, and the participant's
account to which dividend equivalents, other distributions and interest have
been credited shall be paid in cash, (ii) the award, if a cash bonus award,
shall be paid to the participant either in cash, or in
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<PAGE>
shares of common stock with a then fair market value equal to the amount of such
award, or in such combination thereof as the Committee shall determine and (iii)
shares of restricted common stock issued pursuant to an award shall be released
from the restrictions.
III. STOCK OPTIONS
1. Grants of Options. Options to purchase shares of common stock may be
granted to such eligible persons as may be selected by the Committee. These
options may, but need not, constitute "incentive stock options" under Section
422 of the Code or any other form of option under the Code. To the extent that
the aggregate fair market value (determined as of the date of grant) of shares
of common stock with respect to which options designated as incentive stock
options are exercisable for the first time by a participant during any calendar
year (under the Plan or any other plan of the Company, or any parent or
subsidiary) exceeds the amount (currently $100,000) established by the Code,
such options shall not constitute incentive stock options.
2. Number of Shares and Purchase Price. The number of shares of common stock
subject to an option and the purchase price per share of common stock
purchasable upon exercise of the option shall be determined by the Committee;
provided, however, that the purchase price per share of common stock shall not
be less than 100% of the fair market value of a share of common stock on the
date of grant of the option; provided further, that if an incentive stock option
shall be granted to any person who, on the date of grant of such option, owns
capital stock possessing more than ten percent of the total combined voting
power of all classes of capital stock of the Company (or of any parent or
subsidiary) (a "Ten Percent Holder"), the purchase price per share of common
stock shall be the price (currently 110% of fair market value) required by the
Code in order to constitute an incentive stock option.
3. Exercise of Options. The period during which options granted hereunder may
be exercised shall be determined by the Committee; provided, however, that no
incentive stock option shall be exercised later than ten years after its date of
grant; provided further, that if an incentive stock option shall be granted to a
Ten Percent Holder, such option shall not be exercisable more than five years
after its date of grant. The Committee may, in its discretion, establish
performance measures which shall be satisfied or met as a condition to the grant
of an option or to the exercisability of all or a portion of an option. The
Committee shall determine whether an option shall become exercisable in
cumulative or non-cumulative installments and in part or in full at any time. An
exercisable option, or portion thereof, may be exercised only with respect to
whole shares of common stock.
An option may be exercised (i) by giving written notice to the Company
specifying the number of whole shares of common stock to be purchased and
accompanied by payment therefor in full (or arrangement made for such payment to
the Company's satisfaction) either (A) in cash, (B) in previously owned whole
shares of common stock (which the optionee has held for at least six months
prior to delivery of such shares or which the optionee purchased on the open
market and for which the optionee has good title free and clear of all liens and
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<PAGE>
encumbrances) having a fair market value, determined as of the date of exercise,
equal to the aggregate purchase price payable by reason of such exercise, (C) in
cash by a broker-dealer acceptable to the Company to whom the optionee has
submitted an irrevocable notice of exercise or (D) a combination of (A) and (B)
and (ii) by executing such documents as the Company may reasonably request. The
Committee shall have sole discretion to disapprove of an election pursuant to
any of clauses (B)-(D). Any fraction of a share of common stock which would be
required to pay such purchase price shall be disregarded and the remaining
amount due shall be paid in cash by the optionee. No certificate representing
common stock shall be delivered until the full purchase price therefor has been
paid.
4. Termination of Employment or Service. An option may be exercised during
the optionee's continued employment with the Company or during the optionee's
continued provision of services to the Company, and, unless otherwise determined
by the Committee as set forth in the agreement relating to the option, for a
period not in excess of ninety days following termination of employment or the
provision of services, as the case may be, and only within the original term of
the option; provided, however, that if employment of the optionee by the Company
or the provision of services by the optionee to the Company shall have
terminated by reason of retirement or total and permanent disability, then the
option may be exercised to the extent set forth in the agreement relating to the
option for a period not in excess of five years following termination of
employment or the provision of services, but not after the expiration of the
term of the option. In the event of the death of an optionee (i) during
employment or the term in which services are being provided, (ii) within a
period not in excess of five years after termination of employment or the term
in which services are being provided by reason of retirement or total and
permanent disability or (iii) within ninety days after termination of employment
or the term in which services are being provided for any other reason,
outstanding options held by such optionee at the time of death may be exercised
to the extent set forth in the agreement relating to the option by the executor,
administrator, personal representative, beneficiary or similar persons of such
deceased optionee within ninety days of the date of death.
IV. OTHER
1. Non-Transferability of Options. No option shall be transferable other than
(i) by will, the laws of descent and distribution or pursuant to beneficiary
designation procedures approved by the Company or (ii) as otherwise set forth in
the agreement relating to such option. Each option may be exercised during the
participant's lifetime only by the participant or the participant's guardian,
legal representative or similar person. Except as permitted by the second
preceding sentence, no option may be sold, transferred, assigned, pledged,
hypothecated, encumbered or otherwise disposed of (whether by operation of law
or otherwise) or be subject to execution, attachment or similar process. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of any option, such award and all rights thereunder shall
immediately become null and void.
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2. Tax Withholding. The Company shall have the right to require, prior to the
issuance or delivery of any shares of common stock or the payment of any cash
pursuant to a grant or award hereunder, payment by the holder thereof of any
Federal, state, local or other taxes which may be required to be withheld or
paid in connection therewith. An agreement may provide that (i) the Company
shall withhold whole shares of common stock which would otherwise be delivered
to a holder, having an aggregate fair market value determined as of the date the
obligation to withhold or pay taxes arises in connection therewith (the "Tax
Date"), or withhold an amount of cash which would otherwise be payable to a
holder, in the amount necessary to satisfy any such obligation or (ii) the
holder may satisfy any such obligation by any of the following means: (A) a cash
payment to the Company, (B) delivery to the Company of previously owned whole
shares of common stock (which the holder has held for at least six months prior
to the delivery of such shares or which the holder purchased on the open market
and for which the holder has good title, free and clear of all liens and
encumbrances) having an aggregate fair market value determined as of the Tax
Date, (C) authorizing the Company to withhold whole shares of common stock which
would otherwise be delivered having an aggregate fair market value determined as
of the Tax Date or withhold an amount of cash which would otherwise be payable
to a holder, (D) in the case of the exercise of an option, a cash payment by a
broker-dealer acceptable to the Company to whom the optionee has submitted an
irrevocable notice of exercise or (E) any combination of (A), (B) and (C);
provided, however, that the Committee shall have sole discretion to disapprove
of an election pursuant to any of clauses (B)-(E). An agreement relating to a
grant or award hereunder may provide for shares of common stock to be delivered
or withheld having an aggregate fair market value in excess of the minimum
amount required to be withheld, but not in excess of the amount determined by
applying the holder's maximum marginal tax rates. Any fraction of a share of
common stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the holder.
3. Acceleration Upon Change in Control. If while any performance award or
fixed award granted under Article II or any stock option granted under Article
III is outstanding --
(a) any "person," as such term is defined in Section 3(a)(9) of the
Exchange Act, as modified and used in Section 13(d) and 14(d) thereof (but
not including (i) the Company or any of its subsidiaries, (ii) a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock
of the Company) (hereinafter a "Person") is or becomes the beneficial
owner, as defined in Rule 13d-3 of the Exchange Act, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its affiliates, excluding an acquisition resulting from the
exercise of a conversion or exchange privilege in respect of outstanding
convertible or exchangeable securities) representing 50% or more of the
combined voting power of the Company's then outstanding securities; or
Page 7
<PAGE>
(b) during any period of twenty-four (24) consecutive months (not
including any period prior to the effective date of the Plan), individuals
who at the beginning of such period constitute the Board and any new
director (other than a director designated by a Person who has entered into
any agreement with the Company to effect a transaction described in Clause
(a), (c) or (d) of this Section) whose election by the Board or nomination
for election by the Company's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or
(c) the stockholders of the of the Company with any other corporation,
other than (i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity), in combination with the
ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, at least 50% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (ii) a
merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person acquires more than 50%
of the combined voting power of the Company's then outstanding securities;
or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all the Company's assets,
(any of such events being hereinafter referred to as a "Change in Control"),
then from and after the date on which public announcement of the acquisition of
such percentage shall have been made, or the date on which the change in the
composition of the Board set forth above shall have occurred, or the date of any
such stockholder approval of a merger, consolidation, plan of complete
liquidation or an agreement for the sale of the Company's assets as described
above occurs (the applicable date being hereinafter referred to as the
"Acceleration Date"), (i) with respect to such performance awards, the highest
level of achievement specified in the award shall be deemed met and the award
shall be immediately and fully vested, (ii) with respect to such fixed awards,
the period of continued employment or provision of services, as the case may be,
specified in the award upon which the award is contingent shall be deemed
completed and the award shall be immediately and fully vested and (iii) with
respect to such options, all such options, whether or not then exercisable in
whole or in part, shall be fully and immediately exercisable.
4. Restrictions on Shares. Each grant and award made hereunder shall be
subject to the requirement that if at any time the Company determines that the
listing, registration or qualification of the shares of common stock subject
thereto upon any securities exchange or
Page 8
<PAGE>
under any law, or the consent or approval of any governmental body, or the
taking of any other action is necessary or desirable as a condition of, or in
connection with, the delivery of shares thereunder, such shares shall not be
delivered unless such listing, registration, qualification, consent, approval or
other action shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company may require that certificates evidencing
shares of common stock delivered pursuant to any grant or award made hereunder
bear a legend indicating that the sale, transfer or other disposition thereof by
the holder is prohibited except in compliance with the Securities Act of 1933,
as amended, and the rules and regulations thereunder.
5. No Right of Participation or Employment. No person shall have any right to
participate in the Plan. Neither the Plan nor any grant or award made hereunder
shall confer upon any person any right to continued employment or engagement for
services by the Company, any subsidiary or any affiliate of the Company or
affect in any manner the right of the Company, any subsidiary or any affiliate
of the Company to terminate the employment or engagement for services of any
person at any time without liability hereunder.
6. Rights as Stockholder. No person shall have any right as a stockholder of
the Company with respect to any shares of common stock or other equity security
of the Company which is subject to a grant or award hereunder unless and until
such person becomes a stockholder of record with respect to such shares of
common stock or equity security.
7. Governing Law. The Plan, each grant and award hereunder and the related
agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of Delaware and construed in
accordance therewith without giving effect to principles of conflicts of laws.
8. Approval of Plan. The Plan and all grants and awards made hereunder shall
be null and void if the adoption of the Plan is not approved by the sole
stockholder of the Company.
9. Foreign Eligible Persons. Without amending this Plan, the Committee may
grant options to eligible persons who are foreign nationals on such terms and
conditions different from those specified in this Plan as may in the judgment of
the Committee be necessary or desirable to foster and promote achievement of
this Plan and, in furtherance of such purposes the Committee may make such
modifications, amendments, procedures, subplans and the like as may be necessary
or advisable to comply with provisions of laws in other countries or
jurisdictions in which the Company or its subsidiaries operates or has
employees, agents, consultants or advisors.
Page 9
<PAGE>
EXHIBIT 10.8
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
1996 BROAD-BASED EMPLOYEE STOCK PLAN
1. Plan. The purpose of this Donnelley Enterprise Solutions Incorporated 1996
Broad-Based Employee Stock Plan (the "Plan") is to provide incentives to
employees through rewards based upon the ownership and performance of the common
stock of Donnelley Enterprise Solutions Incorporated (the "Company"). The
Committee hereinafter designated shall grant options to purchase shares of
common stock, par value $.01 per share, of the Company (the "Common Stock") to
eligible employees on the terms and subject to the conditions stated in the
Plan.
2. Eligibility. All employees of the Company and all of its direct or indirect
wholly-owned subsidiaries (the "Employers") shall be granted options under the
Plan in accordance with Section 8; provided, however, any person granted an
option under the Donnelley Enterprise Solutions Incorporated 1996 Stock
Incentive Plan at an option price per share of Common Stock equal to the initial
public offering price per share for the Company's Common Stock, shall not be
eligible to be granted options under the Plan; provided further, that an
otherwise eligible employee whose terms and conditions of employment are covered
by a collective bargaining agreement shall be eligible to receive options under
the Plan only if expressly provided for in a collective bargaining agreement or
supplemental letter of understanding signed by such employee's Employer and the
recognized representative of the collective bargaining unit in which the
employee is a member; provided further, that the preceding proviso shall not
apply to employees who are not subject to the United State labor laws. An
employee granted an option pursuant to the Plan shall be referred to herein from
time to time as an "Optionee".
3. Limitation on Shares Available. Subject to adjustment as provided in Section
5, the maximum number of shares of Common Stock available for all grants made
under the Plan shall be the number determined by multiplying twenty-five (25)
times the number of employees who are granted options pursuant to Section 8.
Shares of Common Stock subject to an option granted hereunder which for any
reason are not issued or delivered, including by reason of the expiration,
termination, cancellation or forfeiture of all or a portion such option, shall
be available for future grants or awards under the Donnelley Enterprise
Solutions Incorporated 1996 Stock Incentive Plan as provided therein.
Shares of Common Stock to be delivered may be authorized and unissued
shares of Common Stock, treasury stock or a combination thereof. The Company
reserves the right to purchase shares of Common Stock for the Plan in the open
market.
4. Administration of the Plan. The Plan shall be administered by a committee
(the "Committee") designated by the Board of Directors of the Company (the
"Board"). The Committee may establish rules and regulations for the
administration of the Plan and shall interpret the Plan. All such rules,
regulations and interpretations shall be conclusive and binding on all parties.
The Committee may delegate its authority to interpret all or part of the Plan to
designated officers of the Company.
<PAGE>
5. Adjustments. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of common stock other than a regular cash
dividend, the number and class of securities available under the Plan, the
number and class of securities subject to each outstanding stock option and the
purchase price per security shall be appropriately adjusted by the Committee,
such adjustments to be made in the case of outstanding stock options without a
change in the aggregate purchase price. If any such adjustment would result in a
fractional security being (i) available under the Plan, such fractional security
shall be disregarded, or (ii) subject to an outstanding stock option under the
Plan, the Company shall pay the holder thereof, in connection with the exercise
of such stock option, an amount in cash determined by multiplying (i) the
fraction of such security (rounded to the nearest hundredth) by (ii) the excess,
if any, of (A) the fair market value on the date of such exercise over (B) the
exercise price, if any, of such stock option.
6. Effective Date and Term of Plan. The Plan shall be submitted to the sole
stockholder of the Company for approval and, if approved, shall become effective
as of the closing date of the Company's initial public offering of Common Stock
(the "Closing Date"). The Plan shall terminate on the first day after the
Closing Date on which no stock options granted under the Plan are outstanding.
7. Amendments. The Plan may be amended or terminated by the Board in any
respect and at any time, provided that such action shall not adversely affect
any rights or obligations with respect to any outstanding grants under the Plan.
8. Grants. (a) Options to purchase 25 shares of Common Stock shall be granted
on the Closing Date to eligible employees employed on such date; provided,
however, that employees who, as of the Closing Date, are members of a collective
bargaining unit shall be deemed eligible employees for purposes of this
paragraph 8(a) only if a collective bargaining agreement or supplemental letter
of understanding providing for the receipt of such options by such employees was
fully executed by such employee's Employer and the recognized representative of
the collective bargaining unit prior to August 1, 1996.
(b) The option price per share of Common Stock purchasable upon the
exercise of any option granted pursuant to the Plan shall equal the initial
public offering price per share of Common Stock.
(c) All options granted hereunder shall be evidenced by a certificate
substantially in the form of Exhibit A hereto. Each certificate shall be dated
and signed, including by facsimile signature, by an officer of the Company as of
the date of the grant.
9. Terms of Options. (a) All options granted under the Plan shall become
exercisable in full on the date of the second anniversary of the Closing Date.
Each option shall expire on the date of the tenth anniversary of the Closing
Date. No option shall be exercisable after the date of the tenth anniversary of
the Closing Date. Notwithstanding the foregoing, if an Optionee is no
-2-
<PAGE>
longer employed by at least one Employer for any reason (including due to death
or long-term disability but excluding due to termination of employment upon
retirement at normal retirement age or early retirement at or after age 55 with
the consent of the Company), any option held by such Optionee which is not
exercisable on the date of termination of employment shall terminate
automatically on such date. After an option held by an Optionee has become
exercisable, if such Optionee is no longer employed by at least one Employer for
any reason (including due to death or long-term disability but excluding due to
termination of employment upon retirement at normal retirement age or early
retirement at or after age 55 with the consent of the Company or for any of the
reasons specified in Section 9(c)), then such Optionee (or in the case of death,
such Optionee's executor, administrator, personal representative, beneficiary or
similar person) may exercise such option until the ninetieth (90th) day after
the date of such termination of employment and/or the date of death, as the case
may be, but not after the expiration of the term of the option. Any option held
by an Optionee who retires at normal retirement age or who takes early
retirement at or after age 55 with the consent of the Company, regardless of
whether such option is exercisable on the date of retirement, shall not
terminate as a result of such retirement but shall continue to remain
outstanding and subject to the terms and conditions of the Plan, including
Section 9(b); provided, however, that in the event that such Optionee dies, any
option held by such Optionee which is not exercisable on the date of death of
such Optionee shall terminate automatically upon the death of such Optionee.
(b) No option hereunder shall be transferable other than by will, the
laws of descent and distribution or pursuant to the beneficiary designation
procedures approved by the Committee. Each option shall be exercisable during
the Optionee's lifetime only by the Optionee or the Optionee's guardian, legal
representative or similar person, provided that evidence of such person's
identity and rights with respect to such exercise are acceptable to the
Committee. Except as permitted by the first sentence of this Section 9(b), no
option hereunder shall be sold, transferred, assigned, pledged, hypothecated,
encumbered or otherwise disposed of (whether by operation of law or otherwise)
or be subject to execution, attachment or similar process. Any such attempt to
so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of
any option hereunder shall be null and void and no person shall be entitled to
any rights hereunder by virtue of any attempted execution, attachment or similar
process.
In the event of the death of an Optionee, any unexercised portion of
an option that, but for the death of the Optionee, would have been exercisable
on the date of such Optionee's death by such Optionee may be exercised by the
executor, administrator, personal representative, beneficiary or similar person
of such deceased Optionee until the ninetieth (90th) day after the date of
death, but not after the expiration of the term of the option, provided that
evidence of such person's identity and rights with respect to such exercise are
acceptable to the Committee.
(c) Notwithstanding anything contained herein to the contrary, in the
event the Committee shall determine that an Optionee's employment with an
Employer was terminated by reason of (i) an unauthorized disclosure of
confidential information or trade
-3-
<PAGE>
secrets of any Employer, (ii) unlawful trading in the securities of the Company
or any customers of any Employer, or (iii) fraud, theft or embezzlement with
respect to any Employer or any breach of the Optionee's duties to the Optionee's
Employer or any other Employer, then such Optionee shall forfeit all rights to
any option held by the Optionee under the Plan, and any such option shall
automatically terminate.
(d) Options must be exercised in full. No partial exercise is
permitted. No shares of Common Stock may be purchased under any option granted
under the Plan unless prior to or simultaneously with the purchase, the Optionee
shall have delivered by such means as have been identified by the Committee
notice to the Company, accompanied by payment therefor in full of the option
price, any brokerage fees associated with the exercise of the options (the
"Brokerage Fees"), and any local, state, federal or other taxes required to be
withheld and paid over to governmental taxing authorities by the Company due to
such exercise ("Taxes") (or arrangement made for such payment to the
satisfaction of the Company). Upon exercise, the option price, the Brokerage
Fees and the Taxes may be paid according to procedures established by the
Committee as follows: (i) in cash or (ii) by electing to sell, through an agent
or broker designated by the Company, whole shares of Common Stock issuable upon
exercise of the option having a fair market value determined on the date of
exercise as close as is practicable to the sum of (A) the option price for
shares of Common Stock subject to such exercise, (B) the Brokerage Fees
associated with such exercise and (C) the Taxes associated with such exercise,
provided that the number of whole shares sold shall be sufficient to pay in full
the option price, the Brokerage Fees and the Taxes. No option may be exercised
by an Optionee through any agent or broker other than an agent or broker
designated by the Company. Notwithstanding the foregoing, in the event that an
Optionee has notified the Company through a Company-maintained electronic system
that such Optionee is exercising an option and is paying cash for the option
price and the Taxes and such cash is not received within 30 calendar days
following such notice, then the Company may automatically order the sale,
through the designated agent or broker, of whole shares of Common Stock to pay
in full the option price, the Brokerage Fees and the Taxes and deliver any whole
shares of Common Stock not so applied to the Optionee, plus any cash owed in
lieu of fractional shares. The Committee shall have sole discretion to
disapprove of an election pursuant to clause (ii). No shares of Common Stock
shall be delivered to the Optionee until the full option price, the Brokerage
Fees and the Taxes have been paid. Optionees shall be required to receive all
shares acquired under an option in the form of stock certificates; cash shall
not be paid to an Optionee in lieu of the delivery of stock certificates upon
the exercise of any option, except to the extent necessary to compensate for
fractional shares.
(e) Optionees shall be entitled to the privilege of ownership with
respect to shares of Common Stock subject to options granted hereunder only as
to shares of Common Stock purchased and delivered to an Optionee upon exercise
of an option.
-4-
<PAGE>
10. Miscellaneous.
(a) Effect of Leaves of Absence. Leaves of absence for periods and
purposes conforming to the personnel policies of the Company and approved by the
Employer shall not be deemed terminations of employment or interruptions of
continuous service.
(b) Restrictions on Shares. Notwithstanding any provision of the Plan
to the contrary, unless a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), is in effect as to the shares
purchasable under any option granted under the Plan, no shares of Common Stock
may be purchased under such option. In addition, notwithstanding any provision
of this Plan to the contrary, any option granted under the Plan is subject to
the condition that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
option upon any securities exchange or under any law, the consent or approval of
any regulatory body, or the taking of any other action is necessary or desirable
as a condition of, or in connection with, the delivery of the shares thereunder,
such shares shall not be delivered unless such listing, registration,
qualification, consent, approval or other action shall have been effected or
obtained, free of any conditions not acceptable to the Company.
(c) No Right to Employment. Neither the Plan nor the grant of
options hereunder shall be construed as giving any employee any right to be
retained in the employ of any Employer.
(d) Governing Law. The Plan shall be governed by and interpreted in
accordance with the laws of the State of Delaware.
(e) Nature of Option. The options granted under the Plan shall not
be treated as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.
