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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________.
COMMISSION FILE NUMBER: 0-27644
DIGITAL GENERATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3140772
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
875 BATTERY STREET
SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 276-6600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTIONS 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 NO X
--- ---
NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK, WITHOUT PAR VALUE, OUTSTANDING AS
OF APRIL 30, 1996: 11,469,760.
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DIGITAL GENERATION SYSTEMS, INC.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those indicated in the
forward-looking statements as a result of certain factors, including those set
forth under "Certain Business Considerations" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The registrant has attempted to
identify forward-looking statements in this report by placing an asterisk (*)
following each sentence containing such statements.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements ............................................ 3
Condensed Balance Sheets at March 31, 1996 and December 31, 1995 3
Condensed Statements of Operations for the three months ended
March 31, 1996 and 1995 ......................................... 4
Condensed Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 ......................................... 5
Notes to Condensed Financial Statements ......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 17
Item 2. Changes in Securities ........................................... 17
Item 3. Defaults upon Senior Securities ................................. 17
Item 4. Submission of Matters to a Vote of Security Holders ............. 17
Item 5. Other Information ............................................... 18
Item 6. Exhibits and Reports on Form 8-K ................................ 19
SIGNATURES....................................................... 21
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,593 $ 6,205
Accounts receivable, net 1,550 1,368
Prepaid expenses and other 386 624
-------- --------
Total current assets 35,529 8,197
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Network equipment 9,186 7,931
Office furniture and equipment 1,639 1,373
Leasehold improvements 332 83
-------- --------
11,157 9,387
Less - Accumulated depreciation and amortization (4,452) (3,615)
-------- --------
Property and equipment, net 6,705 5,772
OTHER ASSETS, net 473 490
-------- --------
$ 42,707 $ 14,459
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 671 $ 596
Accrued liabilities 1,463 1,203
Current portion of long-term debt 2,026 1,747
-------- --------
Total current liabilities 4,160 3,546
-------- --------
LONG-TERM DEBT, net of current portion 5,060 4,540
-------- --------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value - -
Authorized - -5,000,000 shares at March 31, 1996
and 7,873,322 shares at December 31, 1995
Outstanding - -none outstanding at March 31, 1996 and
7,273,759 shares at December 31, 1995; aggregate
liquidation preference of $25,433 at December 31, 1995 -- 25,321
Common stock, no par value - -
Authorized - - 30,000,000 shares
Outstanding - - 11,461,499 shares at March 31, 1996
and 1,112,204 shares at December 31, 1995 55,047 224
Receivable from issuance of common stock (175) (175)
Accumulated deficit (21,385) (18,997)
-------- --------
Total shareholders' equity 33,487 6,373
-------- --------
$ 42,707 $ 14,459
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
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DIGITAL GENERATION SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1996 1995
------------ -------------
(Unaudited)
<S> <C> <C>
REVENUES $ 1,894 $ 983
-------- -------
COSTS AND EXPENSES:
Delivery costs 571 312
Customer operations 944 707
Sales and marketing 983 789
Research and development 498 413
General and administrative 384 356
Depreciation and amortization 838 443
-------- -------
Total expenses 4,218 3,020
-------- -------
LOSS FROM OPERATIONS (2,324) (2,037)
-------- -------
OTHER INCOME (EXPENSE):
Interest income 263 97
Interest expense (327) (173)
-------- -------
NET LOSS $ (2,388) $(2,113)
======== =======
PRO FORMA NET LOSS PER SHARE $ (0.20) $ (0.23)
======== =======
PRO FORMA WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 11,675 9,125
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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DIGITAL GENERATION SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
--------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,388) $(2,113)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 838 443
Provision for doubtful accounts 33 32
Changes in operating assets and liabilities --
Accounts receivable (215) (7)
Prepaid expenses and other assets 255 (52)
Accounts payable and accrued liabilities 334 268
-------- -------
Net cash used in operating activities (1,143) (1,429)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (481) ---
-------- -------
Net cash provided by (used in) investing activities (481) ---
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 29,502 1
Payments on long-term debt (490) (140)
-------- -------
Net cash provided by (used in) financing activities 29,012 (139)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,388 (1,568)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,205 9,221
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,593 $ 7,653
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Property and equipment financed with capitalized lease obligations $ 1,289 $ 1,184
Common stock issued for notes receivable -- 98
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
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DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's financial statements included in its
Registration Statement on Form S-1 (Registration No. 33-80203) for the year
ended December 31, 1995.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary to state fairly the results for the three month
period ended March 31, 1996. The results for the three month period ended March
31, 1996 are not necessarily indicative of the results expected for the full
fiscal year.
2. CASH AND CASH EQUIVALENTS
In accordance with the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
has classified all marketable debt securities as held-to-maturity and has
accounted for these investments at amortized cost. Cash and cash equivalents
consist of liquid investments with original maturities of three months or less.
As of March 31, 1996 and December 31, 1995, the Company has invested its
available cash principally in short-term Treasury bills and money market
accounts; as a result, the amortized purchase cost approximates the fair market
value.
3. PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the "if
converted" method) and stock options and warrants (using the treasury stock
method). As the Company has incurred losses since inception, common equivalent
shares have been excluded from the computation as their effect is antidilutive;
however, pursuant to Securities and Exchange Commission requirements, such
computations include all common and common equivalent shares issued within the
12 months preceding the filing date as if they were outstanding for all periods
presented using the treasury stock method. Convertible preferred stock
outstanding during the period are included (using the "if converted" method) in
the computation as common equivalent shares even though the effect is
antidilutive.
