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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 0-21525
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DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-316071
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
161 NORTH CLARK STREET, SUITE 2400, CHICAGO, IL 60601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(312) 419-7600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1997 was $29,366,250 based upon the closing price
on March 20, 1997.
The number of shares of the registrant's common stock outstanding as of
March 20, 1997 was 5,005,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 is incorporated into Part III hereof.
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PART I
ITEM 1. BUSINESS.
GENERAL
Donnelley Enterprise Solutions Incorporated (the "Company" or "DESI") 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 1996, the Company's revenues from
business outsourcing services and information technology services were $57.1
million and $39.4 million, respectively.
BACKGROUND
R.R. Donnelley & Sons Company ("R.R. Donnelley") began offering reprographic
services in 1988 through a division known as Donnelley Business Services
("DBS") and expanded its service offerings to include networked and electronic
color printing, mailroom and facsimile services, word processing, desktop
publishing and imaging. In June 1995, DBS broadened its capabilities from
managing paper-based information to include the management of electronic
information through the acquisition of LANSystems, Inc. ("LANSystems") which
has provided information technology services since 1983, including systems
integration, consulting and software development. As of January 1, 1996, R.R.
Donnelley contributed the assets of DBS to LANSystems and changed LANSystems'
corporate name to Donnelley Enterprise Solutions Incorporated. Beginning in
February 1996, DESI began providing systems management outsourcing services,
which include on-site management and administration of servers and desktops
and operation of the help-desk function. On November 5, 1996, DESI completed
an initial public offering of 2,860,000 shares of its common stock (the
"IPO"), resulting in the reduction of R.R. Donnelley's ownership in the
Company to approximately 42.8%.
SERVICES
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. The Company meets these demands by offering the
following services:
Business Services Outsourcing
The Company's outsourcing portfolio encompasses a comprehensive array of
business services, including document services, word processing and desktop
publishing and imaging services.
Document Services. The Company provides reprographic, networked and
electronic 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
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two hours. Monthly volumes per client site range from 50,000 to 10,000,000
pages. Reprographic services are billed monthly on a unit basis, with periodic
minimum volume requirements.
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, proofreading, desktop publishing and graphics design services.
Documents range from high-volume text, complex numerical tables and
regulatory-compliance documents to client newsletters, presentations and
marketing brochures. Operations are typically multi-shift, employing between
10 and 20 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 five employees
performing each of the imaging tasks, which scan and index 50,000 pages per
month. Due to the project nature of this work, temporary employees are used to
staff peak volume periods. 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 cancelable 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 pricing for each of the outsourcing services
provided pursuant to a particular contract on the anniversary date of such
contract in order to reflect changes in the 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.
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
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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-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.
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 outsourcing
contracts generally will have multi-year terms and will be invoiced monthly.
CLIENTS
The Company 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 26.6% of
the Company's 1996. In 1996, the Company provided services to 32 of the 100
largest law firms as ranked by the American Lawyer for 1995 and 9 of the 10
largest investment banks ranked by dollar volume of public debt and equity
issuances for 1996 as reported by Securities Data Corporation. The Company
also anticipates targeting firms within the commercial banking and asset
management industries. The Company 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.
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In 1996, approximately 23.1% of the Company's revenues came from business
and information technology services provided to firms other than law firms,
investment banks and accounting firms. As a result of its focus on its target
markets, the Company expects this percentage to decrease in the future.
As of December 31, 1996, the Company 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 1996,
the Company provided information technology services to approximately 245
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 28 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.
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 (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.
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
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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. The Company has well-established client
relationships with a significant number of leaders in its target
markets. See "--Clients." 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.
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, Lason Inc. and Arthur
Andersen LLP in imaging.
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., Cambridge Technology Partners, Alternative
Resources Corp., 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
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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 to compete with its current competitors.
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.
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,
employees attend mandatory human resources training seminars, including
seminars concerning diversity, sexual harassment and performance leadership.
As of December 31, 1996, the Company had approximately 935 employees.
Approximately 710 persons were dedicated to providing business services,
including approximately 655 engaged in providing on-site services to clients,
of whom approximately 600 were hourly employees. Approximately 225 persons were
dedicated to providing information technology services, including approximately
134 technical employees. Approximately 10 persons were dedicated to corporate
staff functions. None of the Company's personnel is covered by a collective
bargaining agreement. The Company believes that its relations with its
employees are good.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located in Chicago,
Illinois, where the Company leases a 20,000 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. The Company has 12 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.
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ITEM 3. LEGAL PROCEEDINGS.
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. A former client
filed suit against the Company in 1996 and the Company filed a counter claim
in 1997. The Company is of the opinion that the claim and related counterclaim
will not have a material impact on the results of operations of the Company in
the period in which resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 1, 1996, the sole stockholder of the Company approved the
Company's 1996 Stock Incentive Plan.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to those individuals who currently serve as
executive officers of the Company is set forth below. 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
---- --- --------
<S> <C> <C>
Rhonda I. Kochlefl.................. 38 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..................... 37 President, Donnelley Business
Services division
Robert A. Lento..................... 35 President, LANSystems division
David J. Shea....................... 41 President, Systems Management
division
</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.
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.
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
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April 1993, he served as the Vice President--Finance, Corporate Development
and Planning for Chemical Waste Management, Inc., a hazardous waste management
company. Mr. Botica has also been a Board member of Forrest Holdings Inc., a
nonpublic company, since July 1994, and Recycling Industries, Inc., a
publically traded company, since January 1997.
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 the President of the Systems Management division of
DESI since February 1997. Prior to becoming the President, he served as the
Senior Vice President and General Manager of the Systems Management division
from July 1996 to February 1997. Mr. Shea 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.
Robert A. Lento has been the President of the LANSystems division since
January 1997. From January 1995 to 1997, he was the Senior Vice President of
Operations for Entex Information Services, Inc. ("Entex"), an information
technology services firm. From 1992 to 1995, Mr. Lento was a Regional Director
of Entex. From 1990 to 1992, he was a General Manager of Entex. Prior to
joining Entex, Mr. Lento was the owner of Computer Professionals, Inc., which
was acquired by Entex.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the Nasdaq National Market (NASDAQ
symbol: DEZI). The Company's Common Stock began trading on October 31, 1996 in
connection with the IPO. Prior to such time, R.R. Donnelley was the sole
stockholder of the Company.
As of March 17, 1997, there were approximately 18 holders of record of the
Company's Common Stock.
The following table sets forth the high and low bid prices of the Company's
Common Stock as reported by the Nasdaq National Market for the period
beginning October 31, 1996 and ending December 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR 1996 HIGH LOW
---------------- ------ ------
<S> <C> <C>
Fourth Quarter
(October 31 to December 31)................. 26 1/4 19 1/4
</TABLE>
The Company declared and paid a cash dividend of $622,000 as of June 30,
1996, and, in July 1996, declared a dividend of $8.0 million paid in the form
of the Dividend Note that was paid in full with proceeds from the IPO. The
Company currently intends to retain future earnings for use in its business
and, therefore, does not anticipate paying any cash dividends in 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 Company's credit facility contains restrictions on the Company's
payment of cash dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of DESI. Income statement data for each of the three years in the period
ended December 31, 1996 and balance sheet data as of December 31, 1995 and
1996 have been derived from the audited consolidated financial statements of
DESI contained herein.
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Income statement data for the year ended December 31, 1993 and balance sheet
data as of December 31, 1994 have been derived from audited consolidated
financial statements not contained in this Form 10-K. Income statement data
for the year ended December 31, 1992, and balance sheet data as of December
31, 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 information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Consolidated
Financial Statements of DESI and notes thereto included elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1992 1993 1994 1995(1) 1996(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues.............................. $17,985 $23,527 $34,745 $65,944 $96,464
Cost of revenues...................... 14,075 18,800 27,800 53,900 76,354
------- ------- ------- ------- -------
Gross profit........................ 3,910 4,727 6,945 12,044 20,110
Selling expenses...................... 1,657 1,665 2,110 5,563 9,929
General and administrative expenses... 1,648 1,333 1,540 4,866 6,995
Amortization of goodwill.............. -- -- -- 295 804
Special charge........................ -- -- -- -- 300
------- ------- ------- ------- -------
Earnings from operations............ 605 1,729 3,295 1,320 2,082
Interest expense...................... 87 184 283 522 384
------- ------- ------- ------- -------
Earnings before income taxes........ 518 1,545 3,012 798 1,698
Income taxes.......................... 248 684 1,277 495 1,073
------- ------- ------- ------- -------
Net income ......................... $ 270 $ 861 $ 1,735 $ 303 $ 625
======= ======= ======= ======= =======
Pro forma earnings per share(2)(3).... $ .12
=======
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................... $ 4,758 $ 6,826 $ 9,813 $39,696 $76,176
Debt and advances due to R.R.
Donnelley............................ 1,450 2,181 191 4,672 6,455
Capital lease obligations............. 1,203 2,672 3,845 3,125 2,467
Total shareholders' equity(3)......... -- -- -- 15,757 49,452
</TABLE>
- --------
(1) Income statement data for the years ended December 31, 1995 and 1996
includes the results of operations of LANSystems, which the Company
acquired in June 1995, beginning July 1, 1995.
(2) Pro forma earnings per share is computed by dividing net income for the
year ended December 31, 1996 by the total shares outstanding subsequent to
the IPO of 5,005,000.
(3) No shareholders' equity is shown as of the periods ended December 31, 1992
through 1994 because the Company was operated as a division of R.R.
Donnelley during such periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Overview
The Company 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
9
<PAGE>
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 1996, the Company's revenues from business
services outsourcing and information technology services were $57.1 million
and $39.4 million, respectively. In 1995, the Company had revenues of $45.7
million from business services outsourcing and $20.3 million from information
technology services, representing six months of operations since the June 1995
acquisition of LANSystems.
DESI commenced its outsourcing operations in 1988 as a provider of
reprographic services and has expanded its service offerings to include
networked and electronic 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, including
systems integration, consulting and software development, since 1983. In
February 1996, the Company began providing systems management outsourcing
services.
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
year ended December 31, 1996, the Company's top 20 clients accounted for
approximately 61.0% of the Company's revenues, with the top two clients
accounting for approximately 10.6% and 6.0% of such revenues, respectively.
Thirteen of the contracts with business outsourcing clients expire prior to
December 31, 1997. Although most of the Company's business outsourcing
contracts are cancelable 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 relating to information
technology projects, (iii) the resale of hardware or software products, (iv)
monthly fees under its system management outsourcing contracts, and (v)
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 generally 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 for annual
increases or decreases of the unit pricing for each of the outsourcing
services provided in order to reflect actual costs of labor and supplies.
System management contracts are priced on a monthly fixed fee basis, plus a
fee for overtime and additional services. The majority of the Company's other
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.
Increased penetration in the Company's target markets is a key element in
its growth strategy. The Company's business services outsourcing group
increased its client base in the investment and commercial banking markets
with four new clients in 1996. Two client service expansions combined with
increased volumes in 1996 accounted for a $7.5 million increase in revenue
during 1996 within the business services outsourcing group. Cross-selling
within the Company's existing client base resulted in two new systems
management outsourcing engagements in 1996. Information technology services
revenue growth is due in part to several large scale implementations of
Windows NT in both the legal and investment banking markets. The Company
expects to continue to capitalize on the marketplaces' migration from Netware
to Windows NT.