11. Acceleration of Options Upon a Change in Control. If while any option
remains unexercised and outstanding under the Plan:
(a) any "person," as such term is defined in Section 3(a)(9) of the
Exchange Act, as modified and used in Section 13(d) and 14(d) thereof (but
not including (i) the Company or any of its subsidiaries, (ii) a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company or any of its subsidiaries, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock
of the Company) (hereinafter a "Person") is or becomes the beneficial
owner, as defined in Rule 13d-3 of the Exchange Act, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its affiliates, excluding an acquisition resulting from the
exercise
-5-
<PAGE>
of a conversion or exchange privilege in respect of outstanding convertible
or exchangeable securities) representing 50% or more of the combined voting
power of the Company's then outstanding securities; or
(b) during any period of twenty-four (24) consecutive months (not
including any period prior to the effective date of the Plan), individuals
who at the beginning of such period constitute the Board and any new
director (other than a director designated by a Person who has entered into
any agreement with the Company to effect a transaction described in Clause
(a), (c) or (d) of this Section) whose election by the Board or nomination
for election by the Company's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or
(c) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (i) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, at least 50% of the combined voting power of the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in
which no Person acquires more than 50% of the combined voting power of the
Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all the Company's assets,
(any of such events being hereinafter referred to as a "Change in Control"),
then from and after the date on which public announcement of the acquisition of
such percentage shall have been made, or the date on which the change in the
composition of the Board set forth above shall have occurred, or the date of any
such stockholder approval of a merger, consolidation, plan of complete
liquidation or an agreement for the sale of the Company's assets as described
above occurs (the applicable date being hereinafter referred to as the
"Acceleration Date"), all such outstanding and unexercised options, whether or
not then exercisable, shall be fully and immediately exercisable.
12. Foreign Employees. Without amending this Plan, the Committee may grant
options to eligible persons who are foreign nationals on such terms and
conditions different from those specified in this Plan as may in the judgment of
the Committee be necessary or desirable to foster and promote achievement of the
purposes of this Plan and, in furtherance of such purposes the Committee may
make such modifications, amendments, procedures, subplans and the like as may be
necessary or advisable to comply with provisions of laws in other countries
-6-
<PAGE>
or jurisdictions in which the Company or its Subsidiaries operates or has
employees.
-7-
<PAGE>
Exhibit A
Donnelley Enterprise Solutions Incorporated
1996 Broad-Based Employee Stock Plan
This is to certify that
(OPTIONEE NAME)
was granted on (CLOSING DATE OF IPO), an option to purchase
Twenty-five (25)
SHARES
of Donnelley Enterprise Solutions Incorporated common stock at a fixed
option price of (IPO PRICE) per share. This option is subject to the
terms and conditions of the Donnelley Enterprise Solutions Incorporated
1996 Broad-Based Stock Plan.
This certificate has been
[logo] DESI executed as of (DATE),
on behalf of Donnelley Enterprise
Solutions Incorporated by
(FACSIMILE SIGNATURE)
Rhonda I. Kochlefl
Chairman
<PAGE>
Exhibit 10.10
$22,000,000
CREDIT AGREEMENT
Dated as of November 5, 1996
Among
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
and
THE BORROWING SUBSIDIARIES
FROM TIME TO TIME PARTY HERETO
as Borrowers
-- ---------
THE FINANCIAL INSTITUTIONS
FROM TIME TO TIME PARTY HERETO
as Banks
-- -----
and
HARRIS TRUST AND SAVINGS BANK
as Administrative Agent
-----------------------
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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Section Page
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ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS.......................................... -1-
1.01. Certain Defined Terms.............................................. -1-
1.02. Computation of Time Periods........................................-15-
1.03. Accounting Terms...................................................-15-
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES.........................................-15-
2.01. The Advances.......................................................-15-
2.02. Making the Advances................................................-16-
2.03. Letters of Credit..................................................-19-
2.04. Fees...............................................................-23-
2.05. Reduction and Termination of the Commitments; Right to
Replace Banks......................................................-24-
2.06. Payment; Conversion and Continuation...............................-24-
2.07. Interest on Advances...............................................-25-
2.08. Additional Interest on Eurocurrency Rate Advances..................-26-
2.09. Interest Rate Determination........................................-26-
2.10. Prepayments........................................................-26-
2.11. Funding Indemnification............................................-27-
2.12. Increased Costs and Reduced Return.................................-28-
2.13. Illegality.........................................................-28-
2.14. Payments and Computations..........................................-29-
2.15. Sharing of Payments, Etc...........................................-30-
2.16. Currency Equivalents...............................................-30-
2.17. Borrowing Subsidiaries.............................................-31-
2.18. Taxes..............................................................-32-
2.19. Mitigation.........................................................-34-
2.20. Extension of Termination Date......................................-34-
ARTICLE III
CONDITIONS PRECEDENT........................................................-34-
3.01. Conditions Precedent to the Effectiveness of this Agreement........-34-
3.02. Conditions Precedent to all Advances and Letters of Credit.........-36-
3.03. Conditions Precedent to Initial Advance to Each Borrowing
Subsidiary.........................................................-37-
ARTICLE IV
REPRESENTATIONS AND WARRANTIES............................................-37-
4.01. Representations and Warranties of the Company......................-37-
ARTICLE V
COVENANTS OF THE COMPANY..................................................-40-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5.01. Compliance with Laws, Etc..........................................-40-
5.02. Reporting Requirements.............................................-41-
5.03. Use of Proceeds....................................................-42-
5.04. Limitation on Liens, Etc...........................................-42-
5.05. Mergers, Consolidations, Sales of Assets...........................-44-
5.06. Books and Records; Inspection......................................-45-
5.07. Corporate Existence; Maintenance of Rights and Permits.............-45-
5.08. Conduct of Business................................................-45-
5.09. Payment of Taxes...................................................-45-
5.10. Funded Debt to Cash Flow Ratio.....................................-46-
5.11. Net Worth..........................................................-46-
5.12. Fixed Charge Coverage..............................................-46-
5.13. Indebtedness of Subsidiaries.......................................-46-
5.14. Maintenance of Properties..........................................-46-
5.15. Insurance..........................................................-47-
5.16. Transactions with Affiliates.......................................-47-
5.17. Investments........................................................-47-
5.18. Environmental Liabilities..........................................-47-
5.19. Dividends..........................................................-48-
5.20. Certain Agreements.................................................-48-
5.21. Non-Material Subsidiaries..........................................-48-
ARTICLE VI
EVENTS OF DEFAULT.........................................................-48-
6.01. Events of Default..................................................-48-
6.02. Collateral for Undrawn Letters of Credit...........................-50-
ARTICLE VII
GUARANTEE.................................................................-51-
7.01. Unconditional Guarantee............................................-51-
7.02. Validity...........................................................-52-
7.03. Waivers............................................................-52-
7.04. Subrogation........................................................-52-
7.05. Acceleration.......................................................-52-
7.06. Reinstatement......................................................-52-
7.07. Continuing Guaranty; Assignments...................................-52-
ARTICLE VIII
THE ADMINISTRATIVE AGENT..................................................-53-
8.01. Appointment; Nature of Relationship................................-53-
8.02. Actions by the Administrative Agent................................-53-
8.03. Administrative Agent's Reliance, Etc...............................-54-
8.04. The Administrative Agent and Affiliates............................-55-
8.05. Bank Credit Decision...............................................-55-
8.06. Indemnification....................................................-55-
8.07. Successor Administrative Agent.....................................-55-
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE IX
MISCELLANEOUS.............................................................-56-
9.01. Amendments, Etc....................................................-56-
9.02. Notices, Etc.......................................................-57-
9.03. No Waiver; Remedies................................................-58-
9.04. Costs and Expenses.................................................-58-
9.05. Right of Set-off...................................................-58-
9.06. Binding Effect.....................................................-59-
9.07. Assignments and Participations.....................................-59-
9.08. Governing Law......................................................-62-
9.09. Execution in Counterparts..........................................-62-
9.10. Confidentiality....................................................-62-
9.11. Non-Reliance by the Banks..........................................-63-
9.12. Indemnification....................................................-63-
9.13. Partial Invalidity.................................................-63-
9.14. WAIVER OF JURY TRIAL...............................................-64-
9.15. Jurisdiction, Etc..................................................-64-
</TABLE>
-iii-
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A -- Form of Assignment and Acceptance
EXHIBIT B -- Form of Assumption Letter
EXHIBIT C -- Form of Note
EXHIBIT D -- Form of Notice of Borrowing
EXHIBIT E -- Form of Notice of Continuation/Conversion
EXHIBIT F -- Form of Sidley & Austin Opinion
EXHIBIT G -- Form of Opinion of Counsel to Borrowing Subsidiary
SCHEDULES
SCHEDULE 2.01 -- Banks; Commitments; Lending Offices
SCHEDULE 4.01(m) -- ERISA
SCHEDULE 5.13 -- Capitalized Leases
SCHEDULE 5.17 -- Investments
</TABLE>
-iv-
<PAGE>
CREDIT AGREEMENT
Dated as of November 5, 1996
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED, a Delaware corporation
(the "Company"), each Borrowing Subsidiary (as defined below), the FINANCIAL
INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF and each other financial
institution which from time to time becomes a party hereto (individually a
"Bank" and collectively, the "Banks") , and HARRIS TRUST AND SAVINGS BANK, in
its separate capacity as Administrative Agent (as defined below) for the Banks
hereunder, agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Acquisition" has the meaning specified in Section 5.05(c).
"Administrative Agent" means Harris Trust and Savings Bank, in its
capacity as the contractual representative for all of the Banks for
purposes of this Agreement, as designated and appointed in accordance with
Article VIII, and any successor thereto as provided herein.
"Advance" means an advance by a Bank to a Borrower as part of a
Borrowing and refers to a Base Rate Advance or a Eurocurrency Rate Advance,
each of which shall be a "Type" of Advance.
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under common control with such
Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct
or cause the direction of the management or policies of the controlled
Person, whether through ownership of stock, by contract or otherwise.
"Agreement" means this Credit Agreement, as the same may be amended,
modified, supplemented or restated from time to time.
"Alternative Currency" means Pounds Sterling, Hong Kong Dollars,
Singapore Dollars, Japanese Yen and any other currency (other than U.S.
Dollars) which is generally available to the Banks and which is freely
transferable and convertible into U.S. Dollars in the London interbank
market as agreed to from time to time by the Banks.
<PAGE>
"Applicable Lending Office" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of a Base Rate Advance, and such
Bank's Eurocurrency Lending Office in the case of a Eurocurrency Rate
Advance.
"Applicable Margin" means on any day:
(a) 0.75% if Level I Status exists on such day,
(b) 1.00% if Level II Status exists on such day, and
(c) 1.25% if Level III Status exists on such day.
Level I Status shall apply to the period from the date hereof until the
first date on which financial statements are due pursuant to Section 5.02.
For any date thereafter, Level Status shall be adjusted after each delivery
of the Company's quarterly or annual financial statements pursuant to
Section 5.02, effective on the date such financial statements are due
pursuant to Section 5.02; provided, that if timely delivery of such
financial statements is not made, Level III Status shall be deemed to exist
from the day on which such financial statements were required to be
delivered until such delivery is made, after which time the Level Status
shall be determined from the delivered financial statements.
"Application" has the meaning specified in Section 2.03(b).
"Assignment and Acceptance" means an Assignment and Acceptance
executed by a Bank and an Eligible Assignee and accepted by the
Administrative Agent and the Company, substantially in the form of Exhibit
A hereto.
"Assumption Letter" means a letter of a Subsidiary of the Company
addressed to the Banks in substantially the form of Exhibit B hereto
pursuant to which such Subsidiary agrees to become a "Borrowing Subsidiary"
and agrees to be bound by the terms and conditions hereof.
"Available Commitment" has the meaning specified in Section 2.01.
"Banks" has the meaning specified in the opening paragraph hereof.
"Base Rate" means, for any day, a rate of interest per annum equal to
the higher of (a) the Prime Commercial Rate for such day and (b) the sum of
Federal Funds Effective Rate for such day plus 1/2% per annum.
"Base Rate Advance" means an Advance which bears interest at a rate
based upon the Base Rate, as provided in Section 2.07(a).
"Benefit Administration Services Agreement" means that certain Benefit
Administration Services Agreement between Donnelley and the Company, as in
effect on the date hereof or as amended or modified with the consent of the
Majority Banks.
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<PAGE>
"Borrower" means the Company or any Borrowing Subsidiary.
"Borrowing" means a borrowing consisting of simultaneous Advances of
the same Type made by each of the Banks to a Borrower pursuant to Section
2.01.
"Borrowing Subsidiary" means any Subsidiary of the Company duly
designated by the Company pursuant to Section 2.17 hereof to make
Borrowings hereunder, which Subsidiary shall have delivered to the
Administrative Agent an Assumption Letter in accordance with Section 2.17.
"Business Day" means a day of the year on which banks are not required
or authorized by law to close in Chicago, Illinois and New York, New York
and, if the applicable Business Day relates to any Eurocurrency Rate
Advances, on which dealings in the applicable currency are carried on in
the relevant international interbank market.
"Capitalized Lease" of a Person means any lease of property by such
Person as lessee which would be capitalized on a balance sheet of such
Person prepared in accordance with GAAP.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as
a liability on a balance sheet of such Person prepared in accordance with
GAAP.
"Commission" means the Securities and Exchange Commission or any
federal body succeeding to its functions.
"Commitment" has the meaning specified in Section 2.01.
"Commitment Fee" has the meaning specified in Section 2.04.
"Company" has the meaning specified in the opening paragraph hereof.
"Consolidated Debt" means as of any date the consolidated long-term
Debt, plus short-term Debt for borrowed money, of the Company and its
Consolidated Subsidiaries as of such date.
"Consolidated EBITA" means, for any period, on a consolidated basis
for the Company and its Consolidated Subsidiaries, the sum of the amounts
for such period of (a) Consolidated Net Income (before non-recurring or
extraordinary gains, losses, expenses and charges, provided, that they are
identified as such on the Company's financial statements), plus (b) charges
against income for foreign, federal, state and local taxes, plus (c)
Consolidated Interest Expense, plus (d) amortization of intangible assets.
"Consolidated EBITDA" means, for any period, Consolidated EBITA for
such period plus depreciation expense of the Company and its Consolidated
Subsidiaries for such period.
-3-
<PAGE>
"Consolidated Interest Expense" means, for any period, the sum for
such period of total interest expense of the Company and its Consolidated
Subsidiaries, whether paid or accrued (including, but not limited to, the
interest component of Capitalized Leases), as determined in accordance with
GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
earnings (or loss) after taxes of the Company and its Consolidated
Subsidiaries for such period, determined in accordance with GAAP.
"Consolidated Net Worth" means, as of any date, an amount equal to the
sum of (a) the par or stated value of the outstanding shares of all classes
of capital stock of the Company, (b) paid-in capital and capital surplus of
the Company and (c) retained earnings of the Company, as each of which
would appear on a consolidated balance sheet of the Company and its
Consolidated Subsidiaries.
"Consolidated Subsidiary" means at any date any Subsidiary the
accounts of which would be consolidated with those of the Company in its
consolidated financial statements at such date in accordance with GAAP.
"Contaminant" means any pollutant, hazardous substance, hazardous
chemical, toxic substance, hazardous waste or special waste, as those terms
are defined in federal, state or local laws and regulations, radioactive
material, petroleum, including crude oil or any petroleum-derived
substance, or breakdown or decomposition product thereof, or any
constituent of any such substance or waste, including but not limited to
polychlorinated biphenyls and asbestos.
"Debt" means (without duplication of any item), with respect to any
Person, (a) indebtedness for borrowed money, (b) obligations evidenced by
bonds, debentures, notes or other similar instruments, (c) obligations as
lessee under Capitalized Leases, (d) obligations representing the deferred
purchase price of property or services (other than accounts payable and
accrued expenses arising in the ordinary course of such person's business
payable on customary business terms), (e) obligations, whether or not
assumed, secured by Liens or payable out of the proceeds or production from
property now or hereafter owned or acquired by such Person, (f) obligations
which are evidenced by notes, acceptances or other instruments, (g)
obligations in respect of letters of credit, (h) net mark-to-market
exposure of rate hedging agreements and (i) obligations under direct or
indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise assure a creditor
against loss in respect of, indebtedness or obligations of other Persons
(other than, in the case of the Company or a Subsidiary, indebtedness or
obligations of the Company or any Subsidiary) of the types listed in the
foregoing clause (a) through (h).
"Domestic Lending Office" means, with respect to any Bank, the office
of such Bank specified as its "Domestic Lending Office" opposite its name
on Schedule 2.01 hereto or in the Assignment and Acceptance pursuant to
which it became a Bank, as the case may be, or such other office of such
Bank as such Bank may from time to time specify to the Company and the
Administrative Agent.
-4-
<PAGE>
"Donnelley" means R.R. Donnelley & Sons Company, a Delaware
corporation.
"Donnelley Agreements" has the meaning specified in Section 5.16.
"Effective Date" means November 5, 1996.
"Eligible Assignee" means (a) a Bank; (b) an Affiliate of a Bank; (c)
a commercial bank organized under the laws of the United States or any
State thereof, and having a combined capital and surplus of at least
$500,000,000; (d) a commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Cooperation and
Development, has a combined capital and surplus of at least $500,000,000
and is acting through a branch or agency located in the United States, and
(e) any other Person approved by the Company and the Administrative Agent
in their sole discretion.
"Environmental Action" means any administrative, regulatory or
judicial action, suit, demand, demand letter, claim, notice of
noncompliance or violation, notice of liability or potential liability,
investigation, proceeding, consent order or consent agreement relating in
any way to any Environmental Law, Environmental Permit or Hazardous
Materials or arising from alleged injury or threat of injury to health,
safety or the environment, including, without limitation, (a) by any
governmental or regulatory authority for enforcement, cleanup, removal,
response, remedial or other actions or damages and (b) by any governmental
or regulatory authority or any third party for damages, contribution,
indemnification, cost recovery, compensation or injunctive relief.
"Environmental Law" means any federal, state, local or foreign
statute, law, ordinance, rule, regulation, code, order, judgment, decree or
judicial interpretation relating to the environment, health, safety or
Hazardous Materials.
"Environmental Lien" means a lien in favor of any governmental entity
for (a) any liability under federal or state environmental laws or
regulations, or (b) damages arising from, or costs incurred by such
governmental entity in response to, a release or threatened release of a
hazardous or toxic waste, substance or constituent or other substance into
the environment.
"Environmental Permit" means any permit, approval, indemnification
number, license or other authorization required under any Environmental
Law.
"ERISA" means the Employee Retirement Income Security Act of 1974 as
amended from time to time, and the regulations promulgated and the rulings
issued thereunder.
"ERISA Affiliate" means any Person that for purposes of Title IV or
Section 302 of ERISA is a member of the Company's controlled group, or
under
-5-
<PAGE>
common control with the Company, as determined under Section 414 of
the Internal Revenue Code.
"ERISA Event" means (a) the occurrence of a reportable event, within
the meaning of Section 4043 of ERISA, with respect to any Plan; (b) the
application for a minimum funding waiver with respect to a Plan; (c) the
provision by the administrator of any Plan of a notice of intent to
terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any
such notice with respect to a plan amendment referred to in Section 4041(e)
of ERISA); (d) the cessation of operations at a facility of the Company or
any of its ERISA Affiliates in the circumstances described in Section
4062(e) of ERISA; (e) the withdrawal by the Company or any of its ERISA
Affiliates from a Multiple Employer Plan during a plan year for which it
was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f)
the failure by the Company or any of its ERISA Affiliates to make a payment
to a Plan if the conditions for the imposition of a lien under Section
302(f)(1) of ERISA are satisfied; (g) the adoption of an amendment to a
Plan requiring the provision of security to such Plan, pursuant to Section
307 of ERISA; or (h) the institution by the PBGC of proceedings to
terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of
any event or condition described in Section 4042 of ERISA that could
constitute grounds for the termination of, or the appointment of a trustee
to administer, a Plan.
"Eurocurrency Lending Office" means, with respect to any Bank, the
office of such Bank specified as its "Eurocurrency Lending Office" opposite
its name on Schedule 2.01 hereto or in the Assignment and Acceptance
pursuant to which it became a Bank (or, if no such office is specified, its
Domestic Lending Office), or such other office of such Bank or its
Affiliates which may from time to time be funding or maintaining any
Advance hereunder.
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurocurrency Rate" means, for any Interest Period for all
Eurocurrency Rate Advances comprising part of the same Borrowing, (a) the
per annum rate for deposits in U.S. Dollars or the relevant Alternative
Currency, as applicable, for a period corresponding to the duration of such
Interest Period, which appears on Telerate Page 3750 at approximately 11:00
a.m. (London time) two Business Days before the first day of such Interest
Period and (b) if such rate does not appear on Telerate Page 3750 on such
day, the per annum rate at which deposits in U.S. Dollars or the relevant
Alternative Currency, as applicable, are offered by Harris Bank to first-
class banks in the London interbank market at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest
Period, in the approximate amount of Harris Bank's relevant Eurocurrency
Rate Advance and having a maturity approximately equal to such Interest
Period. The references to Telerate Page 3750 in this definition shall be
construed to be a reference to the relevant page or any other page that may
replace such page on the Telerate service or any other service that may be
designated by the British Bankers'
-6-
<PAGE>
Association as the information vendor for the purpose of displaying British
Bankers' Association Interest Settlement Rates for the relevant currency.
"Eurocurrency Rate Advance" means an Advance which bears interest at a
rate based upon the Eurocurrency Rate, as provided in Section 2.07(b).
"Eurocurrency Rate Reserve Percentage" of any Bank for any Interest
Period for a Eurocurrency Rate Advance means the reserve percentage
applicable two Business Days before the first day of such Interest Period
under regulations issued from time to time by the Board of Governors of the
Federal Reserve System (or any successor) for determining the actual
reserve requirement (including, without limitation, any emergency,
supplemental or other marginal reserve requirement) for such Bank with
respect to liabilities or assets consisting of or including Eurocurrency
Liabilities (or with respect to any other category of liabilities that
includes deposits by reference to which the interest rate on Eurocurrency
Rate Advances of such currency is determined) having a term equal to such
Interest Period.
"Events of Default" has the meaning specified in Section 6.01.
"Exchange Rates" has the meaning specified in Section 2.16(b).
"Federal Funds Effective Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the
immediately preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a Business
Day, the average of the quotations at approximately 10:00 a.m. (Chicago
time) for such day for such transactions received by the Administrative
Agent from three federal funds brokers of recognized standing selected by
it.
"Fixed Charge Coverage Ratio" means the ratio, determined on a
consolidated basis for the Company and its Consolidated Subsidiaries in
accordance with GAAP as of the end of any fiscal quarter, of (i)
Consolidated EBITA plus Minimum Operating Lease Payments to (ii)
Consolidated Interest Expense plus Minimum Operating Lease Payments, in
each case determined as of the last day of such fiscal quarter for the
four-quarter period then ended, except that the Fixed Charge Coverage Ratio
for each fiscal quarter ending before the first anniversary of the
Effective Date shall be determined for the period from the Effective Date
to the end of such fiscal quarter.
