<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Donnelley Enterprise Solutions Incorporated
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
161 NORTH CLARK STREET
CHICAGO, ILLINOIS 60601
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 6, 1998
To the Stockholders of
Donnelley Enterprise Solutions Incorporated:
The Annual Meeting of Stockholders of Donnelley Enterprise Solutions
Incorporated, a Delaware corporation, will be held at 10:00 a.m. on May 6,
1998 at 161 North Clark Street, Suite 2850, Chicago, Illinois 60601, for the
following purposes:
1. To elect two (2) persons to the Board of Directors;
2. To ratify the selection of Arthur Andersen LLP as independent auditors
of the Company for 1998; and
3. To transact such other business as may properly come before the meeting
or any adjournments thereof.
A proxy statement and proxy card with respect to the meeting are enclosed.
The Annual Report to Stockholders and the Annual Report on Form 10-K of the
Company for the year ended December 31, 1997 are also enclosed.
THE BOARD OF DIRECTORS HAS FIXED THE CLOSE OF BUSINESS ON MARCH 16, 1998 AS
THE RECORD DATE FOR THE DETERMINATION OF STOCKHOLDERS ENTITLED TO NOTICE OF,
AND TO VOTE AT, THE ANNUAL MEETING AND ANY ADJOURNMENTS THEREOF.
WE ENCOURAGE YOU TO ATTEND THE ANNUAL MEETING AND VOTE YOUR SHARES IN
PERSON. HOWEVER, IF YOU ARE UNABLE TO ATTEND THE MEETING, PLEASE COMPLETE THE
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY USING THE ENVELOPE PROVIDED SO THAT
YOUR SHARES WILL BE REPRESENTED AT THE MEETING. YOU MAY REVOKE YOUR PROXY AT
ANY TIME BEFORE IT IS ACTUALLY VOTED BY NOTICE IN WRITING TO THE UNDERSIGNED.
YOUR ATTENTION IS DIRECTED TO THE ATTACHED PROXY STATEMENT AND ACCOMPANYING
PROXY.
By Order of the Board of Directors,
LOGO
RHONDA I. KOCHLEFL
Chairman, President and Chief
Executive Officer
Chicago, Illinois
April 9, 1998
<PAGE>
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
161 NORTH CLARK STREET
CHICAGO, ILLINOIS 60601
PROXY STATEMENT
April 9, 1998
This proxy statement and accompanying proxy are first being furnished to the
stockholders of Donnelley Enterprise Solutions Incorporated, a Delaware
corporation (the "Company"), beginning on or about April 9, 1998, in
connection with the solicitation by the Board of Directors of the Company (the
"Board") of proxies for use at the Company's 1998 Annual Meeting of
Stockholders to be held at 161 North Clark Street, Suite 2850, Chicago,
Illinois 60601, at 10:00 a.m. CST, on May 6, 1998, and at any adjournments
thereof (the "Meeting"), for the purposes set forth in the attached Notice of
Annual Meeting of Stockholders and in this proxy statement.
An Annual Report to Stockholders, containing condensed financial statements
for the fiscal year ended December 31, 1997, is being mailed together with the
Company's Annual Report on Form 10-K and this proxy statement to all
stockholders entitled to vote at the meeting. The Annual Report to
Stockholders contains condensed financial statements for the three years ended
December 31, 1997, and certain other information concerning the Company. The
Annual Report to Stockholders and condensed financial statements and the
Annual Report on Form 10-K are neither part of this proxy statement nor
incorporated by reference herein.
The Company's common stock, par value $.01 per share ("Common Stock"), is
the only issued and outstanding class of stock. Only stockholders of record as
of the close of business on March 16, 1998 (the "Record Date") will be
entitled to notice of, and to vote at, the Meeting and any adjournments
thereof. As of the Record Date, 5,005,000 shares of Common Stock were issued
and outstanding. Each share outstanding as of the Record Date entitles its
holder to one vote per share for each proposal submitted for stockholder
consideration. Stockholders may vote in person or by proxy. Execution of a
proxy will not in any way affect a Stockholder's right to attend the meeting
and vote in person.
A proxy, in the enclosed form, which is properly executed, duly returned to
the Company or its authorized representatives or agents and not revoked will
be voted in accordance with the stockholder's instructions contained in the
proxy. If no instructions are indicated on the proxy, the shares represented
thereby will be voted (i) FOR the election of the two directors nominated by
the Board, (ii) FOR the ratification of Arthur Andersen LLP as independent
auditors of the Company for 1998 and (iii) on such other matters that may
properly come before the Meeting, in accordance with the best judgment of the
persons named in the proxy. Any stockholder submitting a proxy may revoke it
at any time before it is exercised by delivering written notice thereof to the
Chairman of the Company. Any stockholder attending the Meeting may vote in
person whether or not the stockholder has previously filed a proxy. Presence
at the Meeting by a stockholder who has signed a proxy does not in itself
revoke the proxy.
The Board knows of no other matter to be presented at the meeting. If any
other matter should be presented at the meeting upon which a vote may be
properly taken, shares represented by all proxies received by the Board will
be voted with respect thereto in accordance with the best judgment of the
persons named as proxies therein.
