<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 SEPTEMBER 30, 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 X NO
--- ---
NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK, WITHOUT PAR VALUE, OUTSTANDING
AS OF OCTOBER 31, 1996: 11,638,089.
===============================================================================
<PAGE> 2
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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets at September 30, 1996 and December 31, 1995 . . . . . . . . 3
Condensed Statements of Operations for the three and nine months
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,418 $ 6,205
Short-term investments 12,968 --
Accounts receivable, net 1,763 1,368
Prepaid expenses and other 323 624
-------------- --------------
Total current assets 31,472 8,197
-------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Network equipment 13,726 7,931
Office furniture and equipment 1,987 1,373
Leasehold improvements 366 83
-------------- --------------
16,079 9,387
Less - Accumulated depreciation and amortization (6,569) (3,615)
-------------- --------------
Property and equipment, net 9,510 5,772
-------------- --------------
OTHER ASSETS, net 687 490
-------------- --------------
$ 41,669 $ 14,459
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 445 $ 596
Accrued liabilities 1,880 1,203
Current portion of long-term debt 3,034 1,747
-------------- --------------
Total current liabilities 5,359 3,546
-------------- --------------
LONG-TERM DEBT, net of current portion 7,246 4,540
-------------- --------------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value --
Authorized -- 5,000,000 shares at September 30, 1996
and 7,873,322 shares at December 31, 1995
Outstanding -- none outstanding at September 30, 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 -- 11,623,807 shares at September 30, 1996
and 1,112,204 shares at December 31, 1995 55,108 224
Receivable from issuance of common stock (175) (175)
Accumulated deficit (25,869) (18,997)
-------------- --------------
Total shareholders' equity 29,064 6,373
-------------- --------------
$ 41,669 $ 14,459
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE> 4
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 2,265 $ 1,146 $ 6,518 $ 3,418
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Delivery costs 664 445 1,938 1,180
Customer operations 934 752 2,855 2,194
Sales and marketing 905 880 2,858 2,466
Research and development 519 407 1,527 1,182
General and administrative 407 322 1,187 1,007
Depreciation and amortization 1,181 637 2,955 1,610
------------ ------------ ------------ ------------
Total expenses 4,610 3,443 13,320 9,639
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (2,345) (2,297) (6,802) (6,221)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 399 132 1,096 313
Interest expense (451) (221) (1,166) (594)
------------ ------------ ------------ ------------
NET LOSS $ (2,397) $ (2,386) $ (6,872) $ (6,502)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.21) $ (0.25) $ (0.59) $ (0.70)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 11,575 9,550 11,577 9,269
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 5
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,872) $ ($6,502)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,955 1,610
Provision for doubtful accounts 75 109
Changes in operating assets and liabilities --
Accounts receivable (470) (155)
Prepaid expenses and other assets 103 (156)
Accounts payable and accrued liabilities 322 629
------------ ------------
Net cash used in operating activities (3,887) (4,465)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (19,340) ---
Maturities of short-term investments 6,372 ---
Acquisition of property and equipment (900) ---
------------ ------------
Net cash used in investing activities (13,868) ---
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 29,563 10
Proceeds from issuance of convertible
preferred stock --- 4,633
Payments on long-term debt (1,595) (689)
------------ ------------
Net cash provided by financing activities 27,968 3,954
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,213 (511)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,205 9,221
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,419 $ 8,710
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Property and equipment financed with
capitalized lease obligations $ 5,588 $ 3,393
Common stock issued for notes receivable -- 98
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
5
<PAGE> 6
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
and nine month periods ended September 30, 1996. The results for the three and
nine month periods ended September 30, 1996 are not necessarily indicative of
the results expected for the full fiscal year.
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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.
Short-term investments are marketable securities with original maturities
greater than three months and less than one year. As of December 31, 1995 and
September 30, 1996, cash and cash equivalents consist principally of U.S.
Treasury bills and various money market accounts; as a result, the amortized
purchase cost approximates the fair market value. As of September 30, 1996,
short-term investments consist principally of U.S. Treasury bills and
commercial paper; amortized cost approximates the fair market value of these
instruments at the balance sheet date.
3. NET LOSS PER SHARE
Net loss per share for the three months ended September 30, 1996 is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares have been excluded
from the computation as their effect is antidilutive.
Net loss per share for the three months ended September 30, 1995 and for the
nine months ended September 30, 1995 and 1996 is computed on a pro forma basis.
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.
6
<PAGE> 7
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.
5. ACQUISITION
On October 15, 1996, the Company entered into a definitive agreement for the
acquisition of 100% of the stock of PDR Productions, Inc., a New York City
media duplication and distribution company, for consideration totaling $8.5
million. Per the agreement, the consideration to be delivered at closing was
$6.0 million of cash, subject to adjustment based on the acquired company's
book value as of the closing and either $2.5 million worth of the Company's
common stock or a $2.5 million promissory note due one year from the closing.
The transaction closed on November 8, 1996, at which time the Company elected to
deliver a promissory note in lieu of delivery of common stock. In addition, the
Company paid an additional $.5 million to the seller at closing based on the
book value of the acquired company at the closing date, which was $.5 million in
excess of the amount specified in the agreement. The book value of the acquired
company is subject to adjustment based on an audit to be completed within
approximately 90 days. The acquisition will be accounted for as a purchase.
The Company currently intends to operate PDR Productions, Inc. as a wholly owned
subsidiary.
7
<PAGE> 8
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 periods 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Delivery Costs . . . . . . . . . . . 29.3 38.8 29.7 34.5
Customer operations . . . . . . . . 41.2 65.6 43.8 64.2
Sales and marketing . . . . . . . . 40.0 76.8 43.8 72.1
Research and development . . . . . . 22.9 35.5 23.4 34.6
General and administrative 18.0 28.1 18.4 29.5
Depreciation and amortization . . . 52.1 55.6 45.3 47.1
------- ------- ------- -------
Total expenses . . . . . . . . . 203.5 300.4 204.4 282.0
------- ------- ------- -------
Loss from operations . . . . . . . . . (103.5) (200.4) (104.4) (182.0)
------- ------- ------- -------
Other income (expense):
Interest income . . . . . . . . . . 17.6 11.5 16.8 9.2
Interest expense . . . . . . . . . . (19.9) (19.3) (17.8) (17.4)
------- ------- ------- -------
Net loss . . . . . . . . . . . . . . . (105.8)% (208.2)% (105.4)% (190.2)%
======= ======= ======= =======
OPERATING DATA:
Deliveries . . . . . . . . . . . . . . 184,000 91,000 520,000 258,000
</TABLE>
8
<PAGE> 9
Revenues
Revenues increased 98% to $2,265,000 for the quarter ended September 30,
1996 from $1,146,000 in the quarter ended September 30, 1995. This increase is
primarily due to increased delivery volume. Deliveries increased 102% to
184,000 in the quarter ended September 30, 1996 from 91,000 in the quarter
ended September 30, 1995. The Company believes that the revenue and delivery
totals for the quarter ended September 30, 1996, as in the same quarter of
1995, reflect the seasonal impact of reduced advertising spending based on
consumer buying patterns and the lack of a primary "Sweeps" rating period in
the third quarter of the year. See "Certain Business Considerations--Potential
Fluctuations in Quarterly Results; Seasonality." Revenues and deliveries for
the nine months ended September 30, 1996 increased to $6,518,000 and 520,000,
respectively, from $3,418,000 and 258,000, respectively, for the nine months
ended September 30, 1995. The Company believes that the increases in delivery
volumes are the result of a number of factors, particularly 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 $12.31 for the quarter ended September 30,
1996, a 2% decrease from $12.59 for the quarter ended September 30, 1995.
Average revenue per delivery for the nine months ended September 30, 1996
decreased 5% to $12.53 from $13.25 for the nine months ended September 30,
1995. For the quarter and nine months ended September 30, 1996, the decreases
in average revenue per delivery were primarily the result of increased volume
discounts. In the quarter ended September 30, 1996, these discounts were
partially offset by an increased proportion of higher-priced DG Express
deliveries made versus the quarter ended September 30, 1995. For the nine
months ended September 30, 1996, the decrease in average revenue per delivery
also reflects 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 increased 49% to $664,000, or 29% of revenues for the
quarter ended September 30, 1996, from $445,000, or 39% of revenues, for the
quarter ended September 30, 1995. Delivery costs for the nine months ended
September 30, 1996 were $1,938,000, or 30% of revenues versus $1,180,000, or
35% of revenues in the nine months ended September 30, 1995. The increases in
delivery costs are primarily due to the increased volume of deliveries. The
reductions in delivery costs as a percentage of revenues are due to reduced
telecommunication expenses per electronic delivery. These reductions are the
result of a rate reduction obtained from the Company's primary long distance
telephone service provider, increased implementation of ISDN transmission
technologies by certain high volume users, and more efficient access to long
distance carriers due to equipment and switching improvements made by the
Company. In addition, the proportion of deliveries being performed
electronically rather than by air freight has increased to approximately 87% in
the quarter ended September 30, 1996 from approximately 75% in the quarter
ended September 30, 1995. 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 increased 24% to $934,000 in the quarter ended
September 30, 1996 from $752,000 for the quarter ended September 30, 1995, and
increased 30% to $2,855,000 for the nine months ended September 30, 1996 from
$2,194,000 for the nine months ended September 30, 1995. These increases are
the result of adding the personnel necessary to respond to the greater volume
of customer orders and deliveries. Customer operations expenses as a
percentage of revenues decreased to 41% from 66% for the quarters ended
September 30, 1996 and 1995, respectively, and to 44% from 64% for the nine
months ended September 30, 1996 and 1995, respectively, as the Company has
realized the
9
<PAGE> 10
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 increased 3% to $905,000 in the quarter ended
September 30, 1996 from $880,000 for the quarter ended September 30, 1995, and
increased 16% to $2,858,000 for the nine months ended September 30, 1996 from
$2,466,000 for the nine months ended September 30, 1995. These increases in
sales and marketing expenses are due to the expansion of the Company's sales
and marketing staff including compensation, fringes and travel, and increased
incentive compensation. For the quarter ended September 30, 1996, these
increases were partially offset by reduced spending for marketing consultants
and other outside services versus the quarter ended September 30, 1995.
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.*
Research and Development
Research and development expenses increased 28% to $519,000 in the quarter
ended September 30, 1996 from $407,000 for the quarter ended September 30,
1995, and increased 29% to $1,527,000 for the nine months ended September 30,
1996 from $1,182,000 for the nine months ended September 30, 1995. The increase
for the quarter ended September 30, 1996 over that of the prior year is due to
compensation expense incurred as a result of additional hiring and salary
increases for engineering staff, as well as increased testing expenditures
incurred in the development of potential new services, including satellite
transmission capability and video transmission capability. The increase in
research and development expenses in the nine months ended September 30, 1996
over the nine months ended September 30, 1995 is due to the compensation and
testing expense increases discussed with regard to the quarter ended September
30, 1996 as well as the recruiting costs associated with hiring of additional
staff incurred primarily in the first quarter of 1996. Compensation and
testing increases have been 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 increased 26% to $407,000 in the quarter
ended September 30, 1996 from $322,000 for the quarter ended September 30,
1995, and increased 18% to $1,187,000 for the nine months ended September 30,
1996 from $1,007,000 for the nine months ended September 30, 1995. The
increases are 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.*
10
<PAGE> 11
Depreciation and Amortization
Depreciation and amortization expenses increased 85% to $1,181,000 in the
quarter ended September 30, 1996 from $637,000 for the quarter ended September
30, 1995, and increased 84% to $2,955,000 for the nine months ended September
30, 1996 from $1,610,000 for the nine months ended September 30, 1995. These
increases are due primarily to the continued expansion of the Company's
network. In particular, the number of units located at radio stations at
September 30, 1996 has increased by approximately 47% from the number at
September 30, 1995, and the capital investment in the Company's Network
Operating Center has increased by $.9 million, or approximately 68%, between
September 30, 1995 and September 30, 1996. In addition, the Company had
capital expenditures totaling $1.1 million during the second and third quarters
of 1996 to develop its video delivery capability.
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 increased by $267,000 to $399,000 in the quarter ended
September 30, 1996 from $132,000 for the quarter ended September 30, 1995, and
increased by $783,000 to $1,096,000 for the nine months ended September 30,
1996 from $313,000 for the nine months ended September 30, 1995. These
increases are primarily due to income derived from the short-term investment of
the $29.5 million of 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 in proportion to the levels of cash used in the
Company's operations.* See "Liquidity and Capital Resources."
Interest expense increased 104% to $451,000 in the quarter ended September
30, 1996 from $221,000 for the quarter ended September 30, 1995, and increased
96% to $1,166,000 for the nine months ended September 30, 1996 from $594,000
for the nine months ended September 30, 1995. These increases are 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
$10.3 million at September 30, 1996 from $5.0 million at September 30, 1995.
The Company expects that interest expense will increase in the future based on
the increased levels of borrowing.* See "Liquidity and Capital Resources."
Liquidity and Capital Resources
Net cash used in operating activities, including the adjustment for
depreciation and amortization, decreased to $3.9 million in the nine months
ended September 30, 1996 from $4.5 million in the nine months ended September
30, 1995. This change is the result of a reduced net loss, exclusive of
depreciation and amortization, plus changes in working capital balances.
The Company used cash of $.9 million for the purchase of property and
equipment and acquired an additional $5.6 million of property and equipment
through capital lease obligations in the nine months ended September 30, 1996.
In the nine months ended September 30, 1995 all of the Company's property and
equipment acquisitions, $3.4 million, had been financed with capital lease
obligations. The capital additions in the nine months ended September 30,
1996 were primarily due to the Company's continued expansion of its network.
The Company also invested $.6 million in equipment necessary to support the
growth of the Company's operating, research, sales and marketing, and
administrative staffs and $.3 million of leasehold improvements were 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
11
<PAGE> 12
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
$1,595,000 in the nine months ended September 30, 1996 versus $689,000 in the
nine months ended September 30, 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 September 30, 1996, the Company's current sources of liquidity
included cash and cash equivalents of $16.4 million, short-term investments of
$13.0 million, and $1.1 million available for capital expenditures remaining
under lease agreements which expire in December 1996. Other than the
acquisition of PDR Productions, Inc. discussed in note five of the notes to the
condensed financial statements, the Company currently has no significant
capital commitments other than its 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 June 1997. * See "Certain
Business Considerations--Future Capital Needs; Uncertainty of Additional
Funding."
12
<PAGE> 13
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 September 30, 1996, the Company's accumulated deficit was $25.9 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 video
13
<PAGE> 14
advertising spots to television stations. 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. 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.
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 in
comparison to the offerings of some dub and ship vendors. 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 work on reliability and throughput enhancement of the network. 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 managing deployment
of software developed to permit enhancement of the Company's current audio and
video units to receive digital satellite transmissions. Work in video
compression technology is directed toward integration and field trials of
14
<PAGE> 15
broadcast quality compression systems with the Company's existing network. 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 and video transmissions by that media. The Company has completed
beta testing of 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 Hughes satellite system will have the
capacity to meet the Company's delivery commitments and broadcast quality
requirements.
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, news, 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 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 and the distribution
of video advertising spots to television stations. The principal competitive
factors affecting these markets 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, Digital Courier International Corporation has begun deployment of a
system to electronically deliver audio content in Canada and the United States
and several other companies have announced such systems. 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 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.
15
<PAGE> 16
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"), RPTs and video units 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 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,
RPTs, and video units and to introduce additional services.* Based on current
plans and assumptions relating to the timing of its operations, the
16
<PAGE> 17
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 June 1997.* 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 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, RPTs and video units. 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, RPTs and video units which would have
the effect of depressing the Company's business until the
17
<PAGE> 18
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 has successfully completed live field
trials of 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 nine 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 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.
18
<PAGE> 19
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
None.
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
In September 1996 the Company advanced $200,000 to a customer in the
audio and video duplication and delivery industry in return for certain
considerations, including an agreement to execute certain audio and video
deliveries through DG Systems and a right of first refusal if the customer is
ever offered for sale. The loan is to be repaid in quarterly installments with
9% interest per annum through March 1999. The loan is secured by the
customer's common stock and will be automatically converted into ownership of
up to approximately 6% of the company if payments are not made within the terms
of the agreement.
In October 1996 the Company entered into a definitive agreement to
acquire PDR Productions, Inc. See Note 5 to the Condensed Financial Statements
and Item 6(b) below.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ ---------------
<S> <C>
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 September 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.
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ --------
<S> <C>
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.
10.24 (a) Digital Generation Systems, Inc. Supplemental Stock Option Plan
10.25 (a) Stock Purchase Agreement by and among Digital Generation Systems, Inc. and PDR
Productions, Inc. and Pat DeRosa dated as of October 15, 1996 and exhibits thereto.
11.1 (a) Statements of computation of weighted average and pro forma common shares and
equivalents.
27 (a) Financial Data Schedule.
- - - - - - - - - - - -
</TABLE>
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number
filed with the 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 the 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 exhibit bearing the same number
filed with registrant's Quarterly Report on Form 10-Q filed May 3,
1996, as amended.
(b) Reports on Form 8-K.
Current report on Form 8-K filed October 31, 1996, reporting the
dissemination of the registrant's press release dated October 16, 1996
announcing that registrant had entered into a definitive agreement to acquire
PDR Productions, Inc.
21
<PAGE> 22
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: November 13, 1996 BY: /S/ THOMAS P. SHANAHAN
-------------------------------------
THOMAS P. SHANAHAN
VICE PRESIDENT & CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL AND
CHIEF ACCOUNTING OFFICER)
22
<PAGE> 1
EXHIBIT 10.24
DIGITAL GENERATION SYSTEMS, INC.
SUPPLEMENTAL STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
o to attract and retain the best available personnel,
o to provide additional equity incentives to eligible
Employees and Consultants, and
o to promote the success of the Company's business.
Nonstatutory Stock Options may be granted under the Plan.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its
Committees as shall be administering the Plan, in accordance with Section 4 of
the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means a Committee appointed by the Board
in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Digital Generation Systems, Inc., a
California corporation.
(g) "Consultant" means any person, including an advisor,
engaged by the Company to render services and who is compensated for such
services, provided that the term "Consultant" shall not include any person who
is also an officer or member of the Board of the Company.
(h) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(i) "Employee" means any person employed by the Company
other than any person who is an officer or member of the Board of the Company.
(j) "Fair Market Value" means, as of any date, the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last
<PAGE> 2
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable.
(k) "Nonstatutory Stock Option" means an Option not
intended to qualify as an incentive stock option within the meaning of Section
422 of the Code and the regulations promulgated thereunder.
(l) "Option" means a stock option granted pursuant to the
Plan.
(m) "Option Agreement" means a written agreement between
the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(n) "Optioned Stock" means the Common Stock subject to an
Option.
(o) "Optionee" means an Employee or Consultant who holds
an outstanding Option.
(p) "Plan" means this Supplemental Stock Option Plan.
(q) "Share" means a share of the Common Stock, as
adjusted in accordance with Section 12 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation,"
whether now or hereafter existing as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions
of Section 12 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 750,000 Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having
been exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated).
4. Administration of the Plan
(a) Administration. The Plan shall be administered by (i)
the Board or (ii) a Committee designated by the Board, which Committee shall be
constituted to satisfy Applicable Laws. Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by the Board. The
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
-2-
<PAGE> 3
(b) Powers of the Administrator. Subject to the
provisions of the Plan, and in the case of a Committee, subject to the specific
duties delegated by the Board to such Committee, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value of the
Common Stock, in accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to
whom Options may be granted hereunder;
(iii) to determine whether and to what extent
Options are granted hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each Option granted hereunder;
(v) to approve forms of agreement for use under
the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common
Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to construe and interpret the terms of the
Plan and awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(ix) to modify or amend each Option (subject to
Section 15(b) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options;
(x) to authorize any person to execute on behalf
of the Company any instrument required to effect the grant of an Option
previously granted by the Administrator;
(xi) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The
Administrator's decisions, determinations and interpretations shall be final
and binding on all Optionees and any other holders of Options.
-3-
<PAGE> 4
5. Eligibility. Nonstatutory Stock Options may be granted to
Employees and Consultants. If otherwise eligible, an Employee or Consultant
who has been granted an Option may be granted additional Options.
Notwithstanding anything to the contrary contained in the Plan, Options may not
be granted to officers or members of the Board under this Plan.
6. Limitations. Neither the Plan nor any Option shall confer
upon an Optionee any right with respect to continuing the Optionee's employment
or consulting relationship with the Company, nor shall they interfere in any
way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its
adoption by the Board. It shall continue in effect until terminated under
Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in
the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be determined by
the Administrator.
(b) Waiting Period and Exercise Dates. At the time an
Option is granted, the Administrator shall fix the period within which the
Option may be exercised and shall determine any conditions which must be
satisfied before the Option may be exercised.
(c) Form of Consideration. The Administrator shall
determine the acceptable form of consideration for exercising an Option,
including the method of payment. Such consideration may consist entirely of:
(i) cash or cash equivalent;
(ii) check;
(iii) recourse promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) delivery of a properly executed exercise
notice together with such other documentation as the Administrator and the
broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price;
-4-
<PAGE> 5
(vi) such other consideration and method of
payment for the issuance of Shares to the extent permitted by Applicable Laws;
or
(vii) any combination of the foregoing methods of
payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable according to the terms of the
Plan and at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement.
An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company
receives: (i) written notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon exercise of an Option shall be issued in the name of the Optionee
or, if requested by the Optionee, in the name of the Optionee and his or her
spouse. Until the stock certificate evidencing such Shares is issued (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such stock certificate promptly after the Option
is exercised. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock certificate is issued,
except as provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment. Upon termination of an
Optionee's status as an Employee or Consultant (other than as a result of the
Optionee's death or Disability), the Optionee may exercise his or her Option,
but only within three (3) months or such other period of time as the
Administrator shall specify from the date of such termination and, unless
determined otherwise by the Administrator, only to the extent that the Optionee
was entitled to exercise it at the date of such termination (and in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). To the extent that Optionee was not entitled to exercise an Option
at the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan. For purposes of this Section 10(b), an
Employee's change of status from Employee to Consultant or from Consultant to
Employee shall not, unless specified otherwise by the Administrator, be
considered a termination of status as an Employee or Consultant.
-5-
<PAGE> 6
(c) Disability of Optionee. Upon termination of an
Optionee's status as an Employee or Consultant as a result of the Optionee's
Disability, the Optionee may exercise his or her Option, but only within six
(6) months or such other time period as the Administrator shall specify from
the date of such termination, and, unless determined otherwise by the
Administrator, only to the extent that the Optionee was entitled to exercise it
at the date of such termination (and in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). To the extent
that Optionee was not entitled to exercise an Option at the date of such
termination, and to the extent that the Optionee does not exercise such Option
(to the extent otherwise so entitled) within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
(d) Death of Optionee. In the event of an Optionee's
death within three (3) months of the termination of employment, the Optionee's
estate or a person who acquired the right to exercise the deceased Optionee's
Option by bequest or inheritance may exercise the Option, but only within six
(6) months or such other time period as the Administrator shall specify
following the date of death, and, unless determined otherwise by the
Administrator, only to the extent that the Optionee was entitled to exercise it
at the date of death (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement). To the extent that Optionee
was not entitled to exercise an Option at the date of death, and to the extent
that the Optionee's estate or a person who acquired the right to exercise such
Option does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
11. Non-Transferability of Options. An Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
12. Adjustments Upon Changes in Capitalization, Dissolution,or
Transfer in Control.
(a) Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be conclusive. Except as
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into
-6-
<PAGE> 7
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to an Option.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, the Administrator shall
notify each Optionee as soon as practicable prior to the effective date of such
proposed transaction. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Transfer of Control.
(i) A "Transfer of Control" shall be deemed to
have occurred in the event any of the following occurs with respect to the
Company:
(a) a merger or consolidation in which
the Company is not the surviving corporation;
(b) a merger or consolidation in which
the Company is the surviving corporation where the shareholders of the Company
before such merger or consolidation do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock of the Company
after such merger or consolidation;
(c) the sale, exchange, or transfer of
all or substantially all of the assets of the Company (other than a sale,
exchange or transfer to one (1) or more Subsidiaries);
(d) the direct or indirect sale or
exchange by the shareholders of the Company of all or substantially all of the
stock of the Company where the shareholders of the Company before such sale or
exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the Company after such sale or
exchange.
(ii) In the event of a Transfer of Control of the
Company, each outstanding Option will be assumed or an equivalent option
substituted by the successor corporation or a parent or Subsidiary of the
successor corporation (the "Successor Corporation"). In the event that an
Option is not assumed or substituted for, such Option shall terminate as of the
date of the Transfer of Control. For the purposes of this paragraph, the
Option shall be considered assumed if, following the Transfer of Control, the
option confers the right to purchase or receive, for each Share of Optioned
Stock subject to the Option immediately prior to the Transfer of Control the
consideration (whether stock, cash, or other securities or property) received
in the Transfer of Control by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the Transfer of Control was not solely common stock of the Successor
Corporation, the Administrator may, with the consent of the Successor
Corporation, provide for the consideration to be received upon the exercise of
the Option for each Share of Optioned Stock subject to the Option to be solely
-7-
<PAGE> 8
common stock of the Successor Corporation equal in fair market value to the per
share consideration received by holders of Common Stock in the Transfer of
Control.
13. Date of Grant. The date of grant of an Option shall be, for
all purposes, the date on which the Administrator makes the determination
granting such Option, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each Optionee
within a reasonable time after the date of such grant.
14. Withholding Taxes. In accordance with any applicable
administrative guidelines it establishes, the Administrator may allow a
purchaser to pay the amount of taxes required by law to be withheld as a result
of a purchase of Shares, by withholding from any payment of Common Stock due as
a result of such purchase, or by permitting the purchaser to deliver to the
Company, Shares having a Fair Market Value, as determined by the Administrator,
equal to the amount of such required withholding taxes.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of
any Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933,
as amended, the Exchange Act, the rules and regulations promulgated thereunder,
Applicable Laws, and the requirements of any stock exchange or quotation system
upon which the Shares may then be listed or quoted, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the
exercise of an Option, the Company may require the person exercising such
Option to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required.
17. Liability of Company. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any
-8-
<PAGE> 9
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
-9-
<PAGE> 1
EXHIBIT 10.25
STOCK PURCHASE AGREEMENT
BY AND AMONG
DIGITAL GENERATION SYSTEMS, INC.
A CALIFORNIA CORPORATION
PDR PRODUCTIONS, INC.