"Funded Debt to Cash Flow Ratio" means the ratio, determined on a
consolidated basis for the Company and its Consolidated Subsidiaries in
accordance with GAAP as of the end of any fiscal quarter, of (i)
Consolidated Debt to (ii) Consolidated EBITDA for the four-quarter period
then ended, except that, for each fiscal quarter ending before the first
anniversary of the Effective
-7-
<PAGE>
Date, Consolidated EBITDA shall be determined for the period from the
Effective Date to the end of such fiscal quarter and shall be annualized by
dividing Consolidated EBITDA by the number of days since the Effective Date
and multiplying such amount by 365. For the first four fiscal quarters
following an Acquisition, Consolidated EBITDA shall include, for any period
of calculation prior to the date of such Acquisition, the Consolidated
EBITDA (determined on a pro forma basis if no actual financial information
is available) of the company or business that was the subject of such
Acquisition for such prior period.
"Funding Date" means the date on which a Borrowing occurs or a Letter
of Credit is issued.
"GAAP" has the meaning specified in Section 1.03.
"Governmental Authority" means any nation, state sovereign, or
government, any federal, regional, state, local or political subdivision
and any entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Harris Bank" means Harris Trust and Savings Bank, an Illinois banking
corporation.
"Hazardous Materials" means petroleum and petroleum products,
byproducts or breakdown products, radioactive materials, asbestos-
containing materials, radon gas and any other chemicals, materials or
substances designated, classified or regulated as being "hazardous" or
"toxic", or words of similar import, under any federal, state, local or
foreign statute, law, ordinance, rule, regulation, code, order, judgment,
decree or judicial interpretation.
"Hong Kong Dollars" means the lawful currency of Hong Kong.
"Indemnified Parties" has the meaning specified in Section 9.12.
"Initial Borrowing Date" means the initial Funding Date.
"Interest Period" means, for each Eurocurrency Rate Advance comprising
part of the same Borrowing, the period commencing on the date of such
Eurocurrency Rate Advance or the date of any conversion or continuation
thereof, and ending on the last day of the period selected by a Borrower
pursuant to the provisions below. The duration of each such Interest
Period shall be one, two, three or six months, as a Borrower may select,
upon notice received by the Administrative Agent pursuant to Section 2.02
or 2.06; provided, however, that
(a) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such
Interest Period shall be extended to occur on the next succeeding
Business Day; provided, that if such extension would cause the last
day of such Interest Period to occur in the next
-8-
<PAGE>
following calendar month, the last day of such Interest Period shall
occur on the next preceding Business Day;
(b) whenever the first day of any Interest Period occurs on a day
in an initial calendar month for which there is no numerically
corresponding day in the calendar month that succeeds such initial
calendar month by the number of months equal to the number of months
in such Interest Period, such Interest Period shall end on the last
Business Day of such succeeding calendar month; and
(c) no Interest Period may terminate later than the Termination
Date.
"Initial Public Offering" means the initial public offering of the
Company's stock pursuant to the Registration Statement.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in
the ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in
the trade) or contribution of capital by such Person; stocks, bonds, mutual
funds, partnership interests, notes, debentures or other securities owned
by such Person; any deposit accounts and certificate of deposit owned by
such Person; and structured notes, derivative financial instruments and
other similar instruments or contracts owned by such Person.
"Japanese Yen" means the lawful currency of Japan.
"L/C Commitment" means the lesser of the aggregate amount of the
Commitments and $2,000,000.
"L/C Documents" means the Letters of Credit, any draft or other
document presented in connection with a drawing thereunder, the
Applications and this Agreement.
"L/C Obligations" means the sum of the aggregate undrawn face amount
of all outstanding Letters of Credit and all unpaid Reimbursement
Obligations.
"Letter of Credit" has the meaning specified in Section 2.03(a).
"Level Status" means Level I Status, Level II Status or Level III
Status, as appropriate.
"Level I Status" exists at any date if at such date the Fixed Charge
Coverage Ratio is greater than or equal to 3 to 1.
-9-
<PAGE>
"Level II Status" exists at any date if at such date Level I Status
does not exist AND the Fixed Charge Coverage Ratio is greater than or equal
to 2 to 1.
"Level III Status" exists at any date if at such date neither Level I
Status nor Level II Status exists.
"Liabilities and Costs" means all liabilities, claims, obligations,
responsibilities, losses, damages, punitive damages, consequential damages,
treble damages, charges, costs and expenses (including, without limitation,
attorneys', experts' and consulting fees and costs of investigation and
feasibility studies), fines, penalties and monetary sanctions, interest,
direct or indirect, known or unknown, absolute or contingent, past, present
or future.
"Lien" means, with respect to any asset, any security interest,
mortgage, pledge, lien, claim, charge or encumbrance of any kind in respect
of such asset.
"Majority Banks" means at any time Banks holding more than 50% of the
Commitments or, if the Commitments have been terminated, Banks holding more
than 50% of the then aggregate unpaid principal amount of the Advances held
by the Banks.
"Margin Stock" has the meaning specified in Regulation U issued by the
Board of Governors of the Federal Reserve System.
"Material Adverse Effect" means a material adverse effect on (a) the
business, financial condition, operations, properties or performance of the
Company and its Subsidiaries, taken as a whole, (b) the legality, validity
or enforceability of this Agreement or any Note or (c) the ability of any
Borrower to perform its obligations under this Agreement and its Notes.
"Material Subsidiary" means a Subsidiary of the Company which, at the
time of determination, (a) shall own assets comprising in excess of 10% of
all of the assets of the Company and its Consolidated Subsidiaries on a
consolidated basis, or (b) has revenues for the four fiscal quarters most
recently ended in excess of 10% of the revenues of the Company and its
Consolidated Subsidiaries on a consolidated basis.
"Minimum Operating Lease Payments" means, for any period, the minimum
fixed rental payments under operating lease agreements, determined for the
Company and its Consolidated Subsidiaries in accordance with GAAP;
provided, that "Minimum Operating Lease Payments" shall not include
executory costs or payments based upon usage under operating lease
agreements.
"Moody's" means Moody's Investors Services Inc.
"Multiemployer Plan" means a multiemployer plan, as defined in Section
4001(a)(3) of ERISA, to which the Company or any of its ERISA Affiliates is
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<PAGE>
making or accruing an obligation to make contributions, or has within any
of the preceding five plan years made or accrued an obligation to make
contributions.
"Note" means a promissory note, in substantially the form of Exhibit C
hereto, duly executed by a Borrower and payable to the order of a Bank in
the amount of its Commitment, including any amendment, modification,
renewal or replacement of such promissory note.
"Notice of Borrowing" has the meaning specified in Section 2.02(a).
"Notice of Conversion or Continuation" has the meaning specified in
Section 2.06(b).
"Original Dollar Amount" means the amount of any obligation hereunder
denominated in U.S. Dollars and, in relation to any Advance or Letter of
Credit denominated in an Alternative Currency, the U.S. Dollar Equivalent
of such Advance or Letter of Credit. The Original Dollar Amount of an
Advance denominated in an Alternative Currency shall be calculated on the
day it is advanced and shall be recalculated on each day it is continued
and on the last Business Day of each fiscal quarter thereafter. The
Original Dollar Amount of a Letter of Credit denominated in an Alternative
Currency shall be calculated on the day such Letter of Credit is issued and
shall be recalculated on the last Business Day of each fiscal quarter
thereafter.
"Other Taxes" has the meaning specified in Section 2.18(b).
"Participating Bank" has the meaning specified in Section 2.03(e).
"Participating Interest" has the meaning specified in Section 2.03(e).
"PBGC" means the Pension Benefit Guaranty Corporation and its
successors and assigns.
"Permit" means any permit, approval, consent, authorization, license,
variance, or permission required from a Governmental Authority under an
applicable Requirement of Law.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a government
or any political subdivision or agency thereof.
"Plan" means a single employer plan, as defined in Section 4001(a)(15)
of ERISA, with respect to which the Company may have any liability.
"Pounds Sterling" means the lawful currency of the United Kingdom.
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<PAGE>
"Prime Commercial Rate" means a rate per annum equal to the prime
commercial rate of interest announced by Harris Bank from time to time,
changing when and as said prime commercial rate changes.
"Pro Rata Share" means, for each Bank, the percentage of the aggregate
Commitments represented by such Bank's Commitment or, if the Commitments
have been terminated, the percentage held by such Bank (including through
participation interests in L/C Obligations) of the aggregate principal
amount of all outstanding obligations hereunder.
"Property" means with respect to any Person, any real or personal
property, plant, building, facility, structure, equipment or unit, or other
asset (tangible or intangible) owned, leased or operated by such Person.
"Receivables" means all rights to receive payment for goods sold or
leased or for services rendered in the ordinary course of business, to the
extent not evidenced by an instrument or chattel paper, together with all
interest, finance charges or other amounts payable by an Obligor in respect
thereof, whether billed or unbilled.
"Register" has the meaning specified in Section 9.07(d).
"Registration Statement" means the Registration Statement of the
Company on Form S-1 originally filed with the Securities and Exchange
Commission (the "SEC") on August 14, 1996, as amended by Amendment No. 1
thereto filed with the SEC on September 30, 1996, and Amendment No. 2
thereto filed with the SEC on October 11, 1996.
"Regulation G," "Regulation T," "Regulation U" and "Regulation X"
means Regulation G, Regulation T, Regulation U and Regulation X,
respectively, of the Federal Reserve Board as in effect from time to time.
"Reimbursement Obligation" has the meaning specified in Section
2.03(d).
"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
from any Property into the indoor or outdoor environment, including the
movement of Contaminants through or in the air, soil, surface water,
groundwater or Property.
"Remedial Action" means any action required to (i) clean up, remove,
treat or in any other way address Contaminants in the indoor or outdoor
environment; (ii) prevent a Release or threat of Release or minimize the
further Release of Contaminants so they do not migrate or endanger or
threaten to endanger public health or welfare or the indoor or outdoor
environment; or (iii) perform pre-remedial studies and investigations or
post-remedial monitoring and care.
"Requirements of Law" means, as to any Person, the charter and by-laws
or other organizational or governing documents of such Person, and any law,
rule
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or regulation, Permit, or determination of any arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon
such Person or any of its Property or to which such Person or any of its
Property is subject, including, without limitation, the Securities Act, the
Securities Exchange Act, Regulation G, Regulation T, Regulation U and
Regulation X, and any certificate of occupancy, zoning ordinance, building,
environmental or land use, law, rule, regulation, ordinance or Permit or
occupational safety or health law, rule or regulation.
"Responsible Officer" means the chief financial officer or any other
officer of the Company or any other Borrower responsible for overseeing or
reviewing compliance with this Agreement or any Note.
"Required Financials" has the meaning specified in Section 1.03.
"Securities Act" means the Securities Act of 1933, as amended to the
date hereof and from time to time hereafter, and any successor statute.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended to the date hereof and from time to time hereafter, and any
successor statute.
"Singapore Dollars" means the lawful currency of Singapore.
"Standard & Poor's" means Standard & Poor's Rating Group.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, limited liability company, association or other business
entity of which securities or other ownership interests having (a) ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions or (b) the ability to direct the management of
such corporation, partnership, limited liability company, association or
other business entity, are at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more of its other
Subsidiaries or by one or more of such Person's other Subsidiaries.
"Tax Allocation and Indemnification Agreement" means that certain Tax
Allocation and Indemnification Agreement between Donnelley and the Company,
as in effect on the date hereof or as amended or modified with the consent
of the Majority Banks.
"Taxes" has the meaning specified in Section 2.18.
"Termination Date" means the earlier of (a) November 5, 1999, subject
to any extension of such date pursuant to Section 2.20 or (b) the date the
Commitments are terminated in whole pursuant to Section 2.05 or 6.01.
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"Transition Services Agreement" means that certain Transition Services
Agreement between Donnelley and the Company, as in effect on the date
hereof or as amended or modified with the consent of the Majority Banks.
"Type" has the meaning specified in the definition of Advance.
"Unmatured Event of Default" means any event or condition which would
constitute an Event of Default but for the requirement that notice be given
or time elapse or both.
"U.S. Dollar Equivalent" has the meaning specified in Section 2.16.
"U.S. Dollars" and the sign "$" each means the lawful currency of the
United States.
"Wholly-Owned Subsidiary" means, with respect to any Person, any
Subsidiary all or substantially all of the outstanding voting securities of
which shall at the time be owned or controlled, directly or indirectly, by
such Person or one or more Wholly-Owned Subsidiaries of such Person, or by
such Person and one or more Wholly-Owned Subsidiaries of such Person.
"Withdrawal Liability" has the meaning specified in Part 1 of Subtitle
E of Title IV of ERISA.
SECTION 1.02. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding."
SECTION 1.03. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles consistent with those applied in the preparation
of the financial statements then most recently delivered by the Company to the
Banks in accordance with Section 5.02 ("GAAP"); provided, however, that if any
change in GAAP would affect (or would result in a material change in the method
of calculating) any of the covenants set forth in Sections 5.10, 5.11 or 5.12
hereof, then (i) together with any financial statements required to be delivered
hereunder (the "Required Financials"), the Company will deliver additional
financial statements, as of the same date or for the same period covered by the
Required Financials, prepared on a pro forma basis as if such change in GAAP had
not occurred, and (ii) any determination of compliance with any covenant set
forth in Section 5.10, 5.11 or 5.12 shall be made in accordance with GAAP
without giving effect to such change and consistently applied.
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
---------------------------------
SECTION 2.01. The Advances. Each Bank severally agrees, on the
terms and conditions hereinafter set forth, to make Advances to the Borrowers
from time to time on any
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Business Day during the period from the Effective Date until the Termination
Date in an aggregate Original Dollar Amount with respect to all Borrowers not to
exceed at any time outstanding an amount (such Bank's "Available Commitment")
equal to:
(a) the lesser of:
(i) such Bank's Pro Rata Share of an amount equal to 85% of the
aggregate Receivables of the Borrowers, and
(ii) the amount set forth opposite such Bank's name on Schedule
2.01 hereto or, if such Bank has entered into any Assignment and
Acceptance, set forth for such Bank in the Register, as such amount
may be reduced pursuant to Section 2.05 (such Bank's "Commitment")
minus
(b) such Bank's Pro Rata Share of the aggregate outstanding L/C
Obligations.
Each Borrowing shall be in an aggregate amount of not less than (x) in the case
of Base Rate Advances, $100,000 or an integral multiple thereof or (y) in the
case of Eurocurrency Rate Advances, $1,000,000 or in an integral multiple of
$100,000 in excess thereof or, if the requested currency for such Advance is not
U.S. Dollars, an approximately equivalent amount and multiple thereof determined
by the Administrative Agent in accordance with Section 2.16 and rounded to the
nearest 10,000 units of the requested Alternative Currency. Each Borrowing
shall consist of Advances of the same Type made on the same day to the same
Borrower by the Banks ratably according to their respective Commitments in the
currency so requested. Within the limits of each Bank's Available Commitment, a
Borrower may borrow under this Section 2.01, prepay pursuant to Section 2.10,
and reborrow under this Section 2.01.
SECTION 2.02. Making the Advances. (a) Each Borrowing shall be
made on notice by the Company (or, if such Borrower is a Borrowing Subsidiary,
by the Company on behalf of such Borrowing Subsidiary) to the Administrative
Agent (which shall give each Bank prompt notice thereof by telecopy), given not
later than 10:00 a.m. (Chicago time) on (i) the date of a proposed Borrowing
comprised of Base Rate Advances, (ii) the third Business Day prior to the date
of a proposed Borrowing comprised of Eurocurrency Rate Advances to be
denominated in U.S. Dollars, and (iii) the fourth Business Day prior to the date
of a proposed Borrowing comprised of Eurocurrency Rate Advances to be
denominated in an Alternative Currency. Each such notice of a Borrowing (a
"Notice of Borrowing") shall be by telecopy, confirmed immediately in writing,
in substantially the form of Exhibit D hereto, specifying therein (A) the date
of such Borrowing, (B) the Type of Advances comprising such Borrowing, which, in
the case of a Borrowing denominated in an Alternative Currency, shall be
Eurocurrency Rate Advances, (C) the currency for such Borrowing, which shall be
in U.S. Dollars or an Alternative Currency, (D) the aggregate amount of such
Borrowing (expressed in the requested currency), (E) in the case of a Borrowing
consisting of Eurocurrency Rate Advances, the initial Interest Period for the
Advances comprising such Borrowing, and (F) whether such Borrowing is to be made
by the Company or by a specified Borrowing Subsidiary. The Administrative Agent
shall, promptly after such time as the Company or such Borrower may no longer
revoke the Notice of
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Borrowing without any liability to the Banks, notify each Bank and the Company
of the applicable interest rate under Section 2.07(a) or (b). Each Bank shall,
before 12:00 p.m. (Chicago time) on the date of such Borrowing, make available
to the Administrative Agent at the Administrative Agent's Domestic Lending
Office, in federal or otherwise immediately available funds, such Bank's Pro
Rata Share of such Borrowing. After the Administrative Agent receives such funds
and upon fulfillment of the applicable conditions set forth in Article III, the
Administrative Agent will make such funds available to the applicable Borrower
at the Administrative Agent's aforesaid address.
(b) Anything in subsection (a) above to the contrary notwithstanding:
(i) If with respect to a request for a Borrowing of an Alternative
Currency other than Pounds Sterling, Hong Kong Dollars, Singapore Dollars,
or Japanese Yen any Bank shall, prior to 10:00 a.m. (Chicago time) on the
third Business Day before the requested date of such Borrowing, notify the
Administrative Agent that the requested Alternative Currency is not
practically available to such Bank in the amount required to make its
Advance in connection therewith; or
(ii) If any Bank shall, prior to the making of any requested
Borrowing consisting of Eurocurrency Rate Advances in an Alternative
Currency, notify the Administrative Agent that the introduction of or any
change in or in the interpretation of any law or regulation makes it
unlawful, or that any central bank or other governmental authority asserts
that it is unlawful, for such Bank or its Eurocurrency Lending Office or
any other Applicable Lending Office to perform its obligations hereunder to
make Eurocurrency Rate Advances in such currency or to fund or maintain
Eurocurrency Rate Advances in such currency hereunder;
then, upon receipt of such notice, the Administrative Agent shall so notify the
Company and the Company may, without incurring an obligation to indemnify for
losses, costs or expenses under Section 2.02(d), by notice to the Administrative
Agent (which shall promptly notify each Bank), either
(x) withdraw the applicable Notice of Borrowing, in which case the
Borrowing shall not occur; or
(y) request that such Borrowing be made by the Banks in U.S. Dollars
as a Borrowing comprised of either Eurocurrency Rate Advances or Base Rate
Advances, in which case the original Notice of Borrowing shall be deemed to
be a Notice of Borrowing which requests a Borrowing in U.S. Dollars in the
U.S. Dollar Equivalent, on the date the Company so notifies the
Administrative Agent, of the originally requested currency for such Type of
Advances (determined in accordance with Section 2.16); provided, that such
request may not be made by the Company if the requested Type of Advance is
a Eurocurrency Rate Advance and the request by the Company is not given to
the Administrative Agent prior to 9:00 a.m. (Chicago time) on the second
Business Day before the requested date of such Borrowing.
In the case of any notice given under clause (y) above, the Company shall
specify in such notice the amount and type of Advance to be made by each Bank in
connection therewith. Any notice
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given by the Company under this subsection (b) shall be given no later than 9:00
a.m. (Chicago time) two Business Days before the date of the requested
Borrowing, may be given by telephone and, if by telephone, shall be confirmed
promptly in writing. If neither the Company nor the applicable Borrower shall
provide a timely notice as contemplated in clause (x) or (y) above in response
to a notice by any Bank under clause (i) or (ii) above, the applicable Notice of
Borrowing shall be deemed withdrawn.
(c) Anything in subsection (a) above to the contrary notwithstanding,
if:
(i) the Eurocurrency Rate can not be determined, in accordance with
the definition of such term, for U.S. Dollars or the Alternative Currency
requested for a Borrowing, or a continuation or conversion thereof; or
(ii) The Majority Banks shall, no later than 5:00 p.m. (Chicago time)
three Business Days before the date of any requested Borrowing,
continuation or conversion consisting of Eurocurrency Rate Advances, or any
continuation thereof or conversion thereto, notify the Administrative Agent
that the Eurocurrency Rate for any Interest Period for such Eurocurrency
Rate Advances, plus additional interest, if any, payable under Section
2.08, is not likely to adequately reflect the cost to such Majority Banks
of making, funding, converting to or continuing their respective
Eurocurrency Rate Advances for such Borrowing for such Interest Period;
then, the Administrative Agent shall promptly notify the Company and the Banks
of such circumstances and upon receipt of such notice, the Company may, without
incurring an obligation to indemnify for losses, costs or expenses under Section
2.02(d), by notice to the Administrative Agent (which shall promptly notify each
Bank), either:
(x) withdraw the applicable Notice of Borrowing or Notice of
Conversion or Continuation, in which case the Borrowing, or the conversion
or continuation of such Borrowing, shall not occur; or
(y) request that such Borrowing, continuation or conversion be made
by the Banks in U.S. Dollars as a Borrowing, continuation or conversion, in
which case the original Notice of Borrowing or Notice of Conversion or
Continuation shall be deemed to be a Notice of Borrowing or Notice of
Conversion or Continuation which requests a Borrowing, continuation or
conversion in U.S. Dollars in the U.S. Dollar Equivalent, on the date the
Company so notifies the Administrative Agent, of the originally-requested
currency for such Advances; provided, that such request may not be made by
the Company if the request by the Company is not given to the
Administrative Agent prior to 9:00 a.m. (Chicago time) on the second
Business Day before the requested date of such Borrowing, continuation or
conversion.
In the case of any notice given under clause (y) above, the Company shall
specify in such notice the amount and Type of Advances to be made, continued or
converted by the Banks in connection therewith. Any notice by the Company under
this subsection (c) shall be given no later than 9:00 a.m. (Chicago time) two
Business Days before the date of the requested Borrowing, may be given
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by telephone, and, if by telephone, shall be confirmed promptly in writing. From
and after the date the Administrative Agent receives the notice described in
Section 2.02(c)(ii), the Banks' obligation to make Eurocurrency Rate Advances
for any affected Interest Period shall be suspended until the Majority Banks
notify the Administrative Agent that the circumstances giving rise to such
notice no longer exist. If the Company shall not provide a timely notice as
contemplated in clauses (x) or (y) above with respect to a Notice of Borrowing,
the applicable Notice of Borrowing shall be deemed withdrawn. If the Company
shall not provide a timely notice as contemplated in clauses (x), or (y) above
with respect to a Notice of Continuation or Conversion, the Company shall be
deemed to have made the request described in clause (y).
