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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21525
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 13-316071
(State of Incorporation) (I.R.S. Employer Identification No.)
161 North Clark Street, Suite 2400, Chicago, IL 60601
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 419-7600
Indicate by check mark whether the registrant (1) has filed all reports
required 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, par value $0.01 per share: 5,010,277 shares outstanding as of
May 12, 1998.
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INDEX
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PAGE
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three month period ended March 31, 1997 and
1998....................................................................................................... 1
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998...................................... 2
Consolidated Statements of Cash Flows for the three month period ended March 31, 1997 and
1998....................................................................................................... 3
Notes to Consolidated Financial Statements.................................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 5
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. *
PART II--OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... *
Item 2. Changes in Securities.................................................................................. *
Item 3. Defaults Upon Senior Securities........................................................................ *
Item 4. Submission of Matters to a Vote of Security Holders.................................................... *
Item 5. Other Information...................................................................................... 10
Item 6. Exhibits and Reports on Form 8-K....................................................................... 10
</TABLE>
*No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS.
DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
($000s, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1997 1998
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<S> <C> <C>
(Unaudited)
Business services outsourcing revenues...................................... $ 16,356 $ 19,785
Integration services revenues............................................... 9,722 7,311
Systems management outsourcing revenues..................................... 960 2,641
---------- ----------
Total revenues........................................................... 27,038 29,737
Business services outsourcing cost of revenues.............................. 12,771 15,498
Integration services cost of revenues....................................... 7,777 5,722
Systems management outsourcing cost of revenues............................. 592 1,958
---------- ----------
Cost of revenues.......................................................... 21,140 23,178
Business services outsourcing gross profit.................................. 3,585 4,287
Integration services gross profit........................................... 1,945 1,589
Systems management outsourcing gross profit................................. 368 683
---------- ----------
Gross profit............................................................. 5,898 6,559
Selling, general and administrative expenses................................ 5,179 5,672
Amortization of goodwill.................................................... 265 270
---------- ----------
Earnings from operations................................................. 454 617
Interest expense (income), net.............................................. (8) 190
Other income................................................................ -- (31)
---------- ----------
Earnings before income taxes............................................. 462 458
Income taxes................................................................ 226 224
---------- ----------
Net income............................................................... $ 236 $ 234
========== ==========
Basic earnings per share.................................................... $0.05 $0.05
========== ==========
Basic common shares outstanding............................................. 5,005,000 5,010,277
========== ==========
Diluted earnings per share.................................................. $0.05 $0.05
========== ==========
Diluted common shares outstanding........................................... 5,009,708 5,013,300
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
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DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED BALANCE SHEETS
($000s, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1997 1998
------ ---- ----
(Unaudited)
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Current assets:
Cash and equivalents........................................................................ $ 3,231 $ 2,937
Accounts receivable, less allowances for doubtful accounts of $3,944 in 1997 and
$ 2,870 in 1998.......................................................................... 22,611 21,940
Unbilled receivables........................................................................ 5,874 5,910
Inventories................................................................................. 3,550 3,249
Prepaid expenses and other current assets................................................... 1,499 1,242
Income taxes receivable..................................................................... 2,418 1,606
Deferred income taxes....................................................................... 2,689 2,452
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Total current assets..................................................................... 41,872 39,336
Property and equipment, net.................................................................... 15,999 15,818
Goodwill, net.................................................................................. 19,158 18,888
Other noncurrent assets........................................................................ 44 43
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Total assets............................................................................. $77,073 $74,085
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit............................................................................... $ 5,600 $ 7,900
Capital lease obligations, current portion................................................... 959 934
Notes payable, current portion............................................................... 111 111
Advances due to related party................................................................ 510 520
Accounts payable............................................................................. 8,585 8,157
Accrued salary and benefits.................................................................. 3,340 2,794
Accrued other expenses....................................................................... 1,632 1,548
Customer prepayments......................................................................... 5,577 2,213
Deferred revenues............................................................................ 2,572 1,402
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Total current liabilities................................................................ 28,886 25,579
Noncurrent liabilities:
Capital lease obligations.................................................................... 1,552 1,635
Deferred income taxes........................................................................ 545 533
Notes payable................................................................................ 74 46
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Total noncurrent liabilities............................................................. 2,171 2,214
Shareholders' equity:
Common stock--$.01 par value, 15,000,000 authorized shares; 5,005,000 and 5,010,277
issued and outstanding at December 31, 1997 and March 31, 1998, respectively............... 50 50
Preferred stock--$.01 par value, 1,000,000 authorized shares; none issued and
outstanding................................................................................. -- --
Additional paid-in capital................................................................... 49,245 49,285
Cumulative translation adjustment............................................................ (2) --
Retained earnings (deficit).................................................................. (3,277) (3,043)
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Total shareholders' equity............................................................... 46,016 46,292
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Total liabilities and shareholders' equity............................................... $77,073 $74,085
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
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DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000s)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1997 1998
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(UNAUDITED)
Cash flows provided by (used in) operating activities:
Net income................................................................................... $ 236 $ 234
Depreciation and amortization................................................................ 1,204 1,335
Amortization of goodwill..................................................................... 265 270
Gain on sale of equipment.................................................................... -- (31)
Net changes in assets and liabilities........................................................ (8,825) (3,361)
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Net cash used in operating activities................................................ (7,120) (1,553)
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Cash flows provided by (used in) investing activities:
Capital expenditures......................................................................... (2,302) (832)
Net proceeds on sale of equipment............................................................ -- 51
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Net cash used in investing activities................................................ (2,302) (781)
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Cash flows provided by (used for) financing activities:
Advances from related party, net............................................................. 3,398 10
Line of credit............................................................................... 4,000 2,300
Principal payments on capital leases......................................................... (294) (284)
Notes payable................................................................................ -- (28)
Proceeds from employee stock purchase plan................................................... -- 40
Stock issuance costs related to IPO.......................................................... (155) --
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Net cash provided by financing activities............................................ 6,949 2,038
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Effect of exchange rate changes on cash and equivalents................................. -- 2
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Net decrease in cash and equivalents......................................................... (2,473) (294)
Cash and equivalents, at beginning of period......................................... 8,910 3,231
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Cash and equivalents, at end of period............................................... $ 6,437 $ 2,937
======= =======
The changes in assets and liabilities were as follows:
Decrease (increase) in assets:
Receivables, net.......................................................................... $(7,590) $ 635
Inventories............................................................................... 1,312 301
Prepaid expenses and other................................................................ 176 257
Income taxes receivable................................................................... -- 812
Deferred income taxes..................................................................... (123) 237
Other noncurrent assets................................................................... -- 1
Increase (decrease) in liabilities:
Accounts payable.......................................................................... (1,765) (428)
Accrued salary and benefits............................................................... 175 (546)
Accrued other expenses.................................................................... 483 (84)
Customer prepayments...................................................................... (2,511) (3,364)
Deferred income taxes..................................................................... 12 (12)
Deferred revenues......................................................................... 1,006 (1,170)
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Net change in assets and liabilities......................................................... $(8,825) $(3,361)
======= =======
Cash paid during the period for:
Interest..................................................................................... $ 82 $ 260
Income taxes................................................................................. 6 --
======= =======
Supplemental non-cash investing and financing activities:
Capital leases............................................................................... $ 315 $ 342
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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 LANSystems,
Inc. ("LANSystems") in a business combination accounted for as a purchase.