4. CAPITAL STOCK
In January 1996, the shareholders approved a one-for-two reverse split of the
Company's preferred and common stock, which has been effected. All share and per
share amounts in the accompanying financial statements have been adjusted
retroactively to give effect to this reverse stock split.
In February 1996, the Company completed the initial public offering of its
common stock. The Company sold 3,000,000 shares for net proceeds of $30,690,000.
Concurrent with the closing of the initial public offering 7,273,759 shares of
convertible preferred stock and warrants to purchase 29,161 shares of preferred
stock were converted into an equivalent number of shares of common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those indicated
in the forward-looking statements as a result of certain factors, including
those set forth under "Certain Business Considerations". The Company has
attempted to identify forward-looking statements in Management's Discussion and
Analysis of Financial Condition and Results of Operations by placing an asterisk
(*) following each sentence containing such statements.
The following table presents unaudited financial information expressed as
a percentage of total revenues and operating data for the period indicated. The
information and operating data has been prepared by the Company on a basis
consistent with the Company's audited financial statements and includes all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation for the periods presented. The
operating results for any quarter should not be relied on as indicative of
results for any future period. See "Certain Business Considerations--History of
Losses; Future Operating Results Uncertain" and "--Potential Fluctuations in
Quarterly Results; Seasonality."
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS: THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Revenues ................................. 100.0% 100.0%
Costs and Expenses:
Delivery costs ...................... 30.2 31.7
Customer operations ................. 49.8 71.9
Sales and marketing ................. 51.9 80.3
Research and development ............ 26.3 42.0
General and administrative .......... 20.3 36.2
Depreciation and amortization ....... 44.2 45.1
----- ------
Total expenses ................... 222.7 307.2
------ ------
Loss from operations ..................... (122.7) (207.2)
------ ------
Other income (expense):
Interest income ..................... 13.9 9.9
Interest expense .................... (17.3) (17.6)
------ ------
Net loss ................................. (126.1)% (214.9)%
====== ======
OPERATING DATA:
Deliveries ............................... 149,000 72,000
</TABLE>
7
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Revenues
Revenues were $1,894,000 for the three months ended March 31, 1996, a 93%
increase from $983,000 for the three months ended March 31, 1995. The increase
is primarily due to a 107% increase in the volume of deliveries. The Company
made 149,000 and 72,000 deliveries in the three months ended March 31, 1996 and
March 31, 1995, respectively. The Company believes that the substantial increase
in delivery volume is the result of a number of factors, including increased
acceptance of the services offered by the Company and the increased availability
of an expanded network of Company equipment located in radio stations.
Average revenue per delivery was $12.71 for the three months ended March
31, 1996, a 7% decrease from $13.65 for the three months ended March 31, 1995.
This decrease is primarily the result of an increase in the proportion of
deliveries made through the Company's dealer channel. The Company offers
discounts to these marketing partners, who consolidate and forward the
deliveries of their agency customers.
Delivery Costs
Delivery costs were $571,000, or 30% of revenues for the three months
ended March 31, 1996, an 83% increase from $312,000, or 32% of revenues, for the
three months ended March 31, 1996. The increase in cost is primarily due to the
increased volume of deliveries. The reduction in delivery costs as a percentage
of revenues is the result of improvements in the rate agreement between the
Company and its primary long distance telephone service provider, increased
implementation of ISDN transmission technologies by certain high volume users,
and an increase in the proportion of deliveries being performed electronically
rather than by air freight. These improvements in the long distance telephone
rate and delivery efficiency were partially offset by an increase in the air
freight rate paid by the Company under the agreement between the Company and its
primary air freight provider.
The Company expects that delivery costs will increase in absolute dollars
and may fluctuate as a percentage of revenues in future periods.* See "Certain
Business Considerations--Potential Fluctuations in Quarterly Results;
Seasonality."
Customer Operations
Customer operations expenses for the three months ended March 31, 1996
were $944,000, a 34% increase from $707,000 for the three months ended March
31, 1995. This increase is the result of adding the personnel necessary to
respond to the greater volume of orders and deliveries made by customers.
Customer operations expenses as a percentage of revenues decreased to 50% from
72% in the three months ended March 31, 1996 and 1995, respectively, as the
Company has realized the benefits of economies of scale from the increased
volume of deliveries and has also improved the efficiency of its order
processing procedures.
The Company expects that customer operations expenses will increase in
absolute dollars and may fluctuate as a percentage of sales in future periods.*
The Company believes that in order to compete effectively and manage future
growth it will be required to continue to implement changes which improve and
increase the efficiency of its customer operations.* See "Certain Business
Considerations--Ability to Maintain and Improve Service Quality" and "--Ability
to Manage Growth."
Sales and Marketing
Sales and marketing expenses were $983,000 for the three months ended
March 31, 1996, a 25% increase from $789,000 for the three months ended March
31, 1995. The increase in sales and marketing expenses is due primarily to the
expansion of the Company's sales force, including additional salaries and the
related fringe benefits, incentive compensation, travel, and overhead costs.
The Company expects to continue to expand sales and marketing programs designed
to introduce the Company's services to the marketplace and to attract new
customers for its services.* See "Certain Business Considerations--Dependence
on Emerging Markets." The Company expects that sales and marketing expenses
will increase in absolute dollars in future periods and may fluctuate
as a percentage of revenue in future periods.*
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Research and Development
Research and development expenses were $498,000 for the three months ended
March 31, 1996, a 21% increase from $413,000 for the three months ended March
31, 1995. The increase is due primarily to the hiring of additional staff to
develop new features for the existing system and to expand development of
potential new services, including satellite transmission capability and video
transmission capability. In particular, increased expenses were incurred for
recruiting fees, salaries and the related fringe benefits and overhead costs.