(d) Each Notice of Borrowing and Notice of Conversion or Continuation
may be revoked by the Company by notice to the Administrative Agent without any
liability on the part of the Company at any time prior to (i) 10:00 a.m.
(Chicago time) on the date of a proposed Borrowing of or conversion into Base
Rate Advances, (ii) 9:00 a.m. (Chicago time) on the second Business Day prior to
the date of a proposed Borrowing, continuation or conversion comprised of
Eurocurrency Rate Advances to be denominated in U.S. Dollars, and (iii) 9:00
a.m. (Chicago time) on the third Business Day prior to the date of a proposed
Borrowing, continuation or conversion comprised of Eurocurrency Rate Advances to
be denominated in an Alternative Currency. In the case of any Borrowing,
continuation or conversion which the related Notice of Borrowing, or Notice of
Conversion or Continuation, specifies is to be comprised of Eurocurrency Rate
Advances, unless the Company revokes such Notice of Borrowing, or Notice of
Conversion or Continuation, in accordance with the preceding sentence and except
as otherwise provided in Sections 2.02(b) and (c), the Company shall indemnify
each Bank against any loss, cost or expense reasonably incurred by such Bank as
a result of any failure to fulfill on or before the date specified in such
Notice of Borrowing, or Notice of Conversion or Continuation for such Borrowing,
conversion or continuation, the applicable conditions set forth in Article III,
including, without limitation, any loss (excluding loss of anticipated profits),
cost or expense reasonably incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by such Bank to fund the Advance to be made
by such Bank as part of such Borrowing, conversion or continuation, when such
Advance, as a result of such failure, is not made, continued or converted on
such date.
(e) Unless the Administrative Agent shall have received notice from a
Bank prior to the date of any Borrowing that such Bank will not make available
to the Administrative Agent such Bank's Pro Rata Share of such Borrowing, the
Administrative Agent may assume that such Bank has made such Pro Rata Share
available to the Administrative Agent on the date of such Borrowing in
accordance with subsection (a) of this Section 2.02 and the Administrative Agent
may, in reliance upon such assumption, make a corresponding amount available to
the applicable Borrower on such date. If and to the extent that such Bank shall
not have so made such Pro Rata Share available to the Administrative Agent, such
Bank and such Borrower severally agree to repay to the Administrative Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to such Borrower until
the date such amount is repaid to the Administrative Agent, at (i) in the case
of such Borrower, the interest rate applicable at the time to Advances
comprising such Borrowing and (ii) in the case of such Bank, the Federal Funds
Effective Rate. If such Bank shall repay such corresponding amount to the
Administrative Agent, such amount so repaid shall constitute such Bank's Advance
as part of such Borrowing for purposes of this Agreement.
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(f) A Bank's failure to make the Advance to be made by it as part of
any Borrowing shall not relieve any other Bank of its obligation, if any,
hereunder to make its Advance on the date of such Borrowing. No Bank shall be
responsible for the failure of any other Bank to make the Advance to be made by
such other Bank on the date of any Borrowing.
SECTION 2.03. Letters of Credit. (a) General Terms. Subject to the
terms and conditions hereof, the Administrative Agent shall issue standby or
commercial letters of credit (each a "Letter of Credit") for the Company's
account in U.S. Dollars or any Alternative Currency in an aggregate undrawn
Original Dollar Amount up to the L/C Commitment, provided that the aggregate L/C
Obligations at any time outstanding shall not exceed the amount by which (i) the
lesser of (x) the aggregate Commitments in effect at such time and (y) 85% of
the aggregate Receivables of the Borrowers exceed (ii) the aggregate outstanding
Original Dollar Amount of Advances at such time. Each Letter of Credit shall be
issued by the Administrative Agent, but each Bank shall be obligated to
reimburse the Administrative Agent for its Pro Rata Share of the amount of each
drawing thereunder and, accordingly, the undrawn face amount of each Letter of
Credit shall constitute usage of the Commitment of each Bank pro rata in
accordance with such Bank's Commitment.
(b) Applications. At any time before the Termination Date, the
Administrative Agent shall, at the request of the Company, issue one or more
Letters of Credit, whether standby or commercial, in a form satisfactory to the
Administrative Agent and the Company, with expiration dates no later than the
Termination Date, in an aggregate Original Dollar Amount as set forth above,
upon the receipt of a duly executed application for the relevant Letter of
Credit in the form customarily prescribed by the Administrative Agent for the
type of Letter of Credit requested (each an "Application"). The current form of
the Administrative Agent's Applications are attached as Schedule 2.3 (Standby)
and Schedule 2.3 (Commercial) hereto. The Administrative Agent shall provide
the Company and each Bank with copies of any new form of Application that may,
from time to time, be adopted by the Administrative Agent. Notwithstanding
anything contained in any Application to the contrary: (i) the Company's
obligation to pay fees in connection with each Letter of Credit shall be
exclusively as set forth in Section 2.4 hereof, (ii) except during the
continuance of an Event of Default, the Administrative Agent will not call for
the funding by the Company of any amount under a Letter of Credit, or any other
form of collateral security for the Company's obligations in connection with
such Letter of Credit, before being presented with a drawing thereunder, and
(iii) if the Administrative Agent is not timely reimbursed for the amount of any
drawing under a Letter of Credit on the date such drawing is paid, the Company's
obligation to reimburse the Administrative Agent for the amount of such drawing
shall bear interest (which the Company hereby promises to pay) from and after
the date such drawing is paid at a rate per annum equal to the Base Rate for
three (3) Business Days and thereafter at a rate per annum equal to the sum of
1% plus the Base Rate from time to time in effect. The Administrative Agent
will promptly notify the Banks of each issuance by it of a Letter of Credit. If
the Administrative Agent issues any Letters of Credit with expiration dates that
are automatically extended unless the Administrative Agent gives notice that the
expiration date will not so extend beyond its then-scheduled expiration date,
the Administrative Agent will give such notice of non-renewal before the time
necessary to prevent such automatic extension if before such required notice
date (i) the expiration date of such Letter of Credit if so extended would be
later than the Termination Date, (ii) the Commitments have been terminated or
(iii) an Event of Default exists and the Majority Banks have given the
Administrative Agent instructions not to so permit the extension of the
expiration date of such Letter of Credit. The Administrative Agent
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agrees to issue amendments to the Letter(s) of Credit increasing the amount, or
extending the expiration date, thereof at the request of the Company subject to
the terms of this Section 2.3 (including, but not limited to, the satisfaction
of the conditions set forth in Section 2.3(c) at the time of such amendment).
Without limiting the generality of the foregoing, the Administrative Agent's
obligation to issue, amend or extend the expiration date of a Letter of Credit
is subject to the conditions of Section 2.3(c) and the other terms of this
Section 2.3 and the Administrative Agent will not issue, amend or extend the
expiration date of any Letter of Credit if any Bank notifies the Administrative
Agent of any failure to satisfy or otherwise comply with such conditions and
terms and directs the Administrative Agent not to take such action.
(c) Conditions to Issuance of Letters of Credit. In addition to
being subject to the satisfaction of the conditions precedent contained in
Sections 3.01 and 3.02, the obligation of the Administrative Agent to issue any
Letter of Credit is subject to the satisfaction in full of the following
conditions:
(i) The Company shall have delivered to the Administrative Agent, at
such times and in such manner as the Administrative Agent may prescribe, an
Application and such other documents and materials as may be required
pursuant to the terms thereof, and the terms of the proposed Letter of
Credit shall be reasonably satisfactory to the Administrative Agent and
shall be consistent with the Administrative Agent's ordinary practice with
respect to terms of its letters of credit; and
(ii) as of the date of issuance, no order, judgment or decree of any
court, arbitrator or Governmental Authority shall purport by its terms to
enjoin or restrain the Administrative Agent from issuing such Letter of
Credit and no law, rule or regulation applicable to the Administrative
Agent and no request or directive (whether or not having the force of law
and whether or not the failure to comply therewith would be unlawful) from
any Governmental Authority with jurisdiction over the Administrative Agent
shall prohibit or request the Administrative Agent to refrain from the
issuance of letters of credit generally or the issuance of that Letter of
Credit.
(d) Reimbursement Obligations. Subject to Section 2.03(b) hereof,
the obligation of the Company to reimburse the Administrative Agent for all
drawings under a Letter of Credit (a "Reimbursement Obligation") shall be
governed by the Application related to such Letter of Credit, except that, if
and as long as no Event of Default exists and the other conditions in Section
2.03(c) hereof are satisfied, any Reimbursement Obligation outstanding on
account of a drawing under a Letter of Credit shall, in the case of a
Reimbursement Obligation denominated in U.S. Dollars, automatically convert
into a Borrowing of Base Rate Advances in an amount equal to such Reimbursement
Obligation on the date such drawing occurs and, in the case of a Reimbursement
Obligation denominated in an Alternative Currency, automatically convert into a
Borrowing of Eurocurrency Rate Advances with an Interest Period of one month in
an amount equal to such Reimbursement Obligation on the date such drawing
occurs, and the Administrative Agent shall notify each Bank thereof, and each
Bank shall thereupon fund its Advance in such Borrowing in accordance with
Sections 2.01 and 2.02 (except for any requirement that a Borrowing be in a
certain amount). If the conditions in Section 3.02 cannot be satisfied with
respect to any drawing, then reimbursement of such drawing shall be made in
immediately
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available funds at the Administrative Agent's principal office in
Chicago, Illinois by no later than 2:00 p.m. (Chicago time) on the date when
such drawing is paid or, if such drawing was paid after 12:00 Noon (Chicago
time), by 12:00 Noon (Chicago time) on the next Business Day. If the Company
does not make any such reimbursement payment on the date due and the
Participating Banks fund their participations therein in the manner set forth in
Section 2.03(e) below, then all payments thereafter received by the
Administrative Agent in discharge of any of the relevant Reimbursement
Obligations shall be distributed in accordance with Section 2.03(e) below.
(e) The Participating Interests. Each Bank (other than the Bank then
acting as Administrative Agent in issuing Letters of Credit), by its acceptance
hereof, severally agrees to purchase from the Administrative Agent, and the
Administrative Agent hereby agrees to sell to each such Bank (a "Participating
Bank"), an undivided percentage participating interest (a "Participating
Interest"), to the extent of its Pro Rata Share, in each Letter of Credit issued
by, and each Reimbursement Obligation owed to, the Administrative Agent. Upon
any failure by the Company to pay any Reimbursement Obligation at the time
required on the date the related drawing is paid, as set forth in Section
2.03(d) above, or if the Administrative Agent is required at any time to return
to the Company or to a trustee, receiver, liquidator, custodian or other Person
any portion of any payment of any Reimbursement Obligation, each Participating
Bank shall, not later than the Business Day it receives notice from the
Administrative Agent to such effect, if such notice is received before 1:00 p.m.
(Chicago time), or not later than the following Business Day, if such notice is
received after such time, pay to the Administrative Agent an amount equal to its
Pro Rata Share of such unpaid or recaptured Reimbursement Obligation together
with interest on such amount accrued from the date the related payment was made
by the Administrative Agent to the date of such payment by such Participating
Bank at a rate per annum equal to the Federal Funds Effective Rate for each such
day. Each such Participating Bank shall thereafter be entitled to receive its
Pro Rata Share of each payment received in respect of the relevant Reimbursement
Obligation and of interest paid thereon, with the Administrative Agent retaining
its Pro Rata Share as a Bank hereunder.
The several obligations of the Participating Banks to the
Administrative Agent under this Section 2.03(e) shall be absolute, irrevocable
and unconditional under any and all circumstances whatsoever (except, without
limiting the Company's obligations under each Application, to the extent the
Company is relieved from its obligation to reimburse the Administrative Agent
for a drawing under a Letter of Credit because of the Administrative Agent's
gross negligence or willful misconduct in determining that documents received
under the Letter of Credit appear to comply on their face with the terms
thereof) and shall not be subject to any set-off, counterclaim or defense to
payment which any Participating Bank may have or have had against the Company,
the Administrative Agent, any other Bank or any other Person whatsoever.
Without limiting the generality of the foregoing, such obligations shall not be
affected by any Event of Default or by any reduction or termination of any
Commitment of any Bank, and each payment by a Participating Bank under this
Section 2.03(e) shall be made without any offset, abatement, withholding or
reduction whatsoever. The Administrative Agent shall be entitled to offset
amounts received for the account of a Bank under this Agreement against unpaid
amounts due from such Bank to the Administrative Agent hereunder (whether as
fundings of participations, indemnities or otherwise), but shall not be entitled
to offset against amounts owed to the Administrative Agent by any Bank arising
outside this Agreement.
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(f) Indemnification. The Participating Banks shall, to the extent of
their respective Pro Rata Shares, indemnify the Administrative Agent (to the
extent not reimbursed by the Company) against any cost, expense (including
reasonable counsel fees and disbursements), claim, demand, action, loss or
liability (except such as result from the Administrative Agent's gross
negligence or willful misconduct) that the Administrative Agent may suffer or
incur in connection with any Letter of Credit. The obligations of the
Participating Banks under this Section 2.03(f) and all other parts of this
Section 2.03 shall survive termination of this Agreement and of all other L/C
Documents.
SECTION 2.04. Fees. (a) Commitment Fee. The Borrowers jointly and
severally agree to pay to the Administrative Agent, for the account of each
Bank, a commitment fee (the "Commitment Fee") on such Bank's average daily
unused Commitment from the date hereof until the Termination Date, payable in
arrears on the last day of each December, March, June and September during the
term of such Bank's Commitment and on the Termination Date, at a rate per annum
equal to the following percentage in effect from time to time:
(i) 0.20% for each day Level I Status exists,
(ii) 0.25% for each day Level II Status exists, and
(iii) 0.30% for each day Level III Status exists.
Level I Status shall apply to the period from the date hereof until the first
date on which financial statements are due pursuant to Section 5.02. For any
date thereafter, Level Status shall be adjusted after each delivery of the
Company's quarterly or annual financial statements pursuant to Section 5.02
effective on the date such financial statements are due pursuant to Section
5.02; provided, that if timely delivery of such financial statements is not
made, Level III Status shall be deemed to exist from the day on which such
financial statements were required to be delivered until such delivery is made,
after which time Level Status shall be determined from the delivered financial
statements.
(b) Letter of Credit Fees.
(i) Banks' Letter of Credit Fees. The Company shall pay, with
respect to each Letter of Credit, a per annum Letter of Credit fee equal to
the Applicable Margin in effect from time to time minus 1/8th of 1%
(computed based upon actual days elapsed in a 365/366-day year) multiplied
by the maximum Original Dollar Amount available to be drawn under such
Letter of Credit. Such fee shall be paid to the Administrative Agent, for
the account of the Banks in accordance with their Pro Rata Shares,
quarterly in arrears, on the last calendar day of each December, March,
June and September occurring after the date hereof.
(ii) Administrative Agent's Letter of Credit Fronting Fees. The
Company shall pay, with respect to each Letter of Credit, a per annum
Letter of Credit fronting fee equal to 1/8th of 1% multiplied by the
maximum Original Dollar Amount available to be drawn under such Letter of
Credit. Such fee shall be paid to the Administrative Agent, for its own
account, quarterly in arrears, on the last
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calendar day of each December, March, June and September occurring after
the date hereof.
(iii) Administrative Agent's Other Fees. In addition to the fees
under clause (i) and (ii) above, the Company shall pay to the
Administrative Agent for its own account (x) the Administrative Agent's
standard issuance fee for each Commercial Letter of Credit and (y) the
Administrative Agent's standard drawing, negotiation, amendment, and other
administrative fees for each Letter of Credit (whether a Commercial Letter
of Credit or Standby Letter of Credit). All the foregoing standard fees
shall be retained by the Administrative Agent for its own account. Such
standard fees referred to in the preceding clauses (x) and (y) may be
established by the Administrative Agent from time to time. The
Administrative Agent shall upon the Company's request furnish the Company
with a current schedule of such standard fees.
SECTION 2.05. Reduction and Termination of the Commitments; Right to
Replace Banks. (a) The Company shall have the right, upon at least five (5)
days' notice to the Administrative Agent, to terminate in whole or reduce
ratably in part the unused portions of the respective Commitments of the Banks;
provided, that (a) the aggregate amount of the Commitments of the Banks shall
not be reduced to an amount less than the sum of the aggregate Original Dollar
Amount of the outstanding Advances and the aggregate Original Dollar Amount of
the outstanding L/C Obligations and (b) each partial reduction shall be in an
aggregate amount of $1,000,000 or any integral multiple of $100,000 in excess
thereof.
(b) Provided that no Event of Default shall have occurred and be
continuing, the Company, with the consent of the Administrative Agent, which
consent shall not be unreasonably withheld, may replace any Bank, in whole but
not in part, that fails to make an Advance that it is required to make hereunder
or that gives notice of any additional amounts payable by the Borrower to such
Bank pursuant to Section 2.12, 2.13 or 2.18(a) by (i) giving such Bank and the
Administrative Agent not less than ten (10) Business Days' prior notice thereof,
which notice shall be irrevocable, shall specify the effective date of such
replacement and shall be effective only when received by such Bank and the
Administrative Agent, and (ii) effecting an assignment of all of the Bank's
Commitment and Advances in accordance with Section 9.07.
SECTION 2.06. Payment; Conversion and Continuation. (a) On the
Termination Date, the Borrowers shall repay, to the Administrative Agent for the
ratable account of the Banks, the entire unpaid principal amount of the Advances
made by each Bank.
(b) Any Borrower may elect (x) to convert Base Rate Advances or any
portion thereof to Eurocurrency Rate Advances denominated in U.S. Dollars, (y)
to convert Eurocurrency Rate Advances denominated in U.S. Dollars or any portion
thereof into Base Rate Advances, or (z) to continue any Eurocurrency Rate
Advance or any portion thereof for an additional Interest Period; provided,
however, that (i) the aggregate amount of Base Rate Advances being converted
into Eurocurrency Rate Advances or of Eurocurrency Rate Advances being
continued shall, in the aggregate, equal $1,000,000 or an integral multiple of
$100,000 in excess thereof (or, in the case of a Eurocurrency Rate Advance
denominated in an Alternative Currency, the minimum amount and multiple thereof
specified by the Administrative Agent pursuant to Section 2.01); and (ii) in the
case of a partial conversion of a Base Rate Advance into a Eurocurrency Rate
Advance,
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the remaining Base Rate Advance shall equal $100,000 or an integral multiple
thereof. The applicable Interest Period for the continuation of any Eurocurrency
Rate Advance shall commence on the day on which the immediately-preceding
Interest Period expires. Each conversion or continuation shall be allocated
among the Advances of each Bank in accordance with its Pro Rata Share of the
amount so converted or continued. Each such election shall be in substantially
the form of Exhibit E (a "Notice of Conversion or Continuation") and shall be
made by giving the Administrative Agent notice by 10:00 a.m. (Chicago time) on
the date of such conversion or continuation, in the case of a conversion to a
Base Rate Advance, or at least three Business Days prior to the date of such
conversion or continuation in the case of a conversion to or continuation of a
Eurocurrency Rate Advance, specifying, in each case (i) whether a conversion or
continuation is to take place, (ii) what Advances are to be converted or
continued, and if converted, the Type of Advance to which it is to be converted,
(iii) the amount of the conversion or continuation, (iv) if applicable, the new
Interest Period therefor and (v) in the case of a conversion, the date of
conversion (which date shall be a Business Day). The Administrative Agent shall
promptly notify each Bank of its receipt of a Notice of Conversion or
Continuation by sending such Bank a copy thereof. If, within the time period
required under the terms of this Section 2.06(b), the Administrative Agent does
not receive a Notice of Conversion or Continuation from the applicable Borrower
containing an election to continue or convert any Advances for an additional
Interest Period, then, upon the expiration of the Interest Period therefor, such
Advances, if denominated in U.S. Dollars, will be automatically converted to
Base Rate Advances, and if denominated in an Alternative Currency, will be
automatically continued for an Interest Period of one month.
SECTION 2.07. Interest on Advances. Each Borrower shall pay
interest on the unpaid principal amount of each Advance made by each Bank to it
from the date of such Advance until such principal amount shall be paid in full,
at the following rates per annum:
(a) Base Rate Advances. During such period as such Advance is a Base
Rate Advance, a rate per annum equal at all times to the Base Rate in effect
from time to time, payable quarterly in arrears on the last day of each
December, March, June and September, commencing December 31, 1996. The
Administrative Agent shall give notice to the Company and the applicable
Borrower (if other than the Company) and each Bank of any change in the Base
Rate promptly after such change occurs, but the Administrative Agent's failure
to give such notice shall not affect the obligation of the Company or such
Borrower to pay interest at such rate when it becomes due and payable.
(b) Eurocurrency Rate Advances. During such period as such Advance
is a Eurocurrency Rate Advance, a rate per annum equal at all times during each
Interest Period for such Advance to the sum of the Eurocurrency Rate for such
Interest Period plus the Applicable Margin, payable on the last day of such
Interest Period and, if such Interest Period has a duration of more than three
months, on each day which occurs during such Interest Period every three months
from the first day of such Interest Period and on the date such Eurocurrency
Rate Advance shall be converted or paid in full.
(c) Default Interest. Notwithstanding the foregoing provisions of
this Section 2.07, any amount of principal and fees and, to the extent permitted
by law, interest, that is not paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest, from the date on which such
amount is due until such amount is paid in full, payable in arrears on the
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date such amount shall be paid in full and on demand, at a rate per annum equal
at all times to 1% per annum above (i) in the case of principal, the rate of
interest otherwise applicable thereto from time to time in accordance with the
terms hereof, and (ii) in the case of interest and fees, the Base Rate in effect
from time to time.
SECTION 2.08. Additional Interest on Eurocurrency Rate Advances.
Each Borrower shall pay to each Bank, so long as and to the extent such Bank
shall be required under regulations of the Board of Governors of the Federal
Reserve System (or any similar authority outside the United States, in the case
of Advances in Alternative Currencies) to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities (or
any other category of liabilities that includes deposits by reference to which
the interest rate on Eurocurrency Rate Advances in the applicable Alternative
Currency is determined) and such Bank's performance under this Agreement (and
other like agreements) shall have given rise to additional reserve requirements
for such Bank thereunder, additional interest on the unpaid principal amount of
each Advance constituting a Eurocurrency Rate Advance of such Bank made to such
Borrower, from the date of such Advance until such principal amount is paid in
full, at an interest rate per annum equal at all times to the remainder obtained
by subtracting (a) the Eurocurrency Rate for the applicable Interest Period for
such Advance from (b) the rate obtained by dividing such Eurocurrency Rate by a
percentage equal to 100% minus the Eurocurrency Rate Reserve Percentage of such
Bank for such Interest Period, payable on each date on which interest is payable
on such Advance. Such Bank shall, not later than the last day of the applicable
Interest Period, provide notice to the Administrative Agent and the Company of
any such additional interest arising in connection with such Advance. Such
additional interest so notified on a timely basis by any Bank shall be payable
to the Administrative Agent for the account of such Bank on the dates specified
for payment of interest for such Advance in Section 2.07.