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 (the
"Company" or "DESI").
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 three general categories of services: business services
outsourcing, integration services and systems management outsourcing. The
Company's business services outsourcing offerings include document services,
such as reprographic, networked and color printing, mailroom and facsimile
services, desktop publishing, and imaging. The Company's integration services
include systems integration, maintenance services, software development and
technical training services. The Company's systems management outsourcing
services include help desk, network management and systems administration.
NOTE 2. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been prepared
by the Company to conform with the requirements applicable to this Quarterly
Report on Form 10-Q. Accordingly, certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted as permitted by such requirements.
However, the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with, and have been prepared in conformity with the accounting
principles reflected in the financial statements and related notes in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The Company entered into certain agreements pursuant to which R.R. Donnelley
or its affiliates agreed to perform certain legal, tax, data processing, risk
management, employee benefit, credit and collection, cash management, banking
and accounts payable services for the Company. The Company was charged fees and
expenses for these services. The majority of these services were terminated in
1996 or early 1997, with the final service terminated in November 1997.
The interim financial statements herein reflect, in the opinion of the Company,
all normal and recurring adjustments necessary to present fairly the financial
information for the periods presented. Certain items in prior periods have been
reclassified to conform with current period classifications. The 1998 interim
results are not necessarily indicative of the results that may be expected for
the remainder of the year.
4
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NOTE 3. 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 is used in
conjunction with cash flows from operations to fund ongoing operations, seasonal
cash needs and for continued growth and investment. The Company was in
compliance with all debt covenants as of March 31, 1998.
NOTE 4. 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.
NOTE 5. BASIC AND DILUTED EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"),
which became effective in the fourth quarter of 1997. FAS 128 replaces the
presentation of earnings per share reflected on the Statement of Income with a
dual presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average numbers of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that could
occur if stock options and other commitments to issue common stock were
exercised resulting in the issuance of common stock that then shared in the
earnings of the Company. The effect of outstanding stock options included in
the computation of diluted earnings per share was not material for either
quarter presented herein.
NOTE 6. COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (FAS 130"), was issued, effective for fiscal years
beginning after December 15, 1997, including interim periods, which requires a
different format for presentation of information already included in the
Company's financial statements. The Company adopted FAS 130 in the first quarter
of 1998. Comprehensive income of the Company includes net income and cumulative
translation adjustments. For both quarters ended March 31, 1997 and March 31,
1998, comprehensive income was $236,000.
NOTE 7. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, Statement of Financial Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("FAS 131"), was
issued, effective for fiscal years beginning after December 15, 1997, which
requires that public business enterprises report certain information about
operating segments and certain information about their products and services,
the geographic areas in which they operate and their major customers. FAS 131
does not affect accounting principles and, accordingly, will not require any
change to reported financial position, results of operations or cash flows. The
Company is currently evaluating the impact of FAS 131 on its segment reporting.
ITEM 2: 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 services outsourcing and systems management
outsourcing. Through the integration services group, the Company also offers
integration services to the professional services market. The Company has
experienced growth by expanding its service offerings, adding new clients,
increasing business with its existing clients, and capitalizing on the growing
trend toward outsourcing. In the first quarter of 1998, the Company's total
revenues were $29.7 million with business services outsourcing, integration
services and systems
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management outsourcing contributing $19.8 million, $7.3 million and $2.6
million, respectively. In the first quarter of 1997, the Company's total
revenues were $27.0 million with business services outsourcing, integration
services and systems management outsourcing contributing $16.3 million, $9.7
million and $1.0 million, respectively.
DESI commenced its outsourcing operations in 1988 as a provider of
reprographic services and has expanded its service offerings to include
networked and electronic color printing, mailroom and facsimile services,
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
integration services, including systems integration, software development and
technical training, since 1983. In February 1996, the Company began providing
systems management outsourcing services including help desk, network management
and systems administration.
The Company's revenues are derived primarily from (i) monthly fees under its
business services outsourcing contracts, (ii) fees relating to integration
projects, (iii) the resale of hardware or software products, (iv) monthly fees
under its system management outsourcing contracts, (v) monthly fees under
integration services maintenance contracts and (vi) technical training projects.
The Company typically enters into contracts and arrangements with its business
services clients that have terms ranging from three to five years. These
contracts and arrangements 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
equipment, labor and supplies. The Company typically enters into systems
management outsourcing contracts with terms that average three years. System
management contracts are priced on a monthly fixed fee basis, plus a fee for
overtime and additional services. Integration services contracts are priced on
a fixed-fee basis or a time-and-materials basis. Contracts for integration
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
presence in the legal and investment banking markets with six new clients,
partially offset by the loss of four clients, two client service expansions and
six expansions to new locations in the first quarter of 1998 compared to the
first quarter of 1997. The Company also expanded into other markets by adding
one new client in the Fortune 500. The Company's systems management group
increased its presence in the legal and investment banking markets with three
new clients, partially offset by the loss of one client, two expansions to new
locations, and two service expansions, including expansions with new clients, in
the first quarter of 1998 compared to the first quarter of 1997. Integration
services revenue included several large scale implementations of document
management systems in both the legal and investment banking markets.