A NEW YORK CORPORATION
AND
PAT DEROSA
DATED AS OF OCTOBER 15, 1996
<PAGE> 2
TABLE OF CONTENTS
ARTICLE PAGE(S)
I DEFINITIONS................................................... 1
II PURCHASE AND SALE OF THE SHARES; PURCHASE PRICE............... 4
2.1 Sale and Purchase of the Shares.................... 4
2.2 Purchase Price..................................... 4
2.3 Fairness Hearing; Promissory Note.................. 5
2.4 Allocation of Purchase Price....................... 5
2.5 Adjustment to the Purchase Price................... 6
2.6 Payment of Transfer Taxes and Other Charges........ 6
III REPRESENTATIONS AND WARRANTIES OF PDR, AND THE
STOCKHOLDER................................................... 7
3.1 Organization, Standing and Power................... 7
3.2 Capital Structure.................................. 7
3.3 Stock Ownership.................................... 8
3.4 Certificate of Incorporation and By-Laws........... 8
3.5 Financial Statements and Books and Records......... 8
3.6 No Undisclosed Liability........................... 8
3.7 Tax Matters........................................ 8
3.8 Authority.......................................... 9
3.9 Compliance with Law................................ 10
3.10 Litigation......................................... 11
3.11 Material Contracts................................. 11
3.12 Title to Property; Encumbrances.................... 12
3.13 Environmental Matters.............................. 13
i
<PAGE> 3
3.14 Interest of Officers............................... 13
3.15 Intellectual Property.............................. 13
3.16 Employee Benefit Plans............................. 14
3.17 Employees and Employee Relations................... 16
3.18 Employee Agreements................................ 16
3.19 Insurance.......................................... 16
3.20 Inventory.......................................... 17
3.21 No Defaults........................................ 17
3.22 Accounts Receivable................................ 17
3.23 Absence of Certain Changes......................... 18
3.24 Restrictions on Business Activities................ 20
3.25 Bank Accounts...................................... 20
3.26 Customers and Suppliers............................ 20
3.27 Certain Business Practices......................... 21
3.28 Related Party Transaction.......................... 21
3.29 Brokers and Finders................................ 21
IV ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDER................................................... 22
4.1 Power of Authorization and Validity................ 22
4.2 Title to Securities................................ 22
4.3 Absence of Violations or Conflicts................. 22
4.4 Absence of Claims Against the Company.............. 22
4.5 Litigation......................................... 22
V REPRESENTATIONS AND WARRANTIES OF DG SYSTEMS.................. 23
5.1 Organization: Standing and Power.................. 23
5.2 Capital Structure.................................. 23
5.3 Authority.......................................... 23
ii
<PAGE> 4
5.4 Litigation......................................... 24
5.5 Brokers and Finders................................ 24
5.6 Transferability of Shares.......................... 24
VI COVENANTS..................................................... 25
6.1 Conduct of Business of PDR......................... 25
6.2 Due Diligence Access to Information: Provision
of Interim Financial Statements.................... 27
6.3 Exclusivity: Acquisition Proposals................. 28
6.4 Breach of Representations, Warranties and
Covenants.......................................... 28
6.5 Consents........................................... 28
6.6 All Reasonable Efforts............................. 29
6.7 Public Announcements............................... 29
6.8 Expenses........................................... 29
6.9 Confidentiality.................................... 29
6.10 Certain Taxes...................................... 29
6.11 Account Collections................................ 29
6.12 Audited Financial Statements....................... 30
6.13 Maintenance of Insurance Policies.................. 30
6.14 Cooperation........................................ 30
6.15 Covenant Not to Compete and Confidential
Information........................................ 30
6.16 Post-Closing Cooperation........................... 33
6.17 Certain Taxes...................................... 33
6.18 Termination of PDR Profit Sharing Plan............. 34
6.19 Continuation of PDR Health Plan Post Closing....... 34
VII CONDITIONS PRECEDENT TO THE CLOSING........................... 34
iii
<PAGE> 5
7.1 Conditions to Each Party's Obligation to Effect
the Closing........................................ 34
7.2 Conditions of Obligations of DG Systems............ 35
7.3 Conditions of Obligation of PDR.................... 37
VIII THE CLOSING................................................... 38
8.1 The Closing........................................ 38
8.2 Closing Deliveries by PDR and Stockholder.......... 38
8.3 Closing Deliveries by DG Systems................... 39
8.4 Post Closing Adjustments........................... 40
IX ARBITRATION................................................... 40
9.1 Mandatory Arbitration.............................. 40
9.2 Mandatory Non-Binding Mediation.................... 40
9.3 Selection of Arbitrators........................... 40
9.4 Qualification of Arbitrators and Mediators......... 41
9.5 Location of Arbitration............................ 41
9.6 Confidentiality of Proceedings..................... 41
9.7 Powers of Arbitrators.............................. 41
X TERMINATION................................................... 42
10.1 Termination........................................ 42
10.2 Authorization...................................... 43
10.3 Survival of Certain Provisions..................... 43
10.4 Liability for Termination.......................... 43
10.5 Disposition of Deposit on Termination.............. 43
XI GENERAL PROVISIONS............................................ 44
11.1 Amendment.......................................... 44
11.2 Extension; Waiver.................................. 44
iv
<PAGE> 6
11.3 Notices............................................ 44
11.4 Interpretation..................................... 45
11.5 Entire Agreement................................... 45
11.6 No Transfer........................................ 45
11.7 Severability....................................... 45
11.8 Other Remedies..................................... 46
11.9 Further Assurances................................. 46
11.10 Variations in Pronouns............................. 46
11.11 Counterparts....................................... 46
11.12 Governing Law...................................... 46
XII INDEMNIFICATION............................................... 46
12.1 Indemnification.................................... 46
12.2 Conditions of Indemnification by PDR............... 47
12.3 Indemnity Limitations with respect to DG Systems
Claims............................................. 48
12.4 Indemnification by DG Systems...................... 49
12.5 Conditions of Indemnification by DG Systems........ 49
12.6 Indemnity Limitations with respect to PDR
Claims............................................. 51
v
<PAGE> 7
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT ("Agreement") dated as of October 15, 1996, by
and among DIGITAL GENERATION SYSTEMS, INC., a California corporation ("DG
Systems"), PDR PRODUCTIONS, INC., a New York corporation ("PDR"), PAT DeROSA
(the "Stockholder") and Neil DeRosa and Joseph DeRosa as to only certain
provisions of this Agreement as set forth hereinafter (Neil DeRosa and Joseph
DeRosa sometimes collectively referred to as the "DeRosas").
RECITALS
WHEREAS, Stockholder owns an aggregate of one hundred eighty (180)
shares of common stock, without par value, of PDR constituting 100% of the
issued and outstanding shares of capital stock of PDR (the "Shares"); and
WHEREAS, the continuing employment of the DeRosas is deemed to be
crucial to the operation of PDR and constitutes a material condition of this
transaction; and
WHEREAS, Stockholder and the DeRosas in order to induce DG Systems to
enter into the transactions contemplated hereby, are willing to enter into
employment agreements, effective as of the date of the Closing, which shall
include restrictive covenants; and
WHEREAS, the parties intend that in addition to the acquisition of the
Shares that DG Systems is acquiring the goodwill of PDR; and
WHEREAS, DG Systems desires to acquire from the Stockholder and
Stockholder desires to sell to DG Systems, the Shares on the terms and subject
to the conditions set forth in this Agreement; and
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
"Aggregate Share Amount" means the quotient obtained by dividing $2.5
million by the average closing price of a share of DG Common Stock on the Nasdaq
National Market for the 20 trading days next preceding the Closing Date (defined
hereinafter) ("Share Price"), provided, however, that the Aggregate Share Amount
will
1
<PAGE> 8
not be greater than 300,000 shares of DG Common Stock or less than 200,000
shares of DG Common Stock.
"Book Value" means PDR's Book Value determined in accordance with GAAP
as of the Closing Date, which is estimated to be at least $1,000,000 which
includes Working Capital (current assets less current liabilities) estimated to
be $450,000.00 and Net Long Term Assets (after accumulated depreciation)
estimated to be $550,000.00 and subject to adjustment of the Purchase Price as
set forth in Article 2.5 hereof.
"Closing" shall mean the consummation of the transactions contemplated
by this Agreement, subject to the terms and conditions of this Agreement.
"Closing Balance Sheet" means the balance sheet of PDR as at the
Closing Date, prepared by the PDR Accountants in accordance with GAAP.
"Closing Date" shall mean the tenth (10th) business day after
satisfaction or waiver of the conditions set forth in Article VII or such other
date which may be mutually agreed upon between the parties.
"Commission" means the United States Securities and Exchange
Commission.
"DG Common Stock" means the Common Stock, without par value, of DG
Systems.
"Encumbrance" means, with respect to an item, claims, liabilities,
liens, pledges, mortgages, deeds of trust, restrictions, options, charges and
encumbrances of any kind, whether accrued, absolute, contingent or otherwise,
affecting that item.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" shall mean United States generally accepted accounting
principles, applied on a consistent basis.
"Governmental Entity" means any federal, state or local court,
administrative agency or commission or other governmental authority or agency,
domestic or foreign.
"Hazardous Material" has the meaning given to it in Section 3.13(a).
"Hazardous Materials Activity" has the meaning given to it in Section
3.13(b).
2
<PAGE> 9
"Intellectual Property Rights" means all rights to all patents,
trademarks, trade names, service marks, copyrights, mask work rights, trade
secret rights and other intellectual property rights, and any applications or
registrations therefor, and all technology, source code, computer software
programs and other information or material, that in any respect are used or
currently proposed to be used in the business of PDR as currently conducted that
PDR owns, has licensed or is otherwise entitled to exercise, without
restriction.
"Knowledge of" or "to the best knowledge of" means the actual knowledge
of the party as to the existence or absence of facts that are the subject of
such representations and warranties without any independent inquiry or
investigation.
"Lock-Up Agreement" means an agreement between DG Systems and the
Stockholder in the form of Exhibit A.
"Material Adverse Change" or "Material Adverse Effect" means with
respect to an entity, a change in the current or expected condition (financial
or otherwise) properties, assets, liabilities, business, operations or prospects
of such entity that is material and adverse to such entity.
"Net Long-Term Assets" means the net assets of PDR less net current
assets of PDR, as such term is defined by GAAP.
"New York Law" means the laws of the State of New York.
"Operating Income" shall mean with respect to the applicable calendar
year, net income of PDR as determined in accordance with GAAP, adjusted as
follows: plus (a) the amount of intercompany overhead allocation charged against
the net income of PDR, (b) all Federal, state and local income tax provisions as
indicated on the income statements of PDR, (c) interest payments, and (d) total
amounts expensed on PDR's financial statements as respects amounts paid or
payable to the DeRosas under their Employment Agreements with PDR less (aa)
increases in gross margin of PDR arising out of customers of DG Systems or its
subsidiaries other than PDR transferred to PDR to the extent gross margins from
each such customer, in the aggregate, exceeds $6,000.00 per annum, and excluding
(bb) income, gains and losses related to dispositions of property or equipment
and (cc) income, gains and losses related to acquired existing businesses;
"PDR Accountants" means Goldstein Golub Kessler & Company, P.C.
"PDR Balance Sheet" means PDR's balance sheet to be prepared and dated
September 30, 1996.
"PDR Capital Stock" means the authorized capital stock of PDR.
3
<PAGE> 10
"PDR Returns" means all Tax returns, statements or other reports
required to be filed with any Taxing Authority with respect to any taxable
period ending on or before the Closing by or on behalf of PDR.
"Plans" shall mean all plans, programs, policies, commitments or other
arrangements (whether or not set forth in a written document) maintained by or
on behalf of PDR that provide deferred or incentive benefits to, or for the
benefits of, any active, former or retire employee or consultant of PDR or their
spouses or dependents.
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any
and all taxes, including, without limitation, (i) any income, alternative or
add-on minimum tax, gross receipts, sales, use, value-added, ad valorem,
transfer, franchise, withholding payroll, employment, excise, severance, stamp,
occupation, net worth, property, custom, duty or other governmental fee or
charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Governmental Entity (a
"Taxing Authority"), or (ii) any liability for the payment of any amounts
thereof as a result of any express or implied obligation to indemnify any other
person.
"Transaction Documents" means this Agreement, the Employment Agreements
and the Lock-Up Agreement, and the instruments delivered pursuant to the
foregoing.
"Working Capital" means PDR's Current Assets less Current Liabilities
determined in accordance with GAAP.
ARTICLE II
PURCHASE AND SALE OF THE SHARES;
PURCHASE PRICE
2.1 Sale and Purchase of the Shares. On the terms and subject to the
conditions set forth in this Agreement, the Stockholder agrees that, on the
Closing Date he will sell, assign and transfer to DG Systems and DG Systems
agrees to purchase from Stockholder for the Purchase Price defined in Section
2.2 below, the Shares.
2.2 Purchase Price. In consideration of the transfer to DG Systems of
the Shares, Stockholder shall receive from DG Systems Eight Million Five Hundred
Thousand ($8,500,000.00) as the purchase price for the Shares (the "Purchase
Price") payable as follows:
(a) Six Million ($6,000,000) Dollars in cash payable as
follows:
4
<PAGE> 11
(i) Deposit. Two Hundred Fifty Thousand and No/100
($250,000.00) Dollars (the "Deposit") upon execution hereof, paid by
check subject to collection, to be held in escrow by Stockholder's
attorneys Jaspan, Schlesinger, Silverman & Hoffman, L.L.P., 300 Garden
City Plaza, Garden City, New York 11530 (herein the "Escrow Agent") to
be held in an interest bearing account pursuant to an Escrow Agreement,
attached hereto as Exhibit B.
(ii) Cash Payment. Five Million Seven Hundred Fifty
Thousand and No/100 Dollars ($5,750,000.00) (the "Cash Payment") which
shall be payable to Stockholder on the Closing Date by Federal Reserve
wire transfer of immediately available funds to an account or accounts
which shall be designated by Stockholder plus or minus prorations and
adjustments as hereinafter provided.
(b) DG Common Stock. The Aggregate Share Amount of DG Common
Stock to be issued to Stockholder at Closing, subject to the Lock-Up Agreement
and the requirements of Section 2.3.
2.3 Fairness Hearing; Promissory Note.
(a) Promptly following execution and delivery of this
Agreement, DG Systems shall, at its expense, undertake diligent and good faith
efforts to file an application for a hearing before the California Commissioner
of Corporations pursuant to Section 25142 of the California Corporate Securities
Law of 1968, as amended, and to obtain a finding of fairness at such hearing and
the issuance of the Permit by the California Department of Corporations.
"Permit" means, after the filing of such application and a finding of fairness
as result of such hearing, that permit issued by the California Department of
Corporations under Section 25121 of the California Corporate Securities Law of
1968, as amended, qualifying the offering and issuance of certain DG Systems
securities pursuant to this Agreement. Stockholder shall promptly cooperate with
all reasonable requests made by DG Systems in connection with such application
and hearing.
(b) If the Permit has not been issued by the Closing Date,
then DG Systems will have no further obligations under Section 2.3(a), and the
Shareholder shall receive in lieu of DG Common Stock a promissory note
substantially in the form of Exhibit C in the principal amount of $2.5 million
bearing simple interest at an annual rate of 8% (the "Promissory Note").
2.4 Allocation of Purchase Price. The parties agree that the Purchase
Price shall be allocated as follows: (a) One Hundred Thousand No/100 Dollars
($100,000.00) to Stockholder's restrictive
5
<PAGE> 12
covenant as set forth herein, and (b) Eight Million Four Hundred Thousand No/100
($8,400,000.00) to the Shares.
The above allocation shall be binding on the parties hereto
for all purposes including federal income tax purposes, and the parties agree
not to take any contrary position with respect to such allocation in any tax
return, tax proceeding, tax audit or any documents filed by any of the parties
with federal, state or local authorities.
2.5 Adjustment to the Purchase Price.
(a) Book Value. In the event the Book Value on the Closing
Date is less than $1,000,000 then the Purchase Price shall be adjusted downward
on a dollar for dollar basis, and, in the event the Book Value is more than
$1,000,000 on the Closing Date then the Purchase Price shall be adjusted upward
on a dollar for dollar basis. The aforesaid adjustments, if any, will be to the
cash portion of the Purchase Price.
(b) Post Closing Adjustment Event. In the event of a "Post
Closing Adjustment Event" as defined in the Lock-Up Agreement, the Purchase
Price shall be adjusted downward by the product of 150,000 shares, multiplied by
the Share Price (the "Adjustment Amount"). In the event of a Post Closing
Adjustment Event, the Purchase Price shall be adjusted as provided above and
shall be accounted for as follows:
(i) If Stockholder received DG Common Stock pursuant to
Section 2.2(b) the Escrow Shares shall be returned to DG Systems by the
escrow agent under the Lock-Up Agreement and Stockholder shall have
further rights with respect to the Escrow Shares the Purchase Price
shall be reduced by the Adjustment Amount, or
(ii) If Stockholder received the Promissory Note the
principal balance of same shall be automatically reduced by the
Adjustment Amount, the Stockholder shall forthwith return the
Promissory Note for $2,500,000 to DG Systems and upon receipt of same
DG Systems shall immediately tender to Stockholder a substitute
Promissory Note identical to the original $2,500,000 Note in all
respects except for the principal amount which shall be reduced by the
Adjustment Amount.
2.6 Payment of Transfer Taxes and Other Charges. Stockholder shall pay
all stock transfer tax fees for the Shares, stamp taxes, value added taxes,
recording taxes and fees, including all interest and penalties, if any, owed by
Stockholder directly relating to the transfer of the Shares contemplated by this
Agreement ("Transfer
6
<PAGE> 13
Taxes"). DG Systems shall be responsible for any sales and use taxes payable
solely as a result of the transfer of the Shares, if any. DG Systems and
Stockholder shall cooperate in timely preparing and delivering to the other
party or parties or filing any forms or other documents, required in order to
reduce the amount of, or exempt the transactions contemplated by this Agreement
from, the imposition of any Transfer Taxes, if applicable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PDR, AND THE STOCKHOLDER
PDR, the Stockholder, and the DeRosas (but only to the limited extent
specifically set forth herein on the signature page hereof) represent and
warrant jointly and severally to DG Systems as follows:
3.1 Organization, Standing and Power. PDR is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has all requisite corporate power and authority to own, operate and
lease its properties and to carry on its business as now being conducted. PDR is
not qualified or licensed as a foreign corporation in any other jurisdiction.
PDR does not currently have any subsidiaries or affiliate companies and does not
otherwise own shares of capital stock or any interest in, and does not currently
control, directly or indirectly, any other corporation, limited liability
company, partnership, association, joint venture or other business entity.
3.2 Capital Structure.
(a) The authorized capital stock of PDR consists of 200 shares
of Common Stock, without par value of which there are 180 shares issued and
outstanding. There are no outstanding securities of PDR or any other right to
purchase securities of PDR other than as described in the preceding sentence.
(b) All issued and outstanding shares of PDR Common Stock have
been duly authorized and validly issued, fully paid and nonassessable and not
subject to preemptive rights or rights of first refusal.
(c) The Stockholder owns of record and beneficially all of the
outstanding PDR Common Stock.
(d) There are no outstanding (i) securities convertible into
or exchangeable for any capital stock of PDR; (ii) options, warrants, preemptive
rights, calls or other rights to purchase or subscribe for any capital stock of
PDR or securities convertible into or exchangeable for capital stock thereof; or
(iii) contracts,
7
<PAGE> 14
commitments, agreements, understandings or arrangements of any kind relating to
the issuance of any capital stock of PDR, any such convertible or exchangeable
securities or any such options, warrants, calls or rights.
3.3 Stock Ownership. The Stockholder has good and marketable title to
the Shares to be conveyed by the Stockholder hereunder, free and clear of any
and all liens and at Closing Stockholder will transfer the Shares hereunder.
3.4 Certificate of Incorporation and By-Laws. Stockholder will furnish
during the Due Diligence Period (hereinafter defined) true and complete copies
of the (i) Certificate of Incorporation of PDR as in effect on the date hereof,
(ii) By-Laws of PDR as in effect on the date hereof, and (iii) any minute books
of PDR. PDR is not in violation of any provisions of its Certificate of
Incorporation or By-Laws, as in effect as of the date hereof.
3.5 Financial Statements and Books and Records. There have been
delivered by PDR true and correct copies of the unaudited, internally prepared,
financial statements of PDR as are listed on Schedule 3.5 hereto (collectively
the "Financial Statements"). To the best of Stockholder's knowledge, the
Financial Statements have been prepared and in accordance with the books and
records of PDR and such Financial Statements present fairly the financial
position, and related results of operations of PDR as of the dates and for the
periods referred to therein. To the best of Stockholder's knowledge, all of the
financial books and records of PDR completely and fairly record in all material
respects the financial affairs of PDR.
To the best of Stockholder's knowledge, as of December 31,
1995, PDR had (i) a Book Value of not less than $1.0 million, (ii) Working
Capital of not less than $450,000, (iii) Net Long-Term Assets of not less than
$550,000, and (iv) no debt other than customary current accounts payable.
3.6 No Undisclosed Liability. Except as set forth on Schedule 3.6, PDR
has no liabilities or obligations of any nature (absolute, accrued, contingent
or otherwise) whether as principal, agent, partner, plan fiduciary, co-venturer,
guarantor or in any capacity whatsoever which are not properly reflected or
reserved against in the Financial Statements, except for liabilities or
obligations which have been incurred in the ordinary course of business and
which individually or in the aggregate would not have a Material Adverse Effect.
3.7 Tax Matters.
(a) All PDR Returns have been or will be filed when due, and
all amounts shown to be due thereon on or before the Closing have been or will
be paid on or before such date. The PDR
8
<PAGE> 15
Financial Statements fully accrue all actual and contingent liabilities for
Taxes with respect to all periods through the dates thereof. The PDR Balance
Sheet (i) fully accrues consistent with past practices all actual and contingent
liabilities for Taxes with respect to all periods through the PDR Balance Sheet
date, and (ii) properly accrues in accordance with past practices all
liabilities for Taxes payable after the Balance Sheet date with respect to all
transactions and events occurring on or prior to such date.
(b) All PDR Returns filed for Taxable years of PDR through the
Taxable year ended December 31, 1995, have not been examined. PDR has not
granted any extension or waiver of the limitation period applicable to any PDR
returns.
(c) As of the date hereof, to PDR's knowledge, there is no
claim, action, suit, proceeding or investigation now pending, threatened against
or with respect to PDR in respect of any Tax. As of the date hereof, PDR has not
received any notice of deficiency or similar document of any tax authority which
has not been satisfied in full. Neither PDR nor any person on behalf of PDR has
entered into or will enter into any agreement or consent pursuant to Section
341(f) of the Code. There are no liens for Taxes upon the assets of PDR except
liens for current taxes not yet due. As of the date hereof, PDR has not been and
will not be required to include any adjustment in taxable income for any tax
period (or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign tax laws as a result of
transactions, events or accounting methods employed prior to the Closing.
(d) Other than pursuant to this Agreement, PDR is not a party
to or bound by (or will prior to the Closing become a party to or bound by) any
Tax indemnity, tax sharing or tax allocation agreement. PDR has previously
provided or made available to DG Systems true and correct copies of all PDR
Returns, and, as reasonably requested by DG Systems, prior to or following the
date hereof, presently existing information statements, reports, work papers,
tax opinions and memoranda and other tax data and documents.
(e) Except as set forth on Schedule 3.7 no audit of any tax
return of the Stockholder or PDR is in progress and to the best of Stockholder's
knowledge, the Stockholder has paid all taxes due and owing on account of PDR's
income for all periods.
(f) PDR shall be liable for all tax consequences of recapture
(including, but not limited to, investment credit recapture and foreign loss
recapture) resulting from the termination of PDR's S-election.
3.8 Authority.
9
<PAGE> 16
(a) PDR has all requisite corporate power and authority to
enter into this Agreement and the other Transaction Documents and, subject to
approval of this Agreement by the Stockholder, to perform its obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the other
Transaction Documents, the performance by PDR of its obligations hereunder and
thereunder and the consummation of the transactions contemplated hereby and
thereby have or shall, prior to Closing, been duly and validly authorized by all
necessary corporate action on the part PDR. This Agreement is, and each of the
other Transaction Documents to which PDR is a party upon its execution by PDR,
will be, a legal, valid and binding obligation of PDR enforceable against PDR in
accordance with is respective terms. The foregoing provisions of Section 3.8(a)
are subject to: (i) bankruptcy, insolvency and similar laws effecting creditors
rights generally, and (ii) equitable principles limitation of certain remedies.
(b) The execution and delivery of this Agreement and the other
Transaction Documents to which PDR is a party, the performance of its
obligations hereunder and thereunder, and the consummation of the transactions
contemplated hereby and thereby does not and will not, conflict with or result
in any material violation of any statute, law, rule, regulation, judgment,
order, decree or ordinance applicable to PDR or its properties or assets, or
conflict with or result in any breach or default (with or without notice or
lapse of time, or both) under or give rise to a right of termination,
cancellation or acceleration of any material obligation or the loss of a
material benefit under, or result in the creation of a lien or Encumbrance on
any of the properties or assets of PDR, except with respect to any Realty Leases
(hereinafter defined or equipment leased on a month to month basis).
(c) No consent, approval, order or authorization of, or
registration, declaration of filing with, any Governmental Entity is required in
connection with the execution and delivery of this Agreement and the other
Transaction Documents by PDR or the consummation by PDR of the transactions
contemplated hereby or thereby, except as otherwise specifically provided
herein.
(d) The execution and delivery of this Agreement and the other
Transaction Documents by PDR or the consummation of PDR of the transactions
contemplated hereby or thereby, does not violate any provision of PDR's
Certificate of Incorporation or Bylaws.
3.9 Compliance with Law. To PDR's knowledge it is in compliance and has
conducted its business so as to comply with all laws, rules and regulations,
judgments, injunctions, awards, decrees or orders of any Governmental Entity
applicable to its operations or with respect to which compliance is a condition
of engaging in the business thereof. There are no judgments or
10
<PAGE> 17
orders, injunctions, decrees, stipulations or awards (whether rendered by a
court or administrative agency or by arbitration) against PDR or against any of
its properties or businesses and to the best knowledge of PDR, none are pending
or threatened.
3.10 Litigation. There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, governmental or regulatory body or
arbitration tribunal by which PDR or its assets, properties or business of any
of them is bound or subject that could reasonably be anticipated to have a
Material Adverse Effect. Except as set forth on Schedule 3.10, there are no
actions, suits, legal, administrative or arbitral proceedings or inquiries
relating to PDR or Stockholder pending or, to the best of PDR's Stockholder's
and knowledge threatened (whether or not the defense thereof or liabilities in
respect thereof are covered by insurance) against PDR or Stockholder. The
matters set forth on Schedule 3.10 if determined against PDR or Stockholder
would not have a Material Adverse Effect.
3.11 Material Contracts. Schedule 3.11 sets forth a true, correct and
complete list of all agreements, contracts, understandings, arrangements,
obligations, leases or licenses with respect to personal property, franchises,
guarantees, commitments and orders (other than purchase orders), whether written
or oral between PDR and any other party, under or pursuant to which PDR is
obligated to make cash payments or deliver products or render services with a
value greater than $5,000.00 or receive cash payments of or receive products or
services with a value greater than $5,000.00 or which are otherwise material to
PDR (collectively, "Contracts"). Except as disclosed in Schedule 3.11, PDR is
not a party to or subject to:
(a) Any union contract or any employment or consulting
contract or arrangement written or oral, providing for future compensation, with
any director or officer or employee;
(b) Any distribution agreement, volume purchase agreement or
other similar agreement, or joint venture contract or arrangement or any other
agreement which has involved or is expected to involve a sharing of profits with
other persons;
(c) Any lease for real or personal property;
(d) Except for trade indebtedness incurred in the ordinary
course of business, any instrument related in any way to indebtedness incurred
for borrowed money;
(e) Any license agreement, either as licensor or licensee;
11
<PAGE> 18
(f) Any contract containing covenants purporting to limit the
freedom of PDR to compete in any line of business in any geographic area;
(g) Any agreement of indemnification, except indemnification
provided in the ordinary course of business;
(h) Any agreement, contract or commitment relating to future
capital expenditures;
(i) Any agreement, contract or commitment relating to the
disposition by PDR of any assets (other than Inventory);
(j) Any agreement providing for minimum payment or resale
obligations, ongoing support or research and development obligations, on the
part of PDR except arrangements entered into in the ordinary course of business;
(k) Any agreement for the provision of products or securities
to any Governmental Entity;
(l) Any material agreement requiring a commitment of PDR
resources or personnel to market, distribute or license products or technology;
or
(m) Any other agreement, contract, letter of intent,
memorandum of understanding or commitment that is material to PDR.
To the best of PDR's knowledge, each material agreement, contract,
mortgage, indenture, plan, lease, instrument, permit, concession, franchise
agreement, license and commitment to which PDR is a party or by which, to the
best knowledge of PDR and the Stockholder, it or any of its assets is bound (i)
is valid and binding on PDR and the other parties thereto, (ii) is in full force
any effect, (iii) has not been materially breached by PDR or any other party
thereto, (iv) contains no material liquidated damages, penalty or similar
provision, and a default will not be caused by reason of the transaction
contemplated hereby. To PDR's knowledge, no party to any such contract,
agreement or instrument intends to cancel, withdraw, modify or amend such
contract, agreement or arrangement. There have been delivered to DG Systems true
and complete copies of all the Contracts.
Except as set forth in Schedule 3.11, no approval or consent of any
person is needed in order that the Contracts continue in full force and effect
subsequent to the consummation of the transactions contemplated by this
Agreement and, upon consummation of such transaction and receipt of such
approvals or consents, each of such Contracts will be enforceable in accordance
with their respective terms.
3.12 Title to Property; Encumbrances.
12
<PAGE> 19
(a) PDR has, and at the Closing will have, good and valid
title to its personal property (tangible and intangible) including without
limitation, all personal property reflected on the most current balance sheet
included in the PDR Financial Statements.
(b) PDR does not own any real property. Schedule 3.12(c)
describes all real property leased (collectively, the "Realty Leases"). Each of
the Realty Leases is in full force and effect and there exists no material
defaults of any party thereunder nor does there exist any circumstances which
with the giving of notice or the passage of time would constitute such a
default.
(c) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated thereby will not violate,
conflict with or result in the breach of any of the terms of or cause a default
of under any of the Realty Leases subject to receipt of landlords consent set
forth in subparagraph (3) below.
(d) Approval or consent of the landlord with respect to the
assignment of the Realty Leases will attempt to be obtained by PDR prior to the
Closing.
3.13 Environmental Matters.
(a) To the best of PDR's knowledge, PDR has not transported,
stored, used, manufactured, released, disposed of or exposed any person to
Hazardous Materials ("Hazardous Materials Activity") in violation of any
applicable local, state or federal statute, rule, regulation, order or law.
(b) No action, proceeding, permit revocation, writ, injunction
or claim is pending or, to the best knowledge of PDR, threatened concerning
PDR's Hazardous Materials Activities or any PDR Facility and PDR is not aware of
any fact or circumstance which could involve PDR in any environmental litigation
or impose any material environmental liability upon PDR.