The strategy to focus on higher margin technology related services continues
to drive a change in the Company's product mix, resulting in an increase in
information technology service related revenues which
10
<PAGE>
typically generate a higher margin. The revenues associated with the resale of
hardware or software products, generally associated with a typical information
technology project, were 48.6% of total information technology revenues for
1996, as compared to 66.0% in 1995. The Company provides other products to its
clients only as an accommodation and generally as required for particular
projects. The Company's maintenance contracts are priced on an annual basis
with payments made generally in advance. The Company's systems management
contracts are provided over multi-year terms, invoiced on a monthly basis.
DESI's cost of revenues associated with business services outsourcing are
comprised of wages, supplies, equipment, research and development and start-up
costs; its cost of revenues associated with systems managements revenues are
comprised of wages, start-up costs and depreciation on fixed assets; and its
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 gross profit margins on its
information technology services are higher than those associated with its
business services outsourcing. 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 support 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 cost of revenues and 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.
Initial Public Offering
On November 5, 1996, the Company completed an initial public offering of
2,860,000 shares of Common Stock (the "IPO" or "Offering"), 1,855,000 of which
were sold by the Company, and 1,005,000 of which were sold by R.R. Donnelley.
Prior to the IPO, the Company was a wholly-owned subsidiary of R.R. Donnelley.
Of the $41.7 million of net proceeds to the Company from the IPO, (1)
approximately $8.7 million was used in final payment for certain contingent
obligations arising from the acquisition of LAN Systems, Inc. ("LANSystems"),
(2) $20.3 million was used in repayment of advances owed R.R. Donnelley, and
(3) approximately $8.1 million was used in repayment of the $8.0 million
Dividend Note and accrued interest. The remaining $4.6 million was used for
general corporate purposes.
As a result of the IPO, the number of shares of common stock outstanding
increased to 5,005,000 shares (including 5,000 of restricted shares granted to
a key executive) from the 3,145,000 shares outstanding prior to the IPO and
total equity increased to approximately $50 million.
11
<PAGE>
Relationship with R.R. Donnelley
Prior to the Offering, DESI operated as a separate business within R.R.
Donnelley. It had 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. As of December 31, 1996, the
Company had advances payable to R.R. Donnelley totaling approximately $6.5
million, which includes both the fees related to the Transition Services
Agreement and Benefit Administration Services Agreement, as well as amounts
funded by R.R. Donnelley on behalf of the Company as specified in the
Transition Services Agreement. See Notes 4 and 11 of Notes to the Consolidated
Financial Statements of DESI.
The consolidated 1994 and 1995 financial statements 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 consolidated 1996 financial statements through the closing of the IPO are
also on a carve-out basis. The Company believes that the assumptions
underlying all such adjustments are reasonable; however, such 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 such
consolidated financial statements through the closing of the IPO were
determined as if the Company had filed a separate return.
The Company has entered into certain agreements pursuant to which R.R.
Donnelley or its affiliates have agreed to perform certain legal, tax, data
processing, risk management, employee benefit, credit and collection, cash
management and banking and accounts payable services for the Company. The
Company is charged fees and expenses for these services, but retains the right
to terminate certain services provided under the agreements upon 30 days
notice. Fees related to the Transition Services Agreement and Benefit
Administration Services Agreement in 1996 were $66,000 and $544,000,
respectively.
Acquisition of LANSystems
LANSystems was acquired on June 21, 1995 for cash of approximately $16.6
million and certain contingent payment obligations. 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 resulted in contingent payments of $9.5
million to former LANSystems shareholders and management participants.
Payments made to the recipients of the contingent payments have been treated
as additional purchase price for LANSystems, resulting in an increase in
goodwill of approximately $9.5 million, which will be amortized over the
remaining useful life (approximately 19 years).
The consolidated financial statements for the year ended December 31, 1995
reflect the results of operations of LANSystems commencing on July 1, 1995.
12
<PAGE>
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 DECEMBER 31,
--------------------------
1994 1995(1) 1996
------- --------- -------
<S> <C> <C> <C>
Revenues
Business services outsourcing..................... 100.0% 69.3% 59.1%
Information technology............................ -- 30.7 40.9
------- ------- -------
Total revenues.................................. 100.0 100.0 100.0
Cost of revenues.................................... 80.0 81.7 79.2
------- ------- -------
Gross profit.................................... 20.0 18.3 20.8
Selling expenses.................................... 6.1 8.4 10.3
General and administrative expenses................. 4.4 7.4 7.3
Amortization of goodwill............................ -- .05 0.8
Special charge...................................... -- -- 0.3
------- ------- -------
Earnings from operations........................ 9.5 2.0 2.1
Interest expense.................................... 0.8 0.8 0.4
------- ------- -------
Earnings before income taxes.................... 8.7 1.2 1.7
Income taxes........................................ 3.7 0.7 1.1
------- ------- -------
Net income...................................... 5.0% 0.5% 0.6%
======= ======= =======
</TABLE>
- --------
(1) The results of operations of LANSystems are included in DESI's
consolidated statements of income since July 1, 1995.
Year ended December 31, 1996 compared to year ended December 31, 1995
Revenues for the year ended December 31, 1996 totaled $96.5 million, a 46.3%
increase over 1995 revenues of $65.9 million. This $30.5 million increase was
comprised of a $11.4 million, or 24.9%, increase in business services
outsourcing revenues and a $19.1 million increase attributable to information
technology services. Business services outsourcing growth was due to a $3.7
million increase in revenues from new clients and a $7.5 million increase in
revenues from existing clients. Information technology growth resulted from
the inclusion of LANSystems for all of 1996. Revenues from information
technology services were comprised of $19.1 million from the resale of
hardware and software products and $20.3 million from services.
Cost of revenues of $76.4 million decreased as a percentage of revenues to
79.2% from 81.7% in 1995 because of an increase in the business services
outsourcing margins, offset by a decrease in the information technology
services margin. Business services outsourcing margins increased as a result
of increased revenues in higher margin services, a decrease in start-up costs,
higher productivity at client sites and a reduction in equipment expense due
to vendor renegotiations. Information technology services margins decreased as
a result of a less than expected LANSystems revenue growth, increased
subcontracted labor and lower productivity from new hires.
Selling expenses increased $4.4 million, or 78.5%, from 1995, and as a
percentage of revenues, increased to 10.3% in 1996 from 8.4% in 1995. Selling
expenses as a percentage of revenues increased primarily due to the LANSystems
acquisition being included for a full year ($3.3 million) and the start up of
systems management outsourcing services.
General and administrative expenses increased $2.1 million, or 43.8%, from
1995 and as a percentage of revenues, decreased to 7.3% in 1996 from 7.4% in
1995. General and administrative expense increased primarily due to the
inclusion of LANSystems for the full year ($1.0 million), the closing of the
LANSystems' San Diego office ($0.3 million) and an investment in personnel to
support revenue growth.
13
<PAGE>
Amortization of goodwill was $0.8 million, compared to $0.3 million in 1995.
The increase was due to the inclusion of the LANSystems acquisition for the
entire 1996 year.
A special charge of $300,000 was recorded in 1996 to reflect the severance
agreement related to the departure, effective October 4, 1996, of Thomas P.
Bradbury who served as President of the LANSystems division.
Interest expense, which primarily related to capital leases and the $8.0
million dividend note to R. R. Donnelley, was offset by interest income earned
on the proceeds from the Offering, decreased by $0.1 million.
The Company's effective income tax rate increased to 63.2% in 1996 from
62.0% in 1995. The effective tax rate exceeds the U.S. federal statutory rate
due to the effect of nondeductible goodwill amortization and state taxes.
Net income increased $0.3 million, or 106.3%, 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, an
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.
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. This
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.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion of the IPO, the Company 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, 1994, 1995
and 1996, the Company factored $33.9 million, $44.8 million and $45.1 million
of receivables, respectively. Factored receivables that remain uncollected
were $14.6 million and $3.5 million at December 31, 1995 and 1996,
respectively, 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 was terminated on December 16, 1996.
On October 30, 1996, the Company entered into a credit agreement with Harris
Trust and Savings Bank (the "Bank") (the "Credit Agreement") under which it is
entitled to borrow up to $22.0 million on a revolving credit basis. Borrowings
under the Credit Agreement will mature in three years and will bear interest
(i) at the prime rate announced by the Bank 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 contains 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. The Company's interest
expense will increase as the Company borrows under the Credit Facility. At
December 31, 1996, the Company was in compliance with all debt covenants and
there were no borrowings outstanding under the Credit Agreement.
The Company had net usage of cash from operations of $8.4 million during the
year ended December 31, 1996, as compared to cash provided by operations of
$3.9 million in 1995. The usage in 1996 was primarily due to an increase in
receivables of $14.9 million. This increase is due to revenue growth and
because information technology clients were not invoiced for October and
November services until late December. Capital expenditures increased $3.2
million to $7.3 million in 1996 from $4.1 million in 1995, primarily due to
new client site start-ups and investment in the Company's financial and
operating management system that is being implemented. Cash was also used to
pay $9.5 million of LANSystems contingent payments. For the year ended
December 31, 1996, the Company had $33.5 million of cash provided by financing
activities, primarily from the net proceeds from the Offering, net of payments
to related party.
For the year ended December 31, 1996, operating cash flow (net income plus
depreciation and amortization of $4.5 million) was $5.1 million, up from $3.8
million the prior year. The Company believes cash flows from operations and
the Credit Facility will be sufficient to fund during the term of the Credit
Facility its ongoing operations, continued growth and investment, including
acquisitions.
CAUTIONARY STATEMENTS REGARDING FUTURE-LOOKING STATEMENTS
This Annual Report on Form 10-K is among certain communications by the
Company that contain forward-looking statements, including statements
regarding the Company's financial position, results of operations and market
position. These forward-looking statements are based on the Company's
estimates, assumptions, projections and current expectations. The Company
hereby notes several important factors that could cause the Company's actual
results and other matters to differ materially from the results, projections
and expectations expressed in the forward-looking statements.
Dependence on Key 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, in part because recommendations from
satisfied clients are critical to the Company's success in attracting new
clients.
15
<PAGE>
Dependence on Ability to Manage Growth. The Company's future performance and
profitability will depend, in large part, on its ability to manage its 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.
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.
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.
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. 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.
Ability to Grow through Introduction of New Services. The Company's business
strategies include growth through the introduction of new services, including
systems management outsourcing, that expand on the Company's expertise in
business services outsourcing and information technology services. There can
be no assurance that DESI will be able to market successfully or operate
profitably any new services, 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.
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. 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.
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. The integration of LANSystems into the Company's
operations 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. 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.
Variability of Quarterly Results. The Company's quarterly operating results
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.
16
<PAGE>
Need to Attract and Retain Key Personnel in Highly Competitive Marketplace.
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. The inability to attract,
retain and motivate such personnel could have a material adverse effect upon
the Company's business, operating results or financial condition.
Dependence on Senior Management. The Company's success depends, 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 loss of
one or more of the Company's key executive officers could have a material
adverse effect on the Company and its prospects.
Lack of Operating History as a Stand-Alone Entity. Prior to the IPO, the
Company operated as a separate business within R.R. Donnelley. 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. Although the Company has established new policies
and procedures applicable to the operation of a public company, there can be
no assurance that the Company will be able to manage successfully the
additional obligations of being a public company.
Financial Statement Presentation. Certain of the Company's consolidated
financial statements and other financial data appearing in this Annual Report
on Form 10-K 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.