DESI's cost of revenues associated with business services outsourcing are
comprised of wages, supplies, equipment and start-up costs; its cost of revenues
associated with systems management revenues are comprised of wages, start-up
costs and depreciation on fixed assets; and its cost of revenues associated with
its integration services are comprised of computer equipment, software, rent
and labor costs. The Company's margins on resold products within integration
services are lower than those for business service outsourcing and systems
management outsourcing. In integration services, the Company has focused on
higher margin technology related services, which has led to a change in the
Company's product mix. The revenues associated with the resale of hardware or
software products project were 30% of total integration services revenue for the
first quarter of 1998, as compared to 38% in the first quarter of 1997.
Integration services margins tend to fluctuate more than business services
outsourcing margins and systems management outsourcing margins.
DESI's selling expenses are comprised of sales and support salaries,
commissions and travel and entertainment. Selling expenses as a percentage of
revenues for integration services are significantly higher than for business
outsourcing services due to the long-term annuity nature of DESI's business
outsourcing contracts.
DESI's research and development activities, the costs of which are included in
general and administrative expenses, consist of software and hardware product
evaluation, trial integration of purchased hardware and software, user
productivity benchmarking and the development of custom integration software.
The Company's results of operations are sensitive to the state of the U.S.
professional service economy, particularly as it affects the Company's target
markets. The volume of services provided by the Company generally are lower in
periods in
6
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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. In addition, clients have taken measures to reduce
their volumes with 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
volume declines have been offset by a growth in revenues and the Company's
ability to attract new clients who desire to reduce their expenses or focus on
their core business 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 LANSystems, 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.
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, collections, insurance,
benefits administration, data processing and payroll. As of March 31, 1998 the
Company had advances payable to R.R. Donnelley totaling approximately $520,000,
which is disputed. As of March 31,1997, the Company had advances payable to R.R.
Donnelley totaling approximately $9.9 million, which included both the fees
related to and amounts funded by R.R. Donnelley on behalf of the Company as
specified in the transition services agreement. The majority of these services
were terminated in 1996 or early 1997, with the final service terminated in
November 1997.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's unaudited
consolidated statements of income as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
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1997 1998
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Business services outsourcing revenues.................................. 60.5% 66.5%
Integration services revenues........................................... 35.9 24.6
Systems management outsourcing revenues................................. 3.6 8.9
----- -----
Total revenues..................................................... 100.0 100.0
Business services outsourcing cost of revenues.......................... 78.1 78.3
Integration services cost of revenues................................... 80.0 78.3
Systems management outsourcing cost of revenues......................... 61.7 74.1
----- -----
Total cost of revenues............................................. 78.2 77.9
Business services outsourcing gross profit.............................. 21.9 21.7
Integration services gross profit....................................... 20.0 21.7
Systems management outsourcing gross profit............................. 38.3 25.9
----- -----
Total gross profit................................................. 21.8 22.1
Selling, general and administrative expenses............................ 19.1 19.1
Amortization of goodwill................................................ 1.0 0.9
----- -----
Earnings from operations........................................... 1.7 2.1
Interest expense, net................................................... -- 0.6
Other income............................................................ -- --
----- -----
Earnings before income taxes....................................... 1.7 1.5
Income taxes............................................................ 0.8 0.7
----- -----
</TABLE>
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<TABLE>
<S> <C> <C>
Net income......................................................... 0.9% 0.8%
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</TABLE>
Quarter ended March 31, 1998 compared to quarter ended March 31, 1997
Revenues for the quarter ended March 31, 1998 totaled $29.7 million, a 10%
increase over 1997 revenues of $27.0 million. This $2.7 million increase was
comprised of a $3.4 million, or 21%, increase in business services outsourcing
revenues, a $2.4 million, or 24.8%, decrease attributable to integration
services revenues and a $1.7 million, or 175.1%, increase attributable to
systems management outsourcing. Business services outsourcing growth was due to
a $2.2 million increase in revenues from new clients and a $1.2 million increase
in revenues from existing clients. Revenues from integration services declined
$2.4 million due to the 1997 turnover in the sales force, which slowed new
sales. Systems management outsourcing growth was due to a $0.9 million increase
in revenues from new clients and a $0.8 million increase in revenues from
existing clients.
Cost of revenues of $23.2 million decreased as a percentage of revenues to
77.9% from 78.2% in the first quarter of 1997 because of an increase in
integration services margins, slightly offset by a decrease in systems
management outsourcing margins. Integration services margins increased as a
result of a change in product mix. Systems management outsourcing margins
decreased as a result of additional costs incurred to staff new contracts and
client service expansions.
Selling, general and administrative expenses increased $0.5 million, or 9.5%,
from the first quarter of 1997 and as a percentage of revenues, remained the
same at 19.1% in the first quarter of 1998 compared to 1997.
Amortization of goodwill was $0.3 million, compared to $0.3 million in the
first quarter of 1997.
Interest expense increased to $0.2 million from the first quarter of 1997 due
to borrowing on the Company's line of credit.
The Company's effective income tax rate was the same at 49% for the first
quarter of 1998 and the first quarter of 1997. The effective tax rate exceeds
the U.S. federal statutory rate due to the effect of nondeductible goodwill
amortization and state taxes.
Net income remained the same at $0.3 million for the first quarter of 1998 and
the first quarter of 1997 as a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
On November 6, 1996, the Company entered into a credit agreement (the "Credit
Agreement") with Harris Trust and Savings Bank (the "Bank") under which it is
entitled to borrow up to $22.0 million on a revolving credit basis. Borrowings
under the Credit Agreement mature in three years and 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 pays a commitment fee of 20 to 30 basis
points per annum, depending on its fixed charge coverage ratio, on the unused
portion of the credit facility. 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 paid $260,000 in interest in the
first quarter of 1998, of which $154,000 is interest expense related to
borrowings on the credit facility, $103,000 relates to interest expense on
capital leases and $3,000 related to interest expense on notes payable. At March
31, 1998, the Company was in compliance with all debt covenants and there were
$7.9 million in borrowings outstanding under the Credit Agreement.