3.14 Interest of Officers. None of the officers or directors has any
interest in any property, real, personal or mixed, tangible or intangible, used
in or pertaining to PDR's business, except for rights as a Stockholder.
3.15 Intellectual Property.
(a) PDR does not own any Intellectual Property Rights.
(b) PDR's business includes the reproduction and distribution
by PDR of audio and video tapes embodying copyrighted and copyrightable
material, trademarks and service marks and other intellectual properties
(collectively, the "Works") owned by others. PDR has been duly authorized, or
the persons employing the
13
<PAGE> 20
services of PDR have been duly authorized, by the owners of all such Works to
permit PDR to reproduce and distribute video and audio tapes embodying the
Works. To the best of its knowledge, the conduct of the business by PDR and in
particular its reproduction and distribution of audio and video tapes embodying
the Works, does not infringe the intellectual properties or other rights of any
person. No consents of any owner of any Works are necessary to the consummation
of the transactions contemplated by this Agreement.
3.16 Employee Benefit Plans.
(a) Schedule 3.16 lists every pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus or other incentive plan, any other written or
unwritten employee program, arrangement, agreement or understanding (whether
arrived at through collective bargaining or otherwise), any medical, vision,
dental or other health plan, any life insurance plan or any other employee
benefit plan or fringe benefit plan, including, without limitation, any
"employee benefit plan," as that term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), currently or
within the past five (5) fiscal years, adopted, maintained, sponsored in whole
or in part, or contributed to by, PDR or any member of a "controlled group of
corporations" with PDR, or any entity that is under "common control" with PDR
(as defined in Section 414(b) or (c) of the Code) ("ERISA Affiliate") for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries of PDR or its ERISA Affiliates (collectively,
the "Plans").
(b) Except as set forth in Schedule 3.16 hereto, no Plan (i)
is a multiemployer plan within the meaning of Section 337 of ERISA, (ii) is a
multiple employer plan within the meaning of Section 413 of the Code, (iii) is
or has been subject to Title IV of ERISA, or (iv) is subject to the requirements
of Section 412 of the Code.
(c) With respect to each Plan, DG Systems has been provided
heretofore, or will be provided during the Due Diligence Period, if available,
with true and complete copies of: (i) all Plan documents and all documents or
instruments establishing or constituting any related trust, annuity contract or
other funding instrument, and any amendments thereto; (ii) the most recent
determination letter received from the IRS; (iii) the most recent financial
statement, if any; (iv) the most recent IRS Form 5500, if any; and (v) written
descriptions of all non-written agreements relating to the Plans. To the best of
PDR's knowledge, all Plans, all Plan documents and all documents or instruments
establishing or constituting any related trust, annuity contract or other
funding instrument, and any amendments thereto, comply in all material respects
with the provisions of ERISA and the Code and other applicable laws, rules and
regulations. All necessary governmental
14
<PAGE> 21
approvals required to date for all Plans have been obtained and all available
favorable determinations as to the qualification under the Code of each of the
Plans, and for any Code Section 501(c) (a) trust maintained in connection with
any Plan that is an employee welfare benefit plan within the meaning of Section
(3) (1) of ERISA, and each amendment thereto, have been made by the IRS, or have
been applied for. Each Plan which is intended to be qualified or tax exempt
under the Code is so qualified or so tax exempt and has received a favorable
determination letter to that effect from the Internal Revenue Service, which
letter is in full force and effect, or a determination letter with respect to
such Plan has been requested within the applicable remedial amendment period
under the Code. Neither PDR nor Stockholder are aware of any facts or
circumstances that are likely to cause the loss of any such qualifications or
revocation of such letter.
(d) To the best of PDR's knowledge and except as set forth on
Schedule 3.16, the administration of all Plans has been consistent with, and in
compliance in all material respects with, applicable requirements of the Code,
ERISA and any applicable collective bargaining arrangements, including, without
limitation, material compliance with all requirements for reporting and
disclosure and requirements for the continuation of group health insurance.
Neither PDR nor its ERISA affiliates nor Stockholder have engaged in any
transaction or acted or failed to act in any manner that violates Section 404 or
406 of ERISA in any material respect or engaged in any prohibited transaction
(as defined in Section 4975 (c) (1) of the Code) for which there exists neither
a statutory nor regulatory exemption or for which an exemption has not been
obtained and which would subject PDR to any material taxes, penalties or other
liabilities. All contributions required by law or the terms of each Plan to have
been made under such Plan, or to any trusts or funds established thereunder or
in connection therewith, have been made by the due dates thereof (including any
valid extensions).
(e) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will constitute (i) a
termination of employment or other event entitling any person to any additional
or other benefits, or that would otherwise modify any benefits or the vesting of
any benefits, under any Plan maintained at any time by PDR or its ERISA
Affiliates, or to which the Company or its ERISA Affiliates contribute or have
contributed or are or were required to contribute or (ii) a violation of Section
404 or 406 or ERISA or a prohibited transaction (as defined in Section 4975 (c)
(1) of the Code) for which there exists neither a statutory nor regulatory
exemption of for which an exemption has not been obtained. With respect to each
Plan, there are no actions, suits or claims pending that may result in material
liability to PDR or to the knowledge of PDR or Stockholder, threatened, and
neither PDR nor Stockholder have knowledge of any facts that are likely to give
rise to any such
15
<PAGE> 22
actions, suits or claims other than, in each case, claims for benefits in the
normal course.
(f) PDR has not made or agreed to make, or is required to make
(in order to bring any of the Plans into compliance with ERISA or the Code), any
change in benefits or coverage that would materially increase the cost of
maintaining any Plan.
(g) To the best of PDR's knowledge, each Plan which is a
"group health plan" within the meaning of Section 5000 of the Code has been
maintained in substantial compliance with Section 4980 (B) of the Code and Title
I, Subtitle B, Part 6 of ERISA and no material tax payable on account of Section
4980 (B) of the Code has been or is expected to be incurred by PDR.
(h) To the best of PDR's knowledge, no benefit payable or
which may become payable by PDR pursuant to any Plan shall constitute an "excess
parachute payment," within the meaning of Section 280 (G) of the Code, which is
or may be subject to the imposition of an excise tax under Section 4999 of the
Code or which would not be deductible by reason of Section 280 (G) of the Code.
3.17 Employees and Employee Relations. Schedule 3.17 contains a
complete list as of the date of this Agreement, of all employees of PDR setting
forth their names, birthdates, job titles, base salaries, bonus compensation
paid or payable and dates of hire. PDR has not at any time during the last five
years had, nor is there now or to the best of PDR's, the DeRosas' and
Stockholder's knowledge threatened, a strike, picket, work stoppage, work
slowdown, or other labor trouble affecting employees. PDR is not a party to and
there does not otherwise exist, any union, collective bargaining or similar
agreement with respect to any of its employees. There is not any negotiation
currently being conducted with any labor organization or employee association
with respect to the employees of PDR or any contemplated attempt by any such
organization or association to organize such employees. To the best of PDR's
knowledge, PDR is in compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and hours
and occupational safety and health and employment practices, and has not engaged
in any unfair labor practice and there is no unfair labor practice complaint
against PDR which has been served on PDR or of which PDR, the DeRosas or
Stockholder has knowledge pending or threatened before the National Labor
Relations Board or any other Governmental Entity. Except as set forth on
Schedule 3.17, there do not exist any pending workmen compensation claims
against PDR that are not adequately provided for by insurance, any pending, or
to the knowledge of PDR, the DeRosas or Stockholder threatened claims alleging
that the workplace of PDR is unsafe or employment discrimination or wrongful
discharge.
16
<PAGE> 23
3.18 Employee Agreements. No employee of PDR has an employment contract
(whether written or verbal) with PDR.
3.19 Insurance. Schedule 3.19 lists all insurance policies covering the
assets, business, equipment, properties, operations, employees, officers and
directors of PDR, the amounts of coverage under each such policy of PDR. Since
January 1, 1996, PDR has not been refused any requested coverage and no material
claim made by PDR has been denied by the underwriters of such policies. All
premiums payable under all such policies have been paid, and PDR is otherwise in
full compliance with the terms of such policies (or other policies providing
substantially similar insurance coverage). To the best knowledge of PDR and the
Stockholder, there is no threatened termination of, or material premium increase
with respect to, any of such policies. There are no outstanding, unpaid claims
under such policy which have gone unpaid for more than 45 days or as to which
the carrier has disclaimed liability.
3.20 Inventory. PDR holds no inventory other than video and audio tape
which are supplies and/or work in progress. PDR stores master videotapes for its
customers. Such video tapes are specifically excluded from this transaction.
3.21 No Defaults. To the best of PDR's knowledge, PDR is not, and
neither PDR nor the Stockholder has received notice that PDR is or would be with
the passage of time (a) in violation of any provision of its Certificate of
Incorporation or Bylaws or (b) in default or violation of any term, condition or
provision of (i) any judgment, decree, order, injunction or stipulation
applicable to PDR, or (ii) any agreement, note, mortgage, indenture, contract,
lease, instrument, permit, concession, franchise or license to which PDR is a
party or by which PDR or its properties or assets may be bound.
3.22 Accounts Receivable.
(a) Each of the accounts receivable of PDR (i) arose from bona
fide sales in the ordinary course of business, (ii) was entered into under
circumstances and by methods usual and customary in PDR's business in the
applicable state or country and the collection practices used with respect
thereto have been and are in all respects legal and proper, and (iii) was
entered into, and credit granted pursuant thereto, consistent with PDR's
historical credit policies and practices. The books of PDR correctly record the
principal balance of all accounts receivable and there are no security
instruments securing any account receivable is enforceable.
(b) To the best of PDR's knowledge, there does not exist any
uncollectible accounts receivable which in the aggregate, exceed PDR's reserve
for bad debts. PDR will deliver no later than five (5) days following Closing a
similar current Aged Trial
17
<PAGE> 24
Balance accounts receivable statement dated as of the Closing Date.
(c) To the best of PDR's knowledge, none of the accounts
receivable of PDR is subject to any material claim of offset, recoupment,
set-off or counterclaim and PDR has no knowledge of any specific facts or
circumstances (whether asserted or unasserted) that could give rise to any such
claim. No person has any lien on any of such accounts receivable and other than
in the ordinary course of business, no agreement for deduction or discount has
been made with respect to any such receivables. PDR has provided DG Systems with
information relating to such amounts of accounts receivable.
3.23 Absence of Certain Changes. Except as set forth in Schedule 3.23
or as otherwise disclosed in this Agreement including without limitation as set
forth in Section 6.17, or any Schedule to this Agreement, since September 30,
1996, PDR has not:
(i) Suffered any Material Adverse Effect in its Working
Capital, condition (financial or otherwise), assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, business or
operations;
(ii) Incurred any liabilities or obligations (absolute,
accrued, contingent or otherwise) except liabilities and obligations
incurred in the ordinary course of business and consistent with past
practice;
(iii) Paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice, of liabilities and obligations
reflected or reserved against in the PDR Financial Statements or
incurred in the ordinary course of business and consistent with past
practice;
(iv) Permitted or allowed any of its property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any lien;
(v) Written off as uncollectible any notes or accounts
receivable, except for immaterial (less than $5,000.00) write-downs and
write-offs in the ordinary course of business and consistent with past
practice;
18
<PAGE> 25
(vi) Sold, transferred, or otherwise disposed of any of its
properties or assets (real, personal or mixed, tangible or intangible),
except in the ordinary course of business and consistent with past
practice;
(vii) Granted any general increase in the compensation of
officers, employees or consultants (including any such increase
pursuant to any bonus, pension, profit sharing or other plan or
commitment) or any increase in the compensation payable or to become
payable to any officer, employee or consultant (including any such
increase pursuant to any bonus, pension, profit-sharing or other plan
or commitment), except in the ordinary course of business consistent
with past practice and no such increase is required by agreement or
understanding;
(viii) Made any single capital expenditure or commitment in
excess of $10,000.00 for additions to property, plant, equipment or
intangible capital assets or made aggregate capital expenditures and
commitments in excess of $25,000.00 for additions to property, plant,
equipment or intangible capital assets;
(ix) Made any change in any method of accounting or accounting
practice or in depreciation or amortization policies or rates adopted
by it;
(x) Paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or
mixed, tangible or intangible) to, or entered into any agreement or
arrangement of any kind with, any of its officers, directors or
stockholders or any affiliate or associate of any of its officers,
directors or stockholders, except compensation to officers at rates not
exceeding the rates of compensation in effect as of September 30, 1996
or any reasonable increases in the ordinary course of business
consistent with past practices;
(xi) Entered into any new, or amended or modified any
existing, employee benefit plan or program or severance arrangements or
granted any termination benefits; or
19
<PAGE> 26
(xii) Agreed, whether in writing or otherwise, to take any
action described in this section.
(xiii) Made any amendment or change in the Certificate of
Incorporation or Bylaws of PDR;
(xiv) Incurred any material damage, destruction or loss,
whether covered by insurance or not, affecting any of the material
properties or business of PDR;
(xv) Made any loan, advance or capital contribution to, or
investment in, any person, other than advances made in the ordinary
course of business of PDR.
(xvi) Entered into any amendment of relinquishment,
termination or nonrenewal by PDR of any Contract, lease, commitment or
other right or obligation other than in the ordinary course of business
consistent with past practice.
(xvii) Experienced any labor dispute, other than routine
individual grievances, or any activity or proceeding by a labor union
or representative thereof to organize any employees of PDR; or
(xviii) Made any agreement or arrangement to take any action
which, if taken prior to the date of this Agreement, would have made
any representation or warranty set forth in this Agreement untrue or
incorrect as of the date when made.
3.24 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon PDR or that has or could
reasonably be expected to have the effect of prohibiting or significantly
impairing any material business practice of PDR, any material acquisition of
property by PDR, or the continuation of the business of PDR as currently
conducted or as currently proposed to be conducted.
3.25 Bank Accounts. Schedule 3.25 sets forth the names and locations of
all banks, trust companies, savings and loan associations and other financial
institutions at which PDR maintains accounts of any nature and names of all
persons authorized to draw thereon, make withdrawals therefrom or have access
thereto.
20
<PAGE> 27
3.26 Customers and Suppliers. Schedule 3.26 sets forth: (a) a list of
the ten (10) largest customers of PDR in terms of sales during the calendar year
ended December 31, 1995 and the six month period ending September 30, 1996
showing the approximate total sales by customer during such periods; and (b) a
list of the ten (10) largest suppliers of PDR in terms of purchases during the
calendar year ended December 31, 1995 and the six month period ending September
30, 1996 and showing the approximate total purchases by PDR from each such
supplier during such periods. Except to the extent set forth in Schedule 3.26
there has not been any Material Adverse Effect in the business relationship of
PDR with any customer or supplier named in Schedule 3.26. Except for the
customers and suppliers named in Schedule 3.26, the Company does not have any
customer who accounted for more than 5% of PDR's sales during the calendar year
1995, or any supplier from whom it purchased more than 5% of the goods or
services which it purchased during the calendar year 1995. PDR has not received
any notice nor does the Stockholder have knowledge of any facts, circumstances
or conditions that create a reasonable basis for believing that, nor does it or
the Stockholder have any reason to believe, that any of its current customers,
other than Music Television Networks (MTV), or suppliers will terminate or
change in a manner materially adverse to the Company their relationships with
the Company either before or within twelve (12) months after the Closing. This
section shall not be construed as a guaranty of the continuation of the business
of PDR's customers post-Closing.
3.27 Certain Business Practices. The Stockholder and to the knowledge
of the Stockholder, the employees, directors, officers, agents or other
representatives of PDR, or any other person acting on behalf of PDR have not,
directly or indirectly, within the past five years, given or agreed to give any
illegal, gift or similar benefit to any customer, supplier, governmental
employee or other person who is or may be in connection with any actual or
proposed transaction.
3.28 Related Party Transaction. Except as set forth on Schedule 3.28,
no officer, director, shareholder or, to the knowledge of PDR and Stockholder:
(a) employee of PDR or (b) affiliate or relative of any of them:
(i) owns directly or indirectly any interest in (except not
more than three (3%) percent stockholdings for investment purposes in
securities of publicly held and traded companies), or is an officer,
partner, director, employee or consultant of, or otherwise receives
renumeration from, any person which is, or is engaged in business as, a
competitor, lessor, lessee, customer or supplier of PDR;
21
<PAGE> 28
(ii) owns directly or indirectly in whole or in part any
tangible or intangible property, the use of which is necessary for the
conduct of PDR's business and which if not obtained from such person
could have a Material Adverse Effect; or
(iii) owes any amount to PDR or, to the knowledge of PDR and
Stockholder, has any cause of action or other claim against PDR other
than for current wages accrued or bonuses, benefits, prerequisites or
reimbursements for business expenses payable in the ordinary course of
business consistent with past practices.
3.29 Brokers and Finders. None of PDR, Stockholder or PDR's respective
officers, directors, employees or stockholders has employed any broker or finder
or incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the transaction contemplated by this Agreement.
ARTICLE IV
ADDITIONAL REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDER
The Stockholder represents and warrants to DG Systems that:
4.1 Power of Authorization and Validity. Stockholder has the full
right, power, legal capacity and authority to enter into and perform his
obligations under this Agreement and each of the other Transaction Documents to
which he is a party. Each of the Transaction Documents to which Stockholder is
or will be a party constitutes, or will constitute upon its execution and
delivery by Stockholder, a valid and binding obligation of Stockholder
enforceable in accordance with its terms.
4.2 Title to Securities. Stockholder owns of record and beneficially,
and immediately prior to the Closing will own of record and beneficially, all of
the outstanding Shares of PDR Common Stock. Stockholder owns, and will own
immediately prior to the Closing, all right title and interest in and to such
Shares, free and clear of all encumbrances, proxies, rights of refusal and
similar rights and other transfer restrictions of any nature whatsoever
(including any arising from any existing or threatened litigation) other than
restrictions on transfer arising out of federal and state securities laws.
4.3 Absence of Violations or Conflicts. The execution and delivery by
Stockholder of the Transaction Documents to which Stockholder is or will be a
party and the consummation by Stockholder of the transactions contemplated by
such Transaction
22
<PAGE> 29
Documents do not and will not with the passing of time or giving of notice or
both: (i) constitute a violation of, be in conflict with, constitute a default
or require any payment under, permit a termination of, or result in the creation
or imposition of any lien upon any properties or assets of PDR, under any
contract or understanding to which Stockholder is a party or to which
Stockholder's properties or assets are subject; or (ii) create, or cause the
acceleration of the maturity of, any debt, obligation or liability of
Stockholder that would result in any lien or other claim upon the properties or
assets of PDR.
4.4 Absence of Claims Against the Company. Stockholder has no claim
against PDR, except for accrued compensation and benefits and the reimbursement
of expenses incurred in the ordinary course of business. Stockholder has no
right, claim or interest in or to any equity ownership interest in PDR other
than the Shares of PDR Common Stock.
4.5 Litigation. To the best of Stockholder's knowledge, There is no
action, proceeding, claim or investigation pending before any Governmental
Entity with respect to which Stockholder has been served or, to the best
knowledge of Stockholder, threatened against Stockholder or pending but with
respect to which Stockholder has not been served, relating to Stockholder's
ownership of PDR Common Stock.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF DG SYSTEMS
DG Systems represents and warrants to PDR as follows:
5.1 Organization: Standing and Power. DG Systems is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation and has all requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as now being
conducted.
5.2 Capital Structure.
(a) The authorized capital stock of DG Systems consists of
30,000,000 shares of Common Stock, without par value, and 5,000,000 shares of
Preferred Stock, without par value. As of the September 30, 1996, there were
issued and outstanding approximately 11,620,807 shares of Common Stock; no
shares of Preferred Stock were outstanding; and an aggregate of approximately
1,971,039 shares of Common Stock were reserved for issuance upon the exercise of
the DG Systems options.
(b) All the outstanding shares of DG Common Stock are validly
issued.
23
<PAGE> 30
(c) The shares of DG Common Stock issuable in connection with
the Closing are duly authorized and reserved for issuance and, when issued in
accordance with the terms of hereof will be validly issued, fully paid,
nonassessable and free of preemptive rights.
5.3 Authority.
(a) DG Systems has all requisite corporate power and authority
to enter into this Agreement and the other Transaction Documents to which they
are a party, to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and such other Transaction Documents, the performance
by DG Systems of its respective obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of DG
Systems, including approval by its board of directors. This Agreement is a
legal, valid and binding obligation of DG Systems enforceable against DG Systems
in accordance with its terms.
(b) Subject to satisfaction of the conditions set forth in
Article VII hereto, the execution and delivery of this Agreement does not and
the consummation of the transactions contemplated hereby will not, conflict with
or result in any material violation of any material statute, law, rule,
regulation, judgment, order, decree, or ordinance applicable to DG Systems or
its properties or assets, or conflict with or result in any breach or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
the loss of material benefit under, or result in the creation of a lien or
Encumbrance of any of the properties or assets of DG Systems pursuant to (i) any
provision of its respective articles or certificate of incorporation or bylaws,
or (ii) any material agreement, contract, note, mortgage, indenture, lease,
instrument, permit, concession, franchise or license to which DG Systems is a
party or by which DG Systems or any of its respective property or assets may be
bound or affected.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to DG Systems in connection with the execution and delivery of
this Agreement and the other Transaction Documents to which it is a party or the
consummation by DG Systems of the transactions contemplated hereby and thereby,
except for (i) filings required by the California Department of Corporations,
(ii) the obtaining of such other orders from, the various state securities or
"blue sky" authorities, and (iii) the making of such reports under the Exchange
Act, as are required in connection with the transactions contemplated by this
Agreement.
24
<PAGE> 31
5.4 Litigation. There is no action, suit, proceeding, arbitration,
investigation or claim pending or, to the best knowledge of DG Systems,
threatened against DG Systems which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay any of the transactions contemplated
hereby of DG Systems' ability to enter into this Agreement. DG Systems is not
aware of any other pending or threatened action, suit, proceeding, investigation
or claim, or any reasonable basis therefor, which individually or in the
aggregate would reasonably be expected to result in a Material Adverse Change in
DG Systems.
5.5 Brokers and Finders. DG Systems nor any of its officers, directors,
employees or stockholders has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated by this Agreement.
5.6 Transferability of Shares. If shares of DG Common Stock are issued
to Stockholder at the Closing in accordance with the terms of this Agreement and
the Permit, then such shares will be freely tradeable, subject to any
restrictions imposed by this Agreement, the Lock-Up Agreement, Rules 144 and 145
promulgated under the Securities Act, and applicable state securities laws.
ARTICLE VI
COVENANTS
PDR and Stockholder jointly and severally, hereby covenant as follows:
6.1 Conduct of Business of PDR.
During the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement or the Closing Date, PDR shall
carry on its business in the usual, regular and ordinary course in substantially
the same manner as conducted prior to the date of this Agreement and, to the
extent consistent with such business, use best efforts consistent with past
practice and policies to preserve intact its present business organizations,
keep available the services of its present officers and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with them, to the end that its goodwill and
ongoing business shall be substantially unimpaired at the Closing Date. PDR
shall promptly notify DG Systems of any event or occurrence not in the ordinary
course of business of PDR, and any event which could result in a Material
Adverse Change in PDR. Except as expressly contemplated by this Agreement, PDR
and Stockholder shall not, without the prior written consent of DG Systems:
25
<PAGE> 32
(a) Enter into any commitment or transaction not in the
ordinary course of business;
(b) Grant any severance or termination pay to any director,
officer, employee or consultant, except mandatory payments made pursuant to
standard written agreements outstanding on the date hereof (with any such
agreement or arrangement to be disclosed herein) or except in accordance with
PDR's past practices;
(c) Other than in the ordinary course of business, enter into
or amend any agreements pursuant to which any other party is granted marketing
or other similar rights of any type or scope with respect to any products of
PDR;
(d) Except in the ordinary course of business with prior
notice to DG Systems, violate, amend or otherwise modify the terms of any of the
Contracts;
(e) Except with prior consultation with DG Systems, commence a
lawsuit other than for the routine collection of bills or as respects a lawsuit
or arbitration proceeding for a breach of this Agreement;
(f) Except as provided in Article 6.17, declare or pay any
dividends on or make any other distributions (whether in cash, stock or
property) in respect of any PDR Capital Stock, or split, combine or reclassify
any of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of PDR
Capital Stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of PDR Capital Stock except repurchases of PDR common stock at cost from
former employees, directors and consultants in accordance with the terms of
agreements providing for the repurchase of shares in connection with any
termination of service to PDR;
(g) Issue, deliver or sell or authorize or propose the
issuance, delivery or sale of or authorization of, the purchase of any shares of
PDR Capital Stock or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities;
(h) Cause or permit any amendments to PDR's Certificate of
Incorporation or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof;
26
<PAGE> 33
(j) Sell, lease, license or otherwise dispose of any PDR
properties or assets except in the ordinary course of business and consistent
with past practice;
(k) Incur any indebtedness for borrowed money or guaranty any
such indebtedness except in the ordinary course or issue or sell any debt
securities or guaranty any debt securities of others;
(l) Adopt or amend any Plan, or enter into any employment
contract, pay any special bonus or special remuneration to any director,
employee or consultant, or increase the salaries or wage rates of its employees
other than pursuant to scheduled employee reviews under PDR's normal employee
review cycle or pursuant to PDR's existing bonus plans, as the case may be, or
pursuant to Section 6.17 or, in connection with the hiring of employees other
than officers in the ordinary course of business, in all cases consistent with
past practice, or otherwise increase or modify the compensation or benefits
payable or to become payable by PDR to any of its directors, employees or
consultants, except for changes pursuant to employment agreements in effect as
of the date hereof or changes in position;
(m) Pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary course of
business consistent with past practice of liabilities reflected or reserved
against in the PDR Financial Statements;
(n) Make any material Tax election, change any material Tax
election, adopt any material Tax accounting method other than in the ordinary
course of business and consistent with past practice, change any material Tax
accounting method, file any materially Tax return (other than any estimated tax
returns, payroll tax returns or sales tax returns) or any amendments to a
material Tax return, enter into any closing agreement, settle any Tax claim or
assessment or consent to any Tax claim or assessment;
(o) Fail to pay or otherwise satisfy its material monetary
obligations as they become due or consistent with past practice, except such as
are being contested in good faith;
(p) Cancel, materially amend or, other than in the ordinary
course upon expiration of a policy term, renew any material insurance policy
except for replacing any material insurance policy with substantially the same
coverage by another insurer;
(q) Take, or agree (in writing or otherwise) to take, any of
the actions described in this Section 6.1 or any action which would make any of
the representations or warranties or covenants of PDR contained in this
Agreement or any other Transaction Document to which PDR or the Stockholder is a
party untrue or incorrect.
27
<PAGE> 34
6.2 Due Diligence Access to Information: Provision of Interim
Financial Statements.
(a) PDR shall afford DG Systems and its independent
accountants, counsel and other representatives, reasonable access during normal
business hours during the twenty (20) business days following the date of this
Agreement (the "Due Diligence Period") to review (i) all properties, books,
contracts, commitments and records, and (ii) all other information concerning
the business, assets, goodwill, properties and personnel as may reasonably be
requested (collectively the "Due Diligence Materials"). Due Diligence shall be
conducted in a manner that will not unreasonably interfere with PDR's business
operations.
(b) PDR shall provide DG Systems such internal PDR Financial
Statements as may reasonably be requested by DG Systems or its accountants
during the Due Diligence Period.
(c) If after DG Systems' review of the Due Diligence Materials
any information contained therein is not satisfactory to DG Systems in their
sole and absolute judgment, it may at any time during the Due Diligence Period
terminate this Agreement and thereupon the Escrow Agent is directed to return
the Deposit to DG Systems.
6.3 Exclusivity: Acquisition Proposals. Unless and until this Agreement
shall have been terminated by either party pursuant to Section 10.1:
(a) None of PDR, and the Stockholder or the DeRosas shall not
knowingly, directly or indirectly, through any officer, director, agent or
representative (including, without limitation, investment bankers, attorneys,
accountants and consultants), or otherwise;
(i) Solicit, initiate or further the submission of
proposals or offers from, or enter into any agreement with, any person
or entity, individually or collectively, relating to any acquisition or
purchase of all or a material portion of the assets of, or any equity
interest in, PDR or any merger, consolidation or business combination
with PDR;
(ii) Participate in any discussions or negotiations
regarding, or furnish to any third party any confidential information
with respect to PDR or DG Systems in connection with any acquisition or
purchase of all or a material portion of the assets of, or any equity
interest in, PDR or any merger, consolidation or business combination
with PDR.
28
<PAGE> 35
(b) PDR shall immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any third party conducted
prior to the date of this Agreement with respect to any of the foregoing.