Principal Stockholder; Potential Conflicts of Interest; Possible Future
Sales of Common Stock by R.R. Donnelley. R.R. Donnelley holds 42.8% of the
outstanding Common of the Company. Consequently, R.R. Donnelley is 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). Currently, two of the five members of the Board of Directors of
the Company are officers of R.R. Donnelley. 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.
Subject to certain restrictions, R.R. Donnelley may sell any and all of the
shares of Common Stock currently 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.
Reference is also made to the Company's Registration Statement (No. 333-
10127) under "Risk Factors" for a more detailed discussion of the foregoing
and other factors that may affect the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by Item 10 of this Annual Report on Form 10-K
regarding directors is incorporated by reference to the section entitled
"Election of Directors" in the Company's Proxy Statement for its 1997 Annual
Meeting of Stockholders. The information required by Item 10 of this Annual
Report on Form 10-K regarding officers is included at the end of Part I of
this Annual Report on Form 10-K. Other information required by Item 10 of this
Annual Report on Form 10-K regarding both directors and officers is
incorporated by reference to the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 1997
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of this Annual Report on Form 10-K is
incorporated by reference to the section entitled "Compensation and Other
Information Concerning Directors and Executive Officers" in the Company's
Proxy Statement for its 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for by Item 12 of this Annual Report on Form 10-K
is incorporated by reference to the section entitled "Ownership of Capital
Stock" in the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for by Item 13 of this Annual Report on Form 10-K
is incorporated by reference to the section entitled "Certain Transactions" in
the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
See "Financial Statements" set forth below.
2. Financial Statement Schedules:
The following financial statement schedule is included as part of this
Annual Report on Form 10-K 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.
3. Exhibits:
<TABLE>
<C> <S>
3.1 First Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 By-laws of the Company.(1)
10.1 Transition Services Agreement between the Company and R.R.
Donnelley.(1)
10.2 Benefit Administration Services Agreement between the Company
and R.R. Donnelley.(1)
10.3 Tax Allocation and Indemnification Agreement between the Company
and R.R. Donnelley.(1)
10.4 Employment Agreement between Rhonda I. Kochlefl and the
Company.(1)(2)
10.5 Employment Agreement between Leo S. Spiegel and the
Company.(1)(2)
10.6 Employment Agreement between Luke F. Botica and the Company.(2)
10.7 Employment Agreement between Linda A. Finkel and the Company.(2)
10.8 Severance Agreement between Thomas P. Bradbury and the
Company.(1)(2)
10.9 1996 Broad-Based Employee Stock Plan.(1)(2)
10.10 Agreement of Merger among R.R. Donnelley & Sons Company,
Donnelley DBS, Inc. and LAN Systems, Inc.(1)
10.11 Form of Credit Agreement among the Company, as Borrower, and the
Banks named therein.(1)
10.12 1997 Non-Employee Director Stock Plan.(2)
10.13 Amended and Restated 1996 Stock Incentive Plan.(2)
10.14 1997 Employee Stock Purchase Plan.
11.1 Computation of Earnings Per Share of Common Stock.
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney of Luke F. Botica, Leo S. Spiegel, Daniel I.
Malina, Charles F. Moran and W. Ed Tyler.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (No. 333-10127), declared effective on October 30, 1996.
(2) Indicates a management contract or compensatory plan or agreement.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed by the Company during the fourth
quarter of 1996.
(c) Exhibits
See Item 14(a)3 above.
19
<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, 1995 and 1996............ F-3
Consolidated Income Statements for the Years Ended December 31, 1994,
1995, and 1996......................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1994, 1995, and 1996................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995, and 1996................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Donnelley Enterprise Solutions Incorporated:
We have audited the accompanying consolidated balance sheets of DONNELLEY
ENTERPRISE SOLUTIONS INCORPORATED (a Delaware corporation) AND SUBSIDIARIES as
of December 31, 1996 and 1995, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donnelley
Enterprise Solutions Incorporated as of December 31, 1996 and 1995, and the
results of operations and cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois,
February 21, 1997
F-2
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents......................................... $ 652 $ 8,910
Accounts receivable, less allowances for doubtful accounts of
$607 in 1995 and $460 in 1996............................... 9,674 21,228
Unbilled receivables......................................... 1,473 4,847
Inventories.................................................. 3,574 4,144
Prepaid expenses and other current assets.................... 488 1,728
Income tax receivable........................................ 1,188 1,533
Deferred income taxes........................................ 1,222 867
------- -------
Total current assets....................................... 18,271 43,257
Property and equipment, net, at cost........................... 9,075 12,646
Deferred income taxes.......................................... 780 --
Goodwill, net.................................................. 11,511 20,213
Other noncurrent assets........................................ 59 60
------- -------
Total assets............................................... $39,696 $76,176
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................... $ -- $ --
Capital lease obligations, current portion................... 1,347 1,162
Advances due to related party................................ 4,672 6,455
Accounts payable............................................. 6,321 7,633
Accrued salary and benefits.................................. 3,046 2,280
Accrued other expenses....................................... 1,652 2,010
Customer prepayments......................................... 3,538 4,434
Deferred revenues............................................ 1,332 1,134
------- -------
Total current liabilities.................................. 21,908 25,108
------- -------
Noncurrent Liabilities:
Capital lease obligations.................................... 1,778 1,305
Deferred taxes............................................... -- 311
Other noncurrent liabilities................................. 253 --
------- -------
Total noncurrent liabilities............................... 2,031 1,616
------- -------
Shareholders' equity:
Common stock--$.01 par value, 15,000,000 authorized Shares;
3,145,000 and 5,005,000 issued and outstanding at December
31, 1995
and 1996, respectively...................................... 31 50
Preferred stock--$.01 par value, 1,000,000 authorized Shares;
none issued and outstanding................................. -- --
Additional paid-in capital................................... 15,726 49,399
Retained earnings............................................ -- 3
------- -------
Total shareholders' equity................................. 15,757 49,452
------- -------
Total liabilities and shareholders' equity................. $39,696 $76,176
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Business services outsourcing revenues................. $34,745 $45,684 $57,048
Information technology revenues........................ -- 20,260 39,416
------- ------- -------
Total revenues..................................... 34,745 65,944 96,464
Cost of revenues....................................... 27,800 53,900 76,354
------- ------- -------
Gross profit....................................... 6,945 12,044 20,110
Selling expenses....................................... 2,110 5,563 9,929
General and administrative expenses.................... 1,540 4,866 6,995
Amortization of goodwill............................... -- 295 804
Special charge......................................... -- -- 300
------- ------- -------
Earnings from operations........................... 3,295 1,320 2,082
Interest expense, net.................................. 283 522 384
------- ------- -------
Earnings before income taxes....................... 3,012 798 1,698
Income taxes........................................... 1,277 495 1,073
------- ------- -------
Net income......................................... $ 1,735 $ 303 $ 625
======= ======= =======
Pro forma earnings per share........................................... $ .12
=======
Pro forma Common Shares outstanding.................................... 5,005
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993.......... -- -- -- --
Net income.......................... -- -- 1,735 1,735
Repayments to related party......... -- -- (1,735) (1,735)
---- ------- ------- -------
Balance at December 31, 1994.......... -- -- -- --
Net income.......................... -- -- 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
Net income.......................... -- -- 625 625
Initial public offering proceeds,
net of expenses.................... 19 41,673 -- 41,692
Dividend to related party........... -- (8,000) (622) (8,622)
---- ------- ------- -------
Balance at December 31, 1996.......... $ 50 $49,399 $ 3 $49,452
==== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income..................................... $ 1,735 $ 303 $ 625
Depreciation and amortization.................. 2,297 3,446 4,492
Amortization of goodwill....................... -- 295 804
Net changes in assets and liabilities.......... 2,653 (109) (14,289)
------- -------- --------
Net cash provided by (used in) operating
activities................................ 6,685 3,935 (8,368)
------- -------- --------
Cash flows used in investing activities:
Capital expenditures........................... (2,081) (4,084) (7,347)
Acquisition of LANSystems by related party..... (16,633) --
LANSystems contingent payments................. -- -- (9,506)
------- -------- --------
Net cash used in investing activities...... (2,081) (20,717) (16,853)
------- -------- --------
Cash flows (used for) provided by financing
activities:
Advances (to) from related parties, net........ (1,990) 4,481 1,783
Repayments/dividend to related party........... (1,735) (303) (8,622)
Contribution of LANSystems from related party.. -- 15,757 --
Net proceeds from the initial public offering.. -- -- 41,692
Principal payments on capital leases........... (879) (1,301) (1,374)
Principal payments on borrowings............... -- (1,200) --
------- -------- --------
Net cash (used for) provided by financing
activities................................ (4,604) 17,434 33,479
------- -------- --------
Net increase in cash and equivalents............. $ -- $ 652 $ 8,258
Cash and equivalents, at beginning of period..... -- -- 652
------- -------- --------
Cash and equivalents, at end of period........... $ -- $ 652 $ 8,910
======= ======== ========
The changes in assets and liabilities, net of
balances assumed through acquisitions, were as
follows:
Decrease (increase) in assets--
Receivables, net............................. $ (964) $ (1,667) $(14,928)
Inventories.................................. (62) 543 (570)
Prepaid expenses and other................... (5) (24) (1,240)
Income tax receivable........................ -- (196) (345)
Deferred income taxes........................ (120) (496) 1,135
Other noncurrent assets...................... -- (3) (1)
Increase (decrease) in liabilities--
Accounts payable............................. 385 671 1,312
Accrued salary and benefits.................. 368 1,081 (766)
Accrued other expenses....................... (43) 1,214 358
Customer prepayments......................... 3,094 444 896
Deferred revenues............................ -- (1,917) (198)
Deferred taxes............................... -- -- 311
Other noncurrent liabilities................. -- 241 (253)
------- -------- --------
Net change in assets and liabilities....... $ 2,653 $ (109) $(14,289)
======= ======== ========
Cash paid during the period for:
Interest....................................... $ 283 $ 522 $ 427
Income taxes................................... -- 86 --
======= ======== ========
Supplemental non-cash investing and financing
activities:
Capital leases................................. $ 2,052 $ 581 $ 716
======= ======== ========
</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 14 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."
On November 5, 1996, the Company completed an initial public offering of
2,860,000 shares of Common Stock (the "IPO" or "Offering"), 1,855,000 of which
were sold by the Company, and 1,005,000 of which were sold by R.R. Donnelley.
Of the $41.7 million of net proceeds to the Company from the IPO, (1)
approximately $8.7 million was used in final payment for certain contingent
obligations arising from the acquisition of LANSystems, (2) $20.3 million was
used in repayment of advances owed R.R. Donnelley, and (3) approximately $8.1
million was used in repayment of the $8.0 million Dividend Note and accrued
interest. The remaining $4.6 million was used for general corporate purposes.
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.
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, 1995 and 1996, unbilled
revenues amounted to $150,000 and $71,000, respectively.
Information Technology Services--For system management contracts revenues
are recognized upon rendering the 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 efforts incurred to
date in 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
F-7
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1996, estimated
revenue in excess of billings on uncompleted contracts amounted to $1,323,000
and $4,776,000, 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.
Cash Equivalents
The company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the consolidated balance sheets and consolidated statements
of cash flows. Cash equivalents are stated at cost, which approximates market
value.
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 8 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 1996, was $295,000
and $1,099,000, 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 years
ended December 31, 1995 and 1996.