SECTION 2.09. Interest Rate Determination. (a) The Administrative
Agent shall give prompt notice to the Company and each of the Banks of the
applicable interest rate determined by the Administrative Agent for purposes of
Section 2.07(a) or (b).
(b) On the date on which the aggregate unpaid principal amount of
Eurocurrency Rate Advances comprising any Borrowing shall be reduced, by
payment, prepayment, conversion of part thereof or otherwise, to less than
$1,000,000 (or, in the case of a Borrowing denominated in an Alternative
Currency, the minimum amount for Borrowings in such currency designated by the
Administrative Agent pursuant to Section 2.01), such Advances shall, in the case
of Advances denominated in U.S. Dollars, automatically convert into Base Rate
Advances and such conversion shall be subject to Section 2.11 and, in the case
of Advances denominated in an Alternative Currency, shall be prepaid and such
prepayment shall be subject to Section 2.11.
SECTION 2.10. Prepayments. A Borrower may prepay, on notice given
no later than 11:00 a.m. (Chicago time) on the date of prepayment (in the case
of Base Rate Advances) and on three Business Days' prior notice (in the case of
Eurocurrency Rate Advances) to the Administrative Agent, each Borrowing made to
such Borrower, in whole or in part. Such notice shall include the proposed date
and aggregate principal amount of such prepayment, and if such notice is given,
such Borrower shall prepay such principal amount, together with accrued interest
to the date of such prepayment on the principal amount prepaid, and any amounts
payable pursuant to Section 2.11 hereof in connection therewith shall be paid on
the date of such prepayment; provided, however, that each partial prepayment of
(i) Base Rate Advances shall be
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in an aggregate principal amount of not less than $100,000 or an integral
thereof, (ii) Eurocurrency Rate Advances denominated in U.S. Dollars shall be in
an aggregate principal amount of not less than $1,000,000 or an integral
multiple of $100,000 in excess thereof and (iii) Eurocurrency Rate Advances
denominated in an Alternative Currency shall be in an aggregate principal amount
of not less than the minimum amount and multiple specified by the Administrative
Agent pursuant to Section 2.01. Subject to Section 2.13, each prepayment of a
Borrowing shall be made to each Bank in accordance with such Bank's Pro Rata
Share thereof. If the aggregate Original Dollar Amount of the outstanding L/C
Obligations and the outstanding principal amount of the Advances, calculated in
accordance with Section 2.16 by the Administrative Agent, exceeds (as the result
of fluctuations in applicable foreign exchange rates) (x) 100% of the then
aggregate amount of the Commitments on the date of any Borrowing, conversion or
continuation of Advances hereunder, or on the date any Letter of Credit is
issued hereunder, or (y) 105% of the then aggregate amount of the Commitments on
the seventh Business Day prior to any December, March, June or September, the
Company shall prepay a Borrowing or Borrowings (in whole or in part, and in any
case as selected by the Company) in an aggregate amount (calculated as
aforesaid, and rounded upward, if necessary, to the nearest $100,000) equal to
the excess of:
(a) the aggregate Original Dollar Amount of the outstanding L/C
Obligations and the outstanding principal amount (calculated as
aforesaid) of Advances, over
(b) the then aggregate amount of the Banks' Commitments
(calculated as aforesaid).
The foregoing prepayment calculation shall be made (A) in the case of clause (x)
above, on the day such Notice of Borrowing, conversion or continuation of
Advances is required to be given, or Letter of Credit is requested, by the
Company and (B) in the case of clause (y) above, on the seventh Business Day
prior to the end of the applicable calendar quarter and reported to the Company
by the fifth Business Day prior to such date. Any such required prepayment
shall be due (1) in the case of clause (x) above, on the day such Borrowing,
conversion or continuation of Advances is made, or Letter of Credit is issued,
and (2) in the case of clause (y) above, on the last Business Day of the
applicable calendar quarter. Each prepayment of any Borrowing (in whole or in
part) made pursuant to this Section 2.10 shall be without premium or penalty,
but shall be subject to the provisions of Section 2.11. Any mandatory
prepayment of a Borrowing shall be made to the Administrative Agent for the
account of each Bank based on such Bank's Pro Rata Share of such Borrowing and
shall include accrued and unpaid interest on the principal amount prepaid and
all amounts owing under Section 2.11.
SECTION 2.11. Funding Indemnification. If any payment of principal
of any Advance (other than a Base Rate Advance) is made other than on the last
day of an Interest Period for such Advance, as a result of acceleration of the
maturity of the Advances pursuant to Section 6.01 or for any other reason, or if
any Eurocurrency Rate Advance is converted to a Base Rate Advance pursuant to
Section 2.13(b) on any day other than the last day of an Interest Period for
such Eurocurrency Rate Advance, the applicable Borrower shall, upon demand by
any Bank (with a copy of such demand to the Administrative Agent), pay to the
Administrative Agent for the account of such Bank any amounts required to
compensate such Bank for any additional losses, costs or expenses which it may
reasonably incur as a result of such payment or conversion,
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including without limitation any loss (excluding loss of anticipated profits),
cost or expense reasonably incurred as a result of the liquidation or re-
employment of deposits or other funds acquired by such Bank to fund or maintain
such Advance.
SECTION 2.12. Increased Costs and Reduced Return. (a) If, due to
either (i) the introduction of or any change (other than, in the case of
Eurocurrency Rate Advances, any change by way of imposition or increase of
reserve requirements included in the Eurocurrency Rate Reserve Percentage),
after the date hereof, in or in the interpretation of any law or regulation or
(ii) the compliance with any guideline or request from any central bank or other
governmental authority (whether or not having the force of law) issued after the
date hereof, there shall be any increase in the cost to any Bank of agreeing to
make, making, funding or maintaining Eurocurrency Rate Advances, by an amount
reasonably deemed by such Bank to be material, then from time to time, within
ten days after demand by such Bank (with a copy of such demand to the
Administrative Agent), such Borrower shall pay to the Administrative Agent for
the account of such Bank additional amounts sufficient to compensate such Bank
for such increased cost; provided, that no Borrower shall be obligated to pay
any such amount to the extent such amount accrued more than 90 days prior to the
demand therefor, except to the extent such introduction, change, guideline or
request has retroactive effect.
(b) If any Bank shall have determined that the adoption, after the
date hereof, of any applicable law, rule or regulation regarding capital
adequacy, or any change in any applicable law, rule or regulation, or any change
in the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive issued after the date hereof regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on the capital of such Bank or any corporation controlling such
Bank, as a consequence of such Bank's obligations hereunder, to a level below
that which such Bank or such corporation could have achieved but for such
adoption, change or compliance by an amount reasonably deemed by such Bank to be
material, then from time to time, within ten days after demand by such Bank
(with a copy of such demand to the Administrative Agent), the Company shall pay
to the Administrative Agent for the account of such Bank such additional amount
or amounts as will compensate such Bank or such corporation, in light of such
circumstances, to the extent such Bank reasonably determines such reduction to
be allocable to the existence of such Bank's Commitment; provided, that no
Borrower shall be obligated to pay any such amount to the extent such amount
accrued more than 90 days prior to the initial demand therefor, except to the
extent such adoption, change or compliance has retroactive effect.
(c) Each Bank will promptly notify the Administrative Agent and the
Company of any event of which it has knowledge, occurring after the date hereof,
which would entitle such Bank to compensation pursuant to this Section 2.12. A
certificate of any Bank claiming compensation under this Section and setting
forth the additional amount or amounts to be paid to it hereunder shall create a
rebuttable presumption as to the correctness of such additional amount or
amounts. Each Bank agrees not to request any payment under this Section 2.12
unless similar requests are then generally being made by such Bank of other
borrowers similarly situated, and to use a reasonable basis for calculating
amounts allocable to its Commitment hereunder.
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SECTION 2.13. Illegality. (a) If any Bank shall determine (which
determination shall be rebuttably presumed correct as to all parties) at any
time that the making or continuance of its Eurocurrency Rate Advances in any
particular currency has become unlawful because of the introduction of or any
change in or in the interpretation of any law or regulation or because of the
assertion of unlawfulness by any central bank or other governmental authority,
then, in any such event, such Bank shall give prompt notice (by telephone
confirmed in writing) to the Administrative Agent of such determination (which
notice the Administrative Agent shall promptly transmit to each Borrower and the
other Banks).
(b) Upon the giving of the notice to the Company referred to in
subsection (a) above, if the affected Advances are then outstanding, each
Borrower shall, upon at least one Business Day's written notice to the
Administrative Agent and the affected Bank, or if permitted by applicable law no
later than the date permitted thereby, in such Borrower's sole discretion,
either (i) prepay the Original Dollar Amount of the principal of all outstanding
Advances of such Bank to which such notice relates, together with accrued
interest thereon to the date of payment, or (ii) convert each such Advance into
a Base Rate Advance denominated in U.S. Dollars and, in each case, be obligated
to reimburse the affected Bank in respect thereof pursuant to Section 2.11
hereof. If more than one Bank gives notice pursuant to Section 2.13(a) at any
time, then all outstanding Advances of the affected Type or currency of such
Banks must be treated in the same manner by the Borrowers pursuant to this
subsection 2.13(b) and the Banks' obligations to make, convert or continue
Eurocurrency Rate Advances shall be suspended until the Administrative Agent
notifies the Borrowers that the circumstances causing such suspension no longer
exist.
SECTION 2.14. Payments and Computations. (a) Each Borrower shall
make each payment hereunder and under the Notes in immediately-available funds
to the Administrative Agent not later than 1:00 p.m. (Chicago time) on the day
when due from such Borrower. The Administrative Agent will, promptly after
receipt such payment, cause to be distributed like funds relating to the payment
of principal or interest or fees ratably (other than amounts payable pursuant to
Sections 2.05(b), 2.08, 2.11, 2.12, 2.13(b), 2.15, or 2.18) to the Banks for the
account of their respective Applicable Lending Offices, and like funds relating
to the payment of any other amount payable to any Bank to such Bank for the
account of its Applicable Lending Office, in each case to be applied in
accordance with the terms of this Agreement. All such payments shall be made in
U.S. Dollars, except that payments of principal of and interest on Borrowings in
an Alternative Currency shall be made in such Alternative Currency; provided
that if the applicable Borrower fails to make any payment of principal or
interest with respect to any Borrowing in an Alternative Currency on the due
date thereof because such Alternative Currency has ceased to be freely
transferable and convertible into U.S. Dollars in the London interbank market,
such failure shall not constitute an Event of Default or an Unmatured Event of
Default if such Borrower pays the U.S. Dollar Equivalent of such payment on the
due date thereof. In addition to any such U.S. Dollar payment, such Borrower
agrees to pay to each affected Bank an indemnity payment within five Business
Days after such Borrower shall have received a certificate from such Bank
setting forth in reasonable detail the amount of any loss, cost, damage or
expense suffered by such Bank as a consequence of such inability to make any
such payment in such Alternative Currency on the due date thereof. Each Bank
agrees to use reasonable efforts to avoid or minimize all such loss, cost,
damage or expense.
(b) All computations of interest based on the Prime Commercial Rate
and all computations of the Commitment Fee shall be made by the Administrative
Agent on the basis of a
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year of 365 or 366 days, as the case may be, and all computations of interest
based on the Eurocurrency Rate or the Federal Funds Effective Rate and all
computations of interest pursuant to Section 2.08 shall be made by the
Administrative Agent on the basis of a year of 360 days, in each case for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest or fees are payable. Each
determination by the Administrative Agent (or, in the case of Section 2.08, by a
Bank) of an interest rate or fee owing hereunder shall create a rebuttable
presumption as to the correctness of such determination.
(c) Whenever any payment hereunder or under the Notes shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest or fee, as the case may be;
provided, however, if such extension would cause payment of interest on
Eurocurrency Rate Advances to be made in the next following calendar month, such
payment shall be made on the next preceding Business Day.
(d) Unless the Administrative Agent shall have received notice from
the applicable Borrower prior to the date on which any payment is due to the
Banks hereunder that such Borrower will not make such payment in full, the
Administrative Agent may assume that such Borrower has made such payment in full
to the Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent
such Borrower shall not have so made such payment in full to the Administrative
Agent, each Bank shall repay to the Administrative Agent forthwith on demand
such amount distributed to such Bank together with interest thereon, for each
day from the date such amount is distributed to such Bank until the date such
Bank repays such amount to the Administrative Agent, at the Federal Funds
Effective Rate.
SECTION 2.15. Sharing of Payments, Etc. If any Bank shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of the Advances made by it (other than
pursuant to Sections 2.08, 2.11, 2.12, 2.13(b), or 2.18) in excess of its
ratable share of payments on account of the Advances obtained by all the Banks,
such Bank shall forthwith purchase from the other Banks such participations in
the Advances made by them as shall be necessary to cause such purchasing Bank to
share the excess payment ratably with each of them; provided, however, that if
all or any portion of such excess payment is thereafter recovered from such
purchasing Bank, such purchase from each Bank shall be rescinded and each Bank
shall repay to the purchasing Bank the purchase price to the extent of such
recovery together with an amount equal to such Bank's ratable share (according
to the proportion of (a) the amount of such Bank's required repayment to (b) the
total amount so recovered from the purchasing Bank) of any interest or other
amount paid or payable by the purchasing Bank in respect of the total amount so
recovered. Each Borrower agrees that any Bank so purchasing a participation from
another Bank with respect to Advances made to such Borrower pursuant to this
Section 2.15 may, to the fullest extent permitted by law, exercise all its
rights of payment (including the right of set-off) with respect to such
participation as fully as if such Bank were the direct creditor of such Borrower
in the amount of such participation.
SECTION 2.16. Currency Equivalents. (a) For purposes of this
Article II, (i) the equivalent in U.S. Dollars (the "U.S. Dollar Equivalent") of
any Alternative Currency shall be determined by using the spot rate at which
Harris Bank offers to exchange U.S. Dollars for such
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Alternative Currency in the interbank market at 10:00 a.m. (Chicago time) two
Business Days prior to the date on which such U.S. Dollar Equivalent is to be
determined, (ii) the equivalent in any Alternative Currency of any other
Alternative Currency shall be determined by using the spot rate at which Harris
Bank offers to exchange such Alternative Currency for the equivalent in such
other Alternative Currency at 10:00 a.m. (Chicago time) two Business Days prior
to the date on which such equivalent is to be determined, and (iii) the
equivalent in any Alternative Currency of U.S. Dollars shall be determined by
using the spot rate at which Harris Bank offers to exchange such Alternative
Currency for U.S. Dollars at 10:00 a.m. (Chicago time) two Business Days prior
to the date on which such equivalent is to be determined.
(b) If for the purpose of obtaining a judgment in any court with
respect to any obligation of a Borrower hereunder, it shall become necessary for
the Administrative Agent or any Bank entitled to receive payments hereunder to
convert any amount into a currency other than the currency denominated hereunder
for such obligation, then such conversion shall be made on the basis of rates
(the "Exchange Rates") determined in the manner described in subsection (a)
above (or, if the applicable currency to be converted is not at the time of
conversion available in the interbank market in London, then in such other
interbank market as the Administrative Agent shall determine to have adequate
availability of such currency) and the date with respect to which such an
equivalent is to be determined shall be the first Business Day preceding the
date on which final judgment is entered. If pursuant to any such judgment
conversion is to be made with respect to a date other than the date referred to
above, and there shall occur a change between the Exchange Rates in effect on
such date and the Exchange Rates in effect on the date of payment, (i) the
applicable Borrower agrees to pay such additional amounts (if any) as may be
necessary to ensure that the amount paid is the amount in such other currency
which, when converted at the Exchange Rates as in effect on the date of payment
or distribution, is the amount then due hereunder in the relevant currency and
(ii) such Borrower shall not be required to pay any amount in excess of the
amount determined to be payable in connection with such obligation, calculated
on the basis of the Exchange Rates in effect on the first Business Day preceding
the date on which final judgment is entered. Any amount due from a Borrower
under this subsection (b) shall be due as a separate debt and is not to be
affected by or merged into any judgment being obtained for any other sums due
hereunder.
SECTION 2.17. Borrowing Subsidiaries. The Company may at any time
or from time to time add as a party to this Agreement any Subsidiary of the
Company as a "Borrowing Subsidiary" hereunder by causing such Subsidiary to
execute and deliver a duly completed Assumption Letter to the Administrative
Agent, with the written consent of the Company at the foot thereof. Upon such
execution, delivery and consent such Subsidiary shall for all purposes be a
party hereto as a Borrowing Subsidiary as fully as if it had executed and
delivered this Agreement. So long as the principal of and interest on all
Advances made to any Borrowing Subsidiary under this Agreement shall have been
paid in full and all other obligations of such Borrowing Subsidiary shall have
been fully performed, such Borrowing Subsidiary may, by not less than five
Business Days' prior notice to the Administrative Agent (which shall promptly
notify the Banks thereof), terminate its status as a "Borrowing Subsidiary."
SECTION 2.18. Taxes. (a) Any and all payments by a Borrower
hereunder or under the Notes shall be made in accordance with Section 2.14, free
and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Bank and the
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Administrative Agent, taxes imposed on its income, and franchise taxes imposed
on it, by the jurisdiction under the laws of which such Bank or the
Administrative Agent is organized or any political subdivision thereof and taxes
imposed on its income, and franchise taxes imposed on it, by the jurisdiction of
such Bank's Applicable Lending Office or any political subdivision thereof (all
such non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If any Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Note to any Bank or the Administrative Agent, (i) the sum
payable shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.18) such Bank or the Administrative Agent (as the case may be)
receives an amount equal to the sum it would have received had no deductions
been made, (ii) such Borrower shall make such deductions and (iii) such Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) In addition, each Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or under the Notes or
from the execution, delivery or registration of, or otherwise with respect to,
this Agreement (hereinafter referred to as "Other Taxes").
(c) Each Borrower will indemnify each Bank and the Administrative
Agent for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 2.18) paid by such Bank or the Administrative Agent
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted; provided, that the Borrowers shall have no obligation under
this subsection (c) to indemnify any Bank or the Administrative Agent if a
Borrower shall have performed its obligations under subsection (a) and (b), and,
if such Borrower is required to make a payment under subsection (a) or (b), such
Borrower shall demonstrate that payment of such Taxes or Other Taxes has been
made on a timely basis to the relevant taxing authorities. This indemnification
shall be made to the Administrative Agent for the account of such Bank or the
Administrative Agent (as the case may be) within 30 days from the date such Bank
or the Administrative Agent makes written demand therefor (with a copy, in the
case of a demand by a Bank, of such demand to the Administrative Agent).
(d) Notwithstanding the foregoing, unless, prior to the Initial
Borrowing Date (in the case of a Bank listed on Schedule 2.01 hereto), or prior
to the effective date of the Assignment and Acceptance by which it became a Bank
(in the case of bank that became a Bank pursuant to such Assignment and
Acceptance), and in each case from time to time thereafter (so long as such Bank
is able to do so), if requested by any Borrower,
(i) each Bank organized under the laws of a jurisdiction outside the
United States shall have provided the Company with the forms prescribed by
the Internal Revenue Service of the United States certifying as to such
Bank's status for purposes of determining exemption from United States
withholding taxes with respect to all payments to be made to such Bank
hereunder or other documents satisfactory to the Company which shall
indicate that all payments to be made to such Bank hereunder are not
subject to United States withholding tax or are
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subject to such taxes at a rate reduced to zero by an applicable tax
treaty, neither the Company nor any other Borrower shall have any
obligation under the last sentence of Section 2.18(a) to make any payments
to or for the benefit of such Bank in excess of the amounts otherwise
payable under this Agreement, and
(ii) each Bank organized under the laws of a jurisdiction outside the
jurisdiction where any Borrowing Subsidiary is incorporated shall have
taken all steps prescribed by the applicable governmental authority in the
jurisdiction where such Borrowing Subsidiary is located so that such Bank
is exempt from applicable withholding taxes with respect to all payments to
be made to such Bank hereunder or so that all payments to be made to such
Bank hereunder are not subject to applicable withholding taxes or are
subject to such taxes at a rate reduced to zero by an applicable tax
treaty, neither the Company nor any other Borrower shall have any
obligation under the last sentence of Section 2.18(a) to make any payments
to or for the benefit of such Bank in excess of the amounts otherwise
payable under this Agreement; provided, however, that the applicable
Borrower shall make the payments required by the last sentence of Section
2.18(a) if the obligation to withhold arises from (A) a change in
applicable law after the date hereof in the case of a Bank listed on
Schedule 2.01 hereto (or, with respect to payments to a new Applicable
Lending Office designated pursuant to Section 2.19, after the date such
Bank designates such new Applicable Lending Office), or (B) in the case of
a Bank which became a party to this Agreement pursuant to an Assignment and
Acceptance, after the effective date of such Assignment and Acceptance or
(C) the designation of a Borrowing Subsidiary incorporated or domiciled in
a jurisdiction other than the United States.
Unless the applicable Borrower has received forms or other documents, including
Form 1001, Form 4224 or any other applicable tax forms from the United States or
any other applicable jurisdiction, such forms to be satisfactory to the Company,
indicating that payments hereunder are not subject to any withholding tax or are
subject to such tax at a rate reduced to zero by an applicable tax treaty, the
applicable Borrower shall withhold taxes from such payments at the applicable
statutory rate in the case of payments to or for any Bank organized under the
laws of a jurisdiction outside the United States (or in the case of a Borrowing
Subsidiary incorporated outside the United States, any Bank organized under the
laws outside of the jurisdiction where such Borrowing Subsidiary is
incorporated). Should a Bank become subject to Taxes because of its failure to
deliver a form required hereunder, the Company shall take such steps as the Bank
shall reasonably request to assist the Bank to recover such Taxes; provided,
that the Company shall be reimbursed by such Bank if an expenditure of money is
required.
SECTION 2.19. Mitigation. Any Bank claiming any additional amounts
payable pursuant to Section 2.12 or 2.18 or subject to Section 2.13 shall use
its reasonable efforts (consistent with its internal policy and legal and
regulatory restrictions) to change the jurisdiction of its Applicable Lending
Office if the making of such a change would avoid the need for, or reduce the
amount of, any such additional amounts which may thereafter accrue under
Sections 2.12 or 2.18 or would avoid the unavailability of Eurocurrency Rate
Advances under Section 2.13 and would not, in any such case, in the judgment of
such Bank, be otherwise disadvantageous to such Bank.