These increases were partially offset by a reduction in spending for
consultants.
The Company expects that research and development expenses will increase
substantially in absolute dollars and may fluctuate as a percentage of revenue
in future periods.*
General and Administrative
General and administrative expenses for the three months ended March 31,
1996 were $384,000, an 8% increase from $356,000 for the three months ended
March 31, 1995. The increase is primarily due to the addition of staff to
support the growth of the Company's business. Increases in salaries, fringe
benefits and overhead have been partially offset by reduced spending for
consultants and temporary labor. The Company expects that general and
administrative expenses will increase in absolute dollars and may fluctuate as a
percentage of sales in future periods.*
Depreciation and Amortization
Depreciation and amortization expenses for the three months ended March
31, 1996 were $838,000, an 89% increase from $443,000 for the three months ended
March 31, 1995. The increase is due to the continued expansion of the Company's
network. In particular, the number of units located at radio stations at March
31, 1996 has increased by approximately 90% from the number at March 31, 1995,
and the capital investment in the Company's Network Operating Center increased
by $1.0 million, or approximately 110%, between March 31, 1995 and March 31,
1996.
The Company expects to continue to invest in the expansion of its
network.* The Company also intends to develop a similar infrastructure within
the television broadcast industry that will require additional, more costly,
terminals to be built and installed in television stations.* The Company expects
depreciation and amortization to increase in absolute dollars in proportion to
this growth.* However, there can be no assurance that the Company will make such
investments or that such investments will result in future revenue growth.
Interest Income and Interest Expense
Interest income for the three months ended March 31, 1996 was $263,000, a
171% increase from $97,000 for the three months ended March 31, 1995. The
increase is primarily due to income derived from the short term investment of
the proceeds from the Company's initial public offering, which was completed in
February 1996. The Company expects that interest income will decrease in the
future based on the levels of cash used in the Company's operations.* See
"Liquidity and Capital Resources."
Interest expense for the three months ended March 31, 1996 was $327,000,
an 89% increase from $173,000 in the three months ended March 31, 1995. The
increase is due to increased debt resulting from lease agreements used to fund
the acquisition of components and equipment needed to develop the Company's
network and to provide Company personnel with the capital resources necessary to
support the Company's business growth. Debt outstanding under these agreements
has increased to $7.1 million at March 31, 1996 from $3.4 million at March 31,
1995. The Company expects that interest expense will increase in the future
based on the increased levels of borrowing.* See "Liquidity and Capital
Resources."
9
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Liquidity and Capital Resources
Net cash used in operating activities, including the adjustment for
depreciation and amortization, decreased to $1.1 million in the three months
ended March 31, 1996 from $1.4 million in the three months ended March 31, 1995.
This change is the result of a decrease in the net loss, exclusive of
depreciation and amortization, plus changes in working capital balances.
The Company used cash of $.5 million for the purchase of property and
equipment and acquired an additional $1.3 million of property and equipment
through capital lease obligations in the three months ended March 31, 1996. In
the three months ended March 31, 1995 all of the Company's property and
equipment acquisitions, $1.2 million, had been financed with capital lease
obligations. The capital additions in the three months ended March 31, 1996 were
a result of the Company's continued expansion of its network and the additions
necessary to support the growth of the Company's operating, research, sales and
marketing, and administrative staffs, including $.3 million of leasehold
improvements completed in conjunction with the relocation of the Company's
headquarters, which was substantially complete by the end of February 1996. In
the future, the Company expects the proportion of equipment acquisitions
financed by capital leases to fluctuate based on such issues as the cost and
availability of lease financing for particular types of equipment and the levels
of cash used or generated by the Company's operating, investing and financing
activities. *
The Company completed its initial public offering in February 1996. The
net proceeds to the Company, after underwriting discounts and offering expenses
were $29,490,000. Principal payments on long-term debt were $490,000 in the
three months ended March 31, 1996 versus $140,000 in the three months ended
March 31, 1995, reflecting the increase in regularly scheduled repayment of the
increased capital lease liability incurred to finance equipment and property
acquisitions. In January 1996 the Company completed an amendment to the Master
Lease Agreement with its primary lessor which increased the balance available
under the agreement by $6.0 million.
At March 31, 1996, the Company's current sources of liquidity included
cash and cash equivalents of $33.6 million and $5.6 million available for
capital expenditures remaining under lease agreements which expire in December
1996. The Company currently has no significant capital commitments other than
the commitments under capital leases. The Company believes that its existing
sources of liquidity will satisfy the Company's projected working capital,
capital lease and term loan commitments and other cash requirements at least
through 1996. * See "Certain Business Considerations--Future Capital Needs;
Uncertainty of Additional Funding."
10
<PAGE> 11
Certain Business Considerations
The Company's business is subject to the following risks and uncertainties, in
addition to those described above.
History of Losses; Future Operating Results Uncertain. The Company was
founded in 1991 and has been unprofitable since its inception and expects to
continue to generate net losses for a minimum of the next twelve months. As of
March 31, 1996, the Company's accumulated deficit was $21.4 million. The Company
has had difficulty in accurately forecasting its future sales and operating
results due to its limited operating history. Accordingly, although the Company
has recently experienced significant growth in sales, such growth rates may not
be sustainable and should not be used as an indication of future sales growth,
if any, or of future operating results. The Company's future success will depend
in part on obtaining continued reductions in delivery and service costs,
particularly continued automation of order processing and reductions in
telecommunications costs.* There can be no assurance the Company's sales will
grow or be sustained in future periods or that the Company will achieve or
sustain profitability in any future period.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past and may in the future vary
significantly depending on factors such as the volume of advertising in response
to seasonal buying patterns, the timing of new product and service
introductions, increased competition, the timing of the Company's promotional
efforts, general economic factors, and other factors. For example, the Company
has historically experienced lower sales in the first quarter and higher sales
in the fourth quarter, due to increased customer advertising volumes for the
Christmas selling season. As a result, the Company believes that period to
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as an indication of future performance. In any
period, the Company's revenues and delivery costs are subject to variation based
on changes in the volume and mix of deliveries performed during the period. In
particular, the Company's operating results have historically been significantly
influenced by the volume of deliveries ordered by television stations during the
"Sweeps" rating periods that currently take place in February, May and November.