Research and Development
Research and development expenditures are charged to earnings as incurred
and amounted to $895,000, $1,274,000, and $1,206,000 for the years ended
December 31, 1994, 1995, and 1996, respectively. These costs are reflected in
the Company's consolidated statements of income as cost of revenues and
general and administrative expenses.
F-8
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
For the years ended December 31, 1994 and 1995, and for the period beginning
January 1, 1996 and ending November 4, 1996, the Company is included in the
consolidated federal income tax return of R.R. Donnelley. The Company will
file a short period return for the period beginning November 5, 1996 and
ending December 31, 1996 on a stand alone basis. The consolidated tax
provision is presented as if the Company filed a separate tax return for the
full year. 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 through the completion of the
IPO were paid by R.R. Donnelley on behalf of the Company.
Fair Value of Financial Instruments
In accordance with the reporting requirements of Statement of Financial
Accounting Standard No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company calculates the fair value of its financial
instruments and includes this additional information in the notes to the
consolidated financial statements when the fair value is different than the
carrying value of those financial instruments. When the fair value reasonably
approximates the carrying value, no additional disclosure is made.
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.
The Company's contract revenues related to information technology projects
are recognized using the percentage of completion method. Under this method,
estimated contract revenues are recorded based on management's estimates and
assumptions (see Note 2--Information Technology Services for further
discussion). 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, 1994,
one client accounted for approximately 15% of the Company's revenues. For the
years ended December 31, 1995, no clients accounted for greater than 10% of
the Company's revenues. For the year ended December 31, 1996, one client
accounted for approximately 11% 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 sold 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, 1994, 1995 and 1996 the Company factored $33.9 million, $44.8 million and
$45.1 million of receivables to DRI, respectively. Factored receivables that
remain uncollected by DRI were $14.6 million and $3.5 million at December 31,
1995 and 1996, and are excluded from the accompanying consolidated balance
sheets.
F-9
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 16, 1996 the Company terminated the factoring agreement and
no longer factors any of its receivables.
Employee Benefit Programs
The Company's employees participated in various employee benefit programs
that were 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 included
medical, dental and life insurance, workers' compensation and a defined
benefit pension plan. The Company 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 $0.9 million, $1.9 million and $2.4 million in
the years ended December 31, 1994, 1995 and 1996, respectively. The costs were
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 8.5%,
7.25% and 7.5% for the years ended December 31, 1994, 1995 and 1996,
respectively. The rate of increase in future compensation levels assumed was
4% for 1994, 1995 and 1996. 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 offered 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 participated 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 provided certain postretirement medical and life insurance
benefits. The Company reimbursed 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 $67,000, $101,000 and $36,000 in the years ended
December 31, 1994, 1995 and 1996, 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
Prior to the completion of the IPO, R.R. Donnelley provided certain support
services to the Company including legal, tax, benefits administration, data
processing, internal audit and payroll services. These charges were 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 accompanying consolidated income
statements were approximately $500,000, $650,000 and $863,000 for the
F-10
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years ended December 31, 1994, 1995, and 1996 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 sold services to clients who are also clients of R.R. Donnelley.
For some of these sales, an R.R. Donnelley salesman would assist the Company
in making the initial client contact and executing the transaction. To
compensate for these services, the Company paid a commission fee to the
respective R.R. Donnelley salesman. Management believes these commission fees
approximated 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 $77,000, $65,000 and $43,000 for
the years ended December 31, 1994, 1995 and 1996 respectively. The sales to
which these commissions relate approximated $5,653,000, $6,027,000, and
$3,936,000, respectively. The Company sold information technology services and
products to R.R. Donnelley. These sales approximated $955,000 and $2,038,000
for the period July 1, 1995 through December 31, 1995 and the twelve-month
period ended December 31, 1996, respectively. The receivables from R.R.
Donnelley related to these sales are reflected in the advances due to related
party discussed in Note 11.
Stock Purchase Plan
The Company participated in a stock purchase plan for selected managers and
key staff employees which was sponsored by R.R. Donnelley. Under the plan, the
Company was required to contribute an amount equal to 70% of participants'
contributions, of which 50% was 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 $28,600 and $135,000 for the years ended December
31, 1994 and 1995, respectively. Effective July 1, 1995, employees acquired in
connection with the acquisition of LANSystems participated in these stock
purchase plan benefits. Due to the fact that the plan terminated upon the
completion of the initial public offering, no expense was recorded for the
year ended December 31, 1996.
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.
5. PRO FORMA EARNINGS PER SHARE
The pro forma earnings per share calculation set forth below does not
reflect the actual weighted average shares outstanding during the years ended
December 31, 1995 and 1996, but assumes the 5,000,000 common shares
outstanding upon the completion of the Offering and the 5,000 restricted
common shares issued to a key executive were outstanding for these years (in
thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Net income.................................................... $ 303 $ 625
Pro forma earnings per share.................................. 0.06 0.12
Pro forma common shares outstanding........................... 5,005 5,005
</TABLE>
F-11
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
Machinery and equipment................................... $10,722 $ 18,211
Capital leases............................................ 6,715 7,089
Leasehold improvements.................................... 757 541
------- --------
Total property and equipment............................ 18,194 25,841
Accumulated depreciation and amortization................. (9,119) (13,195)
------- --------
Net property and equipment.............................. $ 9,075 $ 12,646
======= ========
</TABLE>
Depreciation and amortization expense of property and equipment included in
the accompanying consolidated income statements was $2,297,000, $3,446,000,
and $4,492,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.
7. 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 $3,928,000, $6,065,000 and $8,157,000 for the
years ended December 31, 1994, 1995 and 1996, 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, 1995
and 1996 were approximately $6,715,000 and $7,089,000, respectively. Similar
amounts for accumulated amortization were $3,831,000 and $4,818,000,
respectively. Amortization of capital lease assets is included in depreciation
and amortization expense of property and equipment.
Minimum future lease obligations at December 31, 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Period ending December 31--
1997.................................................. $1,238 $1,312
1998.................................................. 1,187 830
1999.................................................. 797 513
2000.................................................. 497 216
2001 and thereafter................................... 536 28
------ ------
Total minimum payments.............................. $4,255 $2,899
======
Less: Amount representing interest...................... (432)
------
Present value of minimum lease payments................. $2,467
======
</TABLE>
F-12
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SPECIAL CHARGE:
The Company recorded a charge of $300,000 in the twelve months ended
December 31, 1996 to reflect the departure, effective October 4, 1996, of
Thomas P. Bradbury who served as President of the LANSystems division. The
Company and Mr. Bradbury entered into a severance agreement pursuant to which
the Company agreed to continue paying 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.
9. CREDIT AGREEMENT:
The Company entered into a $22.0 million credit agreement with Harris Trust
and Savings Bank on October 30, 1996. The credit agreement will be used in
conjunction with cash flows from operations to fund ongoing operations,
seasonal cash needs, and for continued growth and investment. Amounts
available under the 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 commitment
fee for the year ended December 31, 1996 was $7,700. No borrowings were
outstanding at December 31, 1996.
The facility contains customary financial and other covenants, including
requirements to (i) maintain a minimum consolidated net worth of not less than
80% of consolidated net worth on November 6, 1996 plus 50% of consolidated net
income for each fiscal quarter; (ii) a minimum fixed charge coverage ratio of
not less than 1.5 to 1; (iii) and a funded debt to cash flow ratio of not more
than 2.5 to 1, and restrictions on liens, investments, dividends,
indebtedness, acquisitions and transactions with affiliates. The Company was
in compliance with all debt covenants as of December 31, 1996. The facility
may be extended an additional year upon receipt of notice by the
Administrative Agent before the second, third and fourth anniversary dates of
the Agreement and terminates in full on November 5, 1999.
10. 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. A former client
filed suit against the Company in 1996 and the Company filed a counter claim
in 1997. The Company is of the opinion that the claim and the related
counterclaim will not have a material impact on the results of operations of
the Company in the period in which resolved.
11. 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. The advances outstanding upon the
completion of the IPO were paid in full at November 4, 1996 with proceeds from
the offering.
Advances due to related party as of December 31, 1996 relate to services
provided to the Company by R.R. Donnelley under the Transition Services
Agreement and the Benefit Administration Agreement. Under these agreements,
R.R. Donnelley or its affiliates have agreed to perform certain legal, tax,
data processing, risk management, employee benefit, credit and collection,
cash management and banking and accounts payable services for the Company. The
Company is charged fees and expenses for these services, but retains the right
to terminate certain services provided under the agreements upon 30 days
notice. Of the approximately $6.5 million
F-13
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
due to R.R. Donnelley as of December 31, 1996, approximately $66,000 and
$544,000 relate to fees under the Transition Services Agreement and Benefit
Administration Agreement, respectively. The remaining balance reflects cash
fundings made on behalf of the Company by R.R. Donnelley under the Transition
Services Agreement.
The Transition Services Agreement terminates on December 31, 1997 for all
services other than cash management and tax. The Company has retained the
right to request an extension of the agreement beyond the termination date
provided it notifies R.R. Donnelley forty-five days in advance. The Benefit
Administration Agreement terminated on December 31, 1996.
12. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Federal--
Current....................................... $ 1,133 $ 884 $ (306)
Deferred...................................... (87) (478) 963
State--
Current....................................... 264 107 (67)
Deferred...................................... (33) (18) 483
-------- ------- --------
Total provision............................. $ 1,277 $ 495 $ 1,073
======== ======= ========
</TABLE>
A reconciliation of the effective tax rate from the statutory U.S. federal
income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Federal rate...................................... 34.0% 34.0% 34.0%
State taxes....................................... 7.7 11.2 11.4
Goodwill amortization............................. -- 11.3 13.8
Meals and entertainment........................... 0.7 5.4 4.1
Other............................................. -- 0.1 (0.1)
------- ------- -------
Effective tax rate.............................. 42.4% 62.0% 63.2%
======= ======= =======
</TABLE>
F-14
<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,
---------------
1995 1996
------- ------
<S> <C> <C>
Vacation liability........................................... $ 50 $ 162
Payroll and related liabilities.............................. 442 136
Allowance for doubtful accounts.............................. 252 140
Inventory.................................................... 396 328
Revenue recognition.......................................... (33) (42)
Miscellaneous, other......................................... 115 143
------- -----
Total net current deferred tax asset....................... 1,222 867
------- -----
Accumulated depreciation..................................... 573 593
Reserves and accruals not deductible until paid.............. 213 35
LANSystems contingent payments............................... -- (926)
Miscellaneous, other......................................... (6) (13)
------- -----
Total net noncurrent deferred tax asset (liability)........ 780 (311)
------- -----
Total...................................................... $ 2,002 $ 556
======= =====
</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 through November 4, 1996 were included in advances due to R.R.
Donnelley.
13. STOCK-BASED COMPENSATION PLANS
The Company has two stock option plans, the 1996 Stock Incentive Plan
("Incentive Plan") and the 1996 Broad-Based Employee Stock Plan ("Broad-Based
Plan"). The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net Income:
As Reported..................................................... $625,000
Pro Forma....................................................... 388,000
Primary EPS:
As Reported..................................................... $0.12
Pro Forma....................................................... 0.08
</TABLE>
The Company may grant options for up to 400,000 shares of Common Stock under
both the Incentive Plan and the Broad-Based Plan. Under both Plans, the option
price equals the stock's market price on date of grant. These options vest
over periods of two to four years and expire after ten years. Upon completion
of the IPO, a total of 313,550 options were awarded under these plans to
employees of the Company at an exercise price of $25.00 per share.