A proxy submitted by a stockholder may indicate that all or a portion of the
shares represented by such proxy are not being voted by such stockholder with
respect to a particular matter. This could occur, for example, when a broker
is not permitted to vote stock held in street name on certain matters in the
absence of instructions from the beneficial owner of such stock. The shares
subject to any such proxy which are not being voted with respect to a
particular matter ("non-voted shares") will be considered shares not present
and entitled to vote on such matter, although such shares may be considered
present and entitled to vote for other purposes and will
1
<PAGE>
count for purposes of determining the presence of a quorum. Abstentions will
likewise be considered present and entitled to vote for purposes of
determining the presence of a quorum.
The presence, either in person or by proxy, of the holders of a majority of
the shares entitled to vote will constitute a quorum at the Meeting. The
directors will be elected by the affirmative vote of a plurality of the votes
cast in the election of directors, provided a quorum is present. Stockholders
are not allowed to cumulate their votes in the election of directors.
Abstentions and non-voted shares are not treated as votes cast and therefore
will not affect the outcome of the election of directors. If a quorum is
present at the meeting, the ratification of Arthur Andersen LLP as independent
auditors of the Company for 1998 requires the affirmative vote of a majority
of the shares of Common Stock present in person or by proxy at the meeting and
entitled to vote on such matter. Non-voted shares with respect to such matter
will not affect the determination of whether such matter is approved.
Votes cast by proxy or in person at the Meeting will be tabulated by the
election inspectors appointed for the Meeting and such election inspectors
will determine whether or not a quorum is present.
OWNERSHIP OF CAPITAL STOCK
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Stock by all persons known to the Company
to be the beneficial owner of more than 5% of the outstanding Common Stock as
of the dates set forth below. The information set forth below is based on a
review of statements filed with the Securities and Exchange Commission (the
"Commission") pursuant to Section 13(d) and 13(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS NUMBER OF CLASS
- ---------------- --------- --------
<S> <C> <C>
R.R. Donnelley & Sons Company............................... 2,140,000 42.76%
77 West Wacker Drive
Chicago, Illinois 60601
The Kaufmann Fund, Inc...................................... 719,500 14.39%
140 E. 45th Street, 43rd Floor
New York, New York 10017
Trimark Financial Corporation............................... 426,700 8.5%
Trimark Investment Management, Inc.
One First Canadian Place, Suite 5600
P.O. Box 487
Toronto, Canada M5X 1E5
T. Rowe Price Associates, Inc............................... 350,000 6.9%
T. Rowe Price New Horizons Fund, Inc.
100 E. Pratt Street
Baltimore, Maryland 21202
Kennedy Capital Management, Inc............................. 313,900 6.3%
10829 Olive Blvd.
St. Louis, Missouri 63141
</TABLE>
OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 1, 1998 by each director, each of the
executive officers named in the table under "Compensation and
2
<PAGE>
Other Information Concerning Directors and Executive Officers--Executive
Compensation--Summary Compensation Table" and all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP(2) OF CLASS
- ---------------- ------------ ----------
<S> <C> <C>
Rhonda I. Kochlefl(1).................................. 24,975 *
Leo S. Spiegel......................................... 12,500 *
Robert A. Lento........................................ 7,682 *
Linda A. Finkel........................................ 11,500 *
David J. Shea.......................................... 5,750(3) *
Gregory A. Stoklosa.................................... -- *
W. Ed Tyler............................................ 1,667 *
Charles F. Moran....................................... 1,667 *
Directors and executive officers as a group (10
persons).............................................. 60,091(1) 1.2%
</TABLE>
- --------
*Less than one percent.
(1) Includes 5,000 shares of restricted stock granted to Ms. Kochlefl on
November 5, 1996, one quarter of which vested on November 5, 1997.
(2) Unless otherwise indicated, the named person possesses sole voting power
and investment power with respect to the shares. The shares shown include
shares issuable pursuant to options held by the respective person that may
be exercised within 60 days as follows: Ms. Kochlefl--15,000; Mr.
Spiegel--10,000 (such options will terminate on April 15, 1998); Mr.
Lento--6,250; Ms. Finkel--7,500; Mr. Shea--3,750; Mr. Tyler--1,667; and
Mr. Moran--1,667.
(3) Mr. Shea shares voting and dispositive power with respect to 2,000 shares
of Common Stock.
1. ELECTION OF DIRECTORS
The Board consists of five members and is divided into three classes serving
staggered terms as follows: Class I, comprised of one person and serving for a
term expiring at the 2000 Annual Meeting of Stockholders; Class II, comprised
of two persons and serving for a term expiring at the 1998 Annual Meeting of
Stockholders; and Class III, comprised of two persons and serving for a term
expiring at the 1999 Annual Meeting of Stockholders. Following the expiration
of the initial term, directors will serve for three year terms. Two directors
are to be elected to Class II at the Meeting. Each of the nominees is
currently serving as a director of the Company. The nominees for Class II, if
elected, will continue in office until the 2001 Annual Meeting of
Stockholders.