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SECTION 2.20. Extension of Termination Date. No later than ninety
(90) days before any or all of the second, third and fourth anniversary dates of
this Agreement, the Company may request a one year extension of the Termination
Date by written notice to the Administrative Agent. The Administrative Agent
shall promptly inform the Banks of any such request, and each Bank shall notify
the Administrative Agent in writing not less than thirty (30) days prior to the
anniversary date following such request as to whether or not it consents to the
requested extension. If any Bank fails to so notify the Administrative Agent,
such Bank shall be deemed to have refused to grant the requested extension and
the Termination Date will remain as then scheduled. Upon receipt by the
Administrative Agent of the written consent of all Banks, the Termination Date
shall be automatically extended one additional year.
ARTICLE III
CONDITIONS PRECEDENT
SECTION 3.01. Conditions Precedent to the Effectiveness of this
Agreement. The effectiveness of this Agreement and the obligation of each Bank
to make any Advance to be made by it on the Effective Date, and the obligation
of the Administrative Agent to issue and each Bank to participate in any Letter
of Credit on the Effective Date, shall be subject to the satisfaction on or
before the Effective Date of all of the following conditions precedent:
(a) The Administrative Agent shall have received:
(i) counterparts of this Agreement, executed by the Company, the
Administrative Agent and each of the Banks;
(ii) a certificate of the Secretary of the Company certifying (A)
copies attached thereto of the resolutions of the Board of Directors
of the Company authorizing the Company's execution, delivery and
performance of this Agreement, and the completion of the Initial
Public Offering and the other transactions contemplated hereby, (B)
copies attached thereto of the Certificate of Incorporation and by-
laws of the Company, and (C) the names and true signatures of the
officers of the Company authorized to sign this Agreement and the
Notes and other documents to be executed and delivered by the Company
hereunder; and
(iii) a Note executed by the Company, payable to each Bank;
(iv) a certificate of a duly authorized officer of the Company,
dated the Effective Date, certifying that as of such date, (A) the
representations and warranties contained in Section 4.01 are correct
on and as of the Effective Date, (B) no Event of Default or Unmatured
Event of Default shall have occurred and be continuing and (C) the
conditions for the Effective Date have been satisfied;
(v) a favorable opinion of Sidley & Austin, counsel for the
Company, substantially in the form of Exhibit F hereto;
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(vi) such information as the Administrative Agent and the Banks
may reasonably request to confirm the tax, legal and business
assumptions made in financial statements attached hereto as Exhibit H;
and
(vii) such other information and documents as may reasonably be
required by the Administrative Agent and the Administrative Agent's
counsel;
(b) The Company shall have paid all accrued fees and expenses of the
Administrative Agent and the Banks which are due and payable on the
Effective Date (including, without limitation, the reasonable fees and
expenses of counsel for the Administrative Agent);
(c) There shall have occurred no material adverse change in the
business, financial condition, operations, properties or performance of the
Company or its Subsidiaries from such business, financial condition,
operations, properties or performance reflected in the Registration
Statement;
(d) No action, suit or proceeding (investigative, judicial or
otherwise) against the Company or any of its Subsidiaries pending before
any court or arbitrator or any governmental body, agency or official shall
exist, or, to the knowledge of any Responsible Officer of the Company, be
threatened, that could reasonably be expected to have a Material Adverse
Effect, and there shall exist no injunction or temporary restraining order
that, in the judgment of the Administrative Agent or the Majority Banks,
would prohibit the Advances hereunder;
(e) The representations and warranties contained in Section 4.01
shall be correct on and as of the Effective Date;
(f) No event shall have occurred and be continuing which constitutes
an Event of Default or Unmatured Event of Default;
(g) The Initial Public Offering shall have been consummated in
accordance with Delaware law and on terms and conditions set forth in the
Registration Statement and the Company shall have received net proceeds of
at least $30,000,000 from the Initial Public Offering;
(h) The Company shall have repaid, or simultaneously with the
consummation of the Initial Public Offering shall pay, all amounts owed to
Donnelley; and
(i) The Company shall have repaid, or simultaneously with the
consummation of the Initial Public Offering shall pay, all amounts owed to
earn-out participants as a result of its previous acquisition of
LANSystems, a Delaware corporation.
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For purposes of determining compliance with the conditions specified
above, each Bank shall be deemed to have consented to, approved and accepted,
and to be satisfied with, each document or other matter required thereunder to
be consented to or approved by or acceptable or satisfactory to the Banks unless
the officer of the Administrative Agent responsible for the transactions
contemplated by this Agreement shall have received notice from such Bank prior
to the proposed Effective Date, as notified by the Administrative Agent to the
Banks, specifying its objection thereto. The Administrative Agent shall
promptly notify the Banks of the occurrence of the Effective Date.
SECTION 3.02. Conditions Precedent to all Advances and Letters of
Credit. The obligation of each Bank to make an Advance requested to be made by
it and of the Administrative Agent to issue any Letter of Credit, on any date,
shall be subject to the following conditions precedent as of such date:
(i) The representations and warranties contained in subsections (a)
through (p) of Section 4.01 are correct on and as of the date of such
Borrowing, before and after giving effect to such Borrowing and to the
application of the proceeds therefrom, as though made on and as of such
date;
(ii) If such Borrower is not the Company, the representations and
warranties set forth in Sections 4.01(a) (except with respect to good
standing, to the extent that such Borrower is not incorporated in the
United States and the jurisdiction in which such Borrower is incorporated
does not recognize the concept of good standing), (b), (c) and (d) of this
Agreement would be true and correct on and as of the date of such Borrowing
if such Borrower were the "Company" and each Note issued by such Borrower
were one of the "Notes" referenced therein; and
(iii) No event has occurred and is continuing, or would result from
such Borrowing or from the application of the proceeds therefrom, which
constitutes an Event of Default or Unmatured Event of Default.
The request by a Borrower for any Advance made, or to be made, or any
Letter of Credit issued, or to be issued, on any Funding Date shall constitute a
representation and warranty by such Borrower as of such Funding Date that all
conditions contained in this Section 3.02 have be satisfied or waived in writing
pursuant to Section 9.01.
SECTION 3.03. Conditions Precedent to Initial Advance to Each
Borrowing Subsidiary. The obligation of each Bank to make its initial Advance
hereunder to any Borrowing Subsidiary is subject to the conditions precedent
that the Administrative Agent shall have received the following:
(a) The Assumption Letter executed and delivered by such Borrowing
Subsidiary and containing the written consent of the Company at the foot
thereof, as contemplated by Section 2.17 hereof;
(b) A Note executed by such Borrowing Subsidiary, payable to each
Bank;
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(c) Certified copies of the resolutions of the Board of Directors of
such Borrowing Subsidiary approving the Assumption Letter and all other
documents evidencing corporate action and governmental approvals, if any,
required with respect thereto;
(d) A certificate of the Secretary or an Assistant Secretary of such
Borrowing Subsidiary, certifying the names and true signatures of the
officers of such Borrowing Subsidiary authorized to sign the Assumption
Letter and the other documents to be executed and delivered by such
Borrowing Subsidiary hereunder;
(e) An opinion of counsel to such Borrowing Subsidiary, substantially
in the form of Exhibit G hereto and as to such other matters as the
Administrative Agent shall reasonably request; and
(f) Such other information and documents as may reasonably be
required by the Administrative Agent and the Administrative Agent's
counsel.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 4.01. Representations and Warranties of the Company. The
Company represents and warrants to the Banks as follows:
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of its state of incorporation.
(b) The execution, delivery and performance by the Company of this
Agreement and the Notes are within the Company's corporate powers, have
been duly authorized by all necessary corporate action, and do not
contravene (i) the Company's certificate of incorporation, as amended, or
by-laws or (ii) any law or contractual restriction binding on or affecting
the Company.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required
for the Company's due execution, delivery and performance of this
Agreement.
(d) This Agreement has been, and each of the Notes when delivered
hereunder will have been, duly executed and delivered by the applicable
Borrower. This Agreement is, and each of the Notes when delivered hereunder
will be, a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with their respective terms, subject to
any applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and to general
principles of equity.
(e) The pro forma financial statements of the Company and its
Consolidated Subsidiaries set forth in the Registration Statement present,
on a pro
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forma basis, the financial condition of the Company and such Subsidiaries
as of the date thereof, and reflect on a pro forma basis those liabilities
reflected in the notes thereto and resulting from consummation of the
Initial Public Offering and the other transactions contemplated by this
Agreement, and the payment or accrual of all transaction costs payable on
the Effective Date with respect to any of the foregoing. The assumptions
expressed in the pro forma financial statements referenced in this Section
4.01(e) were prepared in good faith and are reasonable based on the
information available to the Company at the time so furnished.
(f) There are no actions, suits or proceedings pending before any
court or arbitrator or any governmental body, agency or official, or, to
the knowledge of any Responsible Officer of the Company, threatened, that
could reasonably be expected to have a Material Adverse Effect.
(g) Neither the Company nor any of its Subsidiaries is principally
engaged in the business of extending credit for the purpose of purchasing
or carrying Margin Stock and no proceeds of any Advance or Letter of Credit
shall be used to purchase or carry Margin Stock.
(h) Following application of the proceeds of each Advance to the
Company, not more than 25% of the value of the assets (either of the
Company only or of the Company and its Consolidated Subsidiaries) will be
Margin Stock subject to any restriction contained in this Agreement or in
any other agreement or instrument between the Company and any Bank or any
affiliate of any Bank relating to Debt within the scope of Section 6.01(e).
(i) The Advances to each Borrower, and all related obligations of
such Borrower under this Agreement, rank pari passu with all other
unsecured indebtedness for money borrowed or raised by such Borrower that
is not, by its terms, expressly subordinated to other such indebtedness of
such Borrower or that is not preferred by law of a jurisdiction other than
the United States.
(j) No Borrower is an "investment company" or a company "controlled"
by an "investment company", within the meaning of the Investment Company
Act of 1940, as amended.
(k) (i) All necessary Environmental Permits have been obtained and
are in effect for the operations and properties of the Company and its
Subsidiaries, and the Company and its Subsidiaries are in compliance with
all such Environmental Permits, except to the extent that the failure to so
obtain or comply could not reasonably be expected to have a Material
Adverse Effect; and (ii) no circumstances exist that could reasonably be
expected to (A) form the basis of an Environmental Action against the
Company or any of its Subsidiaries or any of their properties that could
reasonably be expected to have a Material Adverse Effect or (B) cause any
such property to be subject to any restrictions on ownership, occupancy,
use or transferability under any Environmental Law that could reasonably be
expected to have a Material Adverse Effect.
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(l) None of the properties owned or leased (i) by the Company or any
of its Consolidated Subsidiaries is listed or proposed for listing on the
National Priorities List under CERCLA or (ii) by the Company or any of its
Subsidiaries is the subject of any investigation or cleanup, whether
voluntary or required pursuant to any Environmental Law or ordered by any
governmental authority, that could reasonably be expected to have a
Material Adverse Effect.
(m) Except as set forth on Schedule 4.01(m), no ERISA Event has
occurred or is reasonably expected to occur with respect to any Plan.
(n) Neither the Company nor any of its ERISA Affiliates (i) has
incurred or is reasonably expected to incur any Withdrawal Liability with
respect to any Multiemployer Plan or (ii) has been notified by the sponsor
of a Multiemployer Plan that such Multiemployer Plan is in reorganization
or has been terminated, within the meaning of Title IV of ERISA, and no
such Multiemployer Plan is reasonably expected to be in reorganization or
to be terminated, within the meaning of Title IV of ERISA.
(o) No Plan has incurred any accumulated funding deficiency (as
defined in Sections 302(a)(2) of ERISA and 412(a) of the Internal Revenue
Code) whether or not waived.
(p) The written information, exhibits and reports prepared and
furnished by the Company or any Borrowing Subsidiary to the Administrative
Agent or to any Bank in connection with the negotiation of, or compliance
with, this Agreement, taken as a whole, contained no material misstatement
of fact nor omitted to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which
they were made, not misleading (it being understood that the Company does
not warrant the accuracy of any projections provided to the Banks pursuant
hereto or in connection herewith, but the Company warrants that all such
projections have been or will be prepared in good faith and have
represented or will represent a reasonable estimate of the anticipated
financial condition and results of operations for the period(s) in question
based on assumptions which the Company believes (at the time of
preparation) to be reasonable).
(q) As of the Initial Borrowing Date and immediately prior to the
making of the initial Advances:
(i) a true and correct copy of the Registration Statement has
been delivered to the Banks and the Registration Statement is in full
force and effect without amendment or modification and no action has
been taken by any competent authority which restrains, prevents or
imposes any material adverse condition upon the Registration Statement
or the Initial Public Offering;
(ii) the information contained in the Registration Statement does
not contain any untrue statement of a material fact
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or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
(iii) all conditions precedent to, and all consents necessary to
permit, the Initial Public Offering pursuant to the Registration
Statement have been satisfied (or waived with the prior written
consent of the Administrative Agent and the Banks), and the Initial
Public Offering has been consummated in accordance with the
Registration Statement and any applicable laws.
ARTICLE V
COVENANTS OF THE COMPANY
------------------------
So long as any Advance shall remain unpaid or any Bank shall have any
Commitment hereunder, unless the Majority Banks shall otherwise consent in
writing:
SECTION 5.01. Compliance with Laws, Etc. The Company will comply,
and cause each of its Subsidiaries to comply, in all material respects with all
applicable laws, rules, regulations and orders, except for laws, rules,
regulations and orders the violation of which, in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
SECTION 5.02. Reporting Requirements. The Company will furnish to
the Banks:
(a) within 55 days after the end of each of the first three quarters
of each fiscal year of the Company, consolidated unaudited balance sheets
of the Company and its Consolidated Subsidiaries, as at the close of each
such quarter, and consolidated profit and loss and reconciliation of
surplus statements and a statement of cash flows of the Company and its
Consolidated Subsidiaries for the period from the beginning of such fiscal
year to the end of such quarter, certified by the chief financial officer
of the Company on behalf of the Company as fairly presenting the
consolidated financial position of the Company and its Consolidated
Subsidiaries as at the dates indicated and the profit and loss and cash
flows for the periods indicated in accordance with GAAP, subject to normal
year-end adjustments;
(b) within 100 days after the end of each fiscal year of the Company,
an unqualified (except for qualifications relating to changes in accounting
principles or practices reflecting changes in GAAP and required or approved
by the Company's independent public accountants) audit report certified by
Arthur Andersen & Co., L.L.P. or other independent public accountants
acceptable to the Majority Banks, prepared in accordance with GAAP on a
consolidated basis for itself and its Consolidated Subsidiaries, including
balance sheets as of the end of such period, related profit and loss and
reconciliation of surplus statements, and a statement of cash flows,
accompanied by a report of said accountants stating that, in connection
with the foregoing, they have obtained no knowledge of any failure of the
Company to comply with the requirements specified in each of Sections 5.10
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through 5.12, or if, in the opinion of such accountants, the Company has
failed to comply with the requirements specified in any such Section,
stating the nature and status of such failure; and (ii) within 180 days
after the close of each of the Company's fiscal years, the management
letter prepared by such accountants in connection with the financial
statements for such fiscal year delivered pursuant to the foregoing clause
(i);
(c) simultaneously with the delivery of the reports referred to in
clauses (a) and (b) above, a certificate of a Responsible Officer of the
Company (A) setting forth in reasonable detail the calculations required to
establish whether the Company was in compliance with the requirements of
Sections 5.10, 5.11 and 5.12 on the date of such financial statements, (B)
stating whether there exists on the date of such certificate any Event of
Default or Unmatured Event of Default and, if any Event of Default or
Unmatured Event of Default then exists, setting forth the details thereof
and the action which the Company is taking with respect thereto and (C)
stating whether the Company has lost any of its top three customers, in
terms of consolidated revenue, during the preceding quarter and setting
forth the details thereof;
(d) promptly after the sending or filing thereof, copies of all
reports which the Company sends to its security holders generally, and at
any time that the Company is obligated to file any report or registration
statement with the Commission or any national securities exchange, copies
of all such reports and registration statements (other than Form S-8 or any
similar form);
(e) promptly following any Responsible Officer's knowledge thereof,
notice in writing of (i) the occurrence of any Event of Default or
Unmatured Event of Default, setting forth the details thereof and the
action which the Company is taking with respect thereto, or (ii) the
institution of, or any adverse judgment in, any litigation, arbitration
proceeding or governmental proceeding which, in the Company's judgment, if
adversely determined, could reasonably be expected to have a Material
Adverse Effect;
(f) promptly following any Responsible Officer's knowledge thereof,
notice in writing of the institution of any steps by the Company or any
other Person to terminate a Plan or of the failure to make a required
contribution to a Plan if such failure is sufficient to give rise to a Lien
under Section 302(f)(1) of ERISA; and
(g) such other pertinent information as any Bank may reasonably
request.
SECTION 5.03. Use of Proceeds. The Borrowers will use the proceeds
of the Advances and Letters of Credit under this Agreement only for general
corporate purposes otherwise permitted under this Agreement, including, without
limitation, working capital needs and acquisitions. The Borrowers further agree
that no proceeds of any Advance shall be used to purchase or carry Margin Stock.
SECTION 5.04. Limitation on Liens, Etc. The Company will not create
or suffer to exist, or permit any of its Consolidated Subsidiaries to create or
suffer to exist, any Lien upon
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or with respect to any of its properties, whether now owned or hereafter
acquired, or assign, or permit any of its Consolidated Subsidiaries to assign,
any right to receive income other than:
(a) Liens on assets of a Subsidiary of a Borrower to secure Debt of
such Subsidiary to such Borrower;
(b) Purchase money Liens claimed by sellers of goods on ordinary
trade terms; provided, that such Liens (i) shall not extend to assets of
any character other than the goods being acquired and (ii) shall not secure
Debt exceeding, in the aggregate, the greater of $3,000,000 or 5% of
Consolidated Net Worth;
(c) Liens securing Debt on property of a corporation or firm (or
division thereof) that becomes a Subsidiary of the Company or of any of its
Subsidiaries after the date hereof in accordance with Section 5.05 and
existing at the time such corporation is merged or consolidated with the
Company or any Subsidiary, at the time such corporation or firm (or
division thereof) becomes a Subsidiary of the Company or any of its
Subsidiaries, or at the time of a sale, lease or other disposition of the
properties of a corporation or a firm (or division thereof) as an entirety
or substantially as an entirety to the Company or a Subsidiary, provided
that such Liens were not created in contemplation of such merger,
consolidation, acquisition, sale, lease or disposition and do not extend to
assets other than those of the Person merged into or consolidated with the
Company or such Subsidiary or acquired by the Company or such Subsidiary;
(d) Purchase money Liens constituting the interest of a lessor under
a lease that would be capitalized on the lessee's balance sheet in
accordance with GAAP, or under a sale-leaseback transaction, in each case
relating to equipment, provided that after giving effect thereto, no Event
of Default under Section 5.10 shall exist;
(e) Liens (other than Environmental Liens, federal tax Liens and
Liens imposed under ERISA) for taxes, assessments or governmental charges
or levies on its property if the same shall not at the time be delinquent
or thereafter can be paid without penalty, or are being contested in good
faith and by appropriate proceedings and for which adequate reserves in
accordance with generally accepted principles of accounting shall have been
set aside on its books;
(f) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course of
business (other than Environmental Liens, federal tax Liens, Liens imposed
under ERISA and judgment Liens) which secure payment of obligations not
more than 60 days past due or which are being contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set
aside on its books;
(g) Liens (other than Liens imposed under ERISA) arising out of
pledges or deposits under worker's compensation laws, unemployment
insurance, old age pensions, or other social security or retirement
benefits, or similar legislation;
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(h) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature generally
existing with respect to properties of a similar character and which do not
in any material way affect the marketability of the same or interfere with
the use thereof in the business of the Company or its Consolidated
Subsidiaries;
(i) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(j) Any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part of any Liens referred to in
the foregoing subsections (a) through (i); provided, that, in the case of
Liens referred to in the foregoing subsections (b), (c) and (d), the
principal amount of Debt secured thereby shall not exceed the principal
amount of Debt so secured at the time of such extension, renewal or
replacement, and that such extension, renewal or replacement Lien shall be
limited to all or a part of the property which is subject to the Lien so
extended, renewed or replaced (plus improvements on such property); and
(k) Additional Liens securing Debt other than as may be included in
the foregoing subsections (a) through (d) and (j); provided, that the
aggregate outstanding principal amount of such Debt shall not at any time
exceed 5% of Consolidated Net Worth at such time.
SECTION 5.05. Mergers, Consolidations, Sales of Assets and
Acquisitions. The Company will not, and will not permit its Material
Subsidiaries to, merge into or consolidate with any other Person, or permit any
other Person to merge into or consolidate with it, or sell, transfer, assign,
lease, sublease, or otherwise dispose of (in one transaction or in a series of
transactions) all or any substantial part of any asset (whether now owned or
hereafter acquired) or any capital stock of any Subsidiary, and the Company will
not, and will not permit any Subsidiary to, purchase, lease or otherwise acquire
(in one transaction or a series of transactions) all or any substantial part (to
the extent such assets constitute one or more distinct business units or
operations) of the assets of any other Person, except that:
(a) the Company or a Material Subsidiary may acquire another
corporation by merger, provided that, if the Company is a party to such
merger, the Company is the surviving corporation, and provided further that
after giving effect to such merger, no Event of Default or Unmatured Event
of Default shall exist;
(b) any Material Subsidiary may merge or consolidate with or into, or
sell or otherwise dispose of any or all of its assets to, the Company or
another Subsidiary, and any Material Subsidiary that is not a Borrowing
Subsidiary may sell all or substantially all of its assets; provided that
(i) after giving effect to such merger, consolidation, sale or other
disposition, no Event of Default or Unmatured Event of Default shall exist,
and (ii) in the case of an asset sale by such a Material Subsidiary, the
assets to be sold do not constitute a material amount of the assets of the
Company and its Subsidiaries, taken as a whole; and
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(c) the Company or any Subsidiary may acquire the assets or equity
securities of any Person (an "Acquisition"), so long as:
(i) such Acquisition has been approved by the board of
directors (or equivalent) or shareholders (or equivalent) of such
Person;
(ii) such assets are used in, or the Person acquired is in, the
same business as the Company or such Subsidiary or a related line of
business; and
(ii) if the purchase price (including all cash paid, notes
issued and indebtedness assumed in connection therewith) of such
Acquisition is over $5,000,000, the Company has delivered to the
Administrative Agent, at least ten (10) Business Days before the
closing of such acquisition, (A) historical or pro forma financial
statements for such Person for its last two fiscal years, if
available, and (B) financial projections for the Company and its
Consolidated Subsidiaries, giving effect to such Acquisition, covering
the period from the date of such Acquisition through the Termination
Date then in effect.