The Company had net usage of cash from operations of $1.6 million during the
quarter ended March 31, 1998, as compared to net cash used by operations of $7.1
million in 1997. The decreased usage in 1998 was primarily due to a decrease in
receivables, due to more timely billing and improved collection procedures,
offset by decreases in customer prepayments and deferred revenues.
8
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Capital expenditures decreased $1.5 million to $0.8 million in the first
quarter of 1998 from $2.3 million in 1997, primarily due to investment in the
first quarter of 1997 in the Company's financial and operating management system
that was implemented in 1997. For the quarter ended March 31, 1998, the Company
had $2.0 million of cash provided by financing activities, primarily from the
Credit Agreement.
For the quarter ended March 31, 1998 operating cash flow (earnings from
operations plus depreciation and amortization) was $1.8 million, up from $1.7
million in the first quarter of 1997. 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.
YEAR 2000
The Company is evaluating the impact, if any, of the Year 2000 compliance
issue. The Company has taken steps to correct any potential problems that may
occur. However, the Company could be impacted by external companies and systems
that interact with those of the Company.
9
<PAGE>
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain statements in this filing and elsewhere (such as in other filings
by the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management and oral statements) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Specifically, the words "intends,"
"expects," "plans," "anticipates," "estimates," and similar expressions
are intended to identify forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include:
(i) dependence on key clients; (ii) dependence on ability to manage growth;
(iii) sensitivity to fluctuations in professional service economy; (iv) risks
associated with performance of integration projects; (v) focus on limited
target markets; (vi) ability to grow through introduction of new services;
(vii) dependence on ability to anticipate technological advances; (viii) year
2000 compliance; (ix) risks associated with integration of LANSystems and growth
through future acquisitions; (x) variability of quarterly results; (xi) need to
attract and retain key personnel in highly competitive market place; (xii)
dependence on senior management; (xiii) lack of operating history as a stand-
alone entity. Refer to Part II, Item 7, of the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and the Company's Registration
Statement (No. 333- 10127) under "Risk Factors" for a more detailed description
of such factors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 First Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 By-laws of the Company.(1)
10.4 Employment Agreement between Rhonda I. Kochlefl and the
Company.(1)(4)
10.7 Employment Agreement between Linda A. Finkel and the
Company.(2)(4)
10.8 Severance Agreement between Thomas P. Bradbury and the
Company.(1)(4)
10.9 1996 Broad-Based Employee Stock Plan.(1)(4)
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)(4)
10.13 Amended and Restated 1996 Stock Incentive Plan.(2)(4)
10.14 1997 Employee Stock Purchase Plan.(2)(4)
10.15 Employment Agreement between Robert A. Lento and the
Company.(3)(4)
10.16 Employment Agreement between David J. Shea and the
Company.(3)(4)
10.17 Amendment No. 1 to Credit Agreement dated March 31, 1997.
10.18 Amendment No. 2 to Credit Agreement dated September 30, 1997.
10.19 Amendment No. 3 to Credit Agreement dated December 31, 1997.
10.20 Employment Agreement between Thomas A. Munro and the
Company.(4)
27.1 Financial Data Schedule.
99.1 Transition Services Agreement between the Company and R.R.
Donnelley.(1)
99.2 Benefit Administration Services Agreement between the Company
and R.R. Donnelley.(1)
99.3 Tax Allocation and Indemnification Agreement between the
Company and R.R. Donnelley.(1)
10
<PAGE>
(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) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K, filed on March 28, 1997.
(3) Incorporated herein by reference to the Company's 1997 Annual Report on
Form 10-K, filed on March 31, 1998.
(4) Indicates a management contract or compensatory plan or agreement.
(b) No Current Report on Form 8-K was filed by the Company during the first
quarter of 1998.
11
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENT OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Donnelley Enterprise Solutions Incorporated
By: /s/ Thomas A. Munro
---------------------------------------
Thomas A. Munro
Vice President & Chief Financial Officer
(Authorized Officer & Principal Financial Officer)
Date: May 14, 1998
12
<PAGE>
EXHIBIT 10.17
FIRST AMENDMENT TO CREDIT AGREEMENT AND WAIVER
Harris Trust and Savings Bank,
as Administrative Agent and as a Bank
111 West Monroe Street
Chicago, Illinois
Gentlemen:
The undersigned, Donnelley Enterprise Solutions Incorporated, a Delaware
corporation (The "Company") and the various Borrowing Subsidiaries (individually
as "Borrower" collectively as "Borrowers") refer to the Credit Agreement dated
as of October 30, 1996, may be amended from time to time (the "Agreement") and
currently in effect between the Borrowers and Harris Trust and Savings Bank, as
Administrative Agent for itself and the other Financial Institutions from time
to time party thereto (individually "Bank" and collectively the "Banks"). All
capitalized terms used herein without definition shall have the same meanings as
they have in the Agreement.
The Borrowers hereby apply to the Banks for certain modifications to the
Agreement and the Borrowers' borrowing arrangements with the Banks and for the
waiver of certain covenants contained in the Agreement.
1. AMENDMENT.
Upon the Banks' acceptance hereof in the space provided for that purpose
below, the Agreement shall be and hereby is amended as follows:
(a) The definition of "Fixed Rate Coverage Ratio" in Article I, Section
1.01 shall be and hereby is amended in its entirety to read as follows:
"Fixed Charge Coverage Ratio" means the ratio, determined
---------------------------
on a consolidated basis for the Company and its
Consolidated Subsidiaries in accordance with GAAP as of
the end of any fiscal quarter, of (i) Consolidated EBITA
plus Minimum Operating Lease Payments to (ii) Consolidated
Interest Expense plus Minimum Operating Lease Payments, in
----
each case determined as of the last day of such fiscal
quarter for the four-quarter period then ended.
(b) The definition of "Funded Debt to Cash Flow Raito" in Article I,
Section 1.01 shall be and hereby is amended in its entirety to ready as follows:
<PAGE>
"Funded Debt to Cash Flow Ratio" means the ratio,
------------------------------
determined on a consolidated basis for the Company and its
Consolidated Subsidiaries in accordance with GAAP as of
the end of any fiscal quarter, of (i) Consolidated Debt to
(ii) Consolidated EBITDA for the four-quarter period then
ended. For the first four fiscal quarters following an
Acquisition, Consolidated EBITDA shall include, for any
period of calculation prior to the date of such
Acquisition, the Consolidated EBITDA (determined on a pro
forma basis if no actual financial information is
available) of the company or business that was the subject
of such Acquisition for such prior period.