Shares represented by all proxies received by the Board and not so marked as
to withhold authority to vote for any individual director or for all directors
will be voted "FOR" the election of Leo S. Spiegel and Gregory A. Stoklosa to
Class II. The Board knows of no reason why either of the nominees should be
unable or unwilling to serve, but if such should be the case, proxies will be
voted in accordance with the best judgment of the persons named as proxies for
such person or persons as may be designated by the Board or the number of
directors constituting the full Board may be reduced.
The affirmative vote of a plurality of votes cast in the election of
directors is required to elect each of Leo S. Spiegel and Gregory A. Stoklosa
as a director in Class II.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES AS DIRECTORS OF
THE COMPANY.
3
<PAGE>
INFORMATION WITH RESPECT TO NOMINEES AND CONTINUING DIRECTORS
The following sets forth certain information about each of the Board's
nominees for election at the Meeting and each director whose term will
continue after the Meeting.
<TABLE>
<CAPTION>
TERM EXPIRES
NAME AGE (CLASS) POSITION
- ---- --- ------------ ------------------------------
<S> <C> <C> <C>
Rhonda I. Kochlefl.............. 39 1999 (III) Chairman, President and Chief
Executive Officer and Director
Charles F. Moran................ 68 2000 (I) Director
Leo S. Spiegel.................. 36 2001 (II) Director
Gregory A. Stoklosa............. 42 2001 (II) Director
W. Ed Tyler..................... 45 1999 (III) Director
</TABLE>
CLASS II--NOMINEES TO SERVE THREE YEARS UNTIL 2001 ANNUAL MEETING
GREGORY A. STOKLOSA has been Vice President and Treasurer of R.R. Donnelley
& Sons Company ("R.R. Donnelley") since January 1996. Mr. Stoklosa joined R.R.
Donnelley in 1993 as Director, Financial Services and in 1994 was promoted to
Assistant Treasurer, Global Corporate Finance. Prior to joining R.R.
Donnelley, Mr. Stoklosa was Assistant Treasurer for Kraft General Foods, Inc.
Mr. Stoklosa has been a director of the Company since January 1998, replacing
Daniel I. Malina who resigned from the Board of Directors at that time.
LEO S. SPIEGEL has been the President and Chief Executive Officer of
Sandpiper Networks, Inc., an internet content distribution company, and a
principal in The Joleo Group since January 1998. He served as Senior Vice
President and Chief Technology Officer of the Company from February 1996 to
January 1998. He served as director and the co-founder, Chief Technology
Officer and Executive Vice President of LANSystems, Inc. from May 1991 until
its acquisition by R.R. Donnelley in June 1995. From June 1989 until May 1991,
he was director and the co-founder and Executive Vice President of Sales and
Marketing of LANSystems, Inc. Prior to June 1989 he was the founder, Chairman
and President of Integrated Analysis, Inc., which merged with LANSystems, Inc.
in 1989. Mr. Spiegel has been a director of the Company since February 1996.
CLASS III--SERVING UNTIL 1999 ANNUAL MEETING
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 Donnelley Business Services, and from June 1995
to February 1996, she was the Chairman of LANSystems, Inc. From 1993 to
January 1995, she was Vice President, Division Director of Donnelley Business
Services. From 1988 to 1991, she was General Manager for the eastern region of
Donnelley Business Services, for which she was responsible for all sales and
operations. Ms. Kochlefl has been a director of the Company since February
1996.
W. ED TYLER has been Executive Vice President and Chief Technology Officer
of R.R. Donnelley since November 1997. From January 1996 to November 1997, he
was the Executive Vice President and Sector President, Information Management
Sector of R.R. Donnelley. Mr. Tyler joined R.R. Donnelley in 1974 and has held
a number of positions, including President, Documentation Services and
President, Networked Services Sector. Mr. Tyler has been a director of the
Company since February 1996.
CLASS I--SERVING UNTIL 2000 ANNUAL MEETING
CHARLES F. MORAN was the Senior Vice President of Administration of Sears,
Roebuck & Co. and a member of the Sears Management Committee from 1989 to
December 1993 when he retired. Mr. Moran has served as an outside director of
Thermadyne Holdings Corporation since 1994, SPS Transactions Services, Inc.
since 1985, Hurley State Bank since 1996 and Advantica Restaurant Group, Inc.
since January 1998. He has also been a
4
<PAGE>
director of Homan-Arthington Foundation and West Side Affordable Housing, Inc.
since 1995 and 1991, respectively. Mr. Moran has been a director of the
Company since March 1997.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has two standing committees: the Audit Committee and the
Compensation Committee, each of which was formed in 1997. The Board held nine
meetings during 1997.
The Audit Committee is responsible for reviewing the Company's annual and
quarterly financial statements with management and the Company's independent
auditors and consulting with management and the auditors regarding the
adequacy of financial and accounting procedures and controls. The Audit
Committee recommends to the Board the retention of the Company's independent
auditors and, when circumstances warrant, selection of new auditors, consults
with the auditors regarding the audit, annually evaluates the auditors'
performance and reviews fees paid to the independent auditors for audit and
non-audit functions and evaluates the impact of non-audit services on the
auditors' independence. Currently, the members of the Audit Committee are Mr.
Tyler (Chairman) and Mr. Moran. The Audit Committee held one meeting during
1997.