The increased volume of these deliveries during such periods and the Company's
pricing for "Sweeps" advertisements have historically increased the total
revenues and revenues per delivery of the Company and tended to reduce delivery
costs as a percentage of revenues. The Company's expense levels are based, in
part, on its expectations of future sales levels. If sales levels are below
expectations, operating results are likely to be materially adversely affected.
In addition, the Company has historically operated with little or no backlog.
The absence of backlog increases the difficulty of predicting sales and
operating results. Fluctuations in sales due to seasonality may become more
pronounced as the growth rate of the Company's sales slows. Due to the unique
nature of the Company's products and services, the Company believes that it will
incur significant expenses for sales and marketing, including advertising, to
educate potential customers about such products and services.*
Dependence on Radio Advertising. The Company's revenues to date have
been derived principally from a single line of business, the delivery of radio
advertising spots from advertising agencies, production studios and dub and ship
houses to radio stations in the United States, and such services are expected to
continue to account for a substantial majority of the Company's revenues for
some time.* A decline in demand for, or average selling prices of, the Company's
radio advertising delivery services, whether as a result of competition from new
advertising media, new product introductions or price competition from
competitors, a shift in purchases by customers away from the Company's premium
services such as DG Express, technological change or otherwise, would have a
material adverse effect on the Company's business, operating results and
financial condition. Additionally, the Company is dependent upon its
relationship with and continued support of the radio stations in which it has
installed communications equipment. Should a substantial number of these
stations go out of business or experience a change in ownership, it could
materially adversely affect the Company's business, operating results and
financial condition.
Dependence on New Product Introductions. The Company's future growth
depends on its successful and timely introduction of new products and services
in markets that do not currently exist or are just emerging. The Company's goals
are to introduce new services, such as the delivery of first-play
11
<PAGE> 12
music singles, and the delivery of video advertising spots to television
stations. The Company is currently evaluating a number of technologies to be
used in designing a system for electronic air play verification. The Company is
also designing and developing, together with ABC Radio Networks, an extension to
the Company's existing network, including satellite transmission capabilities,
through which ABC could electronically distribute advertising and programming to
ABC's affiliate radio stations. The Company, however, has not yet completed
development of these products or services, and there can be no assurance that
the Company will successfully complete any such development, or that if such
development is completed, the Company's planned introduction of these products
and services will realize market acceptance or will meet the technical or other
requirements of potential customers. Moreover, unless the Company can
successfully develop video transmission services, it is unlikely that it can
retain current or attract future audio delivery customers who may ultimately
demand delivery of both media content.
Dependence on Emerging Markets. The market for the electronic delivery
of digital audio and video transmissions by advertisers, advertising agencies,
production studios, and video and music distributors to radio and television
stations, is relatively new and alternative technologies are rapidly evolving.
The Company's marketing task requires it to overcome buyer inertia related to
the diffuse and relatively low level decision making regarding an agency's
choice of delivery services, long standing relationships with existing dub and
ship vendors, and, currently, a service offering which is limited to audio in
contrast to customers' needs for both audio and video delivery. Therefore, it is
difficult to predict the rate at which the market for the electronic delivery of
digital audio and video transmissions will grow, if at all. If the market fails
to grow, or grows more slowly than anticipated, the Company's business,
operating results and financial condition will be materially adversely affected.
Even if the market does grow, there can be no assurance that the Company's
products and services will achieve commercial success. Although the Company
intends to conform its products and services to meet existing and emerging
standards in the market for the electronic delivery of digital audio and video
transmissions, there can be no assurance that the Company will be able to
conform its products to such standards in a timely fashion, or at all. The
Company believes that its future growth will depend, in part, on its ability to
add these services and additional customers in a timely and cost-effective
manner, and there can be no assurance that the Company will be successful in
developing such services, in obtaining new customers, or in obtaining a
sufficient number of radio and television stations, radio and television
networks, advertisers, advertising agencies, production studios, and audio and
video distributors who are willing to bear the costs of installing and
supporting the Company's field receiving equipment, including rooftop satellite
antennae.
The Company's limited marketing efforts to date with regard to the
Company's products and services have involved identification and
characterization of specific market segments for these products and services
with a view to determining the target markets that will be the most receptive to
such products and services. There can be no assurance that the Company has
correctly identified such markets or that its planned products and services will
address the needs of such markets. Furthermore, there can be no assurance that
the Company's technologies, in their current form, will be suitable for specific
applications or that further design modifications, beyond anticipated changes to
accommodate different markets, will not be necessary. Broad commercialization of
the Company's products and services will require the Company to overcome
significant market development hurdles, many of which may not currently be
foreseen.
