<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 18, 1997
DIGITAL GENERATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 0-27644 94-3140772
- ---------------------------- --------------------- -------------
(STATE OF OTHER JURISDICTION (COMMISSION FILE NO.) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
875 BATTERY STREET
SAN FRANCISCO, CA 94111
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(Address, including zip code, of principal executives offices)
Registrant's telephone numbers, including area code: (415) 276-6600
--------------
NOT APPLICABLE
--------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 18, 1997, the Registrant acquired all of the issued and
outstanding capital stock of Starcom Mediatech, Inc., a Delaware corporation
("Mediatech") and a wholly-owned subsidiary of IndeNet, Inc., a Delaware
corporation ("IndeNet"), for aggregate consideration of approximately $25.8
million, including approximately $5.4 million in assumed debt (the "Mediatech
Acquisition"). Mediatech is engaged in the business of media duplication and
distribution and the Registrant intends to cause Mediatech to continue this
business activity.
The Mediatech Acquisition was consummated pursuant to the terms and
conditions set forth in a Stock Purchased Agreement, dated as of July 18, 1997
(the "Mediatech Purchase Agreement"), by and between IndeNet and the Registrant.
The consideration delivered by the Registrant to IndeNet in payment for the
capital stock of Mediatech consisted of: (i) $13,988,730 in cash (subject to
post-closing adjustment of in accordance with the terms of the Mediatech
Purchase Agreement based upon the results of a post-closing audit of Mediatech's
financial condition as of the date of closing; (ii) 324,355 shares of Common
Stock of the Registrant ("the Company Shares"); (iii) a Subordinated Promissory
Note payable to the order of IndeNet in the aggregate principal amount of
$2,243,806.34 and bearing interest at the rate of 9% per annum (the "Company
Note"); (iv) a Secured Subordinated Promissory Note payable to the order of
Thomas H. Baur, a creditor of IndeNet, in the aggregate principal amount of
$2,206,193.66 and bearing interest at the rate of 9% per annum (the "Baur
Note").
In connection with the Mediatech Acquisition, the Registrant granted
certain rights to IndeNet with respect to registration of the Company Shares
under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to
such registration rights, IndeNet has the right to request the registration of
the Company Shares under the Securities Act in the event that the Registrant
shall register securities under the Securities Act for its own account or the
account of the Registrant's other security holders. In addition, after the first
anniversary of the Mediatech Purchase Agreement, the Registrant has the right to
request the registration of the Company Shares under the Securities Act at any
time provided that the proceeds of any offering of the Company Shares pursuant
to such registration shall exceed $500,000.
The Company Note is payable in equal installments of $150,000 on the
last day of each successive calendar quarter, commencing on October 1, 1997, and
matures on