The Compensation Committee is responsible for reviewing and making
recommendations to the Board on all compensation, including all option grants
for executive officers. The Compensation Committee is also responsible for
reviewing the structure of the Company's bonus plans. The Compensation
Committee also administers the Company's Amended and Restated 1996 Stock
Incentive Plan ("1996 Plan"), 1997 Employee Stock Purchase Plan and 1997 Non-
Employee Director Stock Plan ("1997 Plan"). The Compensation Committee is
responsible for reviewing the Board's performance, recommending changes in
Board compensation and other administrative matters relating to the Board. In
addition, the Compensation Committee recommends nominees for election to the
Board. Currently, the members of the Compensation Committee are Mr. Moran
(Chairman) and Mr. Tyler. The Compensation Committee held four meetings during
1997.
2. SELECTION OF AUDITORS
The Board of Directors recommends to the stockholders the ratification of
the selection of Arthur Andersen LLP, independent auditors, to audit the
accounts of the Company for 1998. In the event the stockholders fail to ratify
the appointment, the Board of Directors will consider whether or not to retain
such firm. Even if the selection is ratified, the Board of Directors, in its
discretion, may select a new independent accounting firm at any time during
the year, if the Board of Directors feels that such a change would be in the
best interest of the Company and its stockholders.
Arthur Andersen LLP served as the Company's independent auditors for fiscal
1997. Representatives of that firm are expected to appear at the Annual
Meeting, will have an opportunity to make a statement, if they wish to do so,
and will be available to answer appropriate questions from stockholders at
that time.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF ARTHUR
ANDERSEN LLP.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's Common Stock
(collectively, "Reporting Persons") to file an initial report of beneficial
ownership and certain reports of changes in beneficial ownership of the Common
Stock with the Commission. Such persons are required by regulations of the
Commission to furnish the Company with copies of all such filings. Based on
its review of the copies of such filings received by the Company with respect
to 1997, the Company believes that all Reporting Persons complied with all
Section 16(a) filing requirements in 1997.
5
<PAGE>
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the Company's
Chief Executive Officer and the other four most highly compensated executive
officers of the Company serving as such on December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- --------------------------
NUMBER
OF SECURITIES
UNDERLYING ALL OTHER
OTHER ANNUAL OPTIONS COMPENSATION
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION GRANTED (3) (4)
POSITION YEAR $ $ $ # $
- ------------------ ------ ------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Rhonda I. Kochlefl...... 1997 300,000 -- -- -- --
Chairman, President and
Chief 1996 224,637 -- 9,644 60,000 --
Executive Officer 1995 186,625 45,724 5,925 5,000 --
Leo S. Spiegel.......... 1997 249,996 -- -- -- --
Former Senior Vice
President 1996 229,166 -- 3,946 40,000 813,525
and Chief Technology
Officer(1) 1995 204,470 122,445(2) -- 4,000 356,412
Robert A. Lento......... 1997 201,250 -- -- 25,000 --
President, LANSystems 1996 -- -- -- -- --
1995 -- -- -- -- --
Linda A. Finkel......... 1997 184,992 104,292 -- -- --
President, Donnelley
Business 1996 160,181 29,934 4,972 30,000 --
Services 1995 123,574 26,972 4,787 3,000 --
David J. Shea........... 1997 179,167 37,000 -- 15,000 --
President, Systems
Management 1996 140,692 28,477 5,211 15,000 --
Group 1995 126,492 22,136 4,024 3,000 --
</TABLE>
- --------
(1) Mr. Spiegel ceased being Senior Vice President and Chief Technology
Officer effective January 15, 1998.
(2) Includes $40,670 paid in March 1996 to Mr. Spiegel under the provisions of
the LANSystems, Inc. earnout that related to achievement in 1995 of
specified financial targets.
(3) The stock options reflected in the table for the year 1995 represent
options to purchase shares of common stock, par value $1.25 per share, of
R.R. Donnelley.
(4) Amounts shown for 1995 represent payments made to Mr. Spiegel (i) at the
closing of the acquisition of LANSystems, Inc. in June 1995 in respect of
their LANSystems, Inc. common stock options and (ii) in March 1996 under
provisions of the LANSystems, Inc. earnout that relate to such options and
the achievement in 1995 of specified financial targets. Amounts shown for
1996 represent payments made to Mr. Spiegel prior to the Company's initial
public offering of Common Stock on November 5, 1996 (the "IPO") in final
payment of the LANSystems, Inc. earnout obligations.
6
<PAGE>
OPTION GRANTS IN 1997
The following table shows information for individuals named in the Summary
Compensation Table regarding grants of stock options to them during the year
ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED GRANT DATE
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE PRESENT VALUE
NAME GRANTED (#)(1)(2) 1997 ($/SH) EXPIRATION DATE ($)(3)
- ---- -------------------- ---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Rhonda I. Kochlefl...... -- -- -- -- --
Leo S. Spiegel.......... -- -- -- -- --
Robert A. Lento......... 25,000(4) 25% 10.50 3/10/2007 $178,490
Linda A. Finkel......... -- -- -- -- --
David J. Shea........... 15,000 15% 10.50 3/10/2007 $107,094
</TABLE>
- --------
(1) Options become exercisable (at fair market value on the date of grant)
over a four year period, with one-quarter of the options becoming
exercisable on each of the first four anniversaries of the date of grant,
unless the vesting schedule is accelerated to become fully exercisable
upon death, retirement, disability or a change in control as defined in
the Company's 1996 Plan.