6.4 Breach of Representations, Warranties and Covenants.
PDR and Stockholder shall not take, or fail to take, any action which
from the date hereof through the Closing would cause or constitute a breach of
any of its respective representations, warranties and covenants set forth in
this Agreement. In the event of, and promptly after becoming aware of, the
actual, pending or threatened occurrence of any event which would cause or
constitute such a materially adverse breach or inaccuracy, each party shall give
detailed notice thereof to the other parties and shall use its best efforts to
prevent or promptly remedy such breach or inaccuracy.
6.5 Consents. Each of PDR, Stockholder and DG Systems shall promptly
apply for or otherwise seek, and use its commercially reasonable efforts to
obtain, all consents and approvals required to be obtained by it for the
consummation of the Closing, and PDR shall use its commercially reasonable
efforts to obtain all necessary consents, waivers and approvals under any of
PDR's Contracts in connection with the Closing, except such consents and
approvals as DG Systems and PDR agree PDR shall not seek to obtain.
6.6 All Reasonable Efforts. Each of PDR, the Stockholder and DG Systems
shall use all commercially reasonable efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
Closing under this Agreement. In furtherance and not in limitation of the
foregoing, the Stockholder agrees to vote in favor of or give his written
consent with respect to all voting capital stock of PDR beneficially owned by
him to approve this Agreement and the transactions contemplated by the
Transaction Documents.
6.7 Public Announcements. DG Systems and PDR will make joint
announcements to employees after the execution of this Agreement. Each party
will consult in advance with the other concerning the timing and content of any
announcements, press releases or public statements concerning the transaction
and will not make any such announcement, release or statement without the
other's consent; provided, however, that DG Systems may make any public
statement without PDR's consent, after it has used reasonable efforts to obtain
PDR's consent, if, in the opinion of counsel for DG Systems, such statement or
announcement is required or advisable to comply with applicable securities laws.
6.8 Expenses. Whether or not the transaction hereunder is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby and
29
<PAGE> 36
thereby, including fees of any finders or brokers or investment bankers,
attorneys and accountants (subject, however, to Article 8.3(h)) retained by such
party, shall be paid by the party incurring such expense; provided, however,
that the Stockholder shall bear any attorney fees incurred on behalf of PDR in
connection with this Agreement in excess of $25,000.00.
6.9 Confidentiality. The parties acknowledge that DG Systems and PDR
have each previously executed a Nondisclosure Agreement dated as of March 19,
1996, which shall continue in full force and effect in accordance with its terms
notwithstanding anything herein to the contrary.
6.10 Certain Taxes. The Stockholder and PDR will pay, or cause to be
paid, all Taxes with respect to the income of PDR and Stockholder as respects
PDR business through the Closing Date.
6.11 Account Collections. PDR and Stockholder shall, from the date of
this Agreement to the Closing Date, use their respective best efforts to collect
all accounts receivable and make payment on all accounts payable in the ordinary
course of business and in accordance with its past customs and practices and
without any delay, acceleration or discounting of same other than as is
consistent with such existing practices.
6.12 Audited Financial Statements. Stockholder shall use its best
effort to deliver to DG Systems by October 31, 1996, but in no event later than
November 8, 1996, audited financial statements prepared by PDR's Accountants for
the periods ending December 31, 1993, 1994 and 1995 (collectively the "Audited
Financial Statements"). DG Systems shall have the right to examine and review
same and the supporting financial information and documents, with reasonable
cooperation from Stockholder, for five (5) business days following delivery of
the Audited Financial Statements. PDR's Accountants shall keep DG Systems'
accountants advised of their progress with respect to the preparation of the
Audited Financial Statements and shall promptly provide DG Systems' accountants
with working drafts of the Audited Financial Statements as soon as they become
available subject to final review of PDR's Accountants and the ability to
comment on the form of same.
6.13 Maintenance of Insurance Policies. On and after the date hereof
and until the Closing Date, PDR shall maintain in full force and effect all
insurance (or insurance of similar terms and conditions as currently in effect)
with respect to its business, assets and properties.
6.14 Cooperation. Each of the parties hereto will cooperate with each
party to facilitate the completion of the transactions contemplated hereunder.
6.15 Covenant Not to Compete and Confidential Information.
30
<PAGE> 37
(a) Stockholder and the DeRosas agree that they will not,
directly or indirectly, individually or by, for, with or through any other
person, firm or entity compete in any way with the Business of PDR (as
hereinafter defined) as operated by PDR or any PDR parent, affiliate or
subsidiary and/or its or their successors and/or assigns in New York, New Jersey
and Connecticut. Without limiting the generality of the foregoing, Stockholder
and the DeRosas agree that they will not do any of the following:
(i) Own, manage, control, be employed by or consult
with or provide advice to, serve as an officer or director of or
otherwise become engaged by or associated with any person, firm,
corporation, partnership, company, proprietorship, association, or
other business entity, that competes with the Business of PDR;
(ii) Canvass, solicit or accept the business of any
PDR customer or client as respects the Business of PDR;
(iii) Induce, advise, request or otherwise attempt to
influence any PDR customer or client to withdraw, curtail or cancel its
business with PDR;
(iv) Induce, advise, request or otherwise attempt to
influence any PDR customer or client to refer its business to any
competitor of PDR;
(v) Induce, advise, request or otherwise attempt to
influence any person who is an employee or officer of PDR to terminate
said relationship, except where such action is taken at the request of
PDR in the course of carrying out Stockholder's or the DeRosas' duties
for PDR;
(vi) Disclose or use, in any manner in competition
with or contrary to the interests of PDR, the proprietary customer
lists, manufacturing and/or business methods and/or plans, product
research, budgets, projections, sales strategies, systems, software,
procedures and all other financial and operational data and/or trade
secrets of PDR, it being acknowledged by Stockholder and the DeRosas
that all such information regarding the business of PDR is confidential
information and the exclusive property of PDR; provided, however, that
the restrictions in this Subparagraph 6.15(a)(vi) shall not restrict
the use or disclosure of such
31
<PAGE> 38
confidential information by Stockholder or the DeRosas (A) when ordered
or directed to do so by a court of law or by a governmental agency,
administrative or legislative body, or (B) which is otherwise already
publicly known through no wrongful act of the Stockholder or the
DeRosas.
(b) The covenants set forth in this Article 6.15(a)(i),
6.15(a)(iii), 6.15(a)(iv) and 6.15(a)(vi) shall be operative for a period of
three (3) years from the Closing Date.
(c) Notwithstanding the provisions of subparagraph 6.15(b),
Stockholder and the DeRosas recognize that they have a legal duty to refrain
from acting to impair the good will transferred as part of the transactions
contemplated by this agreement and they agree, therefore, that, with respect to
any person, firm, corporation, partnership, company, proprietorship,
association, or other business entity which was, at any time on or prior to the
Closing Date, a PDR customer and/or a DG Systems customer, the covenants set
forth above shall be indefinite in duration and without geographic limits.
(d) It is the intention of the parties that if any of the
restrictions or covenants contained in Subparagraphs 6.15(a)(i) through (vi)
above are held to cover a geographic area or to be for a length of time which is
not permitted by applicable law, or in any way construed to be too broad or to
any extent invalid, such provision shall not be construed to be null, void and
of no effect, but to the extent such provision would be valid or enforceable
under applicable law, a court of competent jurisdiction or an arbitrator(s), as
the case may be, shall construe and interpret or reform said Subparagraphs
6.15(a)(i) through (vi), as the case may be, to provide for a covenant having
the maximum enforceable geographic area, time period and other provisions (not
greater than those contained herein) as shall be valid and enforceable under
such applicable law.
(e) Stockholder and the DeRosas acknowledge that any breach of
the terms, conditions or covenants set forth in Subparagraphs 6.15(a)(i) through
(vi) shall be competitively unfair and may cause irreparable damage to PDR
because of the special, unique, and unusual character of the Business of PDR,
and that PDR's recovery of damages at law will not be an adequate remedy.
Accordingly, Stockholder and the DeRosas agree that for any breach of the terms,
covenants and agreements of Subparagraphs 6.15(a)(i) through (vi), a temporary
restraining order and/or a preliminary injunction or both may issued against
them as provided in Article IX hereof to restrain any such breach, in addition
to any other rights or remedies PDR may have.
(f) In the event of a violation of any legally enforceable
provision of this Article 6.15 as to which there is a
32
<PAGE> 39
specific time period during which Stockholder and/or the DeRosas are prohibited
from taking certain actions or from engaging in certain activities, as set forth
in Subparagraph 6.15(b), then such violation shall toll the running of that time
period from the date of its commencement for a period not to exceed six (6)
months.
(g) For the purpose of this Article 6.15, the phrase, the
"Business of PDR" shall be deemed to mean the business of being a "dub and ship
house" as that phrase is generally used and understood in the radio/television
advertising distribution business, and includes but is not necessarily limited
to the duplication and manual (as opposed to electronic) shipping/ distribution,
usually by overnight delivery service, of audio/video advertising, programs and
other content to, for example, radio/television stations, cable television
systems, cable interconnects, cable networks and miscellaneous other
destinations together with certain post production services such as closed
captioning, spot editing and the like. The Stockholder and the DeRosas recognize
that DG Systems operates a nationwide multimedia network designed to provide
electronic delivery and related services to the broadcast industry by linking
content providers to broadcast stations, including for example the electronic
distribution of audio spot advertising to radio stations. Stockholder and the
DeRosas recognize that operation of such a network by DG Systems is a
technological extension of the "dub and ship house" business and that it is
contemplated that the extension of such technological advancements will in the
future be applied to the business of PDR as conducted prior to the Closing Date.
As such, Stockholder and the DeRosas agree that for the purpose of this Article
6.15, the phrase, the "Business of PDR" shall be deemed to mean, in addition to
the "dub and ship house" business set forth above as currently conducted by PDR,
any and all replacements, extensions, enhancements and/or improvements in such
dub and ship house business by virtue of technological advancements, including
by way of example but not limitation, the operation of a multimedia network
designed to provide electronic delivery and related services to the broadcast
industry by linking content providers to radio and/or television broadcast
stations and/or cable television systems, over such facilities such as standard
telephone or ISDN lines, but which may include other transmission facilities in
the future, such as satellite and Internet transmission facilities, and which
may be expanded in scope to provide electronic distribution services to address
television and cable advertising, music, network advertising and programming
content, and which may offer new services in the future such as air play
verification. To the extent that there are any inconsistencies between the
description of the Business of PDR as set forth herein and the description of
the "Business of Company" set forth in the Employment Agreements, then as
respects the DeRosas only, the terms of the DeRosas' Employment Agreements shall
prevail and control.
33
<PAGE> 40
(h) Anything hereinabove to the contrary notwithstanding,
Stockholder shall not be restricted from engaging in the production of feature
films and television shows and the production of radio and television spot
advertising and, in the course of so doing, may provide such production services
to, among any others, PDR customers and clients provided, however, that in
connection therewith Stockholder shall not otherwise engage in any activities in
violation of subparagraphs (a)(i)-(vi) of this Paragraph 6.15 and provided
further that Stockholder shall use his reasonable efforts to refer the
distribution business of any such customers and clients to PDR.
6.16 Post-Closing Cooperation. After the Closing Date, the parties
shall cooperate fully with one another and all shall make available to any
taxing authority all information, records or documents reasonably requested in
connection with the preparation of any tax returns or in connection with any tax
liability with respect to any period prior to or after the Closing Date at their
expense.
6.17 Certain Taxes. The Stockholder and PDR will pay, or cause to be
paid, all Taxes with respect to the income of PDR and Stockholder as respects
PDR business activities and operations through the Closing Date. Stockholder and
DG Systems agree and consent to the election provided at Section 1362(e)(3) of
the Internal Revenue Code to have income of PDR allocated between its S short
year return and C short year return under normal tax accounting rules. DG
Systems agrees and acknowledges that notwithstanding anything herein to the
contrary, PDR may make distributions and compensation payments to Stockholder
from time to time for the purpose of making funds available to Stockholder of
amounts sufficient for the payment of his Federal, State and local income taxes
attributable to earnings from PDR for the 1996 fiscal year ("1996 Income
Taxes").
PDR shall advise DG Systems in writing of all distributions or
compensation payments to Stockholder made prior to closing for payment of 1996
Income Taxes, when made, other than those payments made in the ordinary course
of business.
6.18 Termination of PDR Profit Sharing Plan. PDR shall, unless DG
Systems elects otherwise, terminate its "PDR profit sharing plan" prior to or
following the Closing Date. DG Systems shall be held harmless and shall be
indemnified by Stockholder with respect to any and all costs, claims, expenses,
losses and the like arising out of the termination of the PDR profit sharing
plan, pursuant to Article XII of this Agreement.
6.19 Continuation of PDR Health Plan Post Closing. DG Systems will use
its best efforts to continue to maintain the "PDR Health Plan" in effect as of
the Closing after the Closing. In the event DG Systems is unable to maintain the
PDR Health Plan it will
34
<PAGE> 41
provide a substantially equivalent health plan to qualified PDR employees.
ARTICLE VII
CONDITIONS PRECEDENT TO THE CLOSING
7.1 Conditions to Each Party's Obligation to Effect the Closing. The
respective obligation of each party to effect the Closing shall be subject to
the satisfaction prior to the Closing Date of the following conditions, unless
waived by DG Systems and PDR:
(a) Approvals. All authorizations, consents, orders or
approvals of, or declarations or filings with, or expiration of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been filed, occurred or
been obtained.
(b) Legal Action. No regulation, statute, temporary
restraining order, preliminary injunction or permanent injunction or other order
preventing the consummation of the Closing shall have been issued by any
Governmental Entity and remain in effect, and no litigation shall be pending the
ultimate resolution of which is likely to (i) result in the issuance of such an
order or injunction, or the imposition against PDR or DG Systems of substantial
damages if the Closing is consummated, (ii) prohibit DG Systems' ownership or
operation of all or a material portion of the business rights of PDR or DG
Systems, or to compel DG Systems or PDR to dispose of or hold separate all or a
material portion of the business or assets of PDR taken as a whole or DG Systems
and its subsidiaries taken as a whole, as a result of the Closing, or (iii)
render DG Systems or PDR unable to consummate the Closing. In the event any such
order or injunction shall have been issued, each party agrees to use its
reasonable efforts to have any such injunction lifted.
7.2 Conditions of Obligations of DG Systems. The obligations of DG
Systems to effect the Closing are subject to the satisfaction of the following
conditions, unless waived by DG Systems:
(a) Representations and Warranties. The representations and
warranties of PDR set forth in this Agreement shall be true and correct in all
material respects (except for such representations and warranties which are
qualified by their terms by a reference to materiality, which representations
and warranties as so qualified shall be true in all respects) as of the Closing,
except as otherwise contemplated by this Agreement, and except for any
inaccuracies that alone or taken together would not be material and adverse to
the financial condition of PDR taken as a whole. PDR shall have performed and
complied in all material respects with all
35
<PAGE> 42
agreements, obligations and conditions required by this Agreement to be
performed or complied with at or prior to the Closing.
(b) No Material Adverse Change. There shall have been no
Material Adverse Change in PDR taken as a whole on or before the Closing Date,
and DG Systems shall have received a certificate signed by an executive officer
of PDR to such effect on the Closing Date.
(c) Performance of Obligations of PDR. PDR shall have
performed in all material respects all obligations and covenants required to be
performed by it under this Agreement prior to the Closing Date. DG Systems shall
have received a certificate signed by an executive officer of PDR to such
effect.
(d) Governmental Approvals; Consents. DG Systems shall have
received duly executed copies of all consents, permits, approvals, licenses or
orders from any Governmental Entity or other third party required to be obtained
by Stockholder or PDR for the lawful consummation of the transactions
contemplated by this Agreement in form and substance reasonably satisfactory to
DG Systems.
(e) Opinion of PDR's Counsel. DG Systems shall have received
an opinion dated the Closing Date of counsel to PDR and Stockholder addressed to
DG Systems in the form attached hereto as Exhibit D.
(f) Due Diligence. DG Systems shall have completed its due
diligence review of PDR's affairs, including its accounts receivable and other
assets, liabilities (contingent, potential and otherwise), and tax returns and
the results of such review shall be acceptable to DG Systems, its legal counsel
and its independent accountants in their sole and absolute judgment as herein
provided.
(g) Closing Date Financial Items. The Audited Financial
Statements shall provide that as of the Closing Date: (i) PDR's Book Value shall
be not less than $750,000.00 or more than $1,750,000.00, and (ii) PDR shall have
cash on hand of not less than $75,000.
(h) No Action or Proceedings. No statute, rule, regulations,
decree, order or injunction shall have been promulgated, enacted or entered by
any Governmental Entity or judicial authority and be in effect which would
prohibit the consummation of the transactions contemplated by this Agreement and
no action or proceeding by or before any court or other Governmental Entity
shall have been instituted or threatened by any party to restrain or prohibit
Stockholder or PDR from consummating the transactions contemplated by this
Agreement.
36
<PAGE> 43
(i) Officer's Certificate. DG Systems shall have received a
certificate, executed by an executive officer of PDR, dated the Closing Date,
reasonably satisfactory in form and substance to PDR and its counsel, certifying
as to the satisfaction of the conditions set forth in Section 7.2(a) hereof.
(j) Secretary's Certificate. DG Systems shall have received a
certificate dated the Closing Date, from the Secretary or Assistant Secretary of
PDR with respect to the accuracy and completeness of the resolutions adopted by
the Board of Directors of PDR authorizing this Agreement and the consummation of
the transactions contemplated hereby.
(k) Good Standing Certificates. DG Systems shall have received
certificates issued by appropriate Governmental Entities evidencing, as of a
recent date, the good standing and tax status of PDR in the jurisdictions in
which it is incorporated; and as of a date not more than five (5) days prior to
the Closing Date, telegrams or facsimile copies, if available, issued by the
appropriate Governmental Entities with respect to the good standing and tax
status of PDR in such jurisdictions.
(l) Certified Charter Documents. DG Systems shall have
received a copy of the Certificate of Incorporation and all amendments thereto
of PDR, certified by the appropriate Governmental Entities.
(m) Certified By-Laws. DG Systems shall have received a copy
of the By-Laws of PDR as amended through the Closing Date, certified by PDR's
secretary.
(n) Matters Satisfactory to DG Systems' Counsel. All actions,
proceedings, opinions and ancillary documents reasonably required or incidental
to the consummation of the transactions contemplated by this Agreement and all
legal matters related thereto, shall be reasonably satisfactory to counsel for
DG System in all material respects.
(o) Audited Financials. DG Systems shall have received copies
of the Audited Financial Statements and same shall be prepared in accordance
with GAAP.
(p) Other Closing Deliveries. DG System shall have received
all documents required to be delivered to DG Systems by Stockholder and PDR
pursuant to the terms of this Agreement.
(r) Landlord's Consent. The consent of the landlord under
Realty Leases to the assignment of the Realty Leases is obtained.
37
<PAGE> 44
7.3 Conditions of Obligation of PDR. The obligation of PDR to effect
the Closing is subject to the satisfaction of the following conditions unless
waived by PDR:
(a) Representations and Warranties. The representations
warranties of DG Systems set forth in this Agreement shall be true and correct
in all material respects (except for such representations and warranties which
are qualified by their terms by a reference to materiality, which
representations and warranties as so qualified shall be true in all respects) as
of the date of this Agreement, except as otherwise contemplated by this
Agreement, and except for any inaccuracies that alone or taken together would
not be material and adverse to the business condition of DG Systems and its
Subsidiaries taken as a whole.
(b) Performance of Obligations of DG Systems. DG Systems shall
have performed in all material respects all obligations and covenants required
to be performed by them under this Agreement prior to the Closing Date, except
for such failures of performance that are not material and adverse to the
business condition of DG Systems, and PDR shall have received a certificate
signed by an executive officer of DG Systems to such effect.
(c) Landlord's Consent. The consent of the landlord under the
Realty Leases to the assignment of the Realty Leases is obtained.
ARTICLE VIII
THE CLOSING
8.1 The Closing. Subject to Article X and provided that all conditions
set forth in Article VII shall have been satisfied or waived, the Closing will
take place at the offices of Jaspan Schlesinger Silverman & Hoffman LLP, 300
Garden City Plaza, Garden City, New York 11530 or at offices of PDR's
Accountants, at 10:00 a.m. local time, ten (10) days after DG Systems' receipt
from PDR of the Audited Financial Statements (the "Closing Date"). All actions
at the Closing will be deemed to have taken place simultaneously and none of
such actions will be considered completed until each such action have been
completed or waived. Notwithstanding the foregoing or anything else in this
Agreement to the contrary, DG Systems shall have the option to accelerate the
Closing Date to three (3) business days from a notice to close delivered by DG
Systems which notice may be delivered commencing as of November 1, 1996. If as
of such accelerated Closing Date: (i) the Permit has not been issued, DG System
shall issue the Promissory Note in its place, and (ii) the Audited Financial
Statements are not completed, same will be completed following the Closing Date.
38
<PAGE> 45
8.2 Closing Deliveries by PDR and Stockholder. At the Closing, PDR and
Stockholder shall deliver to DG Systems:
(a) A certificate dated the Closing Date signed by an
executive officer required to be delivered pursuant to Section 7.2(a).
(b) A certificate dated the Closing Date signed by the
Secretary or Assistant Secretary of PDR certifying as to the Certificate of
Incorporation and Bylaws of PDR, actions taken by its board of directors and
stockholders in connection with the transactions contemplated by this Agreement
and the signature and incumbency of each officer executing on behalf of PDR any
of the Transaction Documents or any other instruments delivered pursuant thereto
as required to be delivered pursuant to Section 7.2(j).
(c) A certificate dated the Closing Date signed by the Chief
Financial Officer of PDR certifying that PDR is not a "United States real
property holding company" as defined in Section 897(c)(2) of the Code.
(d) Good Standing and other certificates or facsimile copies
of bring down certificates required to be delivered pursuant to Section 7.2(k).
(e) Resolution of PDR certified to by PDR's secretary
authorizing actions taken by PDR pursuant to this Agreement.
(f) Stock certificates representing PDR common shares;
(g) The opinion of PDR's and Stockholder's counsel required to
be delivered pursuant to Section 7.2(e);
(h) The resignation of the directors and officers of PDR;
(i) The certified copies of the Certificate of Incorporation
required to be delivered pursuant to Section 7.2(l);
(j) The stock books, stock ledgers, minute books, corporate
seals and financial records and statements of PDR;
(k) The copies of the Bylaws required to be delivered pursuant
to Section 7.2(m);
(l) Executed Employment Agreements of Patrick DeRosa, Neil
DeRosa and Joseph DeRosa (attached hereto as Exhibit E);
(m) All consents pursuant to Section 7.2(d);
(n) Lock-Up Agreement;
(o) A Closing Date Balance Sheet prepared by PDR's
Accountants, on an estimated basis to be used for Closing purposes
39
<PAGE> 46
subject to audit to be completed by PDR's Accountants in accordance with GAAP
after completion of DG Systems December 31, 1996 audit but in no event later
than January 31, 1997 (the "Final Balance Sheet"). The audit of the Closing Date
Balance Sheet by PDR's Accountants will be done in consultation with DG Systems'
Accountants and to the extent that DG's Accountants dispute the Final Balance
Sheet the dispute shall be resolved through the arbitration process set forth in
Article IX.
8.3 Closing Deliveries by DG Systems. At the Closing, DG Systems will
deliver to PDR and/or the Stockholder, as appropriate:
(a) Certificates dated the Closing Date of an executive
officer of DG Systems required to be delivered pursuant to Section 7.3(a);
(b) A certificate dated the Closing Date signed by the
Secretary or Assistant Secretary of DG Systems, certifying as to its certificate
of Incorporation and bylaws, actions taken by its board of directors in
connection with the transactions contemplated by this Agreement and the
signature and incumbency of the officers of DG Systems executing on their behalf
any of the Transaction Documents;
(c) Good Standing and other certificates and telegrams or
facsimile copies of bring down certificates;
(d) Resolutions of DG Systems authorizing actions taken by
each of DG Systems pursuant to this Agreement;
(e) Certified copies of the Certificate of Incorporation;
(f) Copies of Bylaws;
(g) Balance of Purchase Price.
(h) Payment of five thousand ($5,000.00) Dollars plus one-half
(50%) of the actual cost to PDR for preparation of the Audited Financial
Statements, such payment by DG Systems not to exceed $30,000 in the aggregate.
8.4 Post Closing Adjustments. Upon completion of the Final Balance
Sheet, DG Systems and PDR shall readjust the Book Value Purchase Price
adjustment payments, if applicable, under Section 2.5 but only to the extent
that same are $25,000 more or $25,000 less than the original Purchase Price
adjustment.
ARTICLE IX
ARBITRATION
9.1 Mandatory Arbitration. To the extent mandatory non- binding
mediation does not resolve disputes between the parties as
40
<PAGE> 47
set forth in Section 9.2 below and except for the right of either party to apply
to a court of competent jurisdiction for a temporary restraining order or
preliminary injunctions to preserve the status quo or prevent irreparable harm
pending the selection and confirmation of a panel of arbitrators or for other
equitable relief as respects the covenants in Section 6.15 hereof, any claim,
dispute or controversy arising out of or in connection with or relating to his
agreement or the breach or alleged breach thereof shall be resolved through
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association.
9.2 Mandatory Non-Binding Mediation. The parties shall, prior to
engaging in mandatory arbitration, submit to mandatory non-binding mediation
before a mediator, to be assigned by the American Arbitration Association. The
mediation shall be completed within ten (10) days of assignment of a mediator.
The location of the mediation shall be as set forth in Section 9.5 for location
of the arbitration.
9.3 Selection of Arbitrators. The arbitrator or arbitrators shall be
selected as follows: In the event DG Systems and PDR agree on one arbitrator,
the arbitration shall be conducted by such arbitrator. In the event DG Systems
and PDR do not so agree, they shall each select one independent, qualified
arbitrator and these two arbitrators shall select a third arbitrator. DG Systems
reserved the right to reject any individual arbitrator who shall be employed by
or affiliated with a competing organization.
9.4 Qualification of Arbitrators and Mediators. The arbitrators and
mediators shall be retired federal court judges or state court appellate level
judges and shall also have ten (10) years of commercial litigation experience.
9.5 Location of Arbitration. Shall take place (i) in New York City,
Borough of Manhattan, if the party requesting arbitration is DG Systems, and
(ii) in San Francisco, California, if the party requesting arbitration is PDR,
Stockholder or the DeRosas. Reasonable notice of the time and place of
arbitration shall be given to all persons, other than the parties, as shall be
required by law and the rules of the American Arbitration Association, in which
case such persons or their authorized representatives shall have the right to
attend and participate in the arbitration hearings to the extent and in such
manner as the law shall require. All proceedings shall be held in English and a
transcribed record prepared in English. A court reporter shall record the
arbitration hearing and the reporter's transcript shall be the official
transcript of the proceeding.
9.6 Confidentiality of Proceedings. At the request of either party,
arbitration proceedings will be conducted in secrecy. In such case all
documents, testimony, and records shall be received,
41
<PAGE> 48
heard, and maintained by the arbitrators in secrecy under seal, available for
inspections only by the parties to this agreement and their respective attorneys
and experts, who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The decree of judgment of an
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.
9.7 Powers of Arbitrators. The arbitrator or arbitrators, as the case
may be, shall act by majority vote and shall be able to decree any and all
relief of an equitable nature and shall also be able to award damages, with or
without an accounting, costs, and reasonable attorneys' fees. The arbitrators
shall have no authority to award punitive damages or any other damages not
measured by the prevailing party's actual damages. The arbitrators shall specify
the basis for any damage award and the types of damages awarded. The decision of
the arbitrators shall be in writing, shall set forth the basis for their
decision with respect to all matters and shall be final and binding on the
parties and may be entered and enforced in any court of competent jurisdiction
by either party. The award rendered by the arbitrators shall include costs of
arbitration, reasonable attorneys' fees and reasonable costs for expert and
other witnesses, and judgment on such award may be entered in any court having
jurisdiction thereof.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date, as follows:
(a) by mutual agreement of DG Systems and PDR;
(b) by DG Systems, if there has been a breach by PDR of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of PDR resulting in a Material Adverse Change in PDR, which breach PDR
fails to cure within fifteen (15) business days (or such longer period as may be
reasonably necessary if the default is not reasonably capable of cure within
said 15 days) after notice thereof is given by DG Systems (except that no cure
period shall be provided for a breach by PDR that by its nature cannot be
cured);
(c) by PDR, if there has been a breach by DG Systems of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of DG Systems resulting in a Material Adverse Change in DG Systems and
which DG Systems fails to cure within fifteen (15) business days (or such longer
period as may be reasonably necessary if the default is not reasonably capable
of
42
<PAGE> 49
cure within said 15 days) after notice thereof is given by PDR (except that no
cure period shall be provided for a breach by DG Systems that by its nature
cannot be cured);
(d) by DG Systems if the Closing shall not have been
consummated by December 1, 1996;
(e) by PDR or DG Systems if the Closing shall not have been
consummated on or before December 1, 1996;
(f) by DG Systems or PDR if any injunction or other order of a
competent Governmental Entity preventing the Closing shall have become final and
nonappealable or, in either party's reasonable, good faith judgment, shall
render unlikely within a reasonable period of time the consummation of the
Closing on the terms contemplated hereby;
(g) by DG Systems or PDR if any Governmental Entity shall have
issued a temporary restraining order, preliminary injunction or permanent
injunction or other order preventing the consummation of the Closing or any
litigation shall be pending, the ultimate resolution of which is likely to (i)
result in the issuance of such an order or injunction, or the imposition against
PDR or DG Systems of substantial damages if the Closing is consummated, (ii)
prohibit DG Systems' ownership or operation of all or a material portion of its
business, or to compel DG Systems to dispose of or hold separate all or a
material portion of its respective business or assets, as a result of the
Closing, (iii) render DG Systems or PDR unable to consummate the Closing. In the
event any such order or injunction shall have been issued, each party agrees to
use its reasonable efforts to have any such injunction lifted.