Dependence on Technological Developments. The market for the
distribution of digital audio and video transmissions is characterized by
rapidly changing technology. The Company's ability to remain competitive and its
future success will depend in significant part upon the technological quality of
its products and processes relative to those of its competitors and its ability
both to develop new and enhanced products and services and to introduce such
products and services at competitive prices and in a timely and cost-effective
fashion. The Company's development efforts have been focused on the areas of
satellite transmission technology, video compression technology and air-play
verification technology. A 30-second video file is substantially larger than a
30-second audio file, and because this size video file cannot currently be
delivered over the telephone lines in a manner that is cost competitive with
tape delivery, the Company's ability to successfully introduce electronic video
delivery services depends on its ability to obtain satellite delivery capability
and broadcast quality compression. Work in satellite technology is oriented to
developing appropriate software to permit enhancement of the current Receive
12
<PAGE> 13
Playback Terminals ("RPTs") to receive digital satellite transmissions. Work in
video compression technology is directed toward identifying, qualifying and
licensing broadcast quality compression systems. The Company has an agreement
with Hughes Network Systems, Inc. ("Hughes") which allows the Company to use
Hughes' satellite capacity for electronic delivery of digital audio
transmissions by that media. The Company is currently testing development stage
software designed to enhance and enable the current RPTs to receive digital
satellite transmissions over the Hughes satellite system. There can be no
assurance that the Company will successfully complete such tests or that the
Hughes satellite system will have the capacity to meet the Company's delivery
commitments and broadcast quality requirements. Work in air-play verification
technology is directed toward proving an active encoding technology which allows
a unique identifier to be decoded to a high degree of reliability. There can be
no assurance that these technologies can be developed or applied in a timely and
cost-effective manner.
In addition, the Company has entered into an agreement with ABC Radio
Networks ("ABC") to jointly develop an extension to the Company's existing
network, including satellite transmission capabilities, through which ABC could
electronically distribute advertising and programming to ABC's affiliate radio
stations. There can be no assurance that the Company will successfully complete
the design, development, prototyping, testing or deployment of the audio server
network for ABC. In addition, there can be no assurance that ABC will
successfully develop and deploy an enhanced satellite network with the capacity
to meet the delivery and audio quality requirements of the audio server
network.
The Company must rely substantially on third party vendors for the
development of these technologies and there can be no assurance that such
vendors will be able to develop such technologies in a manner that meets the
needs of the Company and its customers. The failure to implement these
technologies or to obtain licenses on favorable economic terms from other
vendors, individually or in combination, could have a material adverse effect on
the Company's prospects for future growth. There can be no assurance that the
Company will be successful in selecting, developing and implementing new
products or in enhancing its existing products and services on a timely basis or
at all, or that such products will achieve market acceptance. Moreover, the
introduction of products embodying new technologies can render existing products
obsolete or unmarketable. There can be no assurance that the Company will be
successful in identifying, developing, contracting for the manufacture of, and
marketing product enhancements or new products that respond to technological
change, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. Delays in the
commencement of commercial availability of new products and services and
enhancements to existing products and services may result in customer
dissatisfaction and delay or loss of revenue. If the Company is unable, for
technological or other reasons, to develop and introduce new products and
services or enhancements of existing products and services in a timely manner or
if new versions of existing products do not achieve a significant degree of
market acceptance, there could be a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. The Company currently competes in the market for the
distribution of audio advertising spots to radio stations. The principal
competitive factors affecting this market are ease of use, price, timeliness and
accuracy of delivery. The Company competes with a variety of dub and ship houses
such as Mediatech and Spotlink and production studios that have traditionally
distributed taped advertising spots via physical delivery. Although such dub and
ship houses and production studios do not currently offer electronic delivery,
they have long-standing ties to local distributors that will be difficult for
the Company to replace. Some of these dub and ship houses and production studios
have greater financial, distribution and marketing resources and have achieved a
higher level of brand recognition than the Company. Moreover, several other
companies have announced systems for electronically delivering audio content. As
a result, there can be no assurance that the Company will be able to compete
effectively against these competitors merely on the basis of ease of use,
timeliness and accuracy of delivery.
To the extent that the Company is successful in entering new markets,
such as video delivery to television stations and content delivery to radio and
television stations, it would expect to face competition from companies in
related communications markets and/or package delivery markets which could offer
products and services with functionality similar or superior to that offered by
the Company's products and services. In addition, telecommunications providers
13
<PAGE> 14
such as AT&T, MCI and Regional Bell Operating Companies could enter the
market as competitors with materially lower electronic delivery transportation
costs. The Company could also face competition from entities with package
delivery expertise such as Federal Express, United Parcel Service, DHL and
Airborne if any such companies enter the electronic data delivery market. Radio
networks such as ABC or Westwood One could also become competitors by selling
and transmitting advertisements as a complement to their content programming.
In the market for the electronic distribution of digital video transmissions to
television stations, the Company would expect to encounter competition from
CycleSat, Indenet and Broadcast One, in addition to dub and ship houses and
production studios, certain of which currently function as marketing partners
with the Company in the audio distribution market.