(2) Does not include options granted in February 1998 with an exercise price
of $9.875 per share as follows: Ms. Kochlefl--49,000; Ms. Finkel--27,000;
Mr. Lento--10,000; and Mr. Shea--16,000.
(3) The Black-Scholes option pricing method has been used to calculate present
value as of date of grant. The present value as of the date of grant,
calculated using the Black-Scholes method, is based on assumptions about
future interest rates, stock price volatility and dividend yield. The
Black-Scholes model is a complicated mathematical formula widely used to
value exchange traded options. However, stock options granted by the
Company to its officers differ from exchange traded options in three key
respects: options granted by the Company to its officers are long-term,
non-transferable and subject to vesting restrictions while exchange traded
options are short-term and can be exercised or sold immediately in a
liquid market. The Black-Scholes model relies on several key assumptions
to estimate the present value of options, including the volatility of, and
dividend yield on, the security underlying the option, the risk-free rate
of return on the date of grant and the term of the option. In calculating
the grant date present values set forth in the table, a factor of 78.4%
has been assigned to the volatility of the Common Stock; based on the
average volatility of the Company's comparable stocks, the yield on Common
Stock has been set at 0%; based upon the fact that the Company does not
anticipate paying cash dividends in the foreseeable future, the risk-free
rate of return has been fixed at 6.4%, the rate for a five year U.S.
Treasury Note on the date of grant as reported in the Federal Reserve
Statistical Release, and the exercise of the options has been assumed to
occur at the end of the expected option life of seven years. There is no
assurance that these assumptions will prove to be true in the future.
Consequently, the grant date present values set forth in the table are
only theoretical values and may not accurately determine present value.
The actual value, if any, that may be realized by each individual will
depend on the market price of Common Stock on the date of exercise.
(4) Replaces a cancelled option to purchase 25,000 shares of Common Stock at
an exercise price of $25.00. The cancelled option had an expiration date
of January 13, 2007 and a grant date present value of $414,750.
7
<PAGE>
AGGREGATED OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth certain information for the individuals named
in the Summary Compensation Table on stock option exercises and the number and
value of such individuals' unexercised options at December 31, 1997. None of
the named individuals exercised options to purchase Common Stock in 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/97 (#) OPTIONS AT 12/31/97 ($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Rhonda I. Kochlefl.......... 15,000 45,000 $ 0 $ 0
Leo S. Spiegel(1)........... 10,000 30,000 0 0
Robert A. Lento............. -- 25,000 -- 0
Linda A. Finkel............. 7,500 22,500 0 0
David J. Shea............... 3,750 26,210 0 0
</TABLE>
- --------
(1) Pursuant to the 1996 Plan, Mr. Spiegel's stock options will terminate on
April 15, 1998.
COMPENSATION OF DIRECTORS
Each director receives $1,000 and reimbursement for expenses incurred for
each meeting of the Board or any of its committees that such director attends.
In addition, directors who serve as a committee chairperson receive an annual
fee of $2,000.
Pursuant to the 1997 Plan, directors who are not employees of the Company
("non-employee directors") receive an annual grant of options to purchase
5,000 shares of Common Stock at a price equal to the fair market value of a
share of Common Stock on the date of grant. All such option grants become
exercisable over a three year period, with one-third of the options becoming
exercisable on the first, second and third January 1 occurring after their day
of grant.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Ms. Kochlefl entered into a four-year employment agreement with the Company
commencing on November 5, 1996, the date of the closing of the IPO. Pursuant
to the agreement, Ms. Kochlefl earned a base salary of $300,000 with a bonus
opportunity for 1997 to earn up to 100% of base salary if certain pre-
established net income criteria are met by the Company. Bonus opportunities
for 1998, and later years, will be reviewed and approved by the Board or a
committee of the Board.
Ms. Kochlefl's employment agreement provides for a severance payment of up
to 27 months' base salary, depending on the date of severance, where
termination is by the Company for any reason other than for cause or by the
executive upon breach by the Company of the agreement or for good reason. In
addition, 100% of all options and restricted stock awards held by the
executive will vest on such termination. A severance payment will not be
payable and options and restricted stock awards will not vest where
termination is by the Company for cause, by the executive for any reason other
than upon breach by the Company of the agreement or for good reason, or by
reason of the executive's retirement or death. Any severance payment would be
made in a single payment at termination. Ms. Kochlefl's agreement also
contains customary provisions providing for the non-disclosure of confidential
information and an agreement not to compete with the Company for a period of
24 months after the termination of the agreement.
Ms. Finkel, Mr. Lento and Mr. Shea each entered into a four-year employment
agreement with the Company commencing on November 5, 1996, January 9, 1997 and
March 1, 1997, respectively. Pursuant to the agreements, Ms. Finkel, Mr. Lento
and Mr. Shea earned a base salary of $185,000, $210,000 and $175,000,
respectively, with a bonus opportunity for 1997 to earn up to 80% of base
salary if certain pre-established net income criteria are met by the Company.