(h) by DG Systems or PDR if the conditions to Closing set
forth in Section 7.1 are not met;
(i) by DG Systems if the conditions to Closing set forth in
Section 7.2 are not met; and
(j) by PDR if the conditions to Closing set forth in Section
7.3 are not met.
10.2 Authorization. Where action is taken to terminate this Agreement
pursuant to this Section, it shall be sufficient authorization for such action
to be authorized by the Board of Directors of the party taking such action.
10.3 Survival of Certain Provisions. In the event of termination of
this Agreement as provided in this Section, this Agreement shall forthwith
become void; provided, however, that the agreements contained or referred to in
Section 6.8 and the Confidentiality Agreements executed by the parties will
survive.
43
<PAGE> 50
10.4 Liability for Termination. Except as otherwise specifically set
forth in this Agreement in Section 10.5 below, in the event of a termination of
this Agreement pursuant to any of the events or conditions set forth in this
Section, no party shall be liable for any costs, charges, expenses or fees of
any other party and the parties hereto shall be released from all liabilities
owed to the other, other than those liabilities specifically surviving
termination as provided for herein. In addition, in no event will any party to
this Agreement be liable for special, consequential or indirect damages relating
to or arising out of this Agreement, except for such damages arising out of
actual fraud or intentional misrepresentation.
10.5 Disposition of Deposit on Termination. If this Agreement is
terminated by either PDR, DG Systems or both for any reason other than a
termination by PDR pursuant to Section 10.1(c), then in such event Escrow Agent
shall forthwith return the Deposit and all interest earned thereon to DG
Systems. If this Agreement is terminated by PDR pursuant to Section 10.1(c),
then in such event the Escrow Agent shall turn over the Deposit and all interest
earned thereon to PDR as and for liquidated damages. The parties hereto agreeing
that the actual damages in such event would be difficult if not impossible to
measure.
ARTICLE XI
GENERAL PROVISIONS
11.1 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
11.2 Extension; Waiver. At any time prior to the Closing, each of PDR
and DG Systems to the extent legally allowed, (a) may extend the time for the
performance of any of the obligations or other acts of the other, (b) may waive
any inaccuracies in the representations and warranties made to it contained
herein or in any document delivered pursuant hereto, and (c) may waive
compliance with any of the agreements or conditions for the benefit of it
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. A waiver by any party of any provision hereof or
breach hereof shall not operate or be construed as the waiver of any other
provision of any subsequent breach.
11.3 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given (a) on the same day if delivered
personally, (b) three business days after being mailed by registered or
certified mail (return receipt request) as determined by reference to the
postmark, (c) one business day if
44
<PAGE> 51
delivered by an overnight delivery service, or (d) on the same day if sent by
facsimile, confirmation received, to the parties at the following addresses and
facsimile numbers (or at such other address or number for a party as shall be
specified by like notice):
If to DG Systems, to:
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
with copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
if to PDR, to:
PDR Productions, Inc.
219 East 44th Street
New York, New York 10017
Attention: Mr. Pat DeRosa
Telephone: (212) 986-2020
Facsimile: (212) 986-2430
with a copy (which will not constitute notice) to:
Jaspan, Schlesinger, Silverman & Hoffman, L.L.P.
300 Garden City Plaza
Garden City, New York 11530
Attention: Allen Perlstein, Esq.
Telephone: (516) 746-8000
Facsimile: (516) 746-0552
11.4 Interpretation. When a reference is made in this agreement to
Sections or Exhibits, such references shall be to a Section or Exhibit to this
Agreement unless otherwise indicated. The words "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation". The headings contained in this Agreement are for referenced
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
45
<PAGE> 52
11.5 Entire Agreement. This Agreement and the documents and instruments
and other agreements among the parties delivered pursuant hereto constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof and are not intended to
confer upon any other person any rights or remedies hereunder except as
otherwise expressly provided herein.
11.6 No Transfer. This Agreement and the rights and obligations set
forth herein may not be transferred or assigned by operation by law or otherwise
without the consent of each party hereto except by DG Systems to any of its
affiliates or subsidiaries, provided that any such affiliate or subsidiary is
owned 100% either directly or indirectly by DG Systems. This agreement is
binding upon and will inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
11.7 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
11.8 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law or equity on
such party; and the exercise of any one remedy will not preclude the exercise of
any other.
11.9 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
11.10 Variations in Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
11.11 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so
46
<PAGE> 53
executed and delivered shall be an original, but all such counterparts shall
together constitute one and the same instrument.
11.12 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to the
principles thereof regarding conflict of laws.
ARTICLE XII
INDEMNIFICATION
12.1 Indemnification by PDR.
(a) From and after the date hereof and after the Closing Date
subject to the limitations set forth in Section 12.3 hereof, PDR and Stockholder
agree to indemnify and hold harmless DG Systems from and against any and all
losses, liabilities, damages, deficiencies, assessments, judgments, costs or
expenses (including, without limitation, interest penalties and reasonable
attorneys' fees and disbursements) (collectively "Claims") arising out of or
based upon the breach or inaccuracy of any representation or warranty contained
herein made by PDR or Stockholder, the non-performance or breach by PDR or
Stockholder of any covenant, term or provision to be performed by it or any of
them whether hereunder.
(b) DG Systems' right to indemnification as provided in this
Section 12.1 shall not be eliminated, reduced or modified in any way as a result
of the fact that (i) DG Systems have notice of a breach or inaccuracy of any
representation, warranty or covenant contained herein, or (ii) DG Systems has
been provided with access, as requested by DG Systems, to officers and employees
of PDR and such of PDR's books, documents, contracts and records as has been
provided to DG Systems in response to DG Systems' requests.
12.2 Conditions of Indemnification by PDR.
(a) DG Systems (the "Indemnified Party") shall notify the
party or parties liable for such indemnification (the "Indemnifying Party") in
writing of any claim which the Indemnified Party has determined has given or
could give rise to a right of indemnification under this Agreement. Such notice
shall be given within a reasonable (taking into account the nature of the Claim)
period of time after the Indemnified Party has actual knowledge thereof. The
Indemnifying Party shall satisfy its obligations under this Article XII within
twenty (20) days after receipt of subsequent written notice from the Indemnified
Party if an amount is specified therein, or promptly following receipt of
subsequent written notice or notices specifying the amount of such Claim or
additions thereto; provided, however, that for so long as the
47
<PAGE> 54
Indemnifying Party is in good faith defending a Claim pursuant to Section 12.1
hereof, its obligation to indemnify the Indemnified Party with respect thereto
shall be suspended. Failure to provide a notice of Claim within the time period
referred to above shall not constitute a defense to a Claim or release the
Indemnifying Party from any obligation hereunder to the extent that such failure
does not prejudice the position of the Indemnifying Party.
(b) If the facts giving rise to any such indemnification
involve any actual, threatened or possible Claim or demand by any person not a
party to this Agreement against the Indemnified Party, the Indemnifying Party
shall be entitled to contest or defend such Claim or demand at its expense and
through counsel of its own choosing, which counsel shall be reasonably
acceptable to the Indemnified Party, if the Indemnifying Party gives written
notice of its intention to assume the contest and defense of such Claim or
demand to the Indemnified Party as soon as practicable, but in no event more
than thirty (30) days after receipt of the notice of Claim. The Indemnified
Party shall have the obligation to cooperate in the defense of any such Claim or
demand and the right, at is own expense, to participate in the defense of any
Claim. So long as the Indemnifying Party is defending in good faith any such
Claim or demand asserted by a third party against the Indemnified Party, the
Indemnified Party shall not settle or compromise such Claim or demand. The
Indemnifying Party shall have the right to settle or compromise any such claim
or demand without consent of the Indemnified Party at any time utilizing its own
funds to do so if in connection with such settlement or compromise the
Indemnified Party is fully released by the third party and is paid in full any
indemnification amounts due hereunder. In the event the Indemnified Party
desires to settle any such claim which the Indemnifying Party has determined not
to consent, the Indemnified Party shall advise the Indemnifying Party in writing
of the amount it proposes to pay in settlement thereof (the "Proposed
Settlement"). If such Proposed Settlement is unsatisfactory to the Indemnifying
Party, it shall have the right, at its expense, to contest such Claim by giving
written notice of such election to the Indemnified Party within thirty (30) days
after the Indemnifying Party's receipt of the advice of the Proposed Settlement.
If the Indemnifying Party does not deliver such written notice within thirty
(30) days after receipt of such advice, or if the Indemnifying Party, after
having given such notice to the Indemnified Party, fails to defend, settle or
pay such Claim, the Indemnifying Party may offer the Proposed Settlement to the
third party making such Claim. If the Proposed Settlement is not accepted by the
party making such Claim, any new Proposed Settlement figure which the
Indemnified Party may wish to present to the party making such Claim shall first
be presented to the Indemnifying Party who shall have the right, subject to the
conditions hereinabove set forth in this Section 12.2(b), to contest such Claim.
The Indemnified Party shall make available to the Indemnifying Party or its
agents all records and other
48
<PAGE> 55
materials in the Indemnified Party's possession, or obtained by the Indemnified
Party without undue burden, reasonably required by it for its use in contesting
any third party claim or demand and shall otherwise cooperate, at the expense of
the Indemnifying Party, in the defense thereof in such manner as the
Indemnifying Party may reasonably request. Whether or not the Indemnified Party
elects to defend such Claim or demand, the Indemnified Party shall have no
obligation to do so.
12.3 Indemnity Limitations with respect to DG Systems Claims.
(a) PDR and Stockholder shall not be liable for any claims as
to which DG Systems is entitled to indemnification hereunder unless and until
the aggregate amount of any and all such Claims for which PDR and Stockholder
shall be liable, exceeds Fifty Thousand ($50,000.00) Dollars (the "Threshold"),
at which point PDR and Stockholder shall be liable for amounts in excess of the
Threshold.
(b) PDR and Stockholder shall not be liable for any Claims as
to which DG Systems is entitled to indemnification as to amounts in excess of
One Million ($1,000,000.00) Dollars (the "Indemnity Limit");
(c) The obligations of PDR and Stockholder, pursuant to this
Article 12 shall expire on the first anniversary date of the Closing Date except
as to the representations and warranties of PDR and Stockholder set forth in
Sections 3.3, 3.7, 3.12, 3.16, 3.17, 4.1 and 8.4, which shall survive until
expiration of the applicable statute of limitations period, or two (2) years
whichever period is shorter (the "Expiration Period").
(d) DG Systems agrees that with respect to collection against
Stockholder as to any claims it has against Stockholder and/or the DeRosas
pursuant to this Article XII, it will exercise collection efforts in the
following order of priority: (1) by offset against the principal amount due
under the Promissory Note, if applicable (2) by acceptance of any DG Common
Stock (not required to be held in escrow hereunder and under the Lock-Up
Agreement) returned by Stockholder to DG Systems valued at the closing price on
the Nasdaq market on the trading day prior to DG Systems receipt of same, and
(3) against all other properties of Stockholder.
(e) The Threshold, Indemnity Limit and Expiration Period shall
not apply to Section 4.2, 6.17 and 6.18 (unless DG Systems elects not to
terminate the PDR Profit Sharing Plan).
12.4 Indemnification by DG Systems.
(a) From and after the date hereof and after the Closing Date
subject to the limitations set forth in Section 12.6 hereof,
49
<PAGE> 56
DG Systems agrees to indemnify and hold harmless PDR (and its directors,
officers, employees, affiliates, agents and assigns) from and against any and
all losses, liabilities, damages, deficiencies, assessments, judgments, costs or
expenses (including, without limitation, interest penalties and reasonable
attorneys' fees and disbursements) (collectively "Claims") arising out of or
based upon the breach or inaccuracy of any representation or warranty contained
herein made by DG Systems, the non-performance or breach by DG Systems of any
covenant, term or provision to be performed by it or any of them whether
hereunder.
(b) PDR's right to indemnification as provided in this Section
12.4 shall not be eliminated, reduced or modified in any way as a result of the
fact that PDR has notice of a breach or inaccuracy of any representation,
warranty or covenant contained herein.
12.5 Conditions of Indemnification by DG Systems.
(a) PDR (the "Indemnified Party") shall notify the party or
parties liable for such indemnification (the "Indemnifying Party") in writing of
any claim which the Indemnified Party has determined has given or could give
rise to a right of indemnification under this Agreement. Such notice shall be
given within a reasonable (taking into account the nature of the Claim) period
of time after the Indemnified Party has actual knowledge thereof. The
Indemnifying Party shall satisfy its obligations under this Article XII within
twenty (20) days after receipt of subsequent written notice from the Indemnified
Party if an amount is specified therein, or promptly following receipt of
subsequent written notice or notices specifying the amount of such Claim or
additions thereto; provided, however, that for so long as the Indemnifying Party
is in good faith defending a Claim pursuant to Section 12.4 hereof, its
obligation to indemnify the Indemnified Party with respect thereto shall be
suspended. Failure to provide a notice of Claim within the time period referred
to above shall not constitute a defense to a Claim or release the Indemnifying
Party from any obligation hereunder to the extent that such failure does not
prejudice the position of the Indemnifying Party.
(b) If the facts giving rise to any such indemnification
involve any actual, threatened or possible Claim or demand by any person not a
party to this Agreement against the Indemnified Party, the Indemnifying Party
shall be entitled to contest or defend such Claim or demand at its expense and
through counsel of its own choosing, which counsel shall be reasonably
acceptable to the Indemnified Party, if the Indemnifying Party gives written
notice of its intention to assume the contest and defense of such Claim or
demand to the Indemnified Party as soon as practicable, but in no event more
than thirty (30) days after receipt of the notice of Claim. The Indemnified
Party shall have the obligation to cooperate in the defense of any such Claim or
demand and the right,
50
<PAGE> 57
at is own expense, to participate in the defense of any Claim. So long as the
Indemnifying Party is defending in good faith any such Claim or demand asserted
by a third party against the Indemnified Party, the Indemnified Party shall not
settle or compromise such Claim or demand. The Indemnifying Party shall have the
right to settle or compromise any such claim or demand without consent of the
Indemnified Party at any time utilizing its own funds to do so if in connection
with such settlement or compromise the Indemnified Party is fully released by
the third party and is paid in full any indemnification amounts due hereunder.
In the event the Indemnified Party desires to settle any such claim which the
Indemnifying Party has determined not to consent, the Indemnified Party shall
advise the Indemnifying Party in writing of the amount it proposes to pay in
settlement thereof (the "Proposed Settlement"). If such Proposed Settlement is
unsatisfactory to the Indemnifying Party, it shall have the right, at its
expense, to contest such Claim by giving written notice of such election to the
Indemnified Party within thirty (30) days after the Indemnifying Party's receipt
of the advice of the Proposed Settlement. If the Indemnifying Party does not
deliver such written notice within thirty (30) days after receipt of such
advice, or if the Indemnifying Party, after having given such notice to the
Indemnified Party, fails to defend, settle or pay such Claim, the Indemnifying
Party may offer the Proposed Settlement to the third party making such Claim. If
the Proposed Settlement is not accepted by the party making such Claim, any new
Proposed Settlement figure which the Indemnified Party may wish to present to
the party making such Claim shall first be presented to the Indemnifying Party
who shall have the right, subject to the conditions hereinabove set forth in
this Section 12.5(b), to contest such Claim. The Indemnified Party shall make
available to the Indemnifying Party or its agents all records and other
materials in the Indemnified Party's possession, or obtained by the Indemnified
Party without undue burden, reasonably required by it for its use in contesting
any third party claim or demand and shall otherwise cooperate, at the expense of
the Indemnifying Party, in the defense thereof in such manner as the
Indemnifying Party may reasonably request. Whether or not the Indemnified Party
elects to defend such Claim or demand, the Indemnified Party shall have no
obligation to do so.
12.6 Indemnity Limitations with respect to PDR Claims.
(a) DG Systems shall not be liable for any claims as to which
PDR is entitled to indemnification hereunder unless and until the aggregate
amount of any and all such Claims for which DG Systems shall be liable, exceeds
Fifty Thousand ($50,000.00) Dollars (the "Threshold"), at which point PDR and
Stockholder shall be liable for amounts in excess of the Threshold.
51
<PAGE> 58
(b) DG Systems shall not be liable for any Claims as to which
PDR is entitled to indemnification as to amounts in excess of One Million
($1,000,000.00) Dollars (the "Indemnity Limit");
52
<PAGE> 59
(c) The obligations of DG Systems, pursuant to this Article
XII shall expire on the second anniversary date of the Closing Date.
IN WITNESS WHEREOF, the parties have signed this Stock Purchase
Agreement as of the date first written above.
DIGITAL GENERATION SYSTEMS, INC.
By: /s/ Henry W. Donaldson
-----------------------------
Title: Chief Executive Officer
PDR PRODUCTIONS, INC.
By: /s/ Pat DeRosa
-----------------------------
Title: President
/s/ Pat DeRosa
- ---------------------------------
Pat DeRosa
/s/ Neil DeRosa Neil
- ---------------------------------
DeRosa as to Article III,
Article VI Section 8.2,
Article IX, Article XII
/s/ Joseph DeRosa Joseph
- ---------------------------------
DeRosa as to Article III,
Article VI, Section 8.2,
Article IX, Article XII
53
<PAGE> 60
EXHIBIT "A"
LOCK-UP AGREEMENT
Agreement (the "Agreement") dated the ____ day of ____________ 1996,
by and between DIGITAL GENERATION SYSTEMS, INC., a California corporation
whose address is 875 Battery Street, San Francisco, California 94111 ("DG" or
the "Company") and PAT DEROSA, whose address is 140 Fairfield Drive, Holbrook,
New York (the "Stockholder").
RECITALS
WHEREAS, DG has entered into a Stock Purchase Agreement, dated as of
October 15, 1996 with PDR Productions, Inc. ("PDR") and Stockholder, Neil DeRosa
and Joseph DeRosa for the Purchase of 100% of the stock of PDR from Stockholder
by DG (the "Stock Purchase Agreement"); and
WHEREAS, on this date, DG has purchased from Stockholder all of
Stockholder's stock in PDR; and
WHEREAS, as part of the consideration for the above said transaction,
Stockholder has been issued [ ] shares of common stock, no par value, of
DG (the "DG Shares"); and
WHEREAS, pursuant to the Stock Purchase Agreement, the DG Shares are to
be prohibited from a public and/or private transfer for one (1) year from the
date hereof (the "Holding Period") which Holding Period shall expire on 5:00
p.m. Pacific time, on the first anniversary of the date hereof; and
WHEREAS, a portion of the DG Shares are to be held in escrow in the
event subsequent circumstances require a post-closing adjustment of the purchase
price under the Stock Purchase Agreement and the documents executed and
delivered in connection therewith.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants, agreements, undertakings, representations and warranties set forth in
this Agreement, the parties hereto agree as follows:
ARTICLE I
LOCK-UP
SECTION 1.1 PROHIBITION ON TRANSFER OF DG SHARES; TIME; Stockholder
shall not sell, offer to sell, contract to sell, pledge, grant any option for
the sale of or otherwise dispose of any of the DG Shares during the Holding
Period, except as set forth in Section 1.7.
<PAGE> 61
SECTION 1.2 ESCROW OF DG SHARES; DG and Stockholder acknowledge that
(a) the continued employment of Neil DeRosa and Joseph DeRosa pursuant to their
respective Employment Agreements (as set forth in the Stock Purchase Agreement)
is an important consideration for the consummation of the Stock Purchase
Agreement, and (b) the Stock Purchase Agreement contemplates certain Post
Closing Adjustment Events (defined hereinafter) which would trigger a reduction
in the Purchase Price as provided for in the Stock Purchase Agreement. A "Post
Closing Adjustment Event" means the occurrence of either Neil DeRosa's or Joseph
DeRosa's employment with DG being terminated by reason of (i) voluntary
termination of employment by Neil DeRosa or Joseph DeRosa; or (ii) termination
of Neil DeRosa or Joseph DeRosa "for cause" as defined in their respective
Employment Agreements. To insure payment to DG in the event that a Post Closing
Adjustment Event takes place, Stockholder has, on this date, deposited One
Hundred Fifty Thousand (150,000) shares of the DG Shares, as evidenced by stock
certificate(s) number(s) _____________, (the "Escrow Shares") with DG's legal
counsel, Waters, McPherson, McNeill, P.C. 300 Lighting Way, Secaucus, New
Jersey 07096 ("Escrow Agent") together with a stock power for the Escrow
Shares executed in blank (the "Stock Power"). Escrow Agent shall hold the
Escrow Shares and Stock Power in escrow subject to the terms hereof.
In the event that DG exercises its Call Option rights pursuant to
Section 2.1 (a) of this Agreement, whereby the Escrow Shares are purchased by
DG, then the Escrow Shares shall be returned to DG and DG shall deposit in
escrow an amount equal to $___________ [the value of the Escrow Stock on the
Closing Date] (the "Escrow Cash")
If a Post Closing Adjustment Event has not occurred prior to or upon
expiration of the Holding Period, then the Escrow Shares and the Stock Power (or
the Escrow Cash as the case may be) shall be promptly released to Stockholder by
Escrow Agent. If, prior to or upon the expiration of the Holding Period, a Post
Closing Adjustment Event has occurred, then the Escrow Shares and the Stock
Power (or the Escrow Cash as the case may be) shall be released by Escrow Agent
to DG and thereupon Stockholder shall have no further interest in or rights to
such Escrow Shares or Escrow Cash.
SECTION 1.3 GRANT OF SECURITY INTEREST IN ESCROW SHARES OR ESCROW CASH.
To secure reimbursement to DG in the event that a Post Closing Adjustment Event
takes place, Stockholder hereby grants to DG a security interest in all the
Escrow Stock, the Escrow Cash and/or any proceeds or replacements thereof (the
"Collateral"). In accordance with the terms of this Agreement, which security
interest shall terminate at the end of the Holding Period. Stockholder
acknowledges and agrees that possession of the Collateral by the Escrow Agent
shall be sufficient to perfect the security interest in the Collateral granted
to DG hereunder.
- 2 -
<PAGE> 62
SECTION 1.4 ESCROW AGENT RESPONSIBILITY. (a) Escrow Agent is acting
only for the accommodation of the parties and in performing its duties, shall
not be liable for (i) any loss, costs or damages which it may incur as a result
of serving as Escrow Agent hereunder, except for any loss, costs or damages
arising out of its willful misconduct or gross negligence, (ii) any action taken
or omitted to be taken in reliance upon any document, including any written
instructions provided for in this Agreement, which Escrow Agent shall in good
faith believe to be genuine.
(b) In the event Escrow Agent receives Escrow Cash pursuant to Section
1.2, same shall be deposited in its interest bearing trust account at the
Federal Savings or commercial reasonably acceptable to the parties ("Bank").
Escrow Agent shall have no liability for the Escrow Cash if the Bank should
become insolvent.
(c) in the event of a dispute between any of the parties hereto,
sufficient in the sole discretion of Escrow Agent to justify its doing so,
Escrow Agent shall have the right to tender unto a court of competent
jurisdiction, the escrowed documents, and thereupon be discharged and relieved
of all obligations and liability under this Agreement. DG and Stockholder hereby
agree to indemnify and hold Escrow Agent harmless from and against any and all
losses, claims, damages, liabilities and expenses, including reasonable
attorneys' fees, which may be incurred by Escrow Agent in connection with its
serving as Escrow Agent hereunder.
SECTION 1.5 LEGENDED STOCK CERTIFICATES. All certificates representing
the DG Shares shall contain a restrictive legend setting forth the following:
"This Certificate and the shares of stock of Digital
Generation Systems, Inc. represented hereby are subject to, and may be
transferred only in compliance with the terms of a Lock-Up and Escrow
Agreement dated ____________, 1996 between Digital Generation Systems,
Inc. and Pat DeRosa, a copy of which is on file at the Principal office
of the Issuer."
SECTION 1.6 CURRENT PUBLIC INFORMATION. For a period of two years after
the Closing Date, DG will file with the United States Securities and Exchange
Commission all reports required to be filed by DG pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended.
SECTION 1.7 PERMITTED TRANSFER.
(a) Subject to the provisions of Section 1.7(b), Stockholder shall have
the right to transfer ownership of the Non-Escrow Shares to Stockholder's spouse
or a trust set up for the benefit of
- 3 -
<PAGE> 63
Stockholder, Stockholder's spouse or Stockholder's children or grandchildren
("Transferee").
(b) Written notice of intent to transfer the Non-Escrow Shares under
Section 1.7(a) must be delivered to DG at least 10 days prior to the date of the
proposed transfer. This transfer shall be permitted only with the consent of DG
which consent shall not be unreasonably withheld provided that Transferee signs
a document in form and substance reasonably acceptable to DG whereby Transferee
acknowledges that Transferee will be bound by the terms and conditions contained
within this Lock-Up and Escrow Agreement.
SECTION 1.8 DG SHARES HELD FOR INVESTMENT ONLY. Stockholder represents
and warrants to DG that it is acquiring the DG Shares for investment and not
with a present view towards reselling or distributing any of the DG Shares
during the Holding Period and has no present intention of reselling or otherwise
disposing of any of the DG Shares except to the extent as permitted in this
Agreement and except to the extent that the DG Shares are registered under the
Act and the appropriate state securities laws, or are exempt from such laws.
ARTICLE II
CONTINGENT OBLIGATIONS AND CALL OPTION RIGHTS OF DG
SECTION 2.1 CALL OPTION RIGHTS OF DG. At any time prior to the
expiration of the Holding Period, DG shall have the following Call Option rights
with respect to the DG Shares:
a. If no Post Closing Adjustment Events have occurred pursuant to
Section 1.2 of this Agreement, DG shall have the right to purchase the DG Shares
from the Stockholder at a fixed price of $2,500,000.00, regardless of the then
current value of the DG Shares ("Call Option A"). If Call Option "A" is
exercised by DG, the Escrow Shares shall be returned to DG by Escrow Agent and
in exchange, DG shall tender to Escrow Agent the Escrow Cash, as that term is
defined in section 1.2 of this Agreement and the balance of the $2,500,000.00
shall be paid over to Stockholder.
b. If a Post Closing Adjustment Event pursuant to Section 1.2 of this
Agreement has occurred (in which event the Escrow Shares would have been
released to DG), DG shall have the right to purchase the DG Shares which were
not placed in escrow under this Agreement (the "Non-Escrow Shares") from
Stockholder at a fixed price of _______________ [the value of the Non-Escrow
Shares at [closing] , regardless of the then current value of the DG Shares
("Call Option B").
c. Written notice of intent to exercise either Call Option "A" or Call
Option "B" must be delivered to Stockholder 10 business
- 4 -
<PAGE> 64
days prior to the expiration of the Holding Period. DG shall have 10 business
days after written notice of the exercise of either of the Call Options to
tender full payment to Stockholder in return for the transfer of the DG Shares
to DG. In the event securities laws or regulations require any special
exemptions or quantity limitations on the sale from Stockholder to DG pursuant
to the Call Options, the parties shall enter into a mutual satisfactory
agreement as respects same.
SECTION 2.2 CONTINGENT PAYMENT TO STOCKHOLDER. If DG has not exercised
its Call Option rights under Section 2.1, and if the value of the DG Shares, as
computed below, upon expiration of the Holding Period is less than the value of
the DG Shares on the date of this Agreement, then upon the expiration of the
Holding Period, DG shall make a payment to Stockholder computed either under (a)
or (b) below:
(a). If no Post Closing Adjustment Events have occurred pursuant to
Section 1.2 of this Agreement, then DG shall be obligated to pay, upon written
demand by Stockholder, the difference between $2,500,000.00 and the Expiration
Date Share Value (defined hereinafter) of the DG Shares.