Many of the Company's current and potential competitors in the markets
for audio and video transmissions have substantially greater financial,
technical, marketing and other resources and larger installed customer bases
than the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors based on these and
other factors. The Company expects that an increasingly competitive environment
will result in price reductions that could result in reduced unit profit margins
and loss of market share, all of which would have a material adverse effect on
the Company's business, results of operations and financial condition. Moreover,
the market for the distribution of audio and video transmissions has become
increasingly concentrated in recent years as a result of acquisitions, which are
likely to permit many of the Company's competitors to devote significantly
greater resources to the development and marketing of new competitive products
and services. The Company expects that competition will increase substantially
as a result of these and other industry consolidations and alliances, as well as
the emergence of new competitors. There can be no assurance that the Company
will be able to compete successfully with new or existing competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Ability to Maintain and Improve Service Quality. The Company's business
is dependent on its ability to make deliveries to broadcast stations within the
time periods requested by customers. Any failure to do so, whether or not within
the control of the Company, could result in an advertisement not being run and
in the station losing air-time which it could have otherwise sold. Although the
Company disclaims any liability for lost air-time, there can be no assurance
that claims by stations for lost air-time would not be asserted in these
circumstances or that dissatisfied advertisers would refuse to make further
deliveries through the Company in the event of a significant occurrence of lost
deliveries, either of which would have a material adverse effect on the
Company's business, results of operations and financial condition. Although the
Company maintains insurance against business interruption, there can be no
assurance that such insurance will be adequate to protect the Company from
significant loss in these circumstances or that a major catastrophe (such as an
earthquake or other natural disaster) would not result in a prolonged
interruption of the Company's business. In particular, the Company's network
operating center is located in the San Francisco Bay area, which has in the past
and may in the future experience significant, destructive seismic activity that
could damage or destroy the Company's network operating center. In addition, the
Company's ability to make deliveries to stations within the time periods
requested by customers depends on a number of factors, some of which are outside
of its control, including equipment failure, interruption in services by
telecommunications service providers, and the Company's inability to maintain
its installed base of Record Send Terminals ("RSTs") and RPTs that comprise its
distribution network. The result of the Company's failure to make timely
deliveries for whatever reason could be that dissatisfied advertisers would
refuse to make further deliveries through the Company which would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Ability to Manage Growth. The Company has recently experienced a period
of rapid growth that has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant strain
on the Company's management, operating and financial systems and resources. To
accommodate this recent growth and to compete effectively and manage future
growth, if any, the Company will be required to continue to implement and
improve its operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, motivate and
manage its work force. In particular, the Company believes that to achieve these
14
<PAGE> 15
objectives it must complete its automation of the customer order entry
process and the integration of the delivery fulfillment process into the
customer billing system. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. Any failure to implement and improve
the Company's operational, financial and management systems or to expand,
train, motivate or manage employees could have a material adverse effect on the
Company's business, operating results and financial condition.
Future Capital Needs; Uncertainty of Additional Funding. The Company
intends to continue making capital expenditures to produce and install RSTs and
RPTs and to introduce additional services.* Based on current plans and
assumptions relating to the timing of its operations, the Company anticipates
that the net proceeds of its initial public offering completed on February 9,
1996, together with its existing capital and cash from operations, will be
adequate to satisfy its capital requirements through at least the end of 1996.*
There can be no assurance, however, that the net proceeds of the Company's
initial public offering and such other sources of funding will be sufficient to
satisfy the Company's future capital requirements. Based on its current business
plan, the Company anticipates that it will eventually use the entire proceeds of
its initial public offering and there can be no assurance that other sources of
funding will be adequate to fund the Company's capital needs, which depend upon
numerous factors, including the progress of the Company's product development
activities, the cost of increasing the Company's sales and marketing activities
and the amount of revenues generated from operations, none of which can be
predicted with certainty. There can be no assurance that the Company will not
require additional capital sooner than currently anticipated. In addition, the
Company is unable to predict the precise amount of future capital that it will
require and there can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. The inability to obtain
required financing would have a material adverse effect on the Company's
business, financial condition and results of operations. Consequently, the
Company could be required to significantly reduce or suspend its operations,
seek a merger partner or sell additional securities on terms that are highly
dilutive to existing investors.
Expansion into International Markets. Although the Company's plans
include expansion of its operations to Europe and Asia, it does not at present
have network operating center personnel experienced in operating in these
locations.* Telecommunications standards in foreign countries differ from those
in the United States and may require the Company to incur substantial costs and
expend significant managerial resources to obtain any necessary regulatory
approvals and comply with differing equipment interface and installation
standards promulgated by regulatory authorities of those countries. Changes in
government policies, regulations and telecommunications systems in foreign
countries could require the Company's products and services to be redesigned,
causing product and service delivery delays that could materially adversely
affect the Company's operating results. The Company's ability to successfully
enter these new markets will depend, in part, on its ability to attract
personnel with experience in these locations and to attract partners with the
necessary local business relationships.* There can be no assurance, however,
that the Company's products and services will achieve market acceptance in
foreign countries. The inability of the Company to successfully establish and
expand its international operations may also limit its ability to obtain
significant international revenues and could materially adversely affect the
business, operating results and financial condition of the Company. Furthermore,
international business is subject to a number of country-specific risks and
circumstances, including different tax laws, difficulties in expatriating
profits, currency exchange rate fluctuations, and the complexities of
administering business abroad. Moreover, to the extent the Company increases its
international sales, the Company's business, operating results and financial
condition could be materially adversely affected by these risks and
circumstances, as well as by increases in duties, price controls or other
restrictions on foreign currencies, and trade barriers imposed by foreign
governments, among other factors.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of, and on its ability to
attract and retain, qualified management, sales, operations, marketing and
technical personnel. The competition for qualified personnel is intense and the
loss of any of such persons, as well as the failure to recruit additional key
personnel in a timely manner, could adversely affect the Company. There can be
no assurance that the Company will be able to continue to attract and retain
qualified management, sales and technical personnel for the development of its
business. The Company generally has not entered into employment or
noncompetition agreements with any of its employees. The Company does not
maintain key man life insurance on the lives of any of its
15
<PAGE> 16
key personnel. The Company's failure to attract and retain key personnel could
have a material adverse effect on its business, operating results and financial
condition.