Bonus opportunities for 1998, and later years, will be reviewed and approved
by the Board or a committee of the Board.
8
<PAGE>
Each of Ms. Finkel's, Mr. Lento's and Mr. Shea's employment agreement
provides for a severance payment of 24 months' base salary, depending on the
date of severance, where termination is by the Company for any reason other
than for cause or by the executive upon breach by the Company of the agreement
or for good reason. In addition, 100% of all options and restricted stock
awards held by the executive will vest on such termination. A severance
payment will not be payable and options and restricted stock awards will not
vest where termination is by the Company for cause, by the executive for any
reason other than upon breach by the Company of the agreement or for good
reason, or by reason of the executive's retirement or death. Severance
payments would be made monthly. Each agreement also contains customary
provisions providing for the non-disclosure of confidential information and an
agreement not to compete with the Company for a period of 24 months after the
termination of the agreement.
Mr. Spiegel entered into a four-year employment agreement with the Company
commencing on November 5, 1996. Pursuant to the agreement, Mr. Spiegel earned
a base salary of $250,000 with a bonus opportunity for 1997 to earn up to 80%
of base salary if certain pre-established net income criteria are met by the
Company. Mr. Spiegel's employment agreement terminated effective January 15,
1998. Pursuant to the terms of the agreement, Mr. Spiegel remains subject to
customary provisions providing for the non-disclosure of confidential
information and an agreement not to compete with the Company for a period of
24 months after the termination of the agreement.
10-YEAR OPTION REPRICING
The table below provides certain information relating to grants of stock
options made by the Company to executive officers in exchange for previously
granted options since the Company commenced trading on The Nasdaq Stock Market
November 5, 1996.
<TABLE>
<CAPTION>
NUMBER OF MARKET PRICE EXERCISE
SECURITIES OF STOCK PRICE NEW LENGTH OF ORIGINAL
UNDERLYING AT TIME OF AT TIME OF EXERCISE TERM REMAINING AT
NAME DATE OPTIONS REPRICED REPRICING REPRICING PRICE DATE OF REPRICING
- ---- -------------- ---------------- ------------ ---------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Lento March 10, 1997 25,000 $10.50 $25.00 $10.50 9 years, 10 months
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Prior to the formation of the Compensation Committee on March 10, 1997, each
of Rhonda I. Kochlefl, Chairman, President and Chief Executive Officer, and
Leo S. Spiegel, Former Senior Vice President and Chief Technology Officer,
were members of the Company's Board and participated in deliberations
concerning executive officer compensation.
REPORT ON EXECUTIVE COMPENSATION
1997 Compensation of Executive Officers
Each of Ms. Kochlefl, Mr. Spiegel, Ms. Finkel, Mr. Lento and Mr. Shea was
compensated pursuant to a four-year employment agreement with the Company
providing for a minimum annual base salary and a bonus opportunity for 1997 if
certain pre-established 1997 net income criteria were met by the Company. Each
of Ms. Kochlefl's, Mr. Spiegel's and Ms. Finkel's agreements were approved by
the entire Board in October 1996. Mr. Lento's and Mr. Shea's agreements were
ratified by the entire Board on May 7, 1997.
W. Ed Tyler was appointed as a member of the Compensation Committee of the
Board on February 4, 1998. Accordingly, he did not participate in compensation
decisions made by the Compensation Committee prior to that date.
Compensation Policy Regarding Executive Officers
The Compensation Committee, whose current members are Mr. Moran and Mr.
Tyler, is responsible for making decisions regarding the annual salary, short-
term cash and long-term stock incentive compensation, and
9
<PAGE>
other compensation of executive officers, including the named executive
officers. It is expected that the Compensation Committee will make
recommendations regarding (i) the establishment of the target percentage of
each executive officer's total compensation package that is comprised of
salary, short-term cash and long-term stock incentive compensation, and other
compensation, (ii) the base salary of each executive officer, and (iii) the
establishment of performance criteria under annual and long-term awards that
tie such awards to Company performance. The Compensation Committee will also
determine the size and terms of any stock option or other stock-based awards
made under the 1996 Plan and the 1997 Plan.
Tax laws limit the deduction a publicly-held corporation is allowed for
compensation paid to the chief executive officer and to the four most highly
compensated executive officers other than the chief executive officer.
Generally, amounts paid in excess of $1 million to a covered executive, other
than performance-based compensation, cannot be deducted. The Company will
consider ways to maximize the deductibility of executive compensation but has
reserved the right to compensate executive officers in a manner commensurate
with performance and the competitive environment for executive talent. As a
result, some portion of executive compensation paid to an executive officer
whose compensation is subject to the deduction limit of Section 162(m) may not
be deductible by the Company in future years.
Compensation of Chairman
Ms. Kochlefl's 1997 compensation was determined in accordance with her
employment agreement with the Company, which became effective on November 5,
1996, the closing date of the IPO. The terms of Ms. Kochlefl's employment
agreement were determined by the Human Resources Committee of R.R. Donnelley
and were approved by the Board in October 1996. Under the employment
agreement, Ms. Kochlefl was paid an annualized base salary of $300,000 with a
bonus opportunity for 1997 to earn up to 100% of base salary if certain pre-
established 1997 net income criteria were met by the Company. In 1997, such
minimum net income criteria were not met and, therefore, Ms. Kochlefl did not
receive a bonus.