For purposes of this Section 5.05, "a material amount" of assets shall
mean assets (A) constituting 10% or more of the consolidated assets of the
Company and its Consolidated Subsidiaries, or (B) generating 10% or more of the
consolidated revenue of the Company and its Consolidated Subsidiaries in any
fiscal year.
SECTION 5.06. Books and Records; Inspection. The Company will, and
will cause each of its Subsidiaries to, (a) maintain complete and accurate books
and records, in which full and correct entries shall be made of all financial
transactions of the Company and each such Subsidiary in accordance with
generally accepted accounting principles, and (b) permit any Bank, the
Administrative Agent and their respective employees and agents, at such
reasonable times during normal business hours and as often as may be reasonably
requested, to inspect any of the properties of the Company or any of its
Subsidiaries and to inspect and make copies of the material books and records of
the Company and its Subsidiaries and to discuss the affairs and finances of the
Company and its Subsidiaries with their officers; provided, that such Bank or
the Administrative Agent shall have delivered a written request for such
inspection to the Company prior to the date of any such inspection.
SECTION 5.07. Corporate Existence; Maintenance of Rights and
Permits. Subject to the Company's rights under Section 5.05, the Company will,
and will cause each of its Material Subsidiaries to, at all times maintain its
corporate existence and preserve and keep, or cause to be preserved and kept, in
full force and effect its rights and franchises material to its businesses and
all licenses, permits, governmental approvals and authorizations, except to the
extent that the failure to do so would not have a Material Adverse Effect,
either individually or in the aggregate.
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SECTION 5.08. Conduct of Business. The Company shall not, and shall
not permit any Material Subsidiary to, engage in any line of business other than
(a) the businesses engaged in by the Company and its Subsidiaries on the date
hereof and (b) any business or activities substantially similar or related
thereto (which shall include, without limitation, other businesses related to
the provision of integrated information management services).
SECTION 5.09. Payment of Taxes. The Company will pay and discharge,
and cause each of its Material Subsidiaries to pay and discharge, before the
same shall become delinquent, all material taxes, assessments and governmental
charges or levies imposed upon it or its property; provided, however, that
neither the Company nor any of its Material Subsidiaries shall be required to
pay or discharge any such tax, assessment, charge or levy that is being
contested in good faith and by proper proceedings and as to which appropriate
reserves are being maintained in accordance with GAAP, as long as no action has
been commenced to enforce any Lien securing any such tax, assessment, charge or
levy.
SECTION 5.10. Funded Debt to Cash Flow Ratio. The Company will, as
of the end of each fiscal quarter beginning December 31, 1996, maintain a Funded
Debt to Cash Flow Ratio of not more than 2.5 to 1.
SECTION 5.11. Net Worth. The Company will, as of the end of each
fiscal quarter beginning December 31, 1996, maintain Consolidated Net Worth of
not less than the sum of:
(a) 80% of Consolidated Net Worth on the Effective Date (after the
consummation of the Initial Public Offering); plus
(b) 50% of Consolidated Net Income for each fiscal quarter commencing
from and after January 1, 1997 in which Consolidated Net Income is greater
than $0.
SECTION 5.12. Fixed Charge Coverage. The Company will, as of the
end of each fiscal quarter, maintain a Fixed Charge Coverage Ratio of not less
than 1.5 to 1.
SECTION 5.13. Indebtedness of Subsidiaries. The Company will not
permit any Material Subsidiary to create, incur or suffer to exist any Debt,
except:
(a) Debt incurred under this Agreement;
(b) Capitalized Leases existing as of the Effective Date, which
Capitalized Leases are described on Schedule 5.13 hereof, and any
extension, renewal or replacement (or successive extensions, renewals or
replacements) thereof in whole or in part; provided that the principal
amount of Capitalized Lease Obligations for any such extension, renewal or
replacement shall not exceed the principal amount of Capitalized Lease
Obligations at the time of such extension, renewal or replacement, and that
the property subject to such extended, renewed or replaced Capitalized
Lease shall be limited to all or a part of the property which is subject to
the Capitalized Lease so extended, renewed or replaced (plus improvements
on such property); and
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(c) additional Debt having an aggregate outstanding principal balance
of not more than $15,000,000 at any one time.
SECTION 5.14. Maintenance of Properties. The Company will, and will
cause each Material Subsidiary to, do all things necessary to maintain,
preserve, protect and keep its property in good repair, working order and
condition, ordinary wear and tear excepted, and make all necessary and proper
repairs, renewals and replacements so that its business carried on in connection
therewith may be properly conducted at all times.
SECTION 5.15. Insurance. The Company will, and will cause each
Material Subsidiary to, maintain with financially sound and reputable insurance
companies insurance in such amounts and covering such risks as is consistent
with sound business practice, and the Company will furnish to any Bank upon
request full information as to the insurance carried.
SECTION 5.16. Transactions with Affiliates. Other than the Tax
Allocation and Indemnification Agreement, the Benefit Administration Services
Agreement, and the Transition Services Agreement (collectively, the "Donnelley
Agreements") and except for transactions between the Company and its Wholly-
Owned Subsidiaries, the Company will not, and will not permit any Material
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any property or service) with, or make any payment or
transfer to, any Affiliate the financial statements of which would not be
consolidated with those of the Company in accordance with GAAP, except in the
ordinary course of business and pursuant to the reasonable requirements of the
Company's or such Material Subsidiary's business and upon fair and reasonable
terms no less favorable to the Company or such Material Subsidiary than the
Company or such Material Subsidiary would obtain in a comparable arms-length
transaction.
SECTION 5.17. Investments. The Company will not, nor will it permit
any Material Subsidiary to, make or suffer to exist any Investments (including,
without limitation, loans and advances to, and other Investments in,
Subsidiaries), or commitments therefor, or to create any Subsidiary or to become
or remain a partner in any partnership or joint venture, except:
(a) Short-term obligations of, or fully guaranteed by, the United
States of America.
(b) Commercial paper rated A-1 or better by Standard & Poor's. or P-1
or better by Moody's.
(c) Demand deposit accounts maintained in the ordinary course of
business.
(d) Certificates of deposit issued by and time deposits with
commercial banks (whether domestic or foreign) having capital and surplus
in excess of $100,000,000.
(e) Investments in Subsidiaries.
(f) Investments in connection with any acquisition permitted by
Section 5.05.
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(g) Other Investments (i) in existence on the date hereof and
described in Schedule 5.17 hereto or (ii) which in the aggregate are less
than 10% of Consolidated Net Worth at any time.
SECTION 5.18. Environmental Liabilities. No Borrower shall, and the
Company shall not permit any of its Subsidiaries to, become subject to any
Liabilities and Costs which could reasonably be expected to have a Material
Adverse Effect and which arise out of or are related to (a) the Release or
threatened Release at any location of any Contaminant into the environment, or
any Remedial Action in response thereto, or (b) any violation of any
environmental, health and safety Requirements of Law.
SECTION 5.19. Dividends. The Company shall not declare or pay any
dividends on or make any other distributions in respect of any class or series
of capital stock (other than dividends payable solely in its capital stock),
except dividends to the extent that, had such dividends, together with all other
dividends declared during the applicable "Dividend Period" (as defined below),
been added, on a pro forma basis, to the denominator of the Fixed Charge
Coverage Ratio as of the end of the immediately-preceding fiscal quarter, such
Fixed Charge Coverage Ratio would not have been less than the required Fixed
Charge Coverage Ratio for such fiscal quarter set forth in Section 5.12.
"Dividend Period" shall mean, at any time, the period of four fiscal quarters
then most recently ended or, prior to December 31, 1997, the period from the
Effective Date to the end of the most recently ended fiscal quarter.
SECTION 5.20. Certain Agreements. The Company will not terminate
prior to the scheduled termination thereof, amend or modify or permit any such
early termination, amendment or modification of any of the Donnelley Agreements
that could reasonably be expected to be adverse to the Banks without the consent
of the Majority Banks.
SECTION 5.21. Non-Material Subsidiaries. The Company shall not
permit all Subsidiaries which are not Material Subsidiaries, collectively, to
(i) own assets comprising in excess of 25% of all of the consolidated assets of
the Company and its Subsidiaries or (ii) generate revenues for the four fiscal
quarters most recently ended in excess of 25% of the consolidated revenues of
the Company and its Subsidiaries for such period; provided that, prior to
December 31, 1997, clause (ii) of this Section 5.21 shall be determined for the
period from the Effective Date to the fiscal quarter most recently ended before
the date of determination.
ARTICLE VI
EVENTS OF DEFAULT
-----------------
SECTION 6.01. Events of Default. If any of the following events
("Events of Default") shall occur and be continuing:
(a) A Borrower shall fail to pay when due any installment of
principal of any Advance; or
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(b) A Borrower shall fail to pay any fee under this Agreement, or any
installment of interest on any Advance, within ten (10) days after the due
date thereof; or
(c) Any written representation or warranty made by a Borrower herein
or in connection with this Agreement shall prove to have been incorrect in
any material respect when made; or
(d) The Company shall fail to perform or observe (i) any term,
covenant or agreement contained in Section 5.02(a), (b) or (e), 5.03, 5.04,
5.05, 5.08, 5.09, 5.10, 5.11, 5.12, 5.13, 5.16, 5.17, 5.18, or 5.19 or
(ii) any other term, covenant or agreement contained in this Agreement,
other than in (a) or (b) above, on its part to be performed or observed if
such failure shall remain unremedied for 30 days after written notice
thereof shall have been given to the Company by the Majority Banks through
the Administrative Agent; or
(e) The Company or any Material Subsidiary shall fail to pay any
principal of or premium or interest on any Debt, or any obligations in
respect of acceptances, letters of credit or other similar instruments, of
the Company or such Material Subsidiary which is outstanding in a principal
amount of at least $2,000,000 in the aggregate (but excluding Debt arising
under this Agreement), when the same becomes due and payable (whether by
scheduled maturity, required prepayment, acceleration, demand or
otherwise), and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such
Debt or other obligation; or any other event shall occur or condition shall
exist under any agreement or instrument relating to any such Debt or other
obligation and shall continue after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such event or
condition is to accelerate, or permit the acceleration of, the maturity of
such Debt or other obligation; or any Debt or other such obligation in
which the outstanding principal exceeds $2,000,000 shall be otherwise
declared to be due and payable (by acceleration or otherwise) or required
to be prepaid, redeemed, defeased or otherwise repurchased by the Company
or any Material Subsidiary (other than by a regularly-scheduled required
prepayment), or any offer to prepay, redeem, defease or purchase such Debt
shall be required to be made, prior to the stated maturity thereof; or
(f) The Company or any Material Subsidiary shall generally not pay
its debts as such debts become due, or shall admit in writing its inability
to pay its debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or against
the Company or any Material Subsidiary seeking to adjudicate it a bankrupt
or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or for
any substantial part of its property, and in the event of any such
proceeding instituted against the Company or any Material Subsidiary (but
not instituted by it), such
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proceeding shall remain undismissed or unstayed for a period of 60 days or
shall result in the entry of an order for relief, the appointment of a
trustee or receiver, or other action in such proceeding or result adverse
to the Company or such Material Subsidiary, as applicable, or the Company
or any Material Subsidiary shall take any corporate action to authorize any
of the actions set forth above in this subsection (f); or
(g) (i) The filing of a notice of intent to terminate a Plan or the
institution by the PBGC of proceedings to terminate, or appoint a trustee
to administer, a Plan if as a result thereof the Company is reasonably
likely to incur liability in excess of $2,000,000; (ii) a contribution
failure occurs with respect to a Plan sufficient to give rise to a Lien
under Section 302(f)(1) of ERISA; or (iii) the partial or complete
withdrawal of the Company or any of its ERISA Affiliates from a
Multiemployer Plan or the reorganization or termination of a Multiemployer
Plan if as a result thereof the Company is reasonably likely to incur
liability in excess of $2,000,000; or
(h) One or more final judgments or orders for the payment of money,
in an aggregate amount exceeding $2,000,000 at any one time outstanding
(exclusive of judgment amounts fully covered by insurance, to the extent
the insurer has admitted liability in respect thereof), shall be rendered
against the Company or any Material Subsidiary and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order, or (ii) such judgments or orders shall not be discharged (or
provision shall not have been made for such discharge), a stay of execution
thereof shall not be obtained, or such judgments or orders shall not be
paid or bonded, within 30 days from the date of entry thereof, and the
Company or such Material Subsidiary, as the case may be, shall not, within
such 30-day period, appeal therefrom and cause the execution thereof to be
stayed pending such appeal; or
(i) The Company's guaranty obligations under Article VII hereof for
any reason, other than acts or omissions of the Banks, cease to be in full
force and effect or are declared to be null and void; or the Company denies
that it has any further liability with respect thereto or gives notice to
such effect;
then, and in any such event, the Administrative Agent shall at the request, or
may with the consent, of the Majority Banks, by notice to the Company, (i)
declare the obligation of each Bank to make Advances to any Borrower to be
terminated, whereupon the same shall forthwith terminate, and/or (ii) declare
the Notes, all interest thereon and all other amounts payable under this
Agreement (including, without limitation, all Reimbursement Obligations) to be
forthwith due and payable, whereupon the Notes, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Company; provided, however, that in the event of an actual or
deemed entry of an order for relief with respect to the Company under the
Federal Bankruptcy Code, (A) the obligation of each Bank to make Advances to any
Borrower, and the Administrative Agent's obligations to issue Letters of Credit,
shall automatically be terminated and (B) the Notes, all such interest and all
such amounts shall automatically become and be due and
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payable, without presentment, demand, protest or any notice of any kind, all of
which are hereby expressly waived by the Company.
SECTION 6.02. Collateral for Undrawn Letters of Credit. (a) If the
payment or prepayment of the amount available for drawing under any or all
outstanding Letters of Credit is required under Section 6.01 above, the Company
shall forthwith pay the amount required to be so prepaid, to be held by the
Administrative Agent as provided in subsection (b) below.
(b) All amounts prepaid pursuant to subsection (a) above shall be
held by the Administrative Agent in a separate collateral account (such account,
and the credit balances, properties and any investments from time to time held
therein, and any substitutions for such account, any certificate of deposit or
other instrument evidencing any of the foregoing and all proceeds of and
earnings on any of the foregoing being collectively called the "Account") as
security for, and for application by the Administrative Agent (to the extent
available) to, the reimbursement of any payment under any Letter of Credit then
or thereafter made by the Administrative Agent, and to the payment of the unpaid
balance of any Advances and all other amounts owing hereunder. The Account
shall be held in the name of and subject to the exclusive dominion and control
of the Administrative Agent for the benefit of the Administrative Agent and the
Banks. If and when requested by the Company, the Administrative Agent shall
invest funds held in the Account from time to time in direct obligations of, or
obligations the principal of and interest on which are unconditionally
guaranteed by, the United States of America with a remaining maturity of one
year or less, provided that the Administrative Agent is irrevocably authorized
to sell investments held in the Account when and as required to make payments
out of the Account for application to amounts due and owing from the Company to
the Administrative Agent or Banks; provided, however, that if (i) the Company
shall have made payment of all such obligations referred to in subsection (a)
above and (ii) no Letters of Credit, Commitments, Advances, or other amounts
owing hereunder remain outstanding, then the Administrative Agent shall repay to
the Company any remaining amounts held in the Account.
ARTICLE VII
GUARANTEE
---------
SECTION 7.01. Unconditional Guarantee. For valuable consideration,
receipt whereof is hereby acknowledged, and to induce the Banks to make Advances
to each of the Borrowing Subsidiaries, the Company hereby unconditionally
guarantees to the Banks and the Administrative Agent that the principal of and
interest on each Advance and all other amounts payable by each Borrowing
Subsidiary hereunder shall be promptly paid in full when due (whether at stated
maturity, by acceleration or otherwise) in accordance with the terms hereof and
thereof, and, in the case of any extension of time of payment, in whole or in
part, that all such amounts shall be promptly paid when due (whether at stated
maturity, by acceleration or otherwise) in accordance with the terms of such
extension. In addition, the Company hereby unconditionally agrees that upon
default in the payment when due (whether at stated maturity, by acceleration or
otherwise) of any of such principal, interest or other amounts, the Company
shall forthwith pay the same. Without limiting the generality of the foregoing,
the Company's liability shall extend to all amounts that constitute part of the
obligations of any Borrowing Subsidiary hereunder or under any Note and that
would be owed by such Borrowing Subsidiary to any Bank or the
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Administrative Agent under this Agreement or the Notes but for the fact that
they are unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving such Borrower.
SECTION 7.02. Validity. The obligations of the Company under this
Article VII are independent of the obligations of the Borrowing Subsidiaries
guaranteed hereunder, and a separate action or actions may be brought and
prosecuted against the Company to enforce its obligations under this Article
VII, irrespective of whether any action is brought against any Borrowing
Subsidiary or whether any Borrowing Subsidiary is joined in any such action or
actions. The obligations of the Company under this Article VII shall be
unconditional irrespective of (a) the genuineness, validity, regularity or
enforceability of the obligations of the Borrowing Subsidiaries under this
Agreement, any Note or any Assumption Letter, (b) any law, regulation or order
of any jurisdiction affecting any term of any obligation of any Borrowing
Subsidiary under this Agreement or the rights of any Bank or the Administrative
Agent with respect thereto, (c) any change in the time, manner or place of
payment of, or in any other term of, all or any of the obligations of any
Borrowing Subsidiary, or any other amendment or waiver of or any consent to
departure from this Agreement or the Notes, (d) any change, restructuring or
termination of the corporate structure or existence of any Borrowing Subsidiary,
or (e) to the fullest extent permitted by applicable law, any other circumstance
which might otherwise constitute a legal or equitable discharge of a surety or
guarantor.
SECTION 7.03. Waivers. The Company hereby expressly waives
promptness, diligence, presentment, protest and any other notice with respect to
the obligations of the Company under this Article VII and any requirement that
any right or power be exhausted or any action be taken against any Borrowing
Subsidiary and all notices and demands whatsoever.
SECTION 7.04. Subrogation. The Company shall be subrogated to the
rights of the Banks or the Administrative Agent against any Borrowing Subsidiary
hereunder only after the Banks and the Administrative Agent shall have been paid
in full all amounts, with interest thereon, for which such Borrowing Subsidiary
shall have become indebted hereunder.
SECTION 7.05. Acceleration. The Company agrees that, as between it,
on the one hand, and the Banks and the Administrative Agent, on the other hand,
the obligations of each Borrowing Subsidiary guaranteed by it under this Article
VII may be declared to be forthwith due and payable, or may be deemed
automatically to have been accelerated, as provided in Section 6.01 hereof for
purposes of this Article VII, notwithstanding any stay, injunction or other
prohibition (whether in a bankruptcy proceeding affecting such Borrowing
Subsidiary or otherwise) preventing such declaration as against such Borrowing
Subsidiary and that, in the event of such declaration or automatic acceleration,
such obligations (whether or not due and payable by such Borrowing Subsidiary)
shall forthwith become due and payable by the Company for purposes of this
Article VII.
SECTION 7.06. Reinstatement. The Company's obligations under this
Article VII shall be reinstated if at any time any payment received by any Bank
or the Administrative Agent from any Borrowing Subsidiary hereunder is required
to be repaid or returned by such Bank or the Administrative Agent, all as though
such payment had not been made.
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SECTION 7.07. Continuing Guaranty; Assignments. This guarantee of
the Company shall (a) remain in full force and effect until the later of (i) the
cash payment in full of the obligations of all Borrowing Subsidiaries guaranteed
under this Article VII and (ii) the Termination Date, (b) be binding upon the
Company, its successors and assigns and (c) inure to the benefit of, and be
enforceable by, the Banks and the Administrative Agent and their successors,
transferees and assigns (provided that the applicable transfers and assignments
are made in accordance with the terms of this Agreement).
ARTICLE VIII
THE ADMINISTRATIVE AGENT
------------------------
SECTION 8.01. Appointment; Nature of Relationship. Harris Bank is
hereby appointed by the Banks as the Administrative Agent hereunder, and each of
the Banks irrevocably authorizes the Administrative Agent to act as the
contractual representative of such Bank with the rights and duties expressly set
forth herein. The Administrative Agent agrees to act as such contractual
representative upon the express conditions contained in this Article VIII.
Notwithstanding the use of the defined term "Administrative Agent," it is
expressly understood and agreed that the Administrative Agent shall not have any
fiduciary responsibilities to any Bank by reason of this Agreement and that the
Administrative Agent is merely acting as the representative of the Banks with
only those duties as are expressly set forth in this Agreement. In its capacity
as the Banks' contractual representative, the Administrative Agent (a) does not
hereby assume any fiduciary duties to any of the Banks, (b) is a
"representative" of the Banks within the meaning of Section 9-105 of the Uniform
Commercial Code and (c) is acting as an independent contractor, the rights and
duties of which are limited to those expressly set forth in this Agreement.
Each of the Banks hereby agrees to assert no claim against the Administrative
Agent on any agency theory or any other theory of liability for breach of
fiduciary duty, all of which claims each Bank hereby waives.
SECTION 8.02. Actions by the Administrative Agent. As to any
matters not expressly provided for by this Agreement (including, without
limitation, enforcement or collection of the Notes), the Administrative Agent
shall not be required to exercise any discretion or take any action, but shall
be required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of the Majority Banks,
and such instructions shall be binding upon all Banks and all holders of the
Notes; provided, however, that the Administrative Agent shall not be required to
take any action which exposes the Administrative Agent to personal liability or
which is contrary to this Agreement or applicable law. The Administrative Agent
agrees to give to each Bank prompt notice of each notice given to it by any
Borrower pursuant to the terms of this Agreement. The Administrative Agent may
execute any of its duties as Administrative Agent hereunder and under any other
instrument, document or agreement executed in connection herewith by or through
employees, agents, and attorney-in-fact and shall not be answerable to the
Banks, except as to money or securities received by it or its authorized agents,
for the default or misconduct of any such agents or attorneys-in-fact selected
by it with reasonable care. Each such agent shall be entitled to all of the
rights and benefits granted to the Administrative Agent hereunder, and each Bank
shall treat any notice given by any such agent as if it had been given directly
by the Administrative Agent. The Administrative Agent shall be entitled to
advice of counsel concerning the contractual
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arrangement between the Administrative Agent and the Banks and all matters
pertaining to the Administrative Agent's duties hereunder.