(b). If a Post Closing Adjustment Event pursuant to Section 1.2 of this
Agreement has occurred, then, DG shall be obligated to pay, upon written demand
by Stockholder, the difference between $________ [value of the Non-Escrow Shares
at Closing] and the Expiration Date Share Value of the Non-Escrow Shares.
(c). For purposes of (a) and (b) above, the Expiration Date Share Value
for each share of DG Common Stock shall be determined by using the average
closing price of a share of DG Common Stock on the Nasdaq National Market for
the last twenty (20) trading days immediately preceding the last day of the
Holding Period.
ARTICLE III
MISCELLANY
SECTION 3.1 EXPENSES. Except as otherwise specifically provided herein,
each party shall bear its own fees and expenses (including the fees of any
attorneys, accountants, investment bankers or others engaged by such party) in
connection with the transactions contemplated hereby, whether or not such
transactions are consummated.
SECTION 3.2 SEVERABILITY. If any one or more of the provisions of this
Agreement shall be held to be invalid, illegal or unenforceable, the validity,
legality or enforceability of the remaining provisions of this Agreement shall
not be affected thereby. To the extent permitted by applicable law, each party
- 5 -
<PAGE> 65
waives any provision of law which renders any provision of this Agreement
invalid, illegal or unenforceable in any respect.
SECTION 3.3 SUCCESSORS AND ASSIGNS; HEADINGS; COUNTERPARTS. This
Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by and against the successors and assigns of the parties hereto,
which shall include any successor by merger or consolidation. No right or
obligation hereunder shall be assignable without the consent of the other
parties hereto, and any such purported assignment shall be void. The article and
section headings herein are for convenience only and shall not affect the
construction thereof. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
SECTION 3.4 ENTIRE AGREEMENT; MODIFICATION. This Agreement, together
with the Stock Purchase Agreement and the other agreements delivered at the
Closing under the Stock Purchase Agreement, sets forth the entire agreement and
understanding among the parties and supersedes all agreements and understandings
entered into prior to the execution hereof. This Agreement may be modified only
by a written instrument duly executed by or on behalf of each party. No breach
of any covenant, agreement, warranty or representation shall be deemed waived
unless expressly waived in writing by and on behalf of the party who might
assert such breach.
SECTION 3.5 NOTICES. Any notice, direction or other advice or
communication required or permitted to be given hereunder shall be in writing
and shall be given by certified mail, overnight delivery by Federal Express or
similar service or delivery against receipt to the party to whom it is to be
given at such party's address set forth in the beginning of this Agreement or to
such other address as the party shall have furnished in writing to the other
parties in accordance with the provisions of this Section. Notices to the Escrow
Agent shall be sent to the address set forth in Section 1.2. Any notice,
direction or other advice or communication shall be deemed to have been given as
of the date so delivered against receipt, on the next business day when sent by
overnight service or five days after the date so mailed.
SECTION 3.6 CONSENT TO JURISDICTION. All disputes between the parties
hereto under shall be resolved by arbitration pursuant to Article IX of the
Stock Purchase Agreement.
SECTION 3.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the substantive law of the State of New York
applicable to contracts executed and to be performed in such State.
- 6 -
<PAGE> 66
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
ATTEST: DIGITAL GENERATION SYSTEM, INC.
_______________________
BY: ___________________________
(ASST.) SECRETARY (VICE) PRESIDENT
WITNESS:
_______________________ ______________________________
PAT DEROSA
ESCROW AGENT ACKNOWLEDGEMENT: The Escrow Agent acknowledges receipt of
the Escrow Shares and agrees to hold same (or the Escrow Cash, as the case may
be) in escrow pursuant to the terms of Section 1.2 and 1.4 of this Agreement.
WATERS, MCPHERSON, MCNEILL, P. C.
BY: ___________________________
- 7 -
<PAGE> 67
EXHIBIT "B"
ESCROW AGREEMENT
We hereby acknowledge receipt of the check drawn by, or on behalf of
Digital Generation Systems, Inc., having an address at 875 Battery Street, San
Francisco, California 94111 (the "Depositor"), to our order for $250,000.00 (the
"Deposit") representing the payment, subject to collection, of the amount agreed
to be deposited by Depositor pursuant to Article II, Section 2.2(a)(i) of that
certain Stock Purchase Agreement dated as of the 15th day of October, 1996 by
and among Depositor, PDR Productions, Inc. ("PDR"), Pat DeRosa (the
"Stockholder") and Neil DeRosa and Joseph DeRosa (collectively the "DeRosas"),
for the purchase and sale of the shares of capital stock of PDR owned by the
Stockholder as set forth therein. (hereinafter the "Agreement"). We agree to
hold said Deposit as follows:
1. We will deposit the Deposit in our name in an interest-bearing
account at Chemical Bank, Melville, New York and will dispose of the Deposit,
either in whole or in part, pursuant to the provisions of the Agreement. We will
not be liable or responsible for the collection of any check that is delivered
by Depositor.
2. We will have the right, but not the obligation, to require and
receive such written certifications or instructions from either PDR, the
Stockholder, the DeRosas or Depositor as we deem necessary or appropriate before
taking any action thereunder.
3. If any dispute arises between PDR, the Stockholder, the DeRosas and
Depositor, or if we are uncertain as to our obligations hereunder, we will have
the right, but not the obligation, to refrain from taking any action other than
to continue to hold the Deposit, either in whole or in part, in escrow under
this Agreement.
4. We may assume the genuineness of any document or signature that
appears to us to be genuine (whether or not it is an original or a photocopy) if
such document or signature is presented to us. We may assume that any person
purporting to give any written notice or instruction in connection herewith is
fully authorized to do so by the party on whose behalf such written notice or
instruction is given. We will have no obligations other than those specifically
set forth herein. We will have no liability to any party hereto for any acts or
omissions except those that may constitute gross negligence or are taken in
willful disregard of this Escrow Agreement or in bad faith and will in no event
be liable or responsible for any failure of the banking institution in which
said amount is deposited to pay such amount at our direction (unless such
failure is caused by our willful misconduct). Depositor, PDR, the Stockholder
and the DeRosas each
<PAGE> 68
hereby release us from any act or omission by us done in good faith in the
performance of our duties hereunder.
5. We will not be obligated to, but may, institute legal proceedings
of any kind, including but not limited to a legal proceeding or action in a
court of competent jurisdiction to determine our obligations hereunder. We will
be authorized, if we are threatened with litigation, to interplead all
interested parties in any court of competent jurisdiction and to deposit the
Deposit in said court and be relieved of all further obligations hereunder. Any
litigation with respect to this Escrow Agreement or the Deposit must be
commenced in the Supreme Court of the State of New York, Nassau County.
6. The parties authorize us, without creating an obligation on our
part, in the event the Agreement or this Escrow Agreement becomes involved in
litigation, to deposit the amount held pursuant to this Escrow Agreement with
the clerk of the court in which the litigation is pending and thereupon we will
be fully relieved and discharged of any further obligation under this Escrow
Agreement.
7. PDR, the Stockholder, the DeRosas and Depositor will jointly and
severally indemnify and hold us harmless from any damage, cost, liability or
expense (including, but not limited to, legal fees either paid to retained
attorneys or representing the fair value of legal services rendered by us) which
we may incur by reason of our acting hereunder, except for damages arising
because of our willful misconduct or gross negligence, without prejudice to any
right that either party may have to recover from the other party for any such
damage, cost liability or expense. The parties agree that, as between them, the
party to whom the Deposit is delivered will be entitled to reimbursed from the
other party for all sums paid to us under this paragraph. This indemnity will
survive the conclusion of the transaction reflected in the Agreement and the
termination of this Escrow Agreement.
8. We will not be bound by any modification, cancellation or
rescission of this Escrow Agreement unless in writing and signed by us and the
parties.
9. Any notice or other communication hereunder must be sent by express
or certified mail or by Federal Express, or other reputable national overnight
courier service that uses a hand receipt, to the party for which intended at the
address stated for that party in the Agreement, or in the heading of this Escrow
Agreement or at such other address of which that party gives notice and will be
deemed given on the date it is so mailed.
10. Depositor recognizes we are counsel for PDR, the Stockholder and
the DeRosas and agrees we may represent PDR, the Stockholder and the DeRosas in
connection with the Agreement, this Escrow Agreement, or in any action or
proceeding relating thereto.
<PAGE> 69
11. This Escrow Agreement will be governed by the laws of the State of
New York.
Dated: October 15, 1996
ESCROW AGENT:
JASPAN SCHLESINGER SILVERMAN
& HOFFMAN LLP
By:/s/ Allen Perlstein
-----------------------------------------------------------
Allen Perlstein, Partner
PDR:
PDR PRODUCTIONS, INC.
By:/s/ Pat DeRosa, President
-----------------------------------------------------------
DEPOSITOR:
DIGITAL GENERATION SYSTEMS, INC.
By:/s/ Henry W. Donaldson
-----------------------------------------------------------
<PAGE> 70
EXHIBIT "C"
PROMISSORY NOTE
AMOUNT: $2,500,000 DATE: _____________, 1996
For value received, Digital Generation System, Inc., (the "Borrower")
having offices at 875 Battery Street, San Francisco, California 94111, hereby
promises to pay to Pat DeRosa, (the "Lender") residing at
____________________________________________ (or at such other place as the
Lender may designate) the principal sum of [_______] together with interest
according to the following terms and conditions.
PRINCIPAL
The principal amount ("Principal") is Two Million Five Hundred Thousand
Dollars or such lessor amount determined in accordance with Section 4.1 of the
Lock-Up and Registration Agreement.
INTEREST
The Borrower agrees to pay interest on the Principal at the rate of
eight percent (8%) per annum payable in arrears together with the Principal at
the Maturity Date as defined below.
PAYMENTS
Borrower agrees to pay the Principal together with accrued interest on
the first anniversary of the date hereof (the "Maturity Date"). The Principal
and accrued interest under this Note may be prepaid in full or in part at
anytime prior to the Maturity Date, without premium or penalty.
APPLICABLE LAW
The laws of the state of New York will govern this Note. Any action
brought to collect on this Note shall be brought in New York.
WAIVER
Borrower waives the right to require Lender to make demand for payment,
to notify Borrower of non-payment and to obtain an official statement showing
non-payment. Failure of the holder of this Note to assert any right herein shall
not be a waiver thereof.
<PAGE> 71
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed
under seal and delivered by its duly authorized officer as of the date first
above written.
Digital General Systems, Inc.
By:___________________________
Name:
Title:
ATTEST:
____________________________
(Sec'y)
<PAGE> 72
EXHIBIT "D"
[OPINION LETTER OF PDR'S COUNSEL]
__________________, 1996
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Dear Sirs:
We have acted as counsel to PDR Productions, Inc. a New York
corporation, ("Company") and Pat DeRosa ("Seller") in connection with the Stock
Purchase Agreement, dated as of ____________________, 1996 (the "Agreement"),
among Company, Seller and Digital Generation Systems, Inc. ("Digital"). This
opinion is delivered to you pursuant to Section ____ of the Agreement. All
capitalized terms used herein shall have the meanings ascribed to them in the
Agreement, unless otherwise defined herein.
We have represented the Seller and Company only on a limited number of
matters with respect to which we have been specifically consulted and/or
retained and do not act as general counsel to either Seller or the Company.
Accordingly, our knowledge of Seller's and Company's business and affairs is
based solely upon documents in our possession and other information brought to
our attention by representatives of the Seller and Company with respect to those
limited matters which we have been specifically retained by the Seller and
Company to handle.
As to various questions of fact, that may be material to such opinion,
we have relied solely upon information furnished by officers and other
representatives of the Seller and Company and other appropriate persons, and
such other documents as we have deemed appropriate. We have undertaken no
independent investigation or verification of these matters except as expressly
stated herein. In basing the opinions set forth in this opinion on "our
knowledge", the words "our knowledge" signify that, in the course of our
representation of the Seller and Company no facts have become known to us that
would give us actual knowledge or actual notice or would lead us to believe that
any such opinions or other matters are not accurate. Further, the words "our
knowledge" and similar language as used in this opinion are intended to be
limited to the actual knowledge of the attorneys within our firm who are or have
been directly involved in representing the Seller or Company in any capacity.
<PAGE> 73
Subject to the foregoing, in reaching the opinions set forth below, we
have assumed the following:
(a) Digital has duly and validly executed and delivered each document
to which it is a party and its obligations set forth in such Agreement are
legal, valid, and binding obligations, enforceable in accordance with their
respective terms.
(b) All documents submitted to us as originals are authentic; all
documents submitted to us as certified or photostatic copies conform to the
original document, and all records reviewed are accurate and complete.
(c) The representations and warranties of Seller and Company contained
in the Agreement are accurate and complete.
(d) There has not been any mutual mistake of fact or misunderstanding,
fraud, duress or undue influence on the part of any of the parties to the
Agreement.
(e) The conduct of the parties to the Agreement has complied with any
requirements of good faith, fair dealing, and conscionability.
(f) There are no agreements or understandings among the parties,
written or oral, and there is no usage or course of prior dealing among the
parties that would, in either case, define, supplement or qualify the terms of
the Agreement.
The opinions rendered below are also limited by and subject to the
following:
(i) The effect of bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting the rights and remedies of parties generally;
(ii) General principles of equity, whether considered in a
proceeding in equity or at law, and the discretion of the court before which any
proceeding therefor may be brought;
(iii) The unenforceability under certain circumstances, under
state or federal law or court decisions, of provisions expressly or by
implication waiving broadly or vaguely stated rights, unknown future rights,
defenses to obligations or rights granted by law or statute, where such waivers
are against public policy or prohibited by law;
(iv) The unenforceability under certain circumstances of
provisions to the effect that rights or remedies are not exclusive, that every
right or remedy is cumulative and may be exercised in addition to or with any
other right or remedy, that
2
<PAGE> 74
election of a particular remedy or remedies does not preclude recourse to one or
more other remedies, that any right or remedy may be exercised without notice,
or that failure to exercise or delay in exercising rights or remedies will not
operate as a waiver of any such right or remedy;
(v) The unenforceability under certain circumstances of
provisions imposing penalties, forfeitures, late payment charges or an increase
in interest rate upon delinquency in payment or the occurrence of a default; and
(vi) Limitations on the right of the parties to exercise
rights and remedies under the Agreement or to impose penalties for any default
thereunder if it is determined in substance by a court of competent jurisdiction
that the default is not material, the penalties bear no reasonable relation to
the damage suffered as a result of the defaults, or it cannot be demonstrated
that enforcement of the restrictions or burdens is reasonably necessary for the
protection of the party seeking enforcement of the particular provision.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company was duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of New York.
2. The Agreement and the various documents executed and delivered at
the Closing (collectively, the "Closing Documents") by the Seller have been duly
authorized, executed and delivered by Seller and constitute the legal, valid and
binding obligations of the Seller in accordance with their terms.
3. The Agreement and the Closing Documents have been duly authorized,
executed and delivered by Company and constitute the legal, valid and binding
obligations of the Company in accordance with their terms.
4. Execution and delivery by Seller and Company of, and performance of
each of their agreements in, the Agreement do not (i) violate the Certificate of
Incorporation or By-Laws of Company, (ii) to our knowledge, breach or result in
a default under any obligation of Seller or Company of any contract or other
instrument to which the Seller or Company is a party or by which any of their
respective assets or properties is or may be bound or affected, (iii) to our
knowledge, breach or otherwise violate any judgment, order, writ or decree of
any court or administrative agency applicable to Seller or Company or (iv)
violate applicable provisions of statutory law or regulation.
3
<PAGE> 75
5. In the course of our representation of Sellers and Company, we have
not become aware of any pending or threatened legal proceeding before, or
investigation by, any court or administrative agency or authority or any
arbitration tribunal, which relates to or affects the Seller or Company and
which relates to or affects the transactions contemplated by the Agreement.
6. After due inquiry of Seller and the Company and based solely upon
information provided to us, no consent, registration, authorization or approval
of, or exception by, or filing with any court or government administrative
agency or authority is required, or, if required, has not been obtained in
connection with the execution, delivery or performance by the Seller or Company
of the Agreement or any of the instruments or agreements referenced therein or
the taking of any action therein contemplated.
7. The authorized capitalization of the Company consists of 200 shares
of Common Stock no par value per share, of which 180 shares are outstanding
(owned as followed: Pat DeRosa 180) and 20 shares are held in the treasury of
the Company. All of the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued and are fully paid and unassessable,
with no personal liability attaching to the ownership thereof.
8. After due inquiry of Seller and the Company, it is our understanding
that all of the outstanding shares of the Company are owned by the Seller free
and clear of all adverse claims, liens, security interests and encumbrances, and
are not subject to any restrictions on sale.
9. Delivery of the shares of Common Stock by the Seller to the Buyer
pursuant to the Agreement will transfer to the Buyer good and valuable title
thereto based upon the judgment and lien search prepared by __________________
and dated ______________________.
10. After due inquiry of Seller and the Company and based solely upon
information provided to us, the Company does not own or control, or have any
ownership interest or any obligation to acquire an ownership interest, either
directly or indirectly, in, nor is it controlled by or under common control
with, any other corporation, partnership, joint venture or other entity.
This opinion is rendered solely for your benefit in connection with the
transaction contemplated by the Agreement, and may not be given to, disclosed
to, or relied upon by any other person or entity. We do not undertake any
obligation to update this opinion in the event of changes of law occurring after
the date of this opinion or for facts which came to our attention after the date
of this opinion.
Very truly yours,
4
<PAGE> 76
EXHIBIT "E"
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this _____
day of ________________, 1996 (the "Effective Date"), between PDR PRODUCTIONS,
INC., a New York Corporation ("Company") and PAT DEROSA ("Employee").
W I T N E S S E T H:
WHEREAS, Company and Employee, among others, have entered into a Stock
Purchase Agreement dated as of October 15, 1996 (the "Stock Purchase Agreement")
pursuant to which Digital Generation Systems, Inc. ("DG Systems") will purchase
from Pat DeRosa all of the issued and outstanding stock of the Company on the
"Closing Date" (as said term is defined in the Stock Purchase Agreement); and
WHEREAS, Prior to the Closing under the Stock Purchase Agreement (as
defined in the Stock Purchase Agreement) Employee was the sole owner of all of
the issued and outstanding shares of capital stock of Company and had been
employed as a key employee by Company; and
WHEREAS, the parties are desirous of entering into this Agreement in
order to ensure Company of Employee's valuable services pursuant to the terms
and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are mutually acknowledged, the parties hereto agree as
follows:
<PAGE> 77
1. EMPLOYMENT CONDITIONS
a. Company hereby employs Employee as a consultant and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the direction and control of the
Chief Executive Officer of DG Systems (the "CEO") or his designee,
Employee shall perform consulting, oversight and advisory service to
Company at all times reasonably requested by Company, provided however
that on-site consultation to be performed by consultant shall be
performed at places and times reasonably satisfactory to Company and
Employee and only to the extent that such services cannot be reasonably
provided by Employee without his on-site presence required. Company
agrees that after the first anniversary of the date of this Agreement,
it will not require Employee's services for more than five (5) hours
per week, on average.
b. During the term of his employment, Employee shall not be
required to devote all of his business time and attention to providing
services to Company. Company acknowledges that Employee intends to
engage in the business of production of feature films and television
programs which will require Employee's extended uninterrupted stays
away from the New York-New Jersey Metropolitan area. Employee agrees
however that in the course of providing services to Company under the
terms of this Agreement, he will faithfully observe and carry out all
the duties and obligations owed by an employee to his employer, at law
and in equity.
- 2 -
<PAGE> 78
c. Subject to subparagraph 1(b) and the covenants contained in
paragraph 5 of this Agreement, Employee shall be permitted to (i)
engage in the production of radio and television spot advertising (ii)
engage in charitable activities and community affairs, (iii) manage his
personal investments and affairs, and (iv) engage in any activities
that are not in competition with the "Business of Company" as set forth
in paragraph 5 below.
2. TERM.
Subject to the provisions for earlier termination hereinafter
provided, the term of Employee's employment hereunder shall be from the
date of this Agreement through and including December 31, 1999 (the
"Term").
3. COMPENSATION & BENEFITS.
a. For all services to be rendered by Employee pursuant to
this Agreement, Employee shall receive from Company a base salary (the
"Base Salary") at the rate of $2,500.00 per month payable at the end of
each month.
b. For all on site consulting services performed by Employee,
Employee shall receive from Company a per diem fee in an amount to be
reasonably agreed upon between the parties.
c. Employee shall be entitled to reimbursement for all
reasonable business expenses incurred in the performance of his
responsibilities under this Agreement in accordance with the then
current regular business procedures governing such matters at DG
Systems. Employee shall submit to Company
- 3 -
<PAGE> 79
periodic statements of all expenses so incurred, and, subject to
Company's review and approval, Company shall reimburse Employee the
full amount of any such expenses.
4. BENEFITS. Employee shall be entitled to medical insurance
benefits comparable to those provided by Company immediately prior to
the Closing Date, provided however that if the cost to Company for same
exceeds $700.000 per month, the excess amount over $700.00 shall be
reimbursed by Employee to Company.
5. COVENANTS AND CONFIDENTIAL INFORMATION.
a. Employee agrees that he will not, directly or indirectly,
individually or by, for, with or through any other person, firm or
entity compete in any way with the "Business of Company" (as said term
is hereinafter defined) as operated by Company or any Company parent,
affiliate or subsidiary and/or its or their successors and/or assigns
in (i) New York, New Jersey and Connecticut. Without limiting the
generality of the foregoing, Employee agrees that he will not do any of
the following:
i. Own, manage, control, be employed by or consult
with or provide advice to, serve as an officer or director of
or otherwise become engaged by or associated with any person,
firm, corporation, partnership, company, proprietorship,
association, or other business entity, that competes with the
Business of Company;
- 4 -
<PAGE> 80
ii. Canvass, solicit or accept the business of any
Company customer or client;
iii. Induce, advise, request or otherwise attempt to
influence any Company customer or client to withdraw, curtail
or cancel its business with Company;
iv. Induce, advise, request or otherwise attempt to
influence any Company customer or client to refer its business
to any competitor of Company;
v. Induce, advise, request or otherwise attempt to
influence any person who is an employee or officer of Company
to terminate said relationship, except where such action is
taken at the request of Company in the course of carrying out
Employee's duties for Company;
vi. Disclose or use, in any manner in competition
with or contrary to the interests of Company, the proprietary
customer lists, manufacturing and/or business methods and/or
plans, product research, budgets, projections, sales
strategies, systems, software, procedures and all other
financial and operational data and/or trade secrets of
Company, it being acknowledged by Employee that all such
information regarding the business of Company is confidential
information and the exclusive property of Company; provided,
however, that the restrictions in this subparagraph shall not
restrict the use or disclosure of such confidential
information by Employee (A) when ordered or directed to do so
by a court
- 5 -
<PAGE> 81
of law or by a governmental agency, administrative or
legislative body, or (B) which is otherwise already
publicly known through no wrongful act of the Employee.
b. The covenants set forth in this Paragraph shall be
operative during the Term and for a period of three (3) years
thereafter.
c. It is the intention of the parties that if any of the
restrictions or covenants contained in subparagraphs (a)(i) through
(vi) above are held to cover a geographic area or to be for a length of
time which is not permitted by applicable law, or in any way construed
to be too broad or to any extent invalid, such provision shall not be
construed to be null, void and of no effect, but to the extent such
provision would be valid or enforceable under applicable law, a court
of competent jurisdiction or an arbitrator(s), as the case may be,
shall construe and interpret or modify, reform or limit said
subparagraphs (a)(i) through (vi), as the case may be, to provide for a
covenant having the maximum enforceable geographic area, time period
and other provisions (not greater than those contained herein) as shall
be valid and enforceable under such applicable law.
d. Employee acknowledges that any breach of the terms,
conditions or covenants set forth in subparagraphs (a)(i) through (vi)
shall be competitively unfair and may cause irreparable damage to
Company because of the special, unique, and unusual character of the
Business of Company, and that
- 6 -
<PAGE> 82
Company's recovery of damages at law will not be an adequate remedy.
Accordingly, Employee agrees that for any breach of the terms,
covenants and agreements of subparagraphs (a)(i) through (vi), a
temporary restraining order and/or a preliminary injunction or both may
be issued against him by a court of competent jurisdiction as provided
in Paragraph 15 of this Agreement, to restrain any such breach, in
addition to any other rights or remedies Company may have.
e. In the event of a violation of any legally enforceable
provision of this Paragraph as to which there is a specific time period
during which Employee is prohibited from taking certain actions or from
engaging in certain activities, as set forth in subparagraph (a) above,
then such violation shall toll the running of the statute of
limitations for the time period from the date of its commencement until
the date of its cessation.
f. For the purpose of this Paragraph, the phrase, the
"Business of Company" shall be deemed to mean the business of being a
"dub and ship house" as that phrase is generally used and understood in
the radio/television advertising distribution business, and includes
but is not necessarily limited to the duplication and manual (as
opposed to electronic) shipping/distribution, usually by overnight
delivery service, of audio/video tape advertising spots to
radio/television stations, together with certain post production
services such as closed captioning, spot editing
- 7 -
<PAGE> 83
and the like. Employee recognizes that DG Systems operates a nationwide
multimedia network designed to provide electronic delivery and related
services to the broadcast industry by linking content providers to
broadcast stations, including for example the electronic distribution
of audio spot advertising to radio stations. Employee recognizes that
operation of such a network by DG Systems is a technological extension
of the "dub and ship house" business and that it is contemplated that
the extension of such technological advancements will in the future be
applied to the business of Company as conducted prior to the Closing
Date. As such, Employee agrees that for the purpose of this Paragraph,
the phrase, the "Business of Company" shall be deemed to mean, in
addition to the "dub and ship house" business set forth above as
currently conducted by Company, any and all replacements, extensions,
enhancements and/or improvements in such dub and ship house business by
virtue of technological advancements, including by way of example but
not limitation, the operation of a multimedia network designed to
provide electronic delivery and related services to the broadcast
industry by linking content providers to radio and/or television
broadcast stations and/or cable television systems, over such
facilities such as standard telephone or ISDN lines, but which may
include other transmission facilities in the future, such as satellite
and Internet transmission facilities, and which may be expanded in
scope to provide electronic distribution services to address
- 8 -
<PAGE> 84
television and cable advertising, music, network advertising and
programming content, and which may offer new services in the future
such as air play verification.
g. Employee has carefully considered the nature and extent of
the restrictions upon him and the rights and remedies conferred upon
Company under this Paragraph, and hereby acknowledges and agrees that,
subject to the limitations of subparagraph c. above, the same are
reasonable in time and territory, are designed to eliminate competition
which otherwise would be unfair to Company and/or Company's parents,
affiliates, subsidiaries, successors and assigns, do not stifle the
inherent skill and experience of Employee, would not operate as a bar
to Employee's means of support, are fully required to protect the
legitimate interests of Company and do not confer a benefit upon
Company disproportionate to the detriment to Employee.
h. Anything hereinabove to the contrary notwithstanding,
Employee shall not be restricted from engaging in the production of
feature films and television programs and the production of radio and
television spot advertising and, in the course of so doing, may provide
such production services to, among any others, Company customers and
clients provided, however, that in connection therewith Employee shall
not otherwise engage in any activities in violation of subparagraphs
(a)(i)-(vi) of this Paragraph and provided further that Employee shall
use his best efforts to
- 9 -
<PAGE> 85
refer the distribution business of any such customers and clients to
Company.
6. TERMINATION FOR CAUSE AND SEVERANCE COMPENSATION.
a. The employment of Employee under this Agreement, and
the Term hereof, may be terminated by the Company with or without cause
at any time without further liability of Company to Employee, except as
otherwise set forth herein. For purposes hereof, the term "cause"
includes, but is not limited to:
i. Employee's gross insubordination (which is not
cured within ten (10) days of written notice of default from
Company to Employee, setting forth the nature of such alleged
default in reasonably sufficient detail), fraud, dishonesty,
willful misconduct or gross negligence (which is not cured
within ten (10) days of written notice of default from Company
to Employee, setting forth the nature of such alleged default
in reasonably sufficient detail), in the performance of his
duties under this Agreement, including willful failure to
perform such duties as may properly be assigned him;
ii. Employee's material breach of any provisions of
this Agreement (which is not cured within thirty (30) days of
written notice of default from Company to Employee, setting
forth the nature of such alleged default in reasonably
sufficient detail).
- 10 -
<PAGE> 86
b. Upon such termination of Employee's employment by Company
for cause or in the event that Employee voluntarily terminates his
employment with Company, Employee shall be entitled to compensation and
benefits as provided in Paragraphs 3 and 4 hereof, pro-rated up to the
date of such termination.
c. In the event of the termination by the Company of
Employee's employment for any reason other than for cause and, subject
to his compliance with the covenants set forth in Paragraph 5 of this
Agreement, Employee shall be entitled to continue to receive his Base
Salary for the remainder of the Term.