Replacement Grants
On March 10, 1997, the Board of Directors approved the replacement of
options to purchase 25,000 shares of Common Stock held by Robert A. Lento. The
Board originally granted 25,000 options with an exercise price of $25.00 per
share to Mr. Lento on January 13, 1997 in accordance with his employment
agreement. On March 10, 1997 these options were cancelled and Mr. Lento was
granted 25,000 options with an exercise price of $10.50 per share. Soon after
the Board granted the original options to Mr. Lento, the Company's stock
dropped in price due to events that occurred prior to Mr. Lento joining the
Company. The Board made the replacement grant in order to more accurately
reflect the fair market value of the Common Stock of the Company at the time
that Mr. Lento became President of LANSystems in order to give Mr. Lento the
proper incentives to improve the performance of that division. On February 11,
1998, the Compensation Committee approved a program through which the Company
would offer to cancel existing stock options held by non-executive employees
and reissue one option for every two options cancelled. The newly issued
options will have an exercise price of $9.875 per share. The Compensation
Committee determined that this program was necessary to enhance employee
retention and restore employee incentives.
This report has been prepared by the following members of the Compensation
Committee:
Charles F. Moran
W. Ed Tyler
10
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return of the
Company's Common Stock from October 31, 1996 (the date that trading in the
Common Stock commenced on the Nasdaq Stock Market's National Market) to
December 31, 1997 with: (a) the Nasdaq National Market Index; (b) a Peer Group
Index.
STOCK PERFORMANCE GRAPH
LOGO
<TABLE>
<CAPTION>
10/31/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
-------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Donnelley Enterprise
Solutions Incorporated..... 100.00 98.00 42.00 41.50 37.50 32.00
Nasdaq National Market...... 100.00 105.70 100.00 118.00 138.00 128.50
Peer Group.................. 100.00 97.70 79.40 104.30 95.40 79.30
</TABLE>
The Peer Group Index consists of Accustaff Inc., Alternative Resources
Corp., American Management Systems, Cambridge Technology Partners, First Data
Corporation, International Network Services, Lason Inc., and Renaissance
Solutions, Inc. The cumulative total returns of each company have been
weighted according to each company's stock market capitalization as of
December 31, 1997.
CERTAIN TRANSACTIONS
Prior to the IPO, the Company was a wholly-owned subsidiary of R.R.
Donnelley. While a wholly-owned subsidiary, the Company funded its operations
and capital expenditures through advances from R.R. Donnelley and by selling
certain accounts receivable to a subsidiary of R.R. Donnelley. Approximately
$20.3 million of the net proceeds of the IPO to the Company were used in final
payment of amounts owed by the Company to R.R. Donnelley. As of December 31,
1997, the Company had approximately $510,000 in outstanding indebtedness to
R.R. Donnelley, which includes both the fees related to the Transition
Services Agreement
11
<PAGE>
described below, as well as amounts funded by R.R. Donnelley on behalf of the
Company as specified in the Transition Services Agreement, and R.R. Donnelley
owned 42.8% of the Common Stock outstanding. In addition, Messrs. Stoklosa and
Tyler, who are directors of the Company, are employees of R.R. Donnelley. Mr.
Stoklosa is the Vice President and Treasurer and Mr. Tyler is the Executive
Vice President and Sector President, Information Management Sector.
The Company sells integration services and products to R.R. Donnelley. These
sales approximated $411,000 for the twelve-month period ended December 31,
1997.
Prior to the IPO, the Company obtained certain services from R.R. Donnelley,
participated in a number of employee benefit plans maintained by R.R.
Donnelley and was included as part of R.R. Donnelley's federal income tax and
certain other tax returns. In connection with the IPO, the Company entered
into certain agreements with R.R. Donnelley relating to these matters, certain
of which continued to be in force in 1997. None of these agreements resulted
from "arm's length" negotiations.
Pursuant to a Transition Services Agreement between the Company and R.R.
Donnelley, R.R. Donnelley or its affiliates agreed to perform certain legal,
tax, data processing, risk management, credit and collection, cash management
and banking and accounts payable services for the Company. The Transition
Services Agreement was in effect until December 31, 1997, except with respect
to tax services, the provision of which ended on January 31, 1998, and cash
management and banking services, the provision of which ended March 31, 1997.
Total payments by the Company to R.R. Donnelley for services performed
pursuant to the Transition Services Agreement were approximately $219,000 in
fiscal 1997. The Transition Services Agreement was terminated completely at
the Company's request on November 30, 1997.
Prior to the IPO, the Company was included in the consolidated federal
income tax return of R.R. Donnelley and filed on a combined basis with R.R.
Donnelley in certain states. Thus, rather than paying income taxes directly in
these jurisdictions, the Company made tax sharing payments to R.R. Donnelley
pursuant to R.R. Donnelley's tax allocation policy. In general, R.R.