Dependence on Certain Suppliers. The Company relies on certain single
or limited-source suppliers for certain integral components used for the
assembly of the Company's RSTs and RPTS. Although the Company's suppliers are
generally large, well-financed organizations, in the event that a supplier were
to experience financial or operational difficulties that resulted in a reduction
or interruption in component supply to the Company, it would delay the Company's
deployment of RSTs and RPTs which would have the effect of depressing the
Company's business until the Company established sufficient component supply
through an alternative source. The Company believes that there are alternative
component manufacturers that could supply the components required to produce the
Company's products, but the Company is not currently pursuing agreements or
understandings with such alternative sources. If a reduction or interruption of
supply were to occur, it could take a significant period of time for the
Company to qualify an alternative subcontractor, redesign its products as
necessary and contract for the manufacture of such products. The Company does
not have long-term supply contracts with its sole- or limited-source vendors and
purchases its components on a purchase order basis. The Company has experienced
component shortages in the past and there can be no assurance that material
component shortages or production or delivery delays will not occur in the
future. The inability in the future to obtain sufficient quantities of
components in a timely manner as required, or to develop alternative sources as
required, could result in delays or reductions in product shipments or product
redesigns, which would materially and adversely affect the Company's business,
operating results and financial condition.
Pursuant to its development efforts in the area of satellite
transmission technology, the Company is currently testing development stage
software designed to enhance and enable the current RPTs to receive digital
satellite transmissions over the Hughes satellite system. The Company's
dependence on Hughes entails a number of significant risks. The Company's
business, results of operations and financial condition would be materially
adversely affected if Hughes were unable for any reason to meet the Company's
delivery commitments or if any transmissions failed to satisfy the Company's
quality requirements. In the event that the Company were unable to continue to
use Hughes' satellite capacity, the Company would have to identify, qualify and
transition deliveries to an acceptable alternative satellite transmission
vendor. This identification, qualification and transition process could take six
months or longer, and no assurance can be given that an alternative satellite
transmission vendor would be available to the Company or be in a position to
satisfy the Company's delivery requirements on a timely and cost-effective
basis.
The Company obtains its local access telephone transmission services
through Teleport Communications Group. The Company obtains its long distance
telephone access through an exclusive contract with MCI which expires in 1997.
Any material interruption in the supply of either local access or long distance
carrier service could have a material adverse effect on the Company's business,
results of operations and financial condition.
Dependence on Proprietary Technology, Protection of Trademarks,
Copyrights, and Other Proprietary Information; Risk of Third Party Claims of
Infringement. The Company considers its trademarks, copyrights, advertising, and
promotion design and artwork to be of value and important to its business. The
Company relies on a combination of trade secret, copyright and trademark laws
and nondisclosure and other arrangements to protect its proprietary rights. The
Company does not have any patents or patent applications pending. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy or obtain and use information that the Company regards as
proprietary. There can be no assurance that the steps taken by the Company to
protect its proprietary information will prevent misappropriation of such
information and such protection may not preclude competitors from developing
confusingly similar brand names or promotional materials or developing products
and services similar to those of the Company. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. While the Company believes that its
trademarks, copyrights, advertising and promotion design and artwork do not
infringe upon the proprietary rights of third parties, there can be no assurance
that the Company will not receive future communications from third parties
asserting that the Company's trademarks, copyrights, advertising and promotion
design and artwork infringe, or may infringe, on the proprietary rights of third
16
<PAGE> 17
parties. Any such claims, with or without merit, could be time-consuming,
require the Company to enter into royalty arrangements or result in costly
litigation and diversion of management personnel. No assurance can be given that
any necessary licenses can be obtained or that, if obtainable, such licenses can
be obtained on commercially reasonable terms. In the event of a successful claim
of infringement against the Company and failure or inability of the Company to
license the infringed or similar proprietary information, the Company's
business, operating results and financial condition could be materially
adversely affected.
Concentration of Stock Ownership; Potential Issuance of Preferred
Stock; Anti-Takeover Provisions. The present executive officers and directors of
the Company and their affiliates own approximately 37% of the Company's Common
Stock. As a result, these shareholders will be able to control or significantly
influence all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may have the effect of delaying or preventing a change in control
of the Company. In addition, the Company's Board of Directors has the authority
to issue up to 5,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges and restrictions thereof, including voting
rights, without any further vote or action by the Company's shareholders.
Although the Company has no current plans to issue any shares of Preferred
Stock, the rights of the holders of Common Stock would be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. Issuance of Preferred Stock could have the effect of
delaying, deferring or preventing a change in control of the Company.
Furthermore, certain provisions of the Company's Articles of Incorporation and
Bylaws and of California law could have the effect of delaying, deferring or
preventing a change in control of the Company.
Possible Volatility of Share Price. The trading prices of the Company's
Common Stock may be subject to wide fluctuations in response to a number of
factors, including variations in operating results, changes in earnings
estimates by securities analysts, announcements of extraordinary events such as
litigation or acquisitions, announcements of technological innovations or new
products or services by the Company or its competitors, as well as general
economic, political and market conditions. In addition, stock markets have
experienced extreme price and volume trading volatility in recent years. This
volatility has had a substantial effect on the market prices of the securities
of many high technology companies for reasons frequently unrelated to the
operating performance of specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company has been, or may become, involved in
litigation proceedings incidental to the conduct of its business. The Company
does not believe that any such proceedings presently pending will have a
material adverse affect on the Company's financial position or its results of
operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 9, 1996, the shareholders of the Company, acting by written
consent in lieu of a meeting (i) approved the amendment and restatement of the
Company's Articles of Incorporation to, among other things, effect a 1-for-2
reverse split of the outstanding capital stock of the Company; (ii)
17
<PAGE> 18
approved the amendment and restatement of the Company's Articles of
Incorporation, effective upon the closing of the Company's initial public
offering, to eliminate the rights, preferences, and privileges of each formerly
outstanding series of Preferred Stock, to authorize the Company to issue up to
5,000,000 shares of Preferred Stock as determined by the Board of Directors,
eliminate the right of shareholders to act by written consent, and eliminate
cumulative voting when the Company becomes a "listed corporation" under
California law, and (iii) approved the Company's 1996 Employee Stock Purchase
Plan and the reservation of 500,000 post-split shares of Common Stock for
issuance thereunder.