Additionally, 5,000 shares of restricted Common Stock were granted to a key
executive upon completion of the IPO. No other options were outstanding at
December 31, 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The fair value of the options granted
upon completion of the IPO was $15.46. The assumptions used to estimate the
fair value of these grants included a risk-free interest rate of 6.2%, an
expected dividend yield of 0%, an expected life of 7 years and an expected
volatility of 53.0%.
F-15
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. 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 year ended December 31, 1996, the
earnout was renegotiated and a final payment was made. In this regard, $9.5
million was recorded as additional goodwill related to the 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 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>
F-16
<PAGE>
15. QUARTERLY DATA (UNAUDITED):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
FOR THE FISCAL YEARS ENDED QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
December 31, 1995
Revenues............................ $10,883 $10,225 $21,080 $23,756 $65,944
Gross profit........................ 1,480 1,551 4,200 4,813 12,044
Net income (loss)................... 97 165 (161) 202 303
Pro forma net income (loss) per
share.............................. $ 0.02 $ 0.03 $ (0.03) $ 0.04 $ 0.06
======= ======= ======= ======= =======
December 31, 1996
Revenues............................ $20,451 $24,792 $25,780 $25,441 $96,464
Gross profit........................ 4,371 5,562 5,509 4,668 20,110
Net income (loss)................... (69) 691 474 (471) 625
Pro forma net income (loss) per
share.............................. $ (0.01) $ 0.13 $ 0.09 $ (0.09) $ 0.12
======= ======= ======= ======= =======
</TABLE>
The pro forma earnings per share calculation does not reflect the actual
weighted average shares outstanding during the years ended December 31, 1995
and 1996, but assumes the 5,000,000 common shares outstanding upon the
completion of the Offering and the 5,000 restricted common shares issued to a
key executive were outstanding for these years.
F-17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THE REGISTRANT
HAS DULY CAUSED THIS ANNUAL REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN CHICAGO, ILLINOIS ON MARCH 27,
1997.
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 1934, THIS ANNUAL
REPORT ON FORM 10-K 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 March 27, 1997
____________________________________ Chief Executive Officer
Rhonda I. Kochlefl and Director (principal
executive officer)
* Senior Vice President and March 27, 1997
____________________________________ Chief Financial Officer
Luke F. Botica (principal financial and
accounting officer)
* Senior Vice President and March 27, 1997
____________________________________ Chief Technology Officer
Leo S. Spiegel and Director
* Director March 27, 1997
____________________________________
Daniel I. Malina
* Director March 27, 1997
____________________________________
Charles F. Moran
* Director March 27, 1997
____________________________________
W. Ed Tyler
</TABLE>
/s/ Rhonda I. Kochlefl
*By: __________________________
Rhonda I. Kochlefl
Attorney-in-Fact
<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 Form 10-K and have issued our report thereon
dated February 21, 1997. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
listed on page S-2 is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and in our opinion,
fairly states 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
February 21, 1997
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 OTHER NET OF OF
ACCOUNTS OF PERIOD CHARGES TO ACCOUNTS(2) RECOVERIES PERIOD
----------------------- --------- EXPENSES(1) ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1994...... -- -- -- -- --
For the Year Ended
December 31, 1995...... -- $413 $217 $ (23) $607
For the Year Ended
December 31, 1996...... $607 $248 -- $(395) $460
</TABLE>
- --------
(1) These amounts represent provisions for doubtful accounts that are included
in both sales and 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 INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
3.1 First Amended and Restated Certificate of Incorporation
of the Company.(1)
3.2 By-laws of the Company.(1)
10.1 Transition Services Agreement between the Company and
R.R. Donnelley.(1)
10.2 Benefit Administration Services Agreement between the
Company and R.R. Donnelley.(1)
10.3 Tax Allocation and Indemnification Agreement between the
Company and R.R. Donnelley.(1)
10.4 Employment Agreement between Rhonda I. Kochlefl and the
Company.(1)(2)
10.5 Employment Agreement between Leo S. Spiegel and the
Company.(1)(2)
10.6 Employment Agreement between Luke F. Botica and the
Company.(2)
10.7 Employment Agreement between Linda A. Finkel and the
Company.(2)
10.8 Severance Agreement between Thomas P. Bradbury and the
Company.(1)(2)
10.9 1996 Broad-Based Employee Stock Plan.(1)(2)
10.10 Agreement of Merger among R.R. Donnelley & Sons Company,
Donnelley DBS, Inc. and LAN Systems, Inc.(1)
10.11 Form of Credit Agreement among the Company, as Borrower,
and the Banks named therein.(1)
10.12 1997 Non-Employee Director Stock Plan.(2)
10.13 Amended and Restated 1996 Stock Incentive Plan.(2)
10.14 1997 Employee Stock Purchase Plan.
11.1 Computation of Earnings Per Share of Common Stock.
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney of Luke F. Botica, Leo S. Spiegel,
Daniel I. Malina, Charles F. Moran and W. Ed Tyler.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (No. 333-10127), declared effective on October 30, 1996.
(2) Indicates a management contract or compensatory plan or agreement.
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of November 19, 1996 by and among
Donnelley Enterprise Solutions Incorporated, a Delaware corporation (the
"Company"), and Luke F. Botica (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 Senior Vice President
and Chief Financial 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 the Company's
Senior Vice President and Chief Financial Officer. The Executive shall be
subject to the direction of the Chairman, President and Chief Executive
Officer of the Company (or any one of them to whom the Executive then
reports, hereinafter referred to as the "Reporting Executive"), and shall
have such other powers, duties and responsibilities consistent
<PAGE>
with the Executive's position as Senior Vice President and Chief Financial
Officer as may from time to time be prescribed by the Reporting Executive.
In addition, for so long as the Executive is employed by the Company and,
unless otherwise determined by the Reporting Executive, 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.
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 Reporting Executive. 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.
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, (i) the Company shall pay
the Executive a base salary at the rate of $200,004 per year during the
period prior to January 1, 1997, and (ii) $225,000 per year during the
period beginning January 1, 1997, 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 Reporting
Executive in his or her 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.
-2-
<PAGE>
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) 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 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
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review and change by the Board relative to key strategic objectives for the
year.
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 30,000 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. 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 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 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 Reporting 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
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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 entitled to receive twenty-four (24)
monthly payments 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), paid on the last day of a calendar month.
4.8. Relocation. Pursuant to a letter dated March 21, 1996, the
Company agreed to pay and/or reimburse the Executive for certain relocation
expenses associated with Executive's move to the Chicago, Illinois area, up
to a maximum of $200,000. Nothing herein shall alter the Company's
obligation to make such payments and/or reimbursements up to a maximum
expenditure by the Company of $200,000, and the Company shall pay and/or
reimburse the Executive for such expenses provided the Company's
obligation, whether under the March 21, 1996 letter or under the provisions
of this Section 4.8 shall not exceed $200,000 and shall be subject to
reimbursement by the Executive to the Company as set forth in Sections 5.3
and 5.6 below.
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
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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.
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
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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 twelve (12)
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 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
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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). Should the
Executive's employment be terminated pursuant to the provisions of this
Section 5.3 at any time prior to April 1, 1997, then the Executive shall
reimburse the Company for any amounts the Company shall have paid to the
Executive pursuant to the provisions of Section 4.8 above, and the Company
shall have the right to set-off such amounts to be reimbursed against any
payments to be made to the Executive under this Section 5.3.
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 Sections 4.7 and 4.8, (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, 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.
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, or (iii) the Executive's offices are moved from their present
location to a location outside of the
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Chicago, Illinois Metropolitan Area. 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 Sections 4.7 and 4.8, (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, 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.
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 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. Should the Executive's employment be terminated
pursuant to the provisions of this Section 5.6 at any time prior to April
1, 1997, then the Executive shall reimburse the Company for any amounts the
Company shall have paid to the Executive pursuant to the provisions of
Section 4.8 above, and the Company shall have the right to set-off such
amounts to be reimbursed against any payments to be made to the Executive
under this Section 5.6.
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.
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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.
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 5.3,
5.6, 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
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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 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
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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 two
(2) years 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 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
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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:
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; or (v) the Executive's engaging in
activities (A) which constitute a violation of any policy, rule or
regulation adopted by the Company, including policies related to conflicts
of interest, insider trading, reimbursement of business expenses and the
like, or (B) which result in a material injury to the business, financial
condition, results of operations or prospects of the Company or its
Affiliates, as determined by not less than a 75% vote of the Board.
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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 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
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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 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.
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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.
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
the Executive's 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/ Rhonda I. Kochlefl
-------------------------------------------
Name: Rhonda I. Kochlefl
Title: President, CEO
THE EXECUTIVE: /s/ Luke F. Botica
-------------------------------------------
Luke F. Botica
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of October 31, 1996 by and among
Donnelley Enterprise Solutions Incorporated, a Delaware corporation (the
"Company"), and Linda A. Finkel (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 President, DBS
division, 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 the Company's
President, DBS division. The Executive shall be subject to the direction
of the Chairman, President and Chief Executive Officer of the Company (or
any one of them to whom the Executive then reports, hereinafter referred to
as the "Reporting Executive"), and shall have such other powers, duties and
responsibilities consistent with the Executive's position as President, DBS
division, as may from time to time be prescribed by the Reporting
Executive. In
<PAGE>
addition, for so long as the Executive is employed by the Company and,
unless otherwise determined by the Reporting Executive, 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.
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 Reporting Executive. 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.
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 $185,000 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 Reporting Executive in his or her 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
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time shall pay the Executive an annual bonus (the "Bonus"). The Bonus in
respect of 1996 (the "1996 Bonus") will be calculated as follows: The
Company will calculate the dollar amount of the 1996 DBS Bonus pursuant to
Section 4.2.1. below, the dollar amount of the 1996 DESI Bonus pursuant to
Section 4.2.2. below and the dollar amount of the 1996 DBS Fourth Quarter
Bonus pursuant to Section 4.2.3. below. The 1996 Bonus will be equal to the
sum of (i) the dollar amount of the 1996 DBS Bonus times 75%; (ii) the
dollar amount of the 1996 DESI Bonus times 6.25%; and (iii) the dollar
amount of the 1996 DBS Fourth Quarter Bonus times 18.75%.
4.2.1. (a) If the Adjusted Operating Income (as defined below)
for the DBS Division for calendar year 1996 (the "1996 DBS AOI"), is
less than $4,061,250 (the "Minimum DBS Target"), the 1996 DBS Bonus
shall equal zero;
(b) If the 1996 DBS AOI is equal to or greater than the Minimum
DBS Target but less than $5,415,000 (the "Base DBS Target"), the 1996
DBS Bonus shall equal the sum of (i) 20% of the Executive's 1996
salary paid in 1996 (the "1996 Salary") plus (ii) the number obtained
by multiplying 20% of the Executive's 1996 Salary by a fraction (which
shall not be greater than one), the numerator of which is the
difference between the 1996 DBS AOI and the Minimum DBS Target and the
denominator of which is the amount determined by subtracting the
Minimum DBS Target from the Base DBS Target;
(c) If the 1996 DBS AOI is equal to or greater than the Base DBS
Target but less than $8,122,500 (the "Maximum DBS Target"), the 1996
DBS Bonus shall equal the sum of (i) 40% of the Executive's 1996
Salary plus (ii) the number obtained by multiplying 40% of the
Executive's 1996 Salary by a fraction (which shall not be greater than
one), the numerator of which is the difference between the 1996 DBS
AOI and the Base DBS Target and the denominator of which is the amount
determined by subtracting the Base DBS Target from the Maximum DBS
Target; or
(d) If the 1996 DBS AOI is equal to or greater than the Maximum
DBS Target, the 1996 DBS Bonus shall equal 80% of the Executive's 1996
Salary.