(c) The definition of "Harris Bank Offered Rate" shall be added to Article
I, Section 1.01 after the definition of "Harris Bank" and shall read as follows:
"Harris Bank Offered Rate" means, for any day, the fixed
------------------------
rate of interest per annum equal to the rate offered by
Harris Trust and Savings Bank.
(d) Article II, Section 2.07 shall be and hereby is amended as follows:
Harris Bank Offered Rate Advances. During such period as
---------------------------------
such advance is a Harris Bank Offered Rate Advance, a rate
per annum equal at all times during each Interest Period
for such Advance to the Harris Bank Offered Rate in effect
from time to time, payable on the last day of such
Interest Period and, if such Interest Period has a
duration of more than three months, on each day which
occurs during such Interest Period every three months from
the first day of such Interest Period and on the date such
Harris Bank Offered Rate shall be converted or paid in
full. All Harris Bank Offered Rate Advances hereunder
shall net exceed the sum of $5,000,000 and conform to the
provisions and requirements of Eurocurrency Rate Advances,
excluding the requirements for Alternative Currencies
which are not permitted for Harris Bank Offered Rate
Advances and excluding the notice of Borrowing
requirements per Article II, Section 2.02 under which the
Harris Bank Offered Rate Advances shall conform to the
requirements of Base Rate Advances.
Subsections (b) and (c) of Section 2.07 shall be re-lettered as subsections (c)
and (d) and be entitled as follows:
(c) Eurocurrency Rate Advances.
--------------------------
(d) Default Interest.
----------------
2
<PAGE>
(e) Article V, Section 5.03 shall be and hereby is amended in its entirety
to read as follows:
SECTION 5.03. Use of Proceeds. The Borrowers will use the
---------------
proceeds of the Advances and Letters of Credit under this
Agreement for general corporate purposes otherwise
permitted under this Agreement, including, without
limitation, working capital needs and acquisitions, and
for the purchase of the Borrowers' common stock, not to
exceed the sum of $10,000,000. The Borrowers further agree
that no proceeds of any Advance shall be used to purchase
or carry Margin Stock, except for the purchase of the
Borrowers' common stock, not to exceed the sum of
$10,000,000; provided however, that notwithstanding
anything herein to the contrary, such common stock
purchases shall be permitted under this Agreement, so long
as, the Borrowers' provide the Banks with all the
necessary documentation and notification to comply with
Regulation U of the Board of Governors of the Federal
Reserve contemporaneously with the use of any proceeds of
Advances and Letters of Credit under this Agreement.
2. WAIVER.
The Banks waive any non-compliance with the terms of the Agreement which,
after giving effect to this First Amendment, shall no longer exist.
3. CONDITIONS PRECEDENT.
The effectiveness of the First Amendment is subject to the satisfaction of
all of the following conditions precedent:
(a) The Company and the Banks shall have executed this First Amendment.
(b) The Banks shall have received copies executed or certified (as may be
appropriate) of all legal documents or proceedings taken in connection with the
execution and delivery hereof and the other instruments and documents
contemplated hereby.
(c) All legal matters incident to the execution and delivery hereof and of
the instruments and documents contemplated hereby shall be satisfactory to the
Banks and their counsel.
3
<PAGE>
4. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this First Amendment,
the Borrowers hereby represent to the Banks that as of the date hereof and as of
the time that this First Amendment becomes effective, each of the
representations and warranties set forth in Article IV of the Agreement are and
shall be and remain true and correct (except that the representations contained
in Article IV Section 4.01 (e) shall be deemed to refer to the most recent
financial statements of the Borrowers delivered to the Bank) and the Borrowers
are in full compliance with all of the terms and conditions of the Agreement and
no Event of Default as defined in the Agreement as amended hereby nor any Event
of Default as so defined, shall have occurred and be continuing or shall arise
after giving effect to this First Amendment.
5. MISCELLANEOUS.
(a) Effect of Amendment. Except as specifically amended and modified
hereby, the agreement shall stand and remain unchanged and in full force and
effect in accordance with its original terms. Reference to this specific First
Amendment need not be made in any note, instrument or other document making
reference to the Agreement, any reference to the Agreement in any of such to be
deemed to be a reference to the Agreement as amended hereby.
(b) Costs and Expenses. The Borrowers agree to pay on demand all out-of-
pocket costs and expenses incurred by the Banks in connection with the
negotiation, preparation, execution and delivery of this First Amendment and the
documents and transactions contemplated hereby, including the fees and expenses
of counsel to the Banks with respect to the foregoing.
(c) Counterparts; Governing Law. This First Amendment may be executed in
any number of counterparts and by different parties hereto on separate
counterparts, each of which when so executed shall be an original but all of
which to constitute one and the same agreement. This First Amendment shall be
governed by the internal laws of the State of Illinois.
4
<PAGE>
Dated as of June 2, 1997, effective as of March 31, 1997.
DONNELLEY ENTERPRISE
SOLUTIONS INCORPORATED
By: /s/ Luke F. Botica
Its Senior Vice President and Chief
Financial Officer
Accepted and agreed to at Chicago, Illinois, as of the date and year last
above written.
HARRIS TRUST AND SAVINGS BANK
as Administrative Agent and as a Bank
By: /s/ Frank F. Pagura, Jr
Frank F. Pagura, Jr.
Its Vice President
5
<PAGE>
EXHIBIT 10.18
AMENDMENT No. 2, dated as of September 30, 1997 ("Amendment"), to the
---------
CREDIT AGREEMENT, dated as of October 30, 1996 (as the same may be further
amended, supplemented or otherwise modified from time to time, the "Agreement")
---------
among DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED, a Delaware corporation, as
borrower (the "Company"), HARRIS TRUST AND SAVINGS BANK, as Administrative Agent
-------
(in such capacity, the "Administrative Agent"), and the other financial
--------------------
institutions parties thereto (the "Banks").
-----
W I T N E S E T H :
-----------------
WHEREAS, the parties hereto wish to amend certain provisions of the
Agreement on the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined in
-----------
the Agreement shall be used herein as so defined.