SECTION 8.03. Administrative Agent's Reliance, Etc. Neither the
Administrative Agent nor any of its directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement, except for its or their own gross
negligence or willful misconduct. Without limiting the generality of the
foregoing, the Administrative Agent:
(a) may treat the payee of any Note as the holder thereof until the
Administrative Agent receives and accepts an Assignment and Acceptance
entered into by the Bank that is the payee of such Note, as assignor, and
an Eligible Assignee, as assignee, as provided in Section 9.07;
(b) may consult with legal counsel (including counsel for any
Borrower), independent public accountants and other experts selected by it
and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants or
experts;
(c) makes no warranty or representation to any Bank and shall not be
responsible to any Bank for any statements, warranties or representations
(whether written or oral) made in or in connection with this Agreement;
(d) shall have no duty to ascertain, inquire into or verify the
performance or observance of any of the terms, covenants or conditions of
this Agreement on the part of any Borrower, the satisfaction of any
condition specified in Article III, except receipt of items required to be
delivered solely to the Administrative Agent, or the existence or possible
existence of any Event of Default;
(e) shall have no duty to inspect the property (including the books
and records) of any Borrower;
(f) shall not be responsible to any Bank for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of
this Agreement or any other instrument or document furnished pursuant
hereto;
(g) shall incur no liability under or in respect of this Agreement by
acting upon any notice, consent, certificate or other instrument or writing
(which may be by telegram) believed by it to be genuine and signed or sent
by the proper party or parties.
The Administrative Agent shall not be responsible to any Bank for any recitals,
statements, representations or warranties herein or for the perfection or
priority of any Lien on any collateral, if any such Lien is ever granted.
SECTION 8.04. The Administrative Agent and Affiliates. With respect
to any financial institution which shall become the Administrative Agent
hereunder, and with respect to such financial institution's Commitment and the
Advances made by it and Letters of Credit issued
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by it, such financial institution shall have the same rights and powers under
this Agreement as any other Bank and may exercise the same as though it were not
the Administrative Agent; and the term "Bank" or "Banks" shall, unless otherwise
expressly indicated, include such financial institution in its individual
capacity, if applicable. Each such financial institution and its affiliates may
accept deposits from, lend money to, act as trustee under indentures of, and
generally engage in any kind of business with, any Borrower, any of their
respective Subsidiaries and any Person who may do business with or own
securities of any Borrower or any such Subsidiary, all as if such financial
institution were not the Administrative Agent and without any duty to account
therefor to the Banks.
SECTION 8.05. Bank Credit Decision. Each Bank acknowledges that it
has, independently and without reliance upon the Administrative Agent or any
other Bank and based on the financial statements referred to in Section 4.01 and
such other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement.
SECTION 8.06. Indemnification. The Banks agree to indemnify the
Administrative Agent (to the extent not reimbursed by the Borrowers), ratably
according to the respective principal amounts of the Notes held by each of them
(or, if no Notes are outstanding at the time or if any Notes are held by Persons
that are not Banks, ratably according to the respective amounts of their
Commitments) from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by, or
asserted against the Administrative Agent in any way relating to or arising out
of this Agreement or any action taken or omitted by the Administrative Agent
under this Agreement; provided, that no Bank shall be liable for any portion of
such liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting from the Administrative
Agent's gross negligence or willful misconduct. Without limiting the foregoing,
each Bank agrees to reimburse the Administrative Agent promptly upon demand for
its ratable share of any out-of-pocket expenses (including counsel fees)
incurred by the Administrative Agent in connection with the administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, to the extent that the Administrative
Agent is not reimbursed for such expenses by the Borrowers.
SECTION 8.07. Successor Administrative Agent. The Administrative
Agent may resign at any time by giving written notice thereof to the Banks and
the Company. Upon any such resignation, the Majority Banks shall have the right
to appoint a successor Administrative Agent, which shall be another Bank or, if
acceptable to the Company, any other commercial bank organized under the laws of
the United States of America or of any State thereof and having a combined
capital and surplus of at least $500,000,000. If no successor Administrative
Agent shall have been so appointed by the Majority Banks, and shall have
accepted such appointment, within 30 days after the retiring Administrative
Agent gives notice of resignation, then the retiring Administrative Agent may,
on behalf of the Banks, appoint a successor Administrative Agent, which shall be
a commercial bank organized under the laws of the United States of America or of
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any State thereof and having a combined capital and surplus of at least
$500,000,000 and be otherwise acceptable to the Company. Upon the acceptance of
any appointment as Administrative Agent hereunder by a successor Administrative
Agent, such successor Administrative Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall be discharged
from its duties and obligations under this Agreement. After any retiring
Administrative Agent's resignation hereunder as Administrative Agent, the
provisions of this Article VIII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent.
ARTICLE IX
MISCELLANEOUS
-------------
SECTION 9.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Notes, nor any consent to any departure by
any Borrower therefrom, shall in any event be effective unless the same shall be
in writing and signed by the Majority Banks, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no amendment, waiver or consent shall,
unless in writing and signed by each Bank affected thereby, directly do any of
the following:
(a) waive any of the conditions specified in Section 3.01 or 3.03;
(b) increase the Commitment of such Bank or subject such Bank to any
additional obligations;
(c) reduce the principal of, or the stated rate at which interest
accrues on, the Notes or reduce the stated rate at which the Commitment Fee
is calculated;
(d) postpone any date fixed for any payment of principal of, or
interest on, the Advances or any fees or other amounts payable hereunder;
(e) change the percentage of the Commitments, or of the aggregate
unpaid principal amount of the Notes, which shall be required for the Banks
or any of them to take any action hereunder; or
(f) amend this Section 9.01 or Article VII;
provided, further, that no amendment, waiver or consent shall, unless in writing
and signed by the Administrative Agent in addition to the Banks required above
to take such action, affect the rights or duties of the Administrative Agent
under this Agreement or any Note.
SECTION 9.02. Notices, Etc. (a) All notices and other
communications provided for hereunder shall be in writing (including telecopy
communication) and mailed, telecopied or delivered,
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(i) if to the Company, at its address at 161 North Clark Street,
Suite 2400, Chicago, Illinois 60601, Attention: Chief Financial Officer,
telecopy number (312) 419-7659, with a copy to the Chief Executive Officer,
telecopy number (312) 419-7659;
(ii) if to any Borrowing Subsidiary, at the address specified in the
Assumption Letter pursuant to which it became a Borrowing Subsidiary, as
applicable, with a copy to the Company at the address specified herein;
provided, that any such notice may be given solely to the Company, at the
option of the party giving such notice;
(iii) if to any Bank listed on the signature pages hereof, at its
Domestic Lending Office specified opposite its name on Schedule 2.01
hereto;
(iv) if to any other Bank, at its Domestic Lending Office specified in
the Assignment and Acceptance pursuant to which it became a Bank;
(v) if to the Administrative Agent, at the Domestic Lending Office
specified opposite its name on Schedule 2.01 hereto;
or as to the Borrowers and the Administrative Agent, at such other address as
shall be designated by such party in a written notice to the other parties, and
as to each such other party, at such other address as shall be designated by
such party in a written notice to the Company and the Administrative Agent. All
such notices and communications shall, when sent by overnight courier, mailed or
telecopied, be effective when delivered to such courier, deposited in the mails
or telecopied and confirmed by return telecopy, respectively, except that
notices and communications to the Administrative Agent pursuant to Articles II,
III and VIII and notices of the occurrence of an Event of Default or Unmatured
Event of Default shall not be effective until received by the Administrative
Agent.
(b) If any notice required under this Agreement is permitted to be
made, and is made, by telephone, actions taken or omitted to be taken in
reliance thereon by the Administrative Agent or by any Bank shall be binding
upon the Company and each other Borrower notwithstanding any inconsistency
between the notice provided by telephone and any subsequent writing in
confirmation thereof provided to the Administrative Agent or such Bank;
provided, that any such action taken or omitted to be taken by the
Administrative Agent or such Bank shall have been in good faith and in
accordance with the terms of this Agreement.
SECTION 9.03. No Waiver; Remedies. No failure on the part of any
Bank or the Administrative Agent to exercise, and no delay in exercising, any
right hereunder or under any Note shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
SECTION 9.04. Costs and Expenses. (a) The Company agrees to pay
(i) all reasonable out-of-pocket expenses of the Administrative Agent, whether
or not incurred prior to or subsequent to closing, in investigation,
preparation, negotiation, documentation, syndication and administration,
including reasonable expenses of and fees for attorneys for the Administrative
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Agent (who may or may not be employees of the Administrative Agent) and, during
the continuance of an Event of Default, other advisors and professionals engaged
by the Administrative Agent and (ii) on demand all reasonable out-of-pocket
costs and expenses of the Administrative Agent (including, without limitation,
reasonable fees and expenses of counsel), in connection with any amendments,
modifications or waivers of the provisions hereof, or in determining the rights
and obligations of the parties hereto under this Agreement and the Notes, or the
enforcement (whether through negotiations, legal proceedings or otherwise) of
this Agreement and the other documents to be delivered hereunder; provided, that
if, in the event of any enforcement undertaken by the Banks hereunder, it shall
be determined that sufficient conflicts exist such that a single law firm
engaged by the Administrative Agent or the Majority Banks is precluded by law or
by standards of conduct from representing the Banks as a group, and such
conflicts would exist with respect to any other law firm representing the Banks
as a group, the Company agrees to pay on demand all reasonable out-of-pocket
costs and expenses of the minimum number of counsel necessary in the reasonable
judgment of the Banks to provide the Administrative Agent and each Bank with
appropriate legal representation in connection with the enforcement of their
respective rights hereunder, in connection with such enforcement undertaking.
Notwithstanding anything herein to the contrary, the Administrative Agent shall
provide the Company with a written estimate of the legal fees it expects to
incur through the Effective Date, and the Company shall not be liable for any
amount in excess of such estimate unless the Company so consents in writing.
(b) The Company agrees to pay to the Administrative Agent such fees
as shall have been agreed to by the Administrative Agent and the Company in a
separate agreement regarding the provision by the Administrative Agent of
services as Administrative Agent under this Agreement.
SECTION 9.05. Right of Set-off. Upon (a) the occurrence and during
the continuance of any Event of Default and (b) the declaration that the
Advances are due and payable pursuant to the provisions of Section 6.01, each
Bank is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by such Bank to or for the credit or the account
of any Borrower against any and all of the obligations of such Borrower now or
hereafter existing under this Agreement and the Notes held by such Bank,
irrespective of whether or not such Bank shall have made any demand under this
Agreement or such Notes and although such obligations may be unmatured. Each
Bank shall promptly notify the Company after any such set-off and application
made by such Bank; provided, that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of each Bank
under this Section are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which such Bank may have.
SECTION 9.06. Binding Effect. This Agreement shall become effective
upon the satisfaction of the conditions set forth in Section 3.01 and when it
shall have been executed by the Company and the Administrative Agent and when
the Administrative Agent shall have been notified by each Bank listed on the
signature pages hereof that it has executed this Agreement and thereafter shall
be binding upon and inure to the benefit of the Company, the Administrative
Agent and each Bank and their respective successors and assigns, except that
neither the
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Company nor any Borrowing Subsidiary shall have the right to assign its rights
hereunder or any interest herein without the prior written consent of the Banks.
SECTION 9.07. Assignments and Participations. (a) Each Bank may,
upon obtaining the prior written consent of the Company and the Administrative
Agent, and each Bank shall, if demanded by the Company in accordance with
Section 2.05(b), assign to one or more Eligible Assignees all or a portion of
its rights and obligations under this Agreement (including, without limitation,
all or a portion of its Commitment, Advances, participations in the Letters of
Credit and its obligations to acquire such participations); provided, however,
that:
(i) each such assignment shall be of a constant, and not a varying,
percentage of all rights and obligations under this Agreement;
(ii) each such assignment made as a result of a demand by the Company
pursuant to Section 2.05(b) shall be arranged by the Company with the
approval of the Administrative Agent, which approval shall not be
unreasonably withheld or delayed, and shall be either an assignment of all
of the rights and obligations of the assigning Bank under this Agreement or
an assignment of a portion of such rights and obligations made concurrently
with another such assignment or other such assignments that, in the
aggregate, cover all of the rights and obligations of the assigning Bank
under this Agreement;
(iii) no Bank shall be obligated to make any such assignment as a
result of a demand by the Company pursuant to Section 2.05(b) unless and
until such Bank shall have received one or more payments from one or more
Eligible Assignees in an aggregate amount equal to the aggregate
outstanding principal amount of the Advances owing to such Bank and such
Bank's Pro Rata Share of all Reimbursement Obligations then outstanding,
together with accrued interest thereon to the date of payment of such
amount from the Company or one or more Eligible Assignees and an aggregate
amount equal to the sum of (A) the amount such Bank would have received
under Section 2.11 had its Advances and Reimbursement Obligations been
prepaid on the date of such assignment and (B) all other amounts payable to
such Bank under this Agreement and the Notes (including, without
limitation, any amounts owing under Section 2.12, 2.13 or 2.18); and
(iv) the parties to each such assignment shall execute and deliver to
the Administrative Agent, for its acceptance and recording in the Register,
an Assignment and Acceptance, together with any Note subject to such
assignment and a processing and recordation fee of $3,000.
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, (x) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank
assigning thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights and be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance
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covering all or the remaining portion of an assigning Bank's rights and
obligations under this Agreement, such Bank shall cease to be a party hereto).
Notwithstanding the foregoing, each Bank may, without the Company's or the
Administrative Agent's consent, assign all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Commitment and the Advances owing to it) to an Affiliate of such
Bank or to another Bank.
(b) By executing and delivering an Assignment and Acceptance, the
assigning Bank thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows:
(i) other than as provided in such Assignment and Acceptance, such
assigning Bank makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement, or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished
pursuant hereto;
(ii) such assigning Bank makes no representation or warranty and
assumes no responsibility with respect to the financial condition of any
Borrower or the performance or observance by any Borrower of any of its
obligations under this Agreement or any other instrument or document
furnished pursuant hereto;
(iii) such assignee confirms that it has received a copy of this
Agreement, together with such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance;
(iv) such assignee will, independently and without reliance upon the
Administrative Agent, such assigning Bank or any other Bank and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action
under this Agreement;
(v) such assignee confirms that it is an Eligible Assignee;
(vi) such assignee appoints and authorizes the Administrative Agent
to act as the contractual representative of such Bank with the rights and
duties expressly set forth herein; and
(vii) such assignee agrees that it will perform in accordance with
their terms all of the obligations that by the terms of this Agreement are
required to be performed by it as a Bank.
(c) Upon its receipt of an Assignment and Acceptance executed by an
assigning Bank and an assignee representing that it is an Eligible Assignee, and
consented to by the Administrative Agent and the Company, if necessary, together
with any Note or Notes subject to such assignment, the Administrative Agent
shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit A hereto, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt
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notice thereof to the Company. Within ten (10) Business Days after its receipt
of such notice, the Company shall execute and deliver to the Administrative
Agent in exchange for the surrendered Note a new Note to the order of such
Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to
such Assignment and Acceptance and, if the assigning Bank has retained a
Commitment hereunder, a new Note to the order of the assigning Bank in an amount
equal to the Commitment retained by it hereunder. Such new Note or Notes shall
be in an aggregate principal amount equal to the aggregate principal amount of
such surrendered Note or Notes, shall be dated the effective date of such
Assignment and Acceptance and shall otherwise be in substantially the form of
Exhibit C.
(d) The Administrative Agent shall maintain at its address referred
to in Section 9.02 a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and addresses of
the Banks and the Commitment of, and principal amount of the Advances owing to,
each Bank from time to time (the "Register"). The entries in the Register shall
be conclusive and binding for all purposes, absent manifest error, and the
Company, the Administrative Agent and the Banks may treat each Person whose name
is recorded in the Register as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Company or any
Bank at any reasonable time and from time to time upon reasonable prior notice.
(e) Each Bank may sell participations to one or more banks or other
entities in or to all or a portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of its Commitment,
the Advances owing to it, the participations in Letters of Credit held by it,
and the Note or Notes held by it); provided, however, that (i) such Bank's
obligations under this Agreement (including, without limitation, its Commitment
hereunder) shall remain unchanged, (ii) such Bank shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) such Bank shall remain the holder of any such Note for all purposes of
this Agreement, (iv) the Company, the Administrative Agent and the other Banks
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement and (v) no participant
under any such participation shall have any right to approve any amendment or
waiver of any provision of this Agreement or any Note, or any consent to any
departure by any Borrower therefrom, except to the extent that such amendment,
waiver or consent would forgive any principal of or interest on the Notes or
forgive any part of the Commitment Fee, or reduce the stated rate at which
interest or the Commitment Fee is calculated, in each case to the extent subject
to such participation, or postpone any date fixed for any payment of principal
of, or interest on, the Notes or of the Commitment Fee, in each case to the
extent subject to such participation.
(f) Any Bank may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 9.07, disclose
to the assignee or participant or proposed assignee or participant, any
information relating to the Company or any other Borrower furnished to such Bank
by or on behalf of the Company or such other Borrower; provided, that, prior to
any such disclosure of non-public information, such Bank shall have obtained the
Company's consent and the assignee or participant or proposed assignee or
participant shall agree in a manner satisfactory to the Company to preserve the
confidentiality of any confidential information relating to the Company received
by it from such Bank.
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(g) Notwithstanding any other provision set forth in this Agreement,
any Bank may at any time create a security interest in all or any portion of its
rights under this Agreement (including, without limitation, the Advances owing
to it and the Note or Notes held by it) in favor of any Federal Reserve Bank in
accordance with Regulation A of the Board of Governors of the Federal Reserve
System.
SECTION 9.08. Governing Law. This Agreement and the Notes shall be
governed by, and construed in accordance with, the internal laws (as opposed to
conflict of laws principles) of the State of Illinois.
SECTION 9.09. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 9.10. Confidentiality. Each Bank hereby agrees that it will
use reasonable efforts to keep confidential any information from time to time
supplied to it by the Company which the Company designates in writing at the
time of its delivery to the Bank is to be treated confidentially; provided,
however, that nothing herein shall affect the disclosure of any such
information:
(a) to the extent required by statute, rule, regulation or judicial
process;
(b) to counsel for any Bank or to their respective accountants;
(c) to bank examiners and auditors;
(d) to any other Bank, or, subject to Section 9.07(c), any transferee
or prospective transferee of any Advance, any Note or any Commitment; or
(e) to any other Person in connection with any litigation to which
any one or more of the Banks is a party;
provided further, however, that each Bank hereby agrees that it will use
reasonable efforts to promptly notify the Company of any request for information
under clause (e) above or with respect to any request for information not
enumerated in this Section 9.10, if not otherwise prohibited from doing so.
SECTION 9.11. Non-Reliance by the Banks. Each Bank by its signature
to this Agreement represents and warrants that (a) it has not relied in the
extension of the credit contemplated by this Agreement, nor will it rely in the
maintenance thereof, upon any assets of the Company or its Subsidiaries
consisting of Margin Stock as collateral and (b) after reviewing the financial
statements of the Company and its Consolidated Subsidiaries referred to in
Section 4.01(e), such Bank has concluded therefrom that the consolidated cash
flow of the Company and its Consolidated Subsidiaries is sufficient to support
the credit extended to the Company pursuant to this Agreement.
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SECTION 9.12. Indemnification. The Company agrees to indemnify and
hold harmless the Administrative Agent, each Bank, and their respective
officers, directors, employees, and agents (any one of the foregoing being an
"Indemnified Party" and any two or more of the foregoing being "Indemnified
Parties") from and against, and pay the Indemnified Parties the amount of, any
and all claims, damages, liabilities, costs, and expenses (including, without
limitation, reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against an Indemnified Party relating in whole or in part to
this Agreement, the Notes, any documents delivered in connection herewith and
the transactions contemplated hereby, and in connection with or arising out of
or by reason of, or in connection with the preparation of a defense of, any
investigation, litigation or proceeding arising out of, related to or in
connection with (a) this Agreement, the Notes, any of the transactions
contemplated herein or the use or proposed use of the proceeds of any Advances,
(b) any acquisition or proposed acquisition by the Company or any of its
Subsidiaries of all or any portion of the stock or all or substantially all of
the assets of any Person, or (c) the actual or alleged presence of Hazardous
Materials on any property of the Company or any of its Subsidiaries or any
Environmental Action relating to any of them, in each case whether or not such
investigation, litigation or proceeding is brought by the Company, any other
Borrower, their respective shareholders or creditors, an Indemnified Party or
any other Person, and whether or not an Indemnified Party is otherwise a party
thereto, provided, however, that this indemnification shall not apply to any
claim, damage, liability, cost or expense (i) arising from a dispute among Banks
or a dispute between any Bank and the Administrative Agent, or (ii) that is
found in a final, nonappealable judgment by a court of competent jurisdiction to
have resulted from an Indemnified Party's gross negligence or willful
misconduct. The covenants of the Company contained in this Section 9.12 and in
Sections 9.04, 2.12 and 2.18 shall survive the repayment of all amounts due and
payable under this Agreement and the termination of this Agreement.
SECTION 9.13. Partial Invalidity. Wherever possible, each provision
hereof shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such invalid, illegal or unenforceable provision or provisions
or any other provisions hereof, unless such a construction would be
unreasonable.
SECTION 9.14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF,
CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG
THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY
OR THE ACTIONS OF THE COMPANY, ANY BORROWING SUBSIDIARY, THE ADMINISTRATIVE
AGENT OR ANY BANK IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
THEREOF. EACH OF THE PARTIES HERETO AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION SHALL BE DECIDED BY BENCH TRIAL WITHOUT A JURY AND THAT ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
SECTION 9.15. Jurisdiction, Etc. (a) Each of the parties hereto
irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any Illinois
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state court or federal court of the United States of America sitting in Chicago,
Illinois, and any appellate court from any thereof, in any action or proceeding
arising out of or relating to this Agreement or the Notes, or for recognition or
enforcement of any judgment, and each of the parties hereto irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such Illinois state court or, to
the extent permitted by law, in such federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that any party may otherwise have to bring any action or proceeding
relating to this Agreement or the Notes in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the Notes in any
Illinois state or federal court. Each of the parties hereto irrevocably waives,
to the fullest extent permitted by law, the defense of an inconvenient forum to
the maintenance of such action or proceeding in any such court.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
DONNELLEY ENTERPRISE SOLUTIONS
INCORPORATED
By:
---------------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK,
as Administrative Agent and as a Bank
By:
---------------------------------
Name:
Title:
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 28, 1996
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 19, 1996 on LANSystems, Inc. consolidated financial statements
included in or made part of this registration statement filed by Donnelley
Enterprise Solutions Incorporated.
Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
October 28, 1996