7. BUSINESS PRACTICES STATEMENT. On each anniversary date of the
execution of this Agreement, Employee shall provide Company with a statement, in
form and substance reasonably satisfactory to Company and Employee and
substantially in the form annexed hereto, certifying that Employee and, to
Employee's knowledge, the employee's, directors, officers, agents or other
representatives of Company have not, directly or indirectly, within the past
year, given or agreed to give any illegal gift or similar benefit to any
customer, supplier, governmental employee or other person who is or may be
involved in connection with any actual or proposed transaction of the Company.
8. SEVERABILITY. The provisions of this Agreement are severable, and if
any one or more provisions shall be determined to be illegal or otherwise
unenforceable, in whole or in part, the
- 11 -
<PAGE> 87
remaining provisions, and any partially unenforceable provision to the extent
enforceable in any jurisdiction, shall nevertheless be binding and enforceable.
9. BINDING AGREEMENT. The rights and obligations of Company
under this Agreement shall inure to the benefit of, and shall be binding upon,
Company and its successors and assigns, and the rights and obligations of
Employee under this Agreement shall inure to the benefit of, and shall be
binding upon, Employee and his heirs, personal representatives and estate.
10. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) on the same day if delivered
personally, (b) three business days after being mailed by registered or
certified mail )return receipt requested) as determined by reference to the
postmark; or (c) on the same day if sent by facsimile, confirmation received, to
the parties at the following addresses and facsimile numbers (or at such other
address or number for a party as shall be specified by like notice):
If to Company, to:
PDR Productions, Inc.
c/o Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
with a copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
- 12 -
<PAGE> 88
If to Employee, to:
Pat DeRosa
c/o PDR Productions, Inc.
219 East 44th Street
New York, New York 10017
Attention: Mr. Pat DeRosa
Telephone: (212) 986-2020
Facsimile: (212) 986-2430
with a copy (which will not constitute notice) to:
Jaspan, Schlesinger, Silverman & Hoffman
300 Garden City Plaza, 5th Floor
Garden City, New York 11530
Attention: Allen Perlstein, Esq.
Telephone: (516) 746-8000
Facsimile: (516) 746-0552
If to DG Systems, to:
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
with a copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
11. WAIVER. The failure of any party to enforce any provision
or provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions as to any future violations thereof, nor
prevent that party thereafter from enforcing each and every other provision of
this Agreement. The rights granted the parties herein are cumulative and the
waiver of any single remedy shall not constitute a waiver of such party's
- 13 -
<PAGE> 89
right to assert all other legal remedies available to it under the
circumstances.
12. MISCELLANEOUS. This Agreement supersedes all prior
agreements and understandings between the parties with respect to the subject
matter hereof, and may not be modified or terminated orally. No modification,
termination or attempted waiver of this Agreement shall be valid unless in
writing and signed by the party against whom the same is sought to be enforced.
This Agreement may be executed in multiple counterparts, each of which shall be
an original, and all of which, when taken together, shall constitute one and the
same document. This Agreement shall be governed by and construed according to
the laws of the State of New York, without regard to the principles thereof
regarding conflict of laws.
13. CAPTIONS AND PARAGRAPH HEADINGS. Captions and section
headings used herein are for convenience only and are not a part of this
Agreement, and shall not be used in construing it.
14. DEATH OR DISABILITY. In the event of the death or
permanent disability of Employee, Employee, his estate or his designated
beneficiaries shall be entitled to the same compensation, rights and benefits as
are referred to in Paragraph 6(b) above, except that disability benefits paid
for by the Company provided by an insurer shall be credited to Base Salary
otherwise due to Employee hereunder. For purposes of this Paragraph, "permanent
disability" shall be defined as Employee's inability to perform all material
duties required of Employee by this Agreement for a period of six (6)
consecutive months.
- 14 -
<PAGE> 90
15. ARBITRATION. Except for the right of either party to apply
to a court of competent jurisdiction for a temporary restraining order,
preliminary injunction to preserve the status quo or for other equitable relief:
(a) pending arbitration, as hereafter provided, or (b) to enforce the actual or
alleged breach of the covenants set forth in Paragraph 5 of this Agreement, all
claims and disputes under this Agreement shall be resolved in accordance with
the provisions for dispute resolution and arbitration set forth in Article 9 of
the Stock Purchase Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first set forth above.
PDR PRODUCTIONS, INC.
BY:___________________________________
NAME:
TITLE:
______________________________________
PAT DEROSA
- 15 -
<PAGE> 91
BUSINESS PRACTICE STATEMENT
The Board of Directors of Digital Generations Systems, Inc. ("Company")
has determined that the maintenance of high ethical standards is essential to
the long term success of its business activities. To that effect, the
undersigned (hereinafter the "Employee") certifies the following:
1. Employee, and to Employee's knowledge, the Employee's directors,
officers, agents or other representative of the Company, have not, directly or
indirectly, within the past year, given or agreed to give any illegal gift or
similar benefit to any customer, supplier, governmental employee or other person
who is or may be involved in connection with any actual or proposed transaction
of the Company.
I hereby certify that I have read and understand the above Business
Practice Statement. I further acknowledge my obligation and agree to report any
violation of this Business Practice Statement by any other employee which
becomes known to me.
Date: ________________________ ______________________________
Signature
______________________________
Print Name
______________________________
<PAGE> 92
Title
<PAGE> 93
EXHIBIT "E"
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this _____
day of , 1996 (the "Effective Date"), between PDR PRODUCTIONS, INC., a New York
Corporation ("Company") and JOSEPH DEROSA ("Employee").
W I T N E S S E T H:
WHEREAS, Company and Employee, among others, have entered into a Stock
Purchase Agreement dated as of October 15, 1996 (the "Stock Purchase Agreement")
pursuant to which Digital Generation Systems, Inc. ("DG Systems") will purchase
from Pat DeRosa all of the issued and outstanding stock of the Company on the
"Closing Date" (as said term is defined in the Stock Purchase Agreement); and
WHEREAS, Employee has been employed by Company prior to the Effective
Date and Company has asked Employee to serve as its Vice President from and
after the Effective Date; and
WHEREAS, the parties are desirous of entering into this Agreement in
order to ensure Company of Employee's valuable services pursuant to the terms
and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are mutually acknowledged, the parties hereto agree as
follows:
<PAGE> 94
1. EMPLOYMENT CONDITIONS
a. Company hereby employs Employee as its Vice President and Employee
hereby accepts such employment upon the terms and conditions hereinafter set
forth. Subject to the direction and control of the Chief Executive Officer of DG
Systems (the "CEO") or his designee, Employee shall supervise, manage and
direct, in concert with the other Vice President of the Company, the day-to-day
business of the Company, its subsidiaries and affiliates, if any, shall perform
such other duties and undertake such temporary assignments outside of the
Metropolitan Area of New York-New Jersey as may from time to time be directed.
Such temporary assignments outside of the Metropolitan Area of New York-New
Jersey shall be required only upon reasonable advance notice under the
circumstances and for reasonably limited continuous periods of time (e.g. three
(3) business days) as is appropriate under the circumstances and taking into
account Employee's primary responsibilities for the Company's New York-New
Jersey Metropolitan Area operations. In no event shall Employee be "transferred"
on any permanent or quasi permanent basis outside of the New York-New Jersey
Metropolitan Area.
b. During the term of his employment, Employee shall devote
substantially all of his business time and attention to the performance of his
duties under this Agreement. Employer agrees that in the course of his
employment, he will faithfully observe and carry out all of the duties and
obligations owed by an employee to his employer under this Agreement. The
Company shall not
- 2 -
<PAGE> 95
unreasonably require Employee to spend substantially greater time to the
performance of his duties under this Agreement, than Employee has historically
devoted to Company business during the twelve (12) month period preceding the
Effective Date.
c. At the discretion of the CEO or his designee, Employee shall devote
up to twenty-five (25%) percent of his business time engaging in activities
and/or efforts in support of the development on a national basis of the business
of DG Systems, subject, however to the temporary assignment provisions of
subparagraph (a) above.
d. Subject to subparagraph 1(b) and the covenants contained in
paragraph 5 of this Agreement, Employee shall be permitted to (i) engage in
charitable activities and community affairs, (ii) manage his personal
investments and affairs, and (iii) engage in any other activities approved by
the CEO or his designee.
2. TERM.
a. Subject to the provisions for earlier termination hereinafter
provided, the term of Employee's employment hereunder shall be from the date of
this Agreement through and including 12/31/2000 (the "Initial Period").
b. This Agreement may, but need not, be extended for successive one
year periods upon the mutual written agreement of Company and Employee entered
into on or before October 1, 2000 and each subsequent October 1st thereafter.
c. For purposes of this Agreement, "Term" means the Initial Period if
not extended as set forth above, otherwise the period
- 3 -
<PAGE> 96
beginning as the date of this Agreement and terminating upon the last day of the
most recent extension.
3. COMPENSATION.
a. For all services to be rendered by Employee pursuant to this
Agreement, Employee shall receive from Company a base salary (the "Base Salary")
at the initial rate of $150,000.00 per annum payable in equal bi-weekly (or
semi-monthly) installments. Commencing as of January 1, 1998 and on the first
day of 1999 and 2000, Base Salary shall be adjusted (upward only) by the same
annual percentage annual increase in the Consumer Price Index for all Urban
Consumers, All Items, New York-Northeastern New Jersey as published by the
Bureau of Labor Statistics of the United States Department of Labor
(1982-1984=100) for the then previous calendar year.
b. For each of calendar years 1997 and 1998 (and on a prorated basis
pursuant to a plan to be mutually agreed upon between Company and Employee for
1996), in addition to Base Salary, Employee shall be paid ten per cent (10%) of
so much of PDR's annual Operating Income (as defined below), for the year in
question as is in excess of $1,200,000. In no event, however, shall such Bonus
Amount in any year exceed forty per cent (40%) of Employee's Base Salary for the
year. Such additional Bonus Amounts shall be paid to Employee no later than
January 31st of the following year. For purposes of this paragraph 3(b),
"Operating Income" shall mean with respect to the applicable calendar year, "net
income" of the Company as determined in accordance with GAAP,
- 4 -
<PAGE> 97
adjusted as follows: plus (a) the amount of intercompany overhead allocation
charged against the net income of PDR, (b) all federal, state and local income
tax provisions as indicated on the income statement of the Company, (c) interest
payments, and (d) total amounts expensed on the Company's financial statements
as respects amounts paid or payable to Employee or his brother under their
Employment Agreements with the Company, less (aa) increases in gross margin of
PDR arising out of customers of DG Systems or its subsidiaries other than PDR
transferred to PDR to the extent gross margins from each customer, in the
aggregate, exceeds $6,000.00 per annum,(bb) income, gains and losses related to
dispositions of property or equipment, and (cc) income, gains and losses related
to acquired existing businesses.
c. For the calendar years 1999 and 2000, Employee and Company agree
that they shall negotiate in good faith and in a commercially reasonable manner
with respect to the establishment of a mutually acceptable bonus compensation
arrangement for such calendar years.
d. In addition to the amounts payable to Employee as set forth above,
Employee is hereby granted the right and option to purchase 20,000 shares of DG
Systems common stock at a purchase price equal to the fair market value of the
common stock as of the Closing Date as defined in the Stock Purchase Agreement,
upon the terms and conditions set forth in DG Systems' 1996 Supplemental Stock
Option Plan (the "Option Shares").
- 5 -
<PAGE> 98
4. VACATION AND OTHER BENEFITS. Employee shall be entitled to:
a. Four (4) weeks paid vacation during each year of his employment
hereunder;
b. Reimbursement for all reasonable business expenses incurred in the
performance of his responsibilities under this Agreement including late night
car service expense.
c. Reimbursement for reasonable vehicle expenses. Employee shall submit
to Company periodic statements of all expenses so incurred, and, subject to
Company's review and approval, Company shall reimburse Employee the full amount
of any such expenses.
d. Medical benefits, disability insurance and life insurance benefits
as Company offers to its key executives, from time to time during the term of
this Agreement.
e. Access, at Company's expense, to the existing 1992 Chevrolet Blazer
owned by the Company for Company business, subject to replacement of same, if
necessary, provided such replacement is approved by Company, which approval
shall not be unreasonably withheld; and all related expenses in connection with
such vehicle's business use.
5. COVENANTS AND CONFIDENTIAL INFORMATION.
a. Employee agrees that he will not, directly or indirectly,
individually or by, for, with or through any other person, firm or entity
compete in any way with the "Business of Company" (as said term is hereinafter
defined) as operated by Company or any Company parent, affiliate or subsidiary
and/or its or their successors and/or assigns in New York, New Jersey and
Connecticut. Without
- 6 -
<PAGE> 99
limiting the generality of the foregoing, Employee agrees that he will not do
any of the following:
i. Own, manage, control, be employed by or consult with or
provide advice to, serve as an officer or director of or otherwise
become engaged by or associated with any person, firm, corporation,
partnership, company, proprietorship, association, or other business
entity, that competes with the Business of Company;
ii. Canvass, solicit or accept the business of any Company
customer or client;
iii. Induce, advise, request or otherwise attempt to influence
any Company customer or client to withdraw, curtail or cancel its
business with Company;
iv. Induce, advise, request or otherwise attempt to influence
any Company customer or client to refer its business to any competitor
of Company;
v. Induce, advise, request or otherwise attempt to influence
any person who is an employee or officer of Company to terminate said
relationship, except where such action is taken at the request of
Company in the course of carrying out Employee's duties for Company;
vi. Disclose or use, in any manner in competition with or
contrary to the interests of Company, the proprietary customer lists,
manufacturing and/or business methods and/or plans, product research,
budgets, projections, sales strategies, systems, software, procedures
and all other
- 7 -
<PAGE> 100
financial and operational data and/or trade secrets of Company, it
being acknowledged by Employee that all such information regarding the
business of Company is confidential information and the exclusive
property of Company; provided, however, that the restrictions in this
subparagraph shall not restrict the use or disclosure of such
confidential information by Employee (A) when ordered or directed to do
so by a court of law or by a governmental agency, administrative or
legislative body, or (B) which is otherwise already publicly known
through no wrongful act of the Employee.
B. The covenants set forth in this Paragraph shall be operative
during the Term and for a period of three (3) years thereafter.
c. It is the intention of the parties that if any of the restrictions
or covenants contained in subparagraphs (a)(i) through (vi) above are held to
cover a geographic area or to be for a length of time which is not permitted by
applicable law, or in any way construed to be too broad or to any extent
invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction or an arbitrator(s), as the
case may be, shall construe and interpret or reform said subparagraphs (a)(i)
through (vi), as the case may be, to provide for a covenant having the maximum
enforceable geographic area, time period and other provisions (not greater than
those
- 8 -
<PAGE> 101
contained herein) as shall be valid and enforceable under such applicable law.
d. Employee acknowledges that any breach of the terms, conditions or
covenants set forth in subparagraphs (a)(i) through (vi) shall be competitively
unfair and may cause irreparable damage to Company because of the special,
unique, and unusual character of the Business of Company, and that Company's
recovery of damages at law will not be an adequate remedy. Accordingly, Employee
agrees that for any breach of the terms, covenants and agreements of
subparagraphs (a)(i) through (vi), a temporary restraining order and/or a
preliminary injunction or both may be issued against him by a court of competent
jurisdiction as provided in Paragraph 15 of this Agreement, to restrain any such
breach, in addition to any other rights or remedies Company may have.
e. In the event of a violation of any legally enforceable provision of
this Paragraph as to which there is a specific time period during which Employee
is prohibited from taking certain actions or from engaging in certain
activities, as set forth in subparagraph (a) above, then such violation shall
toll the running of the statute of limitations for the time period from the date
of its commencement until the date of its cessation, not to exceed six (6)
months per violation occurrence.
f. For the purpose of this Paragraph, the phrase, the "Business of
Company" shall be deemed to mean the business of being a "dub and ship house" as
that phrase is generally used and understood in the radio/television advertising
distribution
- 9 -
<PAGE> 102
business, and includes but is not necessarily limited to the duplication and
manual (as opposed to electronic) shipping/distribution, usually by overnight
delivery service, of audio/video tape advertising spots to radio/television
stations together with certain post production services. Company acknowledges
and agrees that Employee may engage in production, post production services and
spot editing provided such services are not provided to customers of the Company
receiving such services from the Company as of the date hereof and Employee
agrees to use its best efforts to refer the distribution business of any such
customers and clients to Company. Employee recognizes that DG Systems operates a
nationwide multimedia network designed to provide electronic delivery and
related services to the broadcast industry by linking content providers to
broadcast stations, including for example the electronic distribution of audio
spot advertising to radio stations. Employee recognizes that operation of such a
network by DG Systems is a technological extension of the "dub and ship house"
business and that it is contemplated that the extension of such technological
advancements will in the future be applied to the business of Company as
conducted prior to the Closing Date. As such, Employee agrees that for the
purpose of this Paragraph, the phrase, the "Business of Company" shall be deemed
to mean, in addition to the "dub and ship house" business set forth above as
currently conducted by Company, any and all replacements, extensions,
enhancements and/or improvements in such dub and ship house business by virtue
of technological
- 10 -
<PAGE> 103
advancements, including by way of example but not limitation, the operation of a
multimedia network designed to provide electronic delivery and related services
to the broadcast industry by linking content providers to radio and/or
television broadcast stations and/or cable television systems, over such
facilities such as standard telephone or ISDN lines, but which may include other
transmission facilities in the future, such as satellite and Internet
transmission facilities, and which may be expanded in scope to provide
electronic distribution services to address television and cable advertising,
music, network advertising and programming content, and which may offer new
services in the future such as air play verification.
g. Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon Company under
this Paragraph, and hereby acknowledges and agrees that, subject to the
limitations of subparagraph c. above, the same are reasonable in time and
territory, are designed to eliminate competition which otherwise would be unfair
to Company and/or Company's parents, affiliates, subsidiaries, successors and
assigns, do not stifle the inherent skill and experience of Employee, would not
operate as a bar to Employee's means of support, are fully required to protect
the legitimate interests of Company and do not confer a benefit upon Company
disproportionate to the detriment to Employee.
- 11 -
<PAGE> 104
6. TERMINATION FOR CAUSE AND SEVERANCE COMPENSATION.
a. The employment of Employee under this Agreement, and the Term
hereof, may be terminated by the Company with or without cause at any time
without further liability of Company to Employee, except as otherwise set forth
herein. For purposes hereof, the term for "cause" includes, but is not limited
to:
i. Employee's gross insubordination (which is not cured within
ten (10) days of written notice of default from Company to Employee,
setting forth the nature of such alleged default in reasonably
sufficient detail), fraud, dishonesty, willful misconduct or gross
negligence (which is not cured within ten (10) days of written notice
of default from Company to Employee, setting forth the nature of such
alleged default in reasonably sufficient detail) in the performance of
his duties set forth in this Agreement, including willful failure to
perform such duties as may properly be assigned him;
ii. Employee's material breach of any provisions of this
Agreement, provided, however, that Employee shall first receive written
notice from Company setting forth in reasonable detail the alleged
material breach and provided further that Employee fails to cure such
breach within thirty (30) days of notice of same, or within such longer
period as may be reasonably necessary if the breach is not reasonably
capable of cure within said thirty (30) day period.
b. In the event Employee's employment is terminated by reason of: (i) a
"for cause" termination by Company as provided
- 12 -
<PAGE> 105
herein, (ii) Employee voluntarily terminates his employment (i.e. quits), (iii)
Employee dies, or (iv) Employee becomes subject to "permanent disability" as
hereafter defined, then in such event, Employees entitlement to: (aa) future
Base Salary shall terminate as of the date of employment termination and shall
be prorated up to the date of termination, (bb) Bonus Amounts shall terminate
commencing with the calendar year in which the employment termination occurred,
and (cc) purchase the Option Shares shall be determined in accordance with the
terms and provisions of the DG Systems 1996 Supplemental Stock Option Plan.
c. In the event Employee's employment is terminated by Company "without
cause" as provided herein, then in such event, Employee's entitlement to: (aa)
Base Salary shall continue for the balance of the initial Term or for a period
of six (6) months from the date of termination, whichever is later, (and whether
or not Employee has accepted alternate employment), (bb) Bonus Amounts shall
continue for the period(s) as set forth in this Agreement, and (cc) purchase the
Option Shares shall be determined in accordance with the terms and provisions of
the DG Systems 1996 Supplemental Stock Option Plan.
7. BUSINESS PRACTICES STATEMENT. On or about each anniversary date of the
execution of this Agreement and within five (5) days of receiving a written
request of Employee from Company, Employee shall provide Company with a
statement, in form and substance reasonably satisfactory to Company and Employee
and substantially in the form annexed hereto, certifying that Employee and, to
- 13 -
<PAGE> 106
Employee's knowledge, the employee's, directors, officers, agents or other
representatives of Company have not, directly or indirectly, within the past
year, given or agreed to give any illegal gift or similar benefit to any
customer, supplier, governmental employee or other person who is or may be
involved in connection with any actual or proposed transaction of the Company.
8. SEVERABILITY. The provisions of this Agreement are severable, and if any one
or more provisions shall be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions, and any partially unenforceable
provision to the extent enforceable in any jurisdiction, shall nevertheless be
binding and enforceable.
9. BINDING AGREEMENT. The rights and obligations of Company under this Agreement
shall inure to the benefit of, and shall be binding upon, Company and its
successors and assigns, and the rights and obligations (except the obligation to
provide services hereunder) of Employee under this Agreement shall inure to the
benefit of, and shall be binding upon, Employee and his heirs, personal
representatives and estate.
10. NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed given (a) on the same day if delivered personally, (b) three
business days after being mailed by registered or certified mail )return receipt
requested) as determined by reference to the postmark; or (c) on the same day if
sent by facsimile, confirmation received, to the parties at the
- 14 -
<PAGE> 107
following addresses and facsimile numbers (or at such other address or number
for a party as shall be specified by like notice):
If to Company, to:
PDR Productions, Inc.
c/o Digital Generation Systems, Inc
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
with a copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
If to Employee, to:
Joseph DeRosa
c/o PDR Productions, Inc.
219 East 44th Street
New York, New York 10017
Telephone: (212) 986-2020
Facsimile: (212) 986-2430
with a copy (which will not constitute notice) to:
Jaspan, Schlesinger, Silverman & Hoffman
300 Garden City Plaza, 5th Floor
Garden City, New York 11530
Attention: Allen Perlstein, Esq.
Telephone: (516) 746-8000
Facsimile: (516) 393-8282
If to DG Systems or Sub, to:
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
- 15 -
<PAGE> 108
with a copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
11. WAIVER. The failure of any party to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions as to any future violations thereof, nor prevent that
party thereafter from enforcing each and every other provision of this
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy shall not constitute a waiver of such party's right to
assert all other legal remedies available to it under the circumstances.
12. MISCELLANEOUS. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the subject matter hereof,
and may not be modified or terminated orally. No modification, termination or
attempted waiver of this Agreement shall be valid unless in writing and signed
by the party against whom the same is sought to be enforced. This Agreement may
be executed in multiple counterparts, each of which shall be an original, and
all of which, when taken together, shall constitute one and the same document.
This Agreement shall be governed by and construed according to the laws of the
State of New York, without regard to the principles thereof regarding conflict
of laws.
- 16 -
<PAGE> 109
13. CAPTIONS AND PARAGRAPH HEADINGS. Captions and section headings used herein
are for convenience only and are not a part of this Agreement, and shall not be
used in construing it.
14. DEATH OR DISABILITY. In the event of the death or "permanent disability" (as
hereafter defined) of Employee, Employee, his estate or his designated
beneficiaries shall in addition to all other benefits made available to Employee
by Company outside of the terms of this Agreement, if any, be entitled to the
same compensation, rights and benefits as are referred to in Paragraph 6 above,
except that disability benefits paid for by the Company provided by an insurer
shall be credited to Base Salary otherwise due to Employee hereunder. For
purposes of this Paragraph, "permanent disability" shall be defined as
Employee's inability to perform all material duties required of Employee by this
Paragraph for a period of six (6) consecutive months.
15. ARBITRATION. Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, preliminary injunction
to preserve the status quo or for other equitable relief: (a) pending
arbitration, as hereafter provided, or (b) to enforce the actual or alleged
breach of the covenants set forth in Paragraph 5 of this Agreement pending a
written decision of the arbitration panel on the merits of any claims and/or
disputes under this Agreement, all claims and disputes under this Agreement
shall be resolved in accordance with the provisions for dispute resolution and
arbitration set forth in Article 9 of the Stock Purchase Agreement.
- 17 -
<PAGE> 110
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first set forth above.
PDR PRODUCTIONS, INC.
BY: __________________________
NAME:
TITLE:
__________________________
JOSEPH DEROSA
- 18 -
<PAGE> 111
BUSINESS PRACTICE STATEMENT
The Board of Directors of Digital Generations Systems, Inc. ("Company")
has determined that the maintenance of high ethical standards is essential to
the long term success of its business activities. To that effect, the
undersigned (hereinafter the "Employee") certifies the following:
1. Employee, and to Employee's knowledge, the Employee's directors,
officers, agents or other representative of the Company, have not, directly or
indirectly, within the past year, given or agreed to give any illegal gift or
similar benefit to any customer, supplier, governmental employee or other person
who is or may be involved in connection with any actual or proposed transaction
of the Company.
I hereby certify that I have read and understand the above Business
Practice Statement. I further acknowledge my obligation and agree to report any
violation of this Business Practice Statement by any other employee which
becomes known to me.
Date: ________________________ ______________________________
Signature
______________________________
Print Name
______________________________
<PAGE> 112
Title
<PAGE> 113
EXHIBIT "E"
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this _____
day of , 1996 (the "Effective Date"), between PDR PRODUCTIONS, INC., a New York
Corporation ("Company") and NEIL DEROSA ("Employee").
W I T N E S S E T H:
WHEREAS, Company and Employee, among others, have entered into a Stock
Purchase Agreement dated as of October 15, 1996 (the "Stock Purchase Agreement")
pursuant to which Digital Generation Systems, Inc. ("DG Systems") will purchase
from Pat DeRosa all of the issued and outstanding stock of the Company on the
"Closing Date" (as said term is defined in the Stock Purchase Agreement); and
WHEREAS, Employee has been employed by Company prior to the Effective
Date and Company has asked Employee to serve as its Vice President from and
after the Effective Date; and
WHEREAS, the parties are desirous of entering into this Agreement in
order to ensure Company of Employee's valuable services pursuant to the terms
and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are mutually acknowledged, the parties hereto agree as
follows:
<PAGE> 114
1. EMPLOYMENT CONDITIONS
a. Company hereby employs Employee as its Vice President and Employee
hereby accepts such employment upon the terms and conditions hereinafter set
forth. Subject to the direction and control of the Chief Executive Officer of DG
Systems (the "CEO") or his designee, Employee shall supervise, manage and
direct, in concert with the other Vice President of the Company, the day-to-day
business of the Company, its subsidiaries and affiliates, if any, shall perform
such other duties and undertake such temporary assignments outside of the
Metropolitan Area of New York-New Jersey as may from time to time be directed.
Such temporary assignments outside of the Metropolitan Area of New York-New
Jersey shall be required only upon reasonable advance notice under the
circumstances and for reasonably limited continuous periods of time (e.g. three
(3) business days) as is appropriate under the circumstances and taking into
account Employee's primary responsibilities for the Company's New York-New
Jersey Metropolitan Area operations. In no event shall Employee be "transferred"
on any permanent or quasi permanent basis outside of the New York-New Jersey
Metropolitan Area.
b. During the term of his employment, Employee shall devote
substantially all of his business time and attention to the performance of his
duties under this Agreement. Employer agrees that in the course of his
employment, he will faithfully observe and carry out all of the duties and
obligations owed by an employee to his employer under this Agreement. The
Company shall not
- 2 -
<PAGE> 115
unreasonably require Employee to spend substantially greater time to the
performance of his duties under this Agreement, than Employee has historically
devoted to Company business during the twelve (12) month period preceding the
Effective Date.
c. At the discretion of the CEO or his designee, Employee shall devote
up to twenty-five (25%) percent of his business time engaging in activities
and/or efforts in support of the development on a national basis of the business
of DG Systems, subject, however to the temporary assignment provisions of
subparagraph (a) above.
d. Subject to subparagraph 1(b) and the covenants contained in
paragraph 5 of this Agreement, Employee shall be permitted to (i) engage in
charitable activities and community affairs, (ii) manage his personal
investments and affairs, and (iii) engage in any other activities approved by
the CEO or his designee.