2. Amendments.
----------
(i) The definition of "Consolidated EBITA" in Section 1.01 is amended
in its entirety to read as follows:
"Consolidated EBITA" means, for any period, on a consolidated basis
------------------
for the Company and its Consolidated Subsidiaries, the sum of the amounts
for such period of (a) Consolidated Net Income (before non-recurring or
extraordinary gains, losses, expenses and charges, provided that they are
--------
identified as such on the Company'S financial statements), plus (b) charges
----
against income for foreign, federal, state and local taxes, plus (c)
----
Consolidated Interest Expense, plus (d) amortization of intangible assets,
----
plus (e) one-time charges aggregating $6,110,000 incurred in the fiscal
----
quarter ended September 30, 1997."
(ii) The last paragraph of the definition of "Applicable Margin" in
Section 1.01 is amended in its entirety to read as follows:
"Level I Status shall apply to the period from the date hereof until the
first date on which financial statements are due pursuant to Section 5.02.
------------
For any date thereafter, Level Status shall be adjusted after each delivery
of the Company's quarterly or annual financial statements pursuant to
Section 5.02, effective on the date such financial statements are delivered
------------
pursuant to Section 5.02; provided, that if timely delivery of such
------------ -------- ----
financial statements is not made, Level III Status shall be deemed to exist
from the day on which such financial statements were required to be
delivered until such delivery is made, after which time the Level Status
shall be determined from the delivered financial statements.
Notwithstanding the foregoing, Level II Status shall be deemed to exist
from October 27, 1997, until the date Level Status is adjusted based on the
Company's delivery of its 1997 annual financial statements pursuant to
Section 5.02(b)."
---------------
<PAGE>
(iii) The last paragraph of Section 2.04(a) is amended in its
entirety to read as follows:
"Level I Status shall apply to the period from the date hereof until the
first date on which financial statements are due pursuant to Section 5.02.
------------
For any date thereafter, Level Status shall be adjusted after each delivery
of the Company's quarterly or annual financial statements pursuant to
Section 5.02 effective on the date such financial statements are delivered
------------
pursuant to Section 5.02; provided, that if timely delivery of such
------------ -------- ----
financial statements is not made, Level III Status shall be deemed to exist
from the day on which such financial statements were required to be
delivered until such delivery is made, after which time Level Status shall
be determined from the delivered financial statements. Notwithstanding the
foregoing, Level II Status shall be deemed to exist from October 27, 1997,
until the date Level Status is adjusted based on the Company's delivery of
its 1997 annual financial statements pursuant to Section 5.02(b)."
---------------
(iv) Section 5.12 is amended in its entirety to read as follows:
"The Company will, as of the end of each fiscal quarter, maintain a
Fixed Charge Coverage Ratio of not less than 2 to 1."
3. Conditions Precedent. Section 2(i) of this Amendment shall
--------------------
become effective and be deemed effective as of September 30, 1997, and Sections
2(ii), 2(iii) and 2(iv) of this Amendment shall become effective and be deemed
effective as of the date hereof, subject to the Administrative Agent's receipt
of this Amendment, duly executed by the Company and Harris Trust and Savings
Bank, as Administrative Agent and sole Bank.
4. Covenants, Representations and Warranties.
-----------------------------------------
(i) Upon the effectiveness of this Amendment, the Company reaffirms
all covenants, representations and warranties made by it in the
Credit Agreement and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of September 30, 1997.
(ii) The Company represents and warrants that, after giving effect to
this Amendment, no event has occurred and is continuing or would
result from the execution, delivery or performance of this
Amendment which constitutes or would constitute an Event of
Default or which would constitute an Event of Default but for
the requirement that notice be given or time elapse or both.
(iii) The Company represents and warrants that the execution, delivery
and performance of this Amendment by it (i) are within its
corporate powers and (ii) have been duly authorized by all
necessary corporate action on its part. The Company further
represents and warrants that this Amendment, as of the date it
becomes effective, will constitute a valid and binding agreement
of the Company, enforceable against the Company in accordance
with its terms, subject to the effect of any applicable
bankruptcy, insolvency, reorganization or other laws relating to
or affecting the enforcement of creditors' rights generally or
by equitable principles.
2
<PAGE>
5. Reference to and Effect on Agreement. Upon the effectiveness of
------------------------------------
this Amendment, each reference in the Agreement to "this Agreement,"
"hereunder," "hereof," "herein," "hereby" or words of like import shall mean and
be a reference to the Agreement as amended hereby, and each reference to the
Agreement in any instrument, document or agreement executed or delivered in
connection with the Agreement (including without limitation this Amendment)
shall mean and be a reference to the Agreement as amended hereby.
6. Continuing Effect. Except as expressly amended hereby, the
-----------------
Agreement shall continue to be and shall remain in full force and effect in
accordance with its terms.
7. Governing Law. This Amendment shall be governed by, and
-------------
construed and interpreted in accordance with, the internal laws (as opposed to
conflict of laws principles) of the State of Illinois.
8. Counterparts; Delivery of Facsimiles. This Amendment may be
------------------------------------
executed by the parties hereto in any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of an executed signature page hereof by facsimile
transmission shall be effective as delivery of a manually-signed counterpart
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their properly and duly authorized officers as
of the day and year first above written.
DONNELLEY ENTERPRISE SOLUTIONS
INCORPORATED
By: /s/ Rhonda I. Kochlefl
Name: Rhonda I. Kochlefl
Title: Chairman, President and CEO
HARRIS TRUST AND SAVINGS BANK,
as Administrative Agent and as a Bank
By: /s/ Richard H. Robb
Name: Richard H. Robb
Title: Vice President
3
<PAGE>
EXHIBIT 10.19
AMENDMENT No. 3, dated as of December 31, 1997 ("Amendment"), to the
---------
CREDIT AGREEMENT, dated as of October 30, 1996 (as the same may be further
amended, supplemented or otherwise modified from time to time, the "Agreement")
---------
among DONNELLEY ENTERPRISE SOLUTIONS INCORPORATED, a Delaware corporation, as
borrower (the "Company"), HARRIS TRUST AND SAVINGS BANK, as Administrative Agent
-------
(in such capacity, the "Administrative Agent"), and the other financial
--------------------
institutions parties thereto (the "Banks").