4.2.2. (a) If the Adjusted Operating Income (as defined below)
for DESI taken as a whole for calendar year 1996 (the "1996 DESI
AOI"), is less than $4,677,000 (the "Minimum DESI Target"), the 1996
DESI Bonus shall equal zero;
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(b) If the 1996 DESI AOI is equal to or greater than the Minimum
DESI Target but less than $6,236,000 (the "Base DESI Target"), the
1996 DESI Bonus shall equal the sum of (i) 20% of the Executive's 1996
Salary plus (ii) the number obtained by multiplying 20% of the
Executive's 1996 Salary by a fraction (which shall not be greater than
one), the numerator of which is the difference between the 1996 DESI
AOI and the Minimum DESI Target and the denominator of which is the
amount determined by subtracting the Minimum DESI Target from the Base
DESI Target;
(c) If the 1996 DESI AOI is equal to or greater than the Base
DESI Target but less than $9,354,000 (the "Maximum DESI Target"), the
1996 DESI Bonus shall equal the sum of (i) 40% of the Executive's 1996
Salary plus (ii) the number obtained by multiplying 40% of the
Executive's 1996 Salary by a fraction (which shall not be greater than
one), the numerator of which is the difference between the 1996 DESI
AOI and the Base DESI Target and the denominator of which is the
amount determined by subtracting the Base DESI Target from the Maximum
DESI Target; or
(d) If the 1996 DESI AOI is equal to or greater than the Maximum
DESI Target, the 1996 DESI Bonus shall equal 80% of the Executive's
1996 Salary.
4.2.3. (a) If the Adjusted Operating Income (as defined below)
for the DBS Division for calendar year 1996 (the "1996 Fourth Quarter
AOI"), is less than $3,570,000 (the "Minimum Fourth Quarter Target"),
the 1996 DBS Fourth Quarter Bonus shall equal zero;
(b) If the 1996 Fourth Quarter AOI is equal to or greater than
the Minimum Fourth Quarter Target but less than $4,760,000 (the "Base
Fourth Quarter Target"), the 1996 DBS Fourth Quarter Bonus shall equal
the sum of (i) 20% of the Executive's 1996 Salary plus (ii) the number
obtained by multiplying 20% of the Executive's 1996 Salary by a
fraction (which shall not be greater than one), the numerator of which
is the difference between the 1996 Fourth Quarter AOI and the Minimum
Fourth Quarter Target and the denominator of which is the amount
determined by subtracting the Minimum Fourth Quarter Target from the
Base Fourth Quarter Target;
(c) If the 1996 Fourth Quarter AOI is equal to or greater than
the Base Fourth Quarter Target but less than $7,140,000 (the "Maximum
Fourth Quarter Target"), the 1996 DBS Fourth Quarter Bonus shall equal
the sum of (i) 40% of the Executive's 1996 Salary plus (ii) the number
obtained by multiplying 40%
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of the Executive's 1996 Salary by a fraction (which shall not be
greater than one), the numerator of which is the difference between
the 1996 Fourth Quarter AOI and the Base Fourth Quarter Target and the
denominator of which is the amount determined by subtracting the Base
Fourth Quarter Target from the Maximum Fourth Quarter Target; or
(d) If the 1996 Fourth Quarter AOI is equal to or greater than
the Maximum Fourth Quarter Target, the 1996 DBS Fourth Quarter Bonus
shall equal 80% of the Executive's 1996 Salary.
4.2.4. For purposes of this Section 4.2., "Adjusted Operating
Income" shall mean income before deduction of corporate charges
assessed by R. R. Donnelley & Sons Company, interest, goodwill,
amortization, taxes, prior year audit adjustments, and any amounts
paid as Earn-Out Payments under a Merger Agreement among R. R.
Donnelley & Sons Company, LAN Systems, Inc. and Donnelley DBS, Inc.
dated as of May 29, 1995. "1996 Salary" shall be calculated without
regard to bonuses, commissions, expenses or other special payments
made to the Executive.
4.2.5. Any compensation paid to the Executive as Bonus shall be
in addition to the Base Salary. The 1996 Bonus, if any, calculated as
described above shall be in lieu of any other bonus otherwise due to
the Executive by virtue of her employment with R. R. Donnelley & Sons
Company and/or the Company at any time during calendar year 1996
notwithstanding any earlier dated agreement to the contrary. 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.
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 30,000 shares of Common Stock
at an exercise price equal to the initial public offering price (the
"Options"). Subject to the termination of
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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. 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 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 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 Reporting 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.
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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 receive twenty-four (24)
monthly payments 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), paid on the last day of a calendar month.
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
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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.
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 twelve (12)
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.
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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 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
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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 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.
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, or (iii) the Executive's offices are moved from their present
location to a location outside of the Chicago, Illinois Metropolitan Area.
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, 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.
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 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
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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.
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
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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 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
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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 two
(2) years 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 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
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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:
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
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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; or (v) the Executive's engaging in
activities (A) which constitute a violation of any policy, rule or
regulation adopted by the Company, including policies related to conflicts
of interest, insider trading, reimbursement of business expenses and the
like, or (B) which result in a material injury to the business, financial
condition, results of operations or prospects of the Company or its
Affiliates, as determined by the Board or a committee thereof.
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 comparable
information that the Company or any of its Affiliates have received
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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 the application of such provision in such
circumstances shall be deemed modified to permit
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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.
13.8. Governing Law. This Agreement shall be governed by and
construed in
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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
the Executive's 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/ Rhonda I. Kochlefl
-----------------------------------------------------
Name: Rhonda I. Kochlefl
Title: President, CEO
THE EXECUTIVE: /s/ Linda A. Finkel
--------------------------------------------------------
Linda A. Finkel
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EXHIBIT A
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
1997 NON-EMPLOYEE DIRECTOR STOCK PLAN
AS OF
MAY 7, 1997
1. PURPOSE OF THE PLAN. The purpose of the Donnelley Enterprise Solutions
Incorporated 1997 Non-Employee Director Stock Plan is to promote the long-term
growth of the Corporation by increasing the proprietary interest of Non-
Employee Directors in the Corporation and to attract and retain highly
qualified and capable Non-Employee Directors.
2. DEFINITIONS. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
"AWARD" means an award granted to a Non-Employee Director under the Plan
in the form of Options or Shares, or any combination thereof.
"BOARD" means the Board of Directors of the Corporation.
"CORPORATION" means Donnelley Enterprise Solutions Incorporated.
"FAIR MARKET VALUE" means, with respect to any date, the average between
the highest and lowest sale prices per Share on The Nasdaq Stock Market on
such date, provided that if there shall be no sale of Shares reported on
such date, the Fair Market Value of a Share on such date shall be deemed to
be equal to the average between the highest and lowest sale prices per
Share on The Nasdaq Stock Market for the last preceding date on which sales
of Shares were reported.
"OPTION" means an option to purchase Shares awarded under Section 8 which
does not meet the requirements of Section 422 of the Internal Revenue Code
of 1986, as amended, or any successor law.
"OPTION GRANT DATE" means the date as of which an Option is granted to a
Non-Employee Director.
"OPTIONEE" means a Non-Employee Director of the Corporation to whom an
Option has been granted or, in the event of such Non-Employee Director's
death prior to the expiration of an Option, such Non-Employee Director's
executor, administrator, beneficiary or similar person, or, in the event of
a transfer permitted by Section 7 hereof, such permitted transferee.
"NON-EMPLOYEE DIRECTOR" means a director of the Corporation who is not an
employee of the Corporation or any subsidiary of the Corporation.
"PLAN" means the Donnelley Enterprise Solutions Incorporated 1997 Non-
Employee Director Stock Plan, as amended and restated from time to time.
"SHARES" means shares of the Common Stock, par value $.01 per share, of
the Corporation.
"STOCK OPTION AGREEMENT" means a written agreement between a Non-Employee
Director and the Corporation evidencing an Option.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board
or a committee of the Board designated by the Board ("Committee"). Each member
of the Committee shall be a "Non-Employee Director" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
The Board or Committee, as applicable, shall have full power and authority
to interpret and construe the Plan and adopt such rules and regulations as it
shall deem necessary and advisable to implement and administer the Plan. All
such interpretations, rules and regulations shall be conclusive and binding on
all parties. A majority of the Board or Committee, as applicable, shall
constitute a quorum. The acts of the Board or Committee shall be either (i)
acts of a majority of the members of the Board or Committee present at any
meeting at which a quorum is present or (ii) acts approved in writing by all
of the members of the Board or Committee without a meeting.
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4. AWARDS UNDER THE PLAN. Awards in the form of Options shall be granted to
a Non-Employee Directors in accordance with Section 8. Each Option granted
under the Plan shall be evidenced by a Stock Option Agreement.
5. ELIGIBILITY. Non-Employee Directors of the Corporation shall be eligible
to participate in the Plan in accordance with Section 8.
6. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in Section
11, the aggregate number of Shares which may be issued or delivered upon the
award of Shares and the exercise of Options shall not exceed 75,000 Shares. To
the extent that Shares subject to an outstanding Option are not issued or
delivered by reason of the expiration, termination, cancellation or forfeiture
of such Option or by reason of the delivery of Shares (either actually or by
attestation) to pay all or a portion of the exercise price of such Option,
then such Shares shall again be available under the Plan. Shares of Common
Stock to be issued may be authorized and unissued Shares, treasury Shares or a
combination thereof.
7. 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 Corporation or (ii) as
otherwise set forth in the agreement relating to such Option. Each Option may
be exercised during the Optionee's lifetime only by the Optionee or the
Optionee'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 Option
and all rights thereunder shall immediately become null and void.
8. NON-ELECTIVE OPTIONS. Each Non-Employee Director shall be granted
Options, subject to the following terms and conditions:
TIME OF GRANT. On the date of the 1997 annual meeting of stockholders (or,
if later, on the date on which a person is first elected or begins to serve as
a Non-Employee Director), each person who is a Non-Employee Director
immediately after such annual meeting shall be granted an Option to purchase
5,000 Shares. On the date of each annual meeting subsequent to the 1997 annual
meeting of stockholders each person who is a Non-Employee Director immediately
after such annual meeting shall be granted an Option to purchase 5,000 shares;
provided, that such person has served as as a director of the Company for at
least nine months prior to such annual meeting.
PURCHASE PRICE. The purchase price per Share under each Option granted
pursuant to this Section 8 shall be 100% of the Fair Market Value per Share on
the Option Grant Date.
EXERCISE OF OPTIONS. Subject to Section 9, each Option shall not be
exercisable during the calendar year in which such Option is granted.