On January 31, 1996, the shareholders of the Company, acting by
written consent in lieu of a meeting (i) approved amendments to the Company's
1996 Employee Stock Purchase Plan and reduced the reservation of Common Stock
for the issuance thereunder to 250,000 post-split shares; and (ii) approved an
amendment to the Company's 1992 Stock Option Plan to provide that, upon a change
in control of the Company, the unvested options granted to each of the Company's
executive officers will be subject to accelerated vesting to the extent of 50%
of such unvested options.
These shareholder actions by written consent were taken prior to the
conversion of each outstanding share to the Company's Preferred Stock into one
share of Common Stock upon the closing of the Company's initial public offering.
Each of the shareholder actions taken by written consent was approved by
shareholders holding, on a post-split basis, a total of 653,325 shares of Common
Stock, 2,518,272 shares of the Company's Series A Preferred Stock, 2,182,032
shares of its Series B Preferred Stock, 1,347,831 shares of its Series C
Preferred Stock, and 393,749 shares of its Series D Preferred Stock. There were
no abstentions or broker non-votes in connection with these shareholder actions.
ITEM 5. OTHER INFORMATION
None.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
3.1 (d) Restated Articles of Incorporation of registrant.
3.2 (b) Bylaws of registrant, as amended to date.
4.1 (b) Form of Lock-Up Agreement.
4.2 (b) Form of Common Stock Certificate.
10.1 (b) 1992 Stock Option Plan (as amended) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement.
10.2 (b) Form of Directors' and Officers' Indemnification
Agreement.
10.3 (b) 1995 Director Option Plan and form of Incentive Stock
Option Agreement thereto.
10.4 (b) Form of Restricted Stock Agreement.
10.5.1 (c) Content Delivery Agreement between the Company and
Hughes Network Systems, Inc., dated November 28, 1995.
10.5.2 (c) Equipment Reseller Agreement between the Company and
Hughes Network Systems, Inc., dated November 28, 1995.
10.6 (b) Amendment to Warrant Agreement between the Company and
Comdisco, Inc., dated January 31, 1996.
10.7.1 (c) Corporate Service Plan Agreement between the Company and
MCI Telecommunications Corporation, dated March 23,
1994.
10.7.2 (c) First Amendment to Corporate Service Plan Agreement
between the Company and MCI Telecommunications
Corporation, dated November 2, 1995.
10.8 (b) Master Lease Agreement between the Company and Comdisco,
Inc., dated October 20, 1994, and Exhibits thereto.
10.9 (b) Loan and Security Agreement between the Company and
Comdisco, Inc., dated October 20, 1994, and Exhibits
thereto.
10.10 (b) Master Equipment Lease between the Company and Phoenix
Leasing, Inc., dated January 7, 1993.
10.15 (c) Audio Server Network Prototype Vendor Agreement and
Satellite Vendor Agreement between the Company and ABC
Radio Networks, dated December 15, 1995.
10.16 (b) Employee Stock Purchase Plan (as amended).
10.17 (b) Promissory Note between the Company and Henry W.
Donaldson, dated March 18, 1994, December 5, 1994,
December 5, 1994, and March 14, 1995.
10.18 (b) Warrant Agreement to purchase Series B Preferred
Stock between the Company and Comdisco, Inc., dated as
of October 20, 1994.
10.19 (b) Warrant Agreement to purchase Series C Preferred
Stock between the Company and Comdisco, Inc., dated as
of June 13, 1995..
10.20 (b) Warrant Agreement to purchase Series D Preferred
Stock between the Company and Comdisco, Inc., dated as
of January 11, 1996.
10.21 (d) Lease for 9,809 rentable square feet at 855 Battery
Street, San Francisco, California between the Company
and Westinghouse Electric Corporation dated October 10,
1995 and exhibits thereto.
10.22 (d) Agreement of Sublease for 9,434 rentable square feet at
855 Battery Street, San Francisco, California between
the Company and T.Y. Lin International dated September
8, 1995 and exhibits thereto.
10.23 (d) Agreement of Sublease for 5,613 rentable square feet
at 855 Battery Street, San Francisco, California between
the Company and Law\Crandall, Inc. dated September 29,
1995 and exhibits thereto.
19
<PAGE> 20
EXHIBIT
NUMBER TITLE
------- -----
11.1 (d) Statements of computation of pro forma common shares and
equivalents.
27(a) Financial Data Schedule.
-----------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the
same number filed with registrant's Registration
Statement on Form S-1 (Registration No. 33-80203).
(c) Incorporated by reference to the exhibit bearing the
same number filed with registrant's Registration
Statement on Form S-1 (Registration No. 33-80203). The
registrant has received confidential treatment with
respect to certain portions of this exhibit. Such
portions have been omitted from this exhibit and have
been filed separately with the Securities and Exchange
Commission.
(d) Incorporated by reference to the registrant's Quarterly
Report on Form10-Q filed May 3, 1996
(b) Reports on Form 8-K.
None.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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.
DIGITAL GENERATION SYSTEMS, INC.
Dated: May 13, 1996 BY: \S\ THOMAS P. SHANAHAN
------------------------------------------
THOMAS P. SHANAHAN
VICE PRESIDENT & CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND CHIEF ACCOUNTING
OFFICER)
21
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