-----
W I T N E S E T H :
-----------------
WHEREAS, the parties hereto wish to amend Section 5.12 of the
Agreement on the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined in
-----------
the Agreement shall be used herein as so defined.
2. Amendments. (i) Section 5.05 is amended to read in its entirety
----------
as follows:
"SECTION 5.05. Mergers, Consolidations, Sales of Assets and
--------------------------------------------
Acquisitions. The Company will not, and will not permit its Material
------------
Subsidiaries to, merge into or consolidate with any other Person, or permit
any other Person to merge into or consolidate with it, or sell, transfer,
assign, lease, sublease, or otherwise dispose of (in one transaction or in
a series of transactions) all or any substantial part of any asset (whether
now owned or hereafter acquired) or any capital stock of any Subsidiary,
and the Company will not, and will not permit any Subsidiary to, purchase,
lease or otherwise acquire (in one transaction or a series of transactions)
all or any substantial part (to the extent such assets constitute one or
more distinct business units or operations) of the assets of any other
Person, except that:
(a) the Company or a Material Subsidiary may acquire another
corporation by merger, provided that, if the Company is a party to
such merger, the Company is the surviving corporation, and provided
further that after giving effect to such merger, no Event of Default
or Unmatured Event of Default shall exist;
(b) any Material Subsidiary may merge or consolidate with or
into, or sell or otherwise dispose of any or all of its assets to, the
Company or another Subsidiary, and any Material Subsidiary that is not
a Borrowing Subsidiary may sell all or substantially all of its
assets; provided that (i) after giving effect to such merger,
consolidation, sale or other disposition, no Event of Default or
Unmatured Event of Default shall exist, and (ii) in the case of an
asset sale by such a Material Subsidiary, the assets to be sold do not
constitute a material amount of the assets of the Company and its
Subsidiaries, taken as a whole; and
<PAGE>
(c) the Company or any Subsidiary may acquire the assets or
equity securities of any Person (an "Acquisition"), so long as:
(i) such Acquisition has been approved by the board of
directors (or equivalent) or shareholders (or equivalent) of such
Person;
(ii) such assets are used in, or the Person acquired is in,
the same business as the Company or such Subsidiary or a related
line of business; and
(iii) if the purchase price (including all cash paid, notes
issued and indebtedness assumed in connection therewith) of such
Acquisition is over $5,000,000, the Company has delivered to the
Administrative Agent, at least ten (10) Business Days before the
closing of such Acquisition, (A) historical or pro forma
financial statements for such Person for its last two fiscal
years, if available, and (B) financial projections for the
Company and its Consolidated Subsidiaries, giving effect to such
Acquisition, covering the period from the date of such
Acquisition through the Termination Date then in effect;
provided, that neither the Company nor any Subsidiary shall make
--------
any Acquisition if (x) the purchase price (including all cash
paid, notes issued and indebtedness assumed in connection
therewith) of such Acquisition is over $5,000,000 or (y) the sum
of the purchase price (as so determined) of such Acquisition and
the aggregate purchase prices (as so determined) of all other
Acquisitions made by the Company or any Subsidiary after December
31, 1997, would exceed $5,000,000, unless, in the case of clause
(x) or (y), such Acquisition is approved in writing by the
Majority Banks, which approval shall not be unreasonably withheld
or delayed.
For purposes of this Section 5.05, "a material amount" of assets shall
------------
mean assets (A) constituting 10% or more of the consolidated assets of the
Company and its Consolidated Subsidiaries, or (B) generating 10% or more of
the consolidated revenue of the Company and its Consolidated Subsidiaries
in any fiscal year."
(ii) Section 5.12 is amended in its entirety to read as follows:
"The Company will, as of the end of a fiscal quarter, maintain a Fixed
Charge Coverage Ratio of not less than, in the case of each fiscal quarter
ending on or before September 30, 1997, 2 to 1; in the case of the fiscal
quarter ending December 31, 1997, 1.75 to 1; in the case of the fiscal
quarter ending March 31, 1998, 1.65 to 1; in the case of the fiscal quarter
ending June 30, 1998, 1.5 to 1; in the case of the fiscal quarter ending
September 30, 1998, 1.75 to 1; and in the case of each fiscal quarter
ending on or after December 31, 1998, 2 to 1."
3. Conditions Precedent. This Amendment shall become effective and
--------------------
be deemed effective as of December 31, 1997 subject to the Administrative
Agent's receipt of this Amendment, duly executed by the Company and Harris Trust
and Savings Bank, as Administrative Agent and sole Bank.
4. Covenants, Representations and Warranties.
-----------------------------------------
<PAGE>
(i) Upon the effectiveness of this Amendment, the Company reaffirms
all covenants, representations and warranties made by it in the
Credit Agreement and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of December 31, 1997.
(ii) The Company represents and warrants that, after giving effect to
this Amendment, no event has occurred and is continuing or would
result from the execution, delivery or performance of this
Amendment which constitutes or would constitute an Event of
Default or which would constitute an Event of Default but for
the requirement that notice be given or time elapse or both.
(iii) The Company represents and warrants that the execution, delivery
and performance of this Amendment by it (i) are within its
corporate powers and (ii) have been duly authorized by all
necessary corporate action on its part. The Company further
represents and warrants that this Amendment, as of the date it
becomes effective, will constitute a valid and binding agreement
of the Company, enforceable against the Company in accordance
with its terms, subject to the effect of any applicable
bankruptcy, insolvency, reorganization or other laws relating to
or affecting the enforcement of creditors' rights generally or
by equitable principles.
5. Reference to and Effect on Agreement. Upon the effectiveness of
------------------------------------
this Amendment, each reference in the Agreement to "this Agreement,"
"hereunder," "hereof," "herein," "hereby" or words of like import shall mean and
be a reference to the Agreement as amended hereby, and each reference to the
Agreement in any instrument, document or agreement executed or delivered in
connection with the Agreement (including without limitation this Amendment)
shall mean and be a reference to the Agreement as amended hereby.
6. Continuing Effect. Except as expressly amended hereby, the
-----------------
Agreement shall continue to be and shall remain in full force and effect in
accordance with its terms.
7. Governing Law. This Amendment shall be governed by, and
-------------
construed and interpreted in accordance with, the internal laws (as opposed to
conflict of laws principles) of the State of Illinois.