Thereafter, such Option may be exercised: (i) on or after the first January 1
occurring after its date of grant, for up to one-third of the Shares subject
to such Option on its date of grant, (ii) on or after the second January 1
occurring after its date of grant, for up to an additional one-third (two-
thirds on a cumulative basis) of the Shares subject to such Option on its date
of grant and (iii) on or after the third January 1 occurring after its date of
grant, for up to the remaining one-third (all Shares on a cumulative basis) of
the Shares subject to such Option on its date of grant. No Option shall be
exercised later than ten years after the Option Grant Date. An Option may be
exercised during the Optionee's continued service as a Non-Employee Director,
and, unless otherwise determined by the Board or Committee, as applicable, as
set forth in the Stock Option Agreement relating to the Option, for a period
not in excess of ninety days following termination of service as a Non-
Employee Director, and only within the original term of the Option; provided,
however, that if service by the Optionee as a Non-Employee Director 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 Stock Option Agreement
relating to the Option for a period not in excess of five years following
termination of service as a Non-Employee Director, but not after the
expiration of the term of the Option. In the event of the death of an Optionee
(i) while serving as a Non-Employee Director, (ii) within a period not in
excess of five years after termination of service
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as a Non-Employee Director by reason of retirement or total and permanent
disability or (iii) within ninety days after termination of service as a Non-
Employee Director for any other reason, each outstanding Option held by such
Optionee at the time of death may be exercised to the extent set forth in the
Stock Option 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. An exercisable Option, or
portion thereof, may be exercised only with respect to whole Shares.
An Option may be exercised (i) by giving written notice to the Corporation
specifying the number of whole Shares to be purchased and accompanied by
payment therefor in full (or arrangement made for such payment to the
Corporation's satisfaction) either (A) in cash, (B) in previously owned whole
Shares (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
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 Corporation 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
Corporation may reasonably request. The Board or Committee, as applicable,
shall have sole discretion to disapprove of an election pursuant to any of
clauses (B)-(D). Any fraction of a Share 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 Shares shall be delivered
until the full purchase price therefor has been paid.
9. CHANGE IN CONTROL. If while any Option 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 Corporation or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee benefit
plan of the Corporation 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 Corporation in substantially the same proportions as their ownership of
stock of the Corporation) (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 Corporation (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 Corporation'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 Corporation to effect a transaction described in
Clause (a), (c) or (d) of this Section 9) whose election by the Board or
nomination for election by the Corporation'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 Corporation approve a merger or consolidation
of the Corporation with any other corporation, other than (i) a merger or
consolidation which would result in the voting securities of the
Corporation 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 Corporation, at least 50% of the combined voting power of the
voting securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of the Corporation
(or similar transaction) in which no Person acquires more than 50% of the
combined voting power of the Corporation's then outstanding securities; or
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(d) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition
by the Corporation of all or substantially all the Corporation'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 Corporation's assets as
described above occurs (the applicable date being hereinafter referred to as
the "Acceleration Date"), all Options, whether or not then exercisable in
whole or in part, shall be fully and immediately exercisable.
10. AMENDMENT AND TERMINATION. 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. No amendment may impair the rights of an Optionee without the
consent of such Optionee.
11. 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 Option and the
purchase price per security shall be appropriately adjusted by the Board or
Committee, as applicable, such adjustments to be made in the case of
outstanding Options without an increase 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 Option, the Corporation shall pay the holder thereof, in
connection with the first exercise of such Option 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 exercise
over (B) the exercise price of such Option.
12. RESTRICTIONS ON SHARES. Each grant made hereunder shall be subject to
the requirement that if at any time the Corporation determines that the
listing, registration or qualification of Shares subject thereto upon any
securities exchange, quotation system or 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
Corporation. The Corporation may require that certificates evidencing Shares
delivered pursuant to any grant 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.
13. RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder
of the Corporation with respect to any Shares or other equity security of the
Corporation which are subject to a grant hereunder unless and until such
person becomes a stockholder of record with respect to such Shares or equity
security.
14. GOVERNING LAW. The Plan, each grant hereunder and any related Stock
Option Agreement, and all determinations made and actions taken pursuant
thereto, to the extent not otherwise governed by 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.
15. EFFECTIVE DATE. The Plan shall be submitted to the stockholders of the
Corporation for approval and, if approved, shall become effective as of the
date of such approval. The Plan shall terminate when Shares are no longer
available under the Plan unless terminated prior thereto by action of the
Board. No further grants shall be made under the Plan after termination, but
termination shall not affect the rights of any participant under any grants
made prior to termination.
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EXHIBIT B
AMENDED AND RESTATED
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
1996 STOCK INCENTIVE PLAN
AS OF
MAY 7, 1997
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, 500,000 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.
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
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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 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, as amended and restated, shall
be submitted to the stockholders of the Company for approval and, if approved,
shall become effective as of the date of such approval. 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
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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.
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 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.
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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 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
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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.
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
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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
(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"), (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 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.
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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, as amended and restated, and all grants and
awards made hereunder shall be null and void if the adoption of the Plan, as
amended and restated, is not approved by the stockholders 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.
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EXHIBIT C
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
1997 EMPLOYEE STOCK PURCHASE PLAN
AS OF
MAY 7, 1997
1. Purpose. The purpose of the Donnelley Enterprise Solutions Incorporated
1997 Employee Stock Purchase Plan (the "Plan") is to provide employees of
Donnelley Enterprise Solutions Incorporated, a Delaware corporation (the
"Company"), and its Subsidiary Companies (as defined below) added incentive to
remain employed by such companies and to encourage increased efforts to
promote the best interests of such companies by permitting eligible employees
to purchase common shares, par value $.01 per share, of the Company ("Common
Shares") at below-market prices. The Plan is intended to qualify as an
"employee stock purchase plan" under section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). For purposes of the Plan, the term
"Subsidiary Companies" shall mean all corporations which are subsidiary
corporations (within the meaning of Section 424(f) of the Code) and of which
the Company is the common parent. The Company and its Subsidiary Companies
that, from time to time, adopt the Plan are sometimes hereinafter called
collectively the "Participating Companies."
2. Eligibility. Participation in the Plan shall be open to each employee of
the Participating Companies who has been continuously employed by the
Participating Companies for at least one year (an "Eligible Employee"). No
right to purchase Common Shares hereunder shall accrue under the Plan in favor
of any person who is not an Eligible Employee as of the first day of a
Purchase Period (as defined in Section 3). Notwithstanding anything contained
in the Plan to the contrary, no Eligible Employee shall acquire a right to
purchase Common Shares hereunder if (i) immediately after receiving such
right, such employee would own 5% or more of the total combined voting power
or value of all classes of stock of the Company or any Subsidiary Company
(including any stock attributable to such employee under section 424(d) of the
Code) or (ii) for any calendar year such right would permit such employee's
aggregate rights to purchase stock under all employee stock purchase plans of
the Company and its Subsidiary Companies exercisable during such calendar year
to accrue at a rate which exceeds $25,000 of fair market value of such stock
for such calendar year.
3. Effective Date of Plan; Purchase Periods. The Plan shall become effective
on such date as may be specified by the Board of Directors (the "Board") of
the Company or the Committee (as defined in Section 11), provided it is after
the 1997 Annual Meeting. The Plan shall cease to be effective unless, within
12 months before or after the date of its adoption by the Board, it has been
approved by the shareholders of the Company at a duly-called meeting of such
shareholders.
A "Purchase Period" shall consist of the three month period beginning on
each July 1, October 1, January 1, and April 1, each commencing on or after
the effective date and prior to termination of the Plan.
4. Basis of Participation. (a) Payroll Deduction. Each Eligible Employee
shall be entitled to enroll in the Plan as of the first day of any Purchase
Period which begins on or after such employee has become an Eligible Employee.
To enroll in the Plan, an Eligible Employee shall execute and deliver a
payroll deduction authorization (the "Authorization") to the Company or its
designated agent at the time and in the manner specified by the Company. The
executed Authorization shall become effective on the first day of the Purchase
Period following the day of delivery thereof to the Company or its designated
agent. Each Authorization shall direct that payroll deductions be made by the
employee's employer for each payroll period during which the employee is a
participant in the Plan. The amount of each payroll deduction specified in an
Authorization for each such payroll period shall be a whole percentage amount
determined by the Committee, unless otherwise determined by the Committee to
be a whole dollar amount, in either case not to exceed 10%, or such lesser
percentage as may be determined by the Committee, of the participant's base
rate of pay for the Purchase Period, determined on the first day of the
Purchase Period (before withholding or other deductions), paid to him or her
by any of the Participating Companies.
Payroll deductions (and any other amount paid under the Plan) shall be made
for each participant in accordance with such participant's Authorization until
such participant's participation in the Plan terminates, such participant's
Authorization is revised or the Plan terminates, all as hereinafter provided.
C-1
<PAGE>
A participant may change the amount of his or her payroll deduction
effective as of the first day of any Purchase Period by filing a new
Authorization with the Company or its designated agent at the time and in the
manner specified by the Committee. A participant may not change the amount of
his or her payroll deduction effective as of any date other than the first day
of a Purchase Period, except that a participant may elect to terminate his or
her participation in the Plan as provided in Section 7.
Payroll deductions for each participant shall be credited to a purchase
account established on behalf of the participant on the books of the
participant's employer or such employer's designated agent (a "Purchase
Account"). At the end of each Purchase Period, the amount in each
participant's Purchase Account will be applied to the purchase from the
Company of the number of Common Shares determined by dividing such amount by
the Purchase Price (as defined in Section 5) for such Purchase Period. No
interest shall accrue at any time for any amount credited to a Purchase
Account of a participant.
(b) Other Methods of Participation. The Committee may, in its discretion,
establish additional procedures whereby Eligible Employees may participate in
the Plan by means other than payroll deduction, including, but not limited to,
delivery of funds by participants in a lump sum or automatic charges to
participants' bank accounts. Such other methods of participating shall be
subject to such rules and conditions as the Committee may establish. The
Committee may at any time amend, suspend or terminate any participation
procedures established pursuant to this paragraph without prior notice to any
participant or Eligible Employee.
5. Purchase Price. The purchase price (the "Purchase Price") per Common
Share hereunder for any Purchase Period shall be determined by the Committee,
provided, however, that such price shall be between 85% and 100% of the fair
market value of a Common Share on the last day of such Purchase Period. If
such sum results in a fraction of one cent, the Purchase Price shall be
increased to the next higher full cent. The fair market value of a Common
Share on a given day shall be deemed to be the closing sale price per share
for the Common Shares on the New York Stock Exchange on such day or, if there
shall be no such sale of Common Shares on such day, then on the next preceding
day on which there shall have been such a sale. In no event, however, shall
the Purchase Price be less than the par value of the Common Shares.
6. Issuance of Shares. The Common Shares purchased by each participant shall
be considered to be issued and outstanding to such participant's credit as of
the close of business on the last day of each Purchase Period. The total
number of Common Shares purchased by all participants during each Purchase
Period shall be issued, as of the last day in such Purchase Period, to a
nominee or agent for the benefit of the participants. A participant will be
issued a certificate for his or her shares when his or her participation in
the Plan is terminated, the Plan is terminated or upon request, but in the
last case only in denominations of at least 25 shares; provided, however, that
no certificate shall be issued to a participant who is then employed by the
Company with respect to any shares which have been outstanding to such
participant's credit for less than two years.
After the close of each Purchase Period, a report will be sent to each
participant stating the entries made to such participant's Purchase Account,
the number of Common Shares purchased and the applicable Purchase Price. In
the event that the maximum number of Common Shares are purchased by the
participant for the Purchase Period and cash remains credited to the
participant's Purchase Account, such cash shall be delivered promptly to such
participant.