2. TERM.
a. Subject to the provisions for earlier termination hereinafter
provided, the term of Employee's employment hereunder shall be from the date of
this Agreement through and including 12/31/2000 (the "Initial Period").
b. This Agreement may, but need not, be extended for successive one
year periods upon the mutual written agreement of Company and Employee entered
into on or before October 1, 2000 and each subsequent October 1st thereafter.
c. For purposes of this Agreement, "Term" means the Initial Period if
not extended as set forth above, otherwise the period
- 3 -
<PAGE> 116
beginning as the date of this Agreement and terminating upon the last day of the
most recent extension.
3. COMPENSATION.
a. For all services to be rendered by Employee pursuant to this
Agreement, Employee shall receive from Company a base salary (the "Base Salary")
at the initial rate of $150,000.00 per annum payable in equal bi-weekly (or
semi-monthly) installments. Commencing as of January 1, 1998 and on the first
day of 1999 and 2000, Base Salary shall be adjusted (upward only) by the same
annual percentage annual increase in the Consumer Price Index for all Urban
Consumers, All Items, New York-Northeastern New Jersey as published by the
Bureau of Labor Statistics of the United States Department of Labor
(1982-1984=100) for the then previous calendar year.
b. For each of calendar years 1997 and 1998 (and on a prorated basis
pursuant to a plan to be mutually agreed upon between Company and Employee for
1996), in addition to Base Salary, Employee shall be paid ten per cent (10%) of
so much of PDR's annual Operating Income (as defined below), for the year in
question as is in excess of $1,200,000. In no event, however, shall such Bonus
Amount in any year exceed forty per cent (40%) of Employee's Base Salary for the
year. Such additional Bonus Amounts shall be paid to Employee no later than
January 31st of the following year. For purposes of this paragraph 3(b),
"Operating Income" shall mean with respect to the applicable calendar year, "net
income" of the Company as determined in accordance with GAAP,
- 4 -
<PAGE> 117
adjusted as follows: plus (a) the amount of intercompany overhead allocation
charged against the net income of PDR, (b) all federal, state and local income
tax provisions as indicated on the income statement of the Company, (c) interest
payments, and (d) total amounts expensed on the Company's financial statements
as respects amounts paid or payable to Employee or his brother under their
Employment Agreements with the Company, less (aa) increases in gross margin of
PDR arising out of customers of DG Systems or its subsidiaries other than PDR
transferred to PDR to the extent gross margins from each customer, in the
aggregate, exceeds $6,000.00 per annum,(bb) income, gains and losses related to
dispositions of property or equipment, and (cc) income, gains and losses related
to acquired existing businesses.
c. For the calendar years 1999 and 2000, Employee and Company agree
that they shall negotiate in good faith and in a commercially reasonable manner
with respect to the establishment of a mutually acceptable bonus compensation
arrangement for such calendar years.
d. In addition to the amounts payable to Employee as set forth above,
Employee is hereby granted the right and option to purchase 20,000 shares of DG
Systems common stock at a purchase price equal to the fair market value of the
common stock as of the Closing Date as defined in the Stock Purchase Agreement,
upon the terms and conditions set forth in DG Systems' 1996 Supplemental Stock
Option Plan (the "Option Shares").
- 5 -
<PAGE> 118
4. VACATION AND OTHER BENEFITS. Employee shall be entitled to:
a. Four (4) weeks paid vacation during each year of his employment
hereunder;
b. Reimbursement for all reasonable business expenses incurred in the
performance of his responsibilities under this Agreement including late night
car service expense.
c. Reimbursement for reasonable vehicle expenses. Employee shall submit
to Company periodic statements of all expenses so incurred, and, subject to
Company's review and approval, Company shall reimburse Employee the full amount
of any such expenses.
d. Medical benefits, disability insurance and life insurance benefits
as Company offers to its key executives, from time to time during the term of
this Agreement.
e. Access, at Company's expense, to the existing 1992 Chevrolet Blazer
owned by the Company for Company business, subject to replacement of same, if
necessary, provided such replacement is approved by Company, which approval
shall not be unreasonably withheld; and all related expenses in connection with
such vehicle's business use.
5. COVENANTS AND CONFIDENTIAL INFORMATION.
a. Employee agrees that he will not, directly or indirectly,
individually or by, for, with or through any other person, firm or entity
compete in any way with the "Business of Company" (as said term is hereinafter
defined) as operated by Company or any Company parent, affiliate or subsidiary
and/or its or their successors and/or assigns in New York, New Jersey and
Connecticut. Without
- 6 -
<PAGE> 119
limiting the generality of the foregoing, Employee agrees that he
will not do any of the following:
i. Own, manage, control, be employed by or consult with or
provide advice to, serve as an officer or director of or otherwise
become engaged by or associated with any person, firm, corporation,
partnership, company, proprietorship, association, or other business
entity, that competes with the Business of Company;
ii. Canvass, solicit or accept the business of any Company
customer or client;
iii. Induce, advise, request or otherwise attempt to influence
any Company customer or client to withdraw, curtail or cancel its
business with Company;
iv. Induce, advise, request or otherwise attempt to influence
any Company customer or client to refer its business to any competitor
of Company;
v. Induce, advise, request or otherwise attempt to influence
any person who is an employee or officer of Company to terminate said
relationship, except where such action is taken at the request of
Company in the course of carrying out Employee's duties for Company;
vi. Disclose or use, in any manner in competition with or
contrary to the interests of Company, the proprietary customer lists,
manufacturing and/or business methods and/or plans, product research,
budgets, projections, sales strategies, systems, software, procedures
and all other
- 7 -
<PAGE> 120
financial and operational data and/or trade secrets of Company, it
being acknowledged by Employee that all such information regarding the
business of Company is confidential information and the exclusive
property of Company; provided, however, that the restrictions in this
subparagraph shall not restrict the use or disclosure of such
confidential information by Employee (A) when ordered or directed to do
so by a court of law or by a governmental agency, administrative or
legislative body, or (B) which is otherwise already publicly known
through no wrongful act of the Employee.
b. The covenants set forth in this Paragraph shall be operative during
the Term and for a period of three (3) years thereafter.
c. It is the intention of the parties that if any of the restrictions
or covenants contained in subparagraphs (a)(i) through (vi) above are held to
cover a geographic area or to be for a length of time which is not permitted by
applicable law, or in any way construed to be too broad or to any extent
invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction or an arbitrator(s), as the
case may be, shall construe and interpret or reform said subparagraphs (a)(i)
through (vi), as the case may be, to provide for a covenant having the maximum
enforceable geographic area, time period and other provisions (not greater than
those
- 8 -
<PAGE> 121
contained herein) as shall be valid and enforceable under such applicable law.
d. Employee acknowledges that any breach of the terms, conditions or
covenants set forth in subparagraphs (a)(i) through (vi) shall be competitively
unfair and may cause irreparable damage to Company because of the special,
unique, and unusual character of the Business of Company, and that Company's
recovery of damages at law will not be an adequate remedy. Accordingly, Employee
agrees that for any breach of the terms, covenants and agreements of
subparagraphs (a)(i) through (vi), a temporary restraining order and/or a
preliminary injunction or both may be issued against him by a court of competent
jurisdiction as provided in Paragraph 15 of this Agreement, to restrain any such
breach, in addition to any other rights or remedies Company may have.
e. In the event of a violation of any legally enforceable provision of
this Paragraph as to which there is a specific time period during which Employee
is prohibited from taking certain actions or from engaging in certain
activities, as set forth in subparagraph (a) above, then such violation shall
toll the running of the statute of limitations for the time period from the date
of its commencement until the date of its cessation, not to exceed six (6)
months per violation occurrence.
f. For the purpose of this Paragraph, the phrase, the "Business of
Company" shall be deemed to mean the business of being a "dub and ship house" as
that phrase is generally used and understood in the radio/television advertising
distribution
- 9 -
<PAGE> 122
business, and includes but is not necessarily limited to the duplication and
manual (as opposed to electronic) shipping/distribution, usually by overnight
delivery service, of audio/video tape advertising spots to radio/television
stations together with certain post production services. Company acknowledges
and agrees that Employee may engage in production, post production services and
spot editing provided such services are not provided to customers of the Company
receiving such services from the Company as of the date hereof and Employee
agrees to use its best efforts to refer the distribution business of any such
customers and clients to Company. Employee recognizes that DG Systems operates a
nationwide multimedia network designed to provide electronic delivery and
related services to the broadcast industry by linking content providers to
broadcast stations, including for example the electronic distribution of audio
spot advertising to radio stations. Employee recognizes that operation of such a
network by DG Systems is a technological extension of the "dub and ship house"
business and that it is contemplated that the extension of such technological
advancements will in the future be applied to the business of Company as
conducted prior to the Closing Date. As such, Employee agrees that for the
purpose of this Paragraph, the phrase, the "Business of Company" shall be deemed
to mean, in addition to the "dub and ship house" business set forth above as
currently conducted by Company, any and all replacements, extensions,
enhancements and/or improvements in such dub and ship house business by virtue
of technological
- 10 -
<PAGE> 123
advancements, including by way of example but not limitation, the operation of a
multimedia network designed to provide electronic delivery and related services
to the broadcast industry by linking content providers to radio and/or
television broadcast stations and/or cable television systems, over such
facilities such as standard telephone or ISDN lines, but which may include other
transmission facilities in the future, such as satellite and Internet
transmission facilities, and which may be expanded in scope to provide
electronic distribution services to address television and cable advertising,
music, network advertising and programming content, and which may offer new
services in the future such as air play verification.
g. Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon Company under
this Paragraph, and hereby acknowledges and agrees that, subject to the
limitations of subparagraph c. above, the same are reasonable in time and
territory, are designed to eliminate competition which otherwise would be unfair
to Company and/or Company's parents, affiliates, subsidiaries, successors and
assigns, do not stifle the inherent skill and experience of Employee, would not
operate as a bar to Employee's means of support, are fully required to protect
the legitimate interests of Company and do not confer a benefit upon Company
disproportionate to the detriment to Employee.
- 11 -
<PAGE> 124
6. TERMINATION FOR CAUSE AND SEVERANCE COMPENSATION.
a. The employment of Employee under this Agreement, and the Term
hereof, may be terminated by the Company with or without cause at any time
without further liability of Company to Employee, except as otherwise set forth
herein. For purposes hereof, the term for "cause" includes, but is not limited
to:
i. Employee's gross insubordination (which is not cured within
ten (10) days of written notice of default from Company to Employee,
setting forth the nature of such alleged default in reasonably
sufficient detail), fraud, dishonesty, willful misconduct or gross
negligence (which is not cured within ten (10) days of written notice
of default from Company to Employee, setting forth the nature of such
alleged default in reasonably sufficient detail) in the performance of
his duties set forth in this Agreement, including willful failure to
perform such duties as may properly be assigned him;
ii. Employee's material breach of any provisions of this
Agreement, provided, however, that Employee shall first receive written
notice from Company setting forth in reasonable detail the alleged
material breach and provided further that Employee fails to cure such
breach within thirty (30) days of notice of same, or within such longer
period as may be reasonably necessary if the breach is not reasonably
capable of cure within said thirty (30) day period.
b. In the event Employee's employment is terminated by reason of: (i) a
"for cause" termination by Company as provided
- 12 -
<PAGE> 125
herein, (ii) Employee voluntarily terminates his employment (i.e. quits), (iii)
Employee dies, or (iv) Employee becomes subject to "permanent disability" as
hereafter defined, then in such event, Employees entitlement to: (aa) future
Base Salary shall terminate as of the date of employment termination and shall
be prorated up to the date of termination, (bb) Bonus Amounts shall terminate
commencing with the calendar year in which the employment termination occurred,
and (cc) purchase the Option Shares shall be determined in accordance with the
terms and provisions of the DG Systems 1996 Supplemental Stock Option Plan.
c. In the event Employee's employment is terminated by Company "without
cause" as provided herein, then in such event, Employee's entitlement to: (aa)
Base Salary shall continue for the balance of the initial Term or for a period
of six (6) months from the date of termination, whichever is later, (and whether
or not Employee has accepted alternate employment), (bb) Bonus Amounts shall
continue for the period(s) as set forth in this Agreement, and (cc) purchase the
Option Shares shall be determined in accordance with the terms and provisions of
the DG Systems 1996 Supplemental Stock Option Plan.
7. BUSINESS PRACTICES STATEMENT. On or about each anniversary date of the
execution of this Agreement and within five (5) days of receiving a written
request of Employee from Company, Employee shall provide Company with a
statement, in form and substance reasonably satisfactory to Company and Employee
and substantially in the form annexed hereto, certifying that Employee and, to
- 13 -
<PAGE> 126
Employee's knowledge, the employee's, directors, officers, agents or other
representatives of Company have not, directly or indirectly, within the past
year, given or agreed to give any illegal gift or similar benefit to any
customer, supplier, governmental employee or other person who is or may be
involved in connection with any actual or proposed transaction of the Company.
8. SEVERABILITY. The provisions of this Agreement are severable, and if any one
or more provisions shall be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions, and any partially unenforceable
provision to the extent enforceable in any jurisdiction, shall nevertheless be
binding and enforceable.
9. BINDING AGREEMENT. The rights and obligations of Company under this Agreement
shall inure to the benefit of, and shall be binding upon, Company and its
successors and assigns, and the rights and obligations (except the obligation to
provide services hereunder) of Employee under this Agreement shall inure to the
benefit of, and shall be binding upon, Employee and his heirs, personal
representatives and estate.
10. NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed given (a) on the same day if delivered personally, (b) three
business days after being mailed by registered or certified mail )return receipt
requested) as determined by reference to the postmark; or (c) on the same day if
sent by facsimile, confirmation received, to the parties at the
- 14 -
<PAGE> 127
following addresses and facsimile numbers (or at such other address or number
for a party as shall be specified by like notice):
If to Company, to:
PDR Productions, Inc.
c/o Digital Generation Systems, Inc
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
with a copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
If to Employee, to:
Neil DeRosa
c/o PDR Productions, Inc.
219 East 44th Street
New York, New York 10017
Telephone: (212) 986-2020
Facsimile: (212) 986-2430
with a copy (which will not constitute notice) to:
Jaspan, Schlesinger, Silverman & Hoffman
300 Garden City Plaza, 5th Floor
Garden City, New York 11530
Attention: Allen Perlstein, Esq.
Telephone: (516) 746-8000
Facsimile: (516) 393-8282
If to DG Systems or Sub, to:
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Attention: Mr. Thomas P. Shanahan
Telephone: (415) 276-6600
Facsimile: (415) 276-6601
- 15 -
<PAGE> 128
with a copy (which will not constitute notice) to:
Waters, McPherson, McNeill, P.C.
300 Lighting Way
Secaucus, New Jersey 07096
Attention: Charles J. Harriman, Esq.
Telephone: (201) 863-4400
Facsimile: (201) 863-2866
11. WAIVER. The failure of any party to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions as to any future violations thereof, nor prevent that
party thereafter from enforcing each and every other provision of this
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy shall not constitute a waiver of such party's right to
assert all other legal remedies available to it under the circumstances.
12. MISCELLANEOUS. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the subject matter hereof,
and may not be modified or terminated orally. No modification, termination or
attempted waiver of this Agreement shall be valid unless in writing and signed
by the party against whom the same is sought to be enforced. This Agreement may
be executed in multiple counterparts, each of which shall be an original, and
all of which, when taken together, shall constitute one and the same document.
This Agreement shall be governed by and construed according to the laws of the
State of New York, without regard to the principles thereof regarding conflict
of laws.
- 16 -
<PAGE> 129
13. CAPTIONS AND PARAGRAPH HEADINGS. Captions and section headings used herein
are for convenience only and are not a part of this Agreement, and shall not be
used in construing it.
14. DEATH OR DISABILITY. In the event of the death or "permanent disability" (as
hereafter defined) of Employee, Employee, his estate or his designated
beneficiaries shall in addition to all other benefits made available to Employee
by Company outside of the terms of this Agreement, if any, be entitled to the
same compensation, rights and benefits as are referred to in Paragraph 6 above,
except that disability benefits paid for by the Company provided by an insurer
shall be credited to Base Salary otherwise due to Employee hereunder. For
purposes of this Paragraph, "permanent disability" shall be defined as
Employee's inability to perform all material duties required of Employee by this
Paragraph for a period of six (6) consecutive months.
15. ARBITRATION. Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, preliminary injunction
to preserve the status quo or for other equitable relief: (a) pending
arbitration, as hereafter provided, or (b) to enforce the actual or alleged
breach of the covenants set forth in Paragraph 5 of this Agreement pending a
written decision of the arbitration panel on the merits of any claims and/or
disputes under this Agreement, all claims and disputes under this Agreement
shall be resolved in accordance with the provisions for dispute resolution and
arbitration set forth in Article 9 of the Stock Purchase Agreement.
- 17 -
<PAGE> 130
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first set forth above.
PDR PRODUCTIONS, INC.
BY: __________________________
NAME:
TITLE:
__________________________
NEIL DEROSA
- 18 -
<PAGE> 131
BUSINESS PRACTICE STATEMENT
The Board of Directors of Digital Generations Systems, Inc. ("Company")
has determined that the maintenance of high ethical standards is essential to
the long term success of its business activities. To that effect, the
undersigned (hereinafter the "Employee") certifies the following:
1. Employee, and to Employee's knowledge, the Employee's directors,
officers, agents or other representative of the Company, have not, directly or
indirectly, within the past year, given or agreed to give any illegal gift or
similar benefit to any customer, supplier, governmental employee or other person
who is or may be involved in connection with any actual or proposed transaction
of the Company.
I hereby certify that I have read and understand the above Business
Practice Statement. I further acknowledge my obligation and agree to report any
violation of this Business Practice Statement by any other employee which
becomes known to me.
Date: ________________________ ______________________________
Signature
______________________________
Print Name
______________________________
<PAGE> 132
Title
<PAGE> 133
SCHEDULE 3.5
List of Unaudited Financial Statements
Delivered by PDR Productions, Inc.
1. Balance Sheet as of September 30, 1996
2. Income Statement for the nine month period ending September
30, 1996
3. Schedule of Sales for the nine month period ending September
30, 1996
4. Schedule of Expenses for the nine month period ending
September 30, 1996
<PAGE> 134
SCHEDULE 3.6
List of Liabilities and/or Obligations of PDR of any nature (absolute,
accrued, contingent or otherwise) whether as principal, agent, partner,
plan fiduciary, co-venturer, guarantor or in any capacity whatsoever
which are not properly reflected or reserved against in the financial
statements
This schedule has been omitted in reliance on Item 601(b)(2) of Regulation S-K.
The registrant agrees to furnish supplementally a copy of this schedule to the
Commission upon request.
<PAGE> 135
SCHEDULE 3.7
List of Tax Returns of the Stockholder
or PDR which are currently being audited
NONE
<PAGE> 136
SCHEDULE 3.10
List of pending or threatened actions, suits, legal administrative or
arbitral proceedings or inquiries relating to PDR or the Stockholder
1. Worker Compensation Claim made by Joseph DiVincenzo
<PAGE> 137
SCHEDULE 3.11
A complete list of all agreements, contracts, understandings,
arrangements, obligations, leases or licenses with respect to personal
property, franchises, guarantees, commitments and orders (other than
purchase orders), whether written or oral between PDR and any other
party, under or pursuant to which PDR is obligated to make cash
payments or deliver products or render services with a value greater
than $5,000 or receive cash payments of or receive products with a
value greater than $5,000 or which are otherwise material to PDR
This schedule has been omitted in reliance on Item 601(b)(2) of Regulation S-K.
The registrant agrees to furnish supplementally a copy of this schedule to the
Commission upon request.
<PAGE> 138
SCHEDULE 3.12
Description of all real property leased by PDR
1. Three (3) Floors and Basement Space at 219 East 44th Street,
New York, New York
<PAGE> 139
SCHEDULE 3.16
List of every pension, retirement, profit sharing, deferred
compensation, stock option, employee stock ownership, severance pay,
vacation, bonus or other incentive plan, written or unwritten employee
program, arrangement, agreement or understanding (whether arrived at
through collective bargaining or otherwise), any medical, vision,
dental or other health plan, any life insurance plan or any other
employee benefit plan or fringe benefit plan, including, without
limitation, any "employee benefit plan,"as that term is defined in
Section 33(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") currently or within the past five (5) fiscal
years, adopted, maintained, sponsored, in whole or in part or
contributed to by PDR or any member of a "controlled group of
corporations" with PDR, or any entity that is under "common control"
with PDR (as defined in Section 414(b) or (c) of the Code) for the
benefit of employees, retirees, dependents, spouses, directors,
independent contractors or other beneficiaries of PDR or its ERISA
affiliates
1. Profit Sharing Plan & Trust
2. Medical Plan - Oxford
3. Dental Plan - CIGNA
<PAGE> 140
SCHEDULE 3.17
Complete list as of the date of this Agreement of all employees of PDR,
including their names, birth dates, job titles, base salaries, bonus
compensation paid or payable during the calendar year 1996 and dates of
hire
This schedule has been omitted in reliance on Item 601(b)(2) of Regulation S-K.
The registrant agrees to furnish supplementally a copy of this schedule to the
Commission upon request.
<PAGE> 141
SCHEDULE 3.19
A list of all insurance policies covering the assets, business,
equipment, properties, operations, employees, officers and directors of
PDR and the amounts of coverage under each such policy
1. Providence Washington Insurance Co. - Business Insurance
(4/30/96 - 4/30/97)
2. Workers Compensation - State Insurance Fund
3. Metropolitan Life Insurance Co. 92 - Chevy Blazer
4. NY Life Insurance Co. - Lou Maltese - Life Insurance
<PAGE> 142
SCHEDULE 3.23
A list of the following occurrences since September 30, 1996
(a) any matter having a material adverse affect in PDR's working
capital, condition (financial or otherwise), assets,
liabilities (absolute, accrued, contingent or otherwise),
reserves, business or operations
Reduction of Music Television Network product
(b) any liabilities or obligations (absolute, accrued, contingent
or otherwise) incurred by PDR except liabilities and
obligations incurred in the ordinary course of business and
consistent with past practice
None - Other than set forth on Schedule 3.6
(c) payment, discharge or satisfaction by PDR of any
claims, liabilities or obligations (absolute, accrued,
contingent or otherwise) other than the payment,
discharge or satisfaction in the ordinary course of
business and consistent with past practice, of
liabilities and obligations reflected or reserved
against in the PDR Financial Statements or incurred in
the ordinary course of business and consistent with
past practices
None
(d) all liens PDR has permitted or allowed to be placed
against any of its property or assets (real, personal
or mixed, tangible or intangible)
None - Other than Leases set forth on Schedule 3.6
(e) accounts receivable greater than $5,000.00 written off
as uncollectible by PDR
None
(f) any properties or assets (real, personal or mixed, tangible or
intangible) sold, transferred or otherwise disposed of by PDR
except in the ordinary course of business and consistent with
past practice
None
(g) any and all general increases in the compensation of offices,
employees or consultants (including any such increase pursuant
to any bonus, pension, profit sharing or other plan or
commitment) or any increase in the compensation payable or to
become payable to any
<PAGE> 143
SCHEDULE 3.23 (CON'T)
officer, employee or consultant (including any such increase
pursuant to any bonus, pension, profit sharing or other plan
or commitment) granted by PDR except in the ordinary course of
business consistent with past practice and where no such
increase is required by agreement or understanding
None
(h) any and all single capital expenditures or commitments in
excess of $10,000.00 for additions to property, plant,
equipment or intangible capital assets or any capital
expenditures and commitments the cost of which aggregates more
than $25,000.00 for additions to property plant, equipment or
intangible capital assets
- Purchase of Sony Digital Beta Camera
- Purchase of Sony DA888 Audio Duplicating Machine
- Purchase of Panasonic DVC Pro Video Duplicator
(i) any changes in the method of accounting or accounting
practices or in depreciation or amortization policies
or rates adopted by PDR
None
(j) payments, loans, advances, sales, transfers or leases to, or
any agreements or arrangements entered into, of any kind, with
any officers, directors or stockholders or affiliates or
associates of any its officers, directors or stockholders not
in the ordinary course of business consistent with past
practices
None
(k) any modifications to or new employee benefit plans, programs
or severance arrangements entered into or any termination
benefits granted by PDR
None
(l) any agreements to take any action described in Section 3.24 of
this Agreement
None
(m) any amendments or changes to the Certificate of Incorporation
or By-Laws of PDR
None
<PAGE> 144
SCHEDULE 3.23 (CON'T)
(n) any material damage, destruction or loss whether covered by
insurance or not incurred by PDR which affect any of the
material properties or business of PDR
None
(o) any loans, advances or capital contributions to or investments
in any person by PDR
None
(p) any amendments, relinquishments, terminations or non- renewals
by PDR of any contract, lease, commitment or other right or
obligation other than in the ordinary course of business
consistent with past practice
None
(q) any labor disputes other than routine individual grievances or
any action or proceeding by a labor union or representative
thereof to organize employees of PDR
None
(r) any agreements or arrangements to take action which would make
any representation or warranty in this Agreement untrue or
incorrect as of the date when made
None
<PAGE> 145
SCHEDULE 3.25
A list of the names and locations of all banks, trust companies,
savings and loan associations and other financial institutions at which
PDR maintains accounts of any nature and the names of all persons
authorized to draw thereon, make withdrawals therefrom or have access
thereto
1. Bank - Republic National Bank of N.Y., 415 Madison Avenue,
New York, New York 10017-1161, Checking Account (No.
0390016 411) and Savings Account (Account No. 0398121435).
2. The following names can sign checks:
Pat DeRosa
Neil DeRosa
Joseph DeRosa
<PAGE> 146
SCHEDULE 3.26(a)
A list of the ten largest customers of PDR in terms of sales during the
calendar year ended December 31, 1995 and the six month period ending
June 30, 1996 showing the approximate total sales by customer during
such periods
This schedule has been omitted in reliance on Item 601(b)(2) of Regulation S-K.
The registrant agrees to furnish supplementally a copy of this schedule to the
Commission upon request.
<PAGE> 147
SCHEDULE 3.26(b)
A list of the ten largest suppliers of PDR in terms of purchases during
the calendar year ended December 31, 1995 and the six month period
ending June 30, 1996, showing the approximate total purchases by PDR
from each such supplier during such periods
This schedule has been omitted in reliance on Item 601(b)(2) of Regulation S-K.
The registrant agrees to furnish supplementally a copy of this schedule to the
Commission upon request.
<PAGE> 148
SCHEDULE 3.28
Alist of any officer, director, shareholder or employee of PDR or an
affiliate or relative of any of them who:
(a) owns, directly or indirectly, any interest in (except not more
than three (3%) percent stockholdings for investment purposes
in securities of publicly held and traded companies) or is an
officer, partner, director, employee or consultant of, or
otherwise receives renumeration from any person which is, or
is engaged in business as a competitor, lessor, lessee,
customer or supplier of PDR;
NONE
(b) owns directly or indirectly in whole or in part any tangible
or intangible property, the use of which is necessary for the
conduct of PDR's business and which if not obtained from such
person could have a material adverse affect on PDR; or
NONE
(c) owes any amount to PDR or to the knowledge of PDR and
stockholder, has any cause of action or other claim against
PDR other than for current wages accrued or bonuses, benefits,
prerequisites, or reimbursements for business expenses payable
in the ordinary course of business consistent with past
practices.
NONE
<PAGE> 1
EXHIBIT 11.1
DIGITAL GENERATION SYSTEMS, INC.
STATEMENTS OF COMPUTATION OF WEIGHTED AVERAGE AND
PRO FORMA COMMON SHARES AND EQUIVALENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (2,397) $ (2,386) $ (6,872) $ (6,502)
============ ============ ============ ============
Weighted average common shares outstanding 11,575 897 8,638 893
Weighted average common equivalent shares:
Weighted average preferred stock outstanding 7,109 2,424 6,832
Adjustments to reflect requirements of
the Securities and Exchange
Commission's Staff Accounting
Bulletin No. 83:
Common stock issuances 195 65 195
Convertible preferred stock issuances 581 194 581
Preferred stock warrants 20 7 20
Common stock option grants 748 249 748
------------ ------------ ------------ ------------
Total weighted average common shares
and equivalents 11,575
============
Pro forma total weighted average
common shares and equivalents 9,550 11,577 9,269
============ ============ ============
Net loss per share $ (0.21)
============
Pro forma net loss per share $ (0.25) $ (0.59) $ (0.70)
============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 16,418
<SECURITIES> 12,968
<RECEIVABLES> 1,763
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,472
<PP&E> 16,079
<DEPRECIATION> (6,569)
<TOTAL-ASSETS> 41,699
<CURRENT-LIABILITIES> 5,359
<BONDS> 7,246
0
0
<COMMON> 55,108
<OTHER-SE> (26,044)
<TOTAL-LIABILITY-AND-EQUITY> 41,699
<SALES> 0
<TOTAL-REVENUES> 6,518
<CGS> 0
<TOTAL-COSTS> 13,320
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 1,166
<INCOME-PRETAX> (6,872)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,872)
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