8. Counterparts; Delivery of Facsimiles. This Amendment may be
------------------------------------
executed by the parties hereto in any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of an executed signature page hereof by facsimile
transmission shall be effective as delivery of a manually-signed counterpart
hereof.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their properly and duly authorized officers as
of the day and year first above written.
DONNELLEY ENTERPRISE SOLUTIONS
INCORPORATED
By: /s/ Thomas. A. Munro
Name: Thomas A. Munro
Title: Vice President and Chief Financial
Officer
HARRIS TRUST AND SAVINGS BANK,
as Administrative Agent and as a Bank
By: /s/ M. James Barry
Name: M. James Barry
Title: Vice President
4
<PAGE>
Exhibit 10.20
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of August 1, 1997 and modified on
March 12, 1998 by and among Donnelley Enterprise Solutions Incorporated, a
Delaware corporation (the "Company"), and Tom Munro (the "Executive").
-------
WHEREAS, the Company desires to employ the Executive as its 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 August 1, 1997.
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 third 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 Chief
Financial Officer. The Executive shall be subject to the direction of the
CEO, Chairman, President (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 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.
<PAGE>
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 $170,000 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 shall be prorated
-----------
for any subsequent period of service less than one full year.
4.2. Bonus Compensation. During the term hereof, the Company from
------------------
time to time shall pay the Executive an annual bonus (the "Bonus"). The
-----
Bonus will be calculated according to the Donnelley Enterprise Solutions
Incorporated Employee Incentive Compensation Plan.
-2-
<PAGE>
4.2.1. Any compensation paid to the Executive as Bonus shall be
in addition to the Base Salary. All bonus and benefit plans are
subject to annual review and change by the Board relative to key
strategic objectives for the year. Bonus payments to the Executive
shall be prorated for any subsequent period of service less than one
full year.
4.3. Vacations. During the term hereof, the Executive shall be
---------
entitled to four (4) weeks of vacation per annual vacation period of the
Company, such vacation to be taken at such times and intervals as shall be
determined by the Executive in the Executive's reasonable discretion. 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.
4.4. Other Benefits. During the term hereof and subject to any
--------------
contribution therefor generally required of executives of the Company, the
Executive shall be entitled to participate in all employee benefit plans
and other programs (including, but not limited to, any medical, dental,
retirement, disability, life insurance, sick leave and other benefits) from
time to time adopted by the Board and in effect for executives of the
Company generally, except to the extent such plans are in a category of
benefit otherwise already provided to the Executive. Such participation
shall be subject to (i) the terms of the applicable plan documents, (ii)
generally applicable Company policies and (iii) the discretion of the Board
or any administrative or other committee provided for in or contemplated by
such plan. The Company may alter, modify, add to or delete its employee
benefit plans at any time as the Board, in its sole judgment, determines to
be appropriate.
4.5. 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.
4.6. 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
-3-
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
each of a physician selected by the Company and a physician selected
by the Executive, to determine whether the Executive is so disabled
and such determination shall for the purposes of this Agreement be
conclusive of the issue. If such question shall arise and the
Executive shall fail to submit to such medical examination, the
Board's determination of the issue shall be binding on the Executive.
5.3. By the Company for Cause. The Company may terminate the
------------------------
Executive's employment hereunder for Cause as provided in Section 11.2. If
the Executive's employment hereunder is terminated for Cause, the Company
shall have no further obligation or liability to the Executive relating to
the Executive's employment hereunder, or the termination thereof, except
that the Company shall pay to the Executive (i) Base Salary earned but
unpaid through and including the date of termination, (ii) any amount
payable pursuant to Section 4.6, and (iii) any other amounts accrued by the
Executive but unpaid through and including the date of termination (it
being understood that a Bonus does not accrue until December 31 of the year
on which such Bonus is based).
5.4. By the Company other than for Cause. The Company may terminate
-----------------------------------
the Executive's employment hereunder other than for Cause at any time after
the Effective Date upon two weeks prior written notice to the Executive.
In the event of such termination, then the Company shall pay the Executive
(i) Base Salary earned but unpaid through and including the date of
termination, (ii) any amount payable pursuant to Section 4.6, (iii) the
amounts specified in Section 4.7, (iv) any unpaid portion of any Bonus for
any fiscal year preceding the year in which such termination occurs that
was earned but had not previously been paid, (v) at the times the Company
pays its executives bonuses in accordance with its general payroll
policies, any Bonus which would have been paid had termination not occurred
during the fiscal year in which such termination occurs (pro-rated based on
a formula, the numerator of which shall be the number of days during the
fiscal year in which such termination occurs the Executive was employed by
the Company and the denominator of which shall be 365 or 366, as the case
may be), and (vi) any other amounts accrued by the Executive but unpaid
through and including the date of termination. In addition, 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
<PAGE>
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, or (ii) there is a material diminution
in the responsibilities, duties and powers of the Executive. 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 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.
-7-
<PAGE>
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 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
-8-
<PAGE>
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 Company for time spent in
-9-
<PAGE>
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 the
-10-
<PAGE>
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 the
-11-
<PAGE>
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.
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 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-
<PAGE>
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.
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 Tom Munro at
his home address or, (b) in the case of the Company, at its principal place
of business and to the attention of the Chief Financial Officer; or to such
other address as
-13-
<PAGE>
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.
-14-
<PAGE>
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 Kochlefl
Title: Chairman, President & CEO
THE EXECUTIVE: /s/ Thomas A. Munro
Thomas A. Munro
-15-
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,937
<SECURITIES> 0
<RECEIVABLES> 30,720
<ALLOWANCES> 2,870
<INVENTORY> 3,249
<CURRENT-ASSETS> 39,336
<PP&E> 31,609
<DEPRECIATION> 15,791
<TOTAL-ASSETS> 74,085
<CURRENT-LIABILITIES> 25,579
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 46,242
<TOTAL-LIABILITY-AND-EQUITY> 74,085
<SALES> 0
<TOTAL-REVENUES> 29,737
<CGS> 0
<TOTAL-COSTS> 23,178
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 156
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> 458
<INCOME-TAX> 224
<INCOME-CONTINUING> 0
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<NET-INCOME> 234
<EPS-PRIMARY> 0.05
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