7. Termination of Participation. A participant may elect at any time to
terminate his or her participation in the Plan, provided such election is
received by the Company or its designated agent in writing prior to the date
specified by the Committee for termination of participation during the
Purchase Period for which such termination is to be effective. Upon any such
termination, the cash credited to such participant's Purchase Account on the
date of such termination, one or more certificates for the number of full
Common Shares held for his or her benefit, and the cash equivalent for any
fractional share so held shall be delivered promptly to such participant. Such
cash equivalent shall be determined by multiplying the fractional share by the
fair market value of a Common Share on the last day of the Purchase Period
immediately preceding such termination, determined as provided in Section 5.
C-2
<PAGE>
If the participant dies, terminates employment with the Participating
Companies for any reason, or otherwise ceases to be an Eligible Employee, such
participant's participation in the Plan shall immediately terminate. Upon such
terminating event, the cash credited to such participant's Purchase Account on
the date of such termination, one or more certificates for the number of full
Common Shares held for such participant's benefit, and the cash equivalent of
any fractional share so held, determined as provided above in this Section 7,
shall be delivered promptly to such participant or his or her legal
representative, as the case may be.
Notwithstanding anything herein to the contrary, if a participant sells,
assigns, transfers or otherwise disposes of any shares of Common Stock which
are purchased under the Plan within two years of the date of purchase of such
shares under the Plan, such participant shall automatically cease to be
eligible to participate in the Plan on the next eight Purchase Periods next
following the date on which the Company becomes aware of the most recent such
disposition. A participant who transfers shares to a trust or brokerage
account may restore such person's right to participate in the Plan by re-
registering such shares in the participant's name within three months of
notice from the Company and delivering a copy of the certificate representing
such re-registered shares to the Compensation and Employee Benefits department
of the Company.
8. Termination or Amendment of the Plan. The Company, by action of the Board
or the Committee, may terminate the Plan at any time, in which case notice of
such termination shall be given to all participants, but any failure to give
such notice shall not impair the effectiveness of the termination.
Without any action being required, the Plan shall terminate in any event
when the maximum number of Common Shares to be sold under the Plan (as
provided in Section 12) has been purchased. Such termination shall not impair
any rights which under the Plan shall have vested on or prior to the date of
such termination. If at any time the number of Common Shares remaining
available for purchase under the Plan are not sufficient to satisfy all then-
outstanding purchase rights, the Board or Committee may determine an equitable
basis of apportioning available Common Shares among all participants.
The Board or the Committee may amend the Plan from time to time in any
respect for any reason; provided, however, no such amendment shall (a)
materially adversely affect any purchase rights outstanding under the Plan
during the Purchase Period in which such amendment is to be effected, (b)
increase the maximum number of Common Shares which may be purchased under the
Plan, (c) decrease the Purchase Price of the Common Shares for any Purchase
Period below 85% of the fair market value thereof on the last day of such
Purchase Period or (d) adversely affect the qualification of the Plan under
section 423 of the Code.
Upon termination of the Plan, one or more certificates for the number of
full Common Shares held for each participant's benefit, the cash equivalent of
any fractional share so held, determined as provided in Section 7, and, except
as otherwise provided in Section 14, the cash, if any, credited to the such
participant's Purchase Account, shall be distributed promptly to such
participant.
9. Non-Transferability. Rights acquired under the Plan are not transferable
and may be exercised only by a participant.
10. Shareholder's Rights. No Eligible Employee or participant shall by
reason of the Plan have any rights of a shareholder of the Company until he or
she shall acquire Common Shares as herein provided.
11. Administration of the Plan. The Plan shall be administered by the
Compensation Committee of the Board of Directors of Donnelley Enterprise
Solutions Incorporated (the "Committee"). In addition to the power to amend or
terminate the Plan pursuant to Section 8, the Committee shall have full power
and authority to: (i) interpret and administer the Plan and any instrument or
agreement entered into under the Plan; (ii) establish such rules and
regulations and appoint such agents as it shall deem appropriate for the
proper administration of the Plan; and (iii) make any other determination and
take any other action that the Committee deems necessary or desirable for
administration of the Plan. Decisions of the Committee shall be final,
conclusive and binding upon all persons, including the Company, any
participant and any other employee of the Company. A majority of the members
of the Committee may determine its actions and fix the time and place of its
meetings.
C-3
<PAGE>
The Plan shall be administered so as to ensure that all participants have
the same rights and privileges as are provided by section 423(b)(5) of the
Code.
12. Maximum Number of Shares. The maximum number of Common Shares which may
be purchased under the Plan is 200,000 subject, however, to adjustment as
hereinafter set forth. Common Shares sold hereunder may be treasury shares,
authorized and unissued shares, or a combination thereof. If the Company
shall, at any time after the effective date of the Plan, change its issued
Common Shares into an increased number of shares, with or without par value,
through a stock dividend or a split-up of shares, or into a decreased number
of shares, with or without par value, through a combination of shares, then,
effective with the record date for such change, the maximum number of Common
Shares which thereafter may be purchased under the Plan and the maximum number
of shares which thereafter may be purchased during any Purchase Period shall
be the maximum number of shares which, immediately prior to such record date,
remained available for purchase under the Plan and Purchase Period
proportionately increased, in case of such stock dividend or split-up, or
proportionately decreased in case of such combination of shares.
13. Miscellaneous. Except as otherwise expressly provided herein, any
Authorization, election or notice under the Plan from an Eligible Employee or
participant shall be delivered to the Company or its designated agent and,
subject to any limitations specified in the Plan, shall be effective when so
delivered. The Plan, and the Company's obligation to sell and deliver Common
Shares hereunder, shall be subject to all applicable federal and state laws,
rules and regulations, and to such approval by any regulatory or governmental
agency as may, in the opinion of counsel for the Company, be required.
14. Change in Control. In order to maintain the participants' rights in the
event of any Change in Control of the Company, as hereinafter defined, upon
such Change in Control the then current Purchase Period shall thereupon end,
and all participants' Purchase Accounts shall be applied to purchase shares
pursuant to Section 5, and the Plan shall immediately thereafter terminate.
"Change in Control" shall have the meaning assigned to such term in the
Donnelley Enterprise Solutions Incorporated Corporation 1996 Stock Incentive
Plan.
C-4
<PAGE>
EXHIBIT 11.1
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
PRO FORMA BASIC EARNINGS PER SHARE:
Net Income....................................................... $ 303 $ 625
Pro forma Common Shares outstanding(1)......................... 5,005 5,005
====== ======
Pro forma Earnings per share .................................. $ 0.06 $ 0.12
====== ======
PRO FORMA FULLY DILUTED EARNINGS PER SHARE:
Net Income....................................................... $ 303 $ 625
Pro forma Common Shares outstanding(1)......................... 5,005 5,005
Common Share equivalents applicable to stock options........... -- --
------ ------
Pro forma Common Share and Common Share equivalents............ 5,005 5,005
====== ======
Pro forma Earnings per share--fully diluted(2)................. $ 0.06 $ 0.12
====== ======
</TABLE>
- --------
(1) Pro forma Common Shares outstanding assumes the 5,000,000 common shares
outstanding upon the completion of the Offering and the 5,000 restricted
common shares issued to a key executive were outstanding for both years.
(2) This calculation is submitted in accordance with Item 601(b) 11 of
regulation S-K although it is not required by APB Opinion No. 15 because
it results in dilution of less than 3%.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into Donnelley Enterprise Solutions
Incorporated's previously filed Registration Statement on Form S-8
(Registration No. 333-15549).
Chicago, Illinois
March 24, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Rhonda I. Kochlefl his
true and lawful attorney-in-fact, with full power and authority, for the purpose
of executing, in the name and on behalf of the undersigned as a director and/or
officer of Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company"), an Annual Report on Form 10-K for the year ended December 31,
1996, and any and all amendments to such Annual Report, and to each thereof is
so executed, for filing with the Securities and Exchange Commission. The
undersigned hereby grants unto such attorney-in-fact full power of substitution
and revocation in the premises and hereby ratifies and confirms all that such
attorney-in-fact may do or cause to be done by virtue of these presents.
Dated: March 23, 1997
/s/ Daniel I. Malina
-----------------------------------------
Name: Daniel I. Malina
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Rhonda I. Kochlefl his
true and lawful attorney-in-fact, with full power and authority, for the purpose
of executing, in the name and on behalf of the undersigned as a director and/or
officer of Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company"), an Annual Report on Form 10-K for the year ended December 31,
1996, and any and all amendments to such Annual Report, and to each thereof is
so executed, for filing with the Securities and Exchange Commission. The
undersigned hereby grants unto such attorney-in-fact full power of substitution
and revocation in the premises and hereby ratifies and confirms all that such
attorney-in-fact may do or cause to be done by virtue of these presents.
Dated: March 22, 1997
/s/ Leo S. Spiegel
-----------------------------------------
Name: Leo S. Spiegel
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Rhonda I. Kochlefl his
true and lawful attorney-in-fact, with full power and authority, for the purpose
of executing, in the name and on behalf of the undersigned as a director and/or
officer of Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company"), an Annual Report on Form 10-K for the year ended December 31,
1996, and any and all amendments to such Annual Report, and to each thereof is
so executed, for filing with the Securities and Exchange Commission. The
undersigned hereby grants unto such attorney-in-fact full power of substitution
and revocation in the premises and hereby ratifies and confirms all that such
attorney-in-fact may do or cause to be done by virtue of these presents.
Dated: March 23, 1997
/s/ C. I. Moran
-----------------------------------------
Name: C. I. Moran
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Rhonda I. Kochlefl his
true and lawful attorney-in-fact, with full power and authority, for the purpose
of executing, in the name and on behalf of the undersigned as a director and/or
officer of Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company"), an Annual Report on Form 10-K for the year ended December 31,
1996, and any and all amendments to such Annual Report, and to each thereof is
so executed, for filing with the Securities and Exchange Commission. The
undersigned hereby grants unto such attorney-in-fact full power of substitution
and revocation in the premises and hereby ratifies and confirms all that such
attorney-in-fact may do or cause to be done by virtue of these presents.
Dated: March 23, 1997
/s/ W. Ed Tyler
-----------------------------------------
Name: W. Ed Tyler
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Rhonda I. Kochlefl his
true and lawful attorney-in-fact, with full power and authority, for the purpose
of executing, in the name and on behalf of the undersigned as a director and/or
officer of Donnelley Enterprise Solutions Incorporated, a Delaware corporation
(the "Company"), an Annual Report on Form 10-K for the year ended December 31,
1996, and any and all amendments to such Annual Report, and to each thereof is
so executed, for filing with the Securities and Exchange Commission. The
undersigned hereby grants unto such attorney-in-fact full power of substitution
and revocation in the premises and hereby ratifies and confirms all that such
attorney-in-fact may do or cause to be done by virtue of these presents.
Dated: March 23, 1997
/s/ Luke F. Botica
-----------------------------------------
Name: Luke F. Botica
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8910
<SECURITIES> 0
<RECEIVABLES> 26535
<ALLOWANCES> (460)
<INVENTORY> 4144
<CURRENT-ASSETS> 43257
<PP&E> 25841
<DEPRECIATION> (13195)
<TOTAL-ASSETS> 76176
<CURRENT-LIABILITIES> 25108
<BONDS> 0
<COMMON> 50
0
0
<OTHER-SE> 49402
<TOTAL-LIABILITY-AND-EQUITY> 76176
<SALES> 0
<TOTAL-REVENUES> 96464
<CGS> 0
<TOTAL-COSTS> 76354
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 248
<INTEREST-EXPENSE> 384
<INCOME-PRETAX> 1698
<INCOME-TAX> 1073
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