Donnelley's tax allocation policy provided that the consolidated or combined
tax liability was allocated among the entities in the consolidated or combined
group based principally upon taxable income, credits, preferences and other
amounts directly related to each entity. Upon completion of the IPO, the
Company no longer was permitted to be included in such consolidated and
combined tax returns. Instead, it began to file its own federal, state and
local income tax returns and pay its own taxes on a separate company basis.
Pursuant to a Tax Allocation and Indemnification Agreement between the Company
and R.R. Donnelley, however, the Company remained obligated to pay to R.R.
Donnelley any income taxes shown on such consolidated and combined tax
returns, generally to the extent attributable to the Company, for calendar
year 1995 and for the tax period (the "Interim Period") beginning on January
1, 1996 and ending on November 4, 1996 (to the extent that it has not
previously paid such amounts to R.R. Donnelley). Under federal regulations,
the Company will be subject to several liability for the consolidated federal
income taxes for any tax year (including the Interim Period) in which it was a
member of the R.R. Donnelley federal consolidated group (whether or not such
taxes are attributable to the Company). R.R. Donnelley has agreed to indemnify
the Company against such liability and any similar liability under state and
local law. R.R. Donnelley has also agreed to indemnify the Company against any
increase in the Company's taxes (whether or not related to taxes paid on a
consolidated or combined basis) for periods ending on or prior to the date of
completion of the IPO that results from an action of a taxing authority or a
court (except to the extent such increase provides tax benefits to the Company
for periods beginning after such date, in which case the sum of such tax
benefits will be retained by R.R. Donnelley or paid by the Company to R.R.
Donnelley). During fiscal 1997, the Company did not pay any amounts to R.R.
Donnelley pursuant to the Tax Allocation and Indemnity Agreement.
The Company entered into a letter agreement dated January 16, 1998 with The
Joleo Group, a corporation owned by Leo S. Spiegel and his wife, pursuant to
which Mr. Spiegel will provide consulting services to the Company with respect
to a variety of matters including strategic planning and account management.
Mr. Spiegel will charge the Company fees and expenses for such services that
the Company believes are reasonable for such services.
12
<PAGE>
OTHER MATTERS
The Board knows of no other business which will be presented for action at
the Meeting other than those items identified in the Notice of Annual Meeting
of Stockholders. If other matters properly come before the Meeting by the
Board of Directors, it is intended that proxies will be voted at the Meeting
in accordance with the best judgment of the person or persons exercising the
authority conferred by such proxies.
STOCKHOLDER PROPOSALS
The Company currently contemplates that the 1999 Annual Meeting of
Stockholders will be held in May 1999. Stockholder proposals intended to be
presented at that meeting must be received by the Company not later than
December 1, 1998, at its principal executive office, Attention: Secretary, in
order to be considered for inclusion in the Company's proxy statement and form
of proxy relating to that annual meeting.
The Company's By-laws provide that stockholders seeking to bring business
before a meeting of stockholders, or to nominate candidates for election as
directors at a meeting of stockholders, must provide timely notice thereof in
writing. To be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive office of the Company, by the
Chairman, not less than 60 days nor more than 90 days prior to the scheduled
meeting (or, if less than 70 days' notice of the meeting is given or make to
stockholders, not later than the close of business on the tenth day following
the earlier of (i) the day on which such notice of the date of the meeting was
mailed, or (ii) the day on which public disclosure of the date of such meeting
was made). The notice is required to contain certain information about the
nominee or proposal and the stockholder making the nomination or proposal. A
nomination or proposal that does not comply with the above procedure will be
disregarded.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies on behalf of the Board will be borne by
the Company. In addition to the solicitation of proxies by mail, the Company
may request banks, brokers and other custodians, nominees and fiduciaries to
solicit their customers who have stock of the Company registered in the names
of a nominee, and, if so, will reimburse such banks, brokers and other
custodians, nominees and fiduciaries for their reasonable out-of-pocket costs.
Solicitation by officers and employees of the Company may also be made of some
stockholders may in person or by mail, telephone, or facsimile following the
original solicitation.
By Order of the Board of Directors
LOGO
Rhonda I. Kochlefl
Chairman, President and Chief
Executive Officer
Chicago, Illinois
April 9, 1998
13
<PAGE>
PROXY BALLOT QUESTIONS:
1. Election of Directors
Nominees: Leo S. Spiegel and Gregory A. Stoklosa
[_] FOR all nominees listed above (except as marked to the contrary
below)
[_] WITHHOLD AUTHORITY to vote for
all nominees listed above
-----------------------------------------------------------------------------
2. Ratification of Arthur Andersen LLP as independent auditors of the Company
for 1998
[_] FOR [_] AGAINST [_] ABSTAIN
(To be signed on reverse side)
When properly executed, this proxy will be voted as directed. If no direction
is given, this proxy will be voted FOR Proposals 1 and 2 and in the discretion
of the proxies nominated hereby on any other business as may properly come
before the meeting.
Dated: ______________________ , 1998
------------------------------------
Signature
------------------------------------
Signature, if held jointly
Please sign exactly as your name
appears above. For joint accounts,
each owner should sign. When
signing as executor, administrator,
attorney, trustee or guardian,
etc., please give your full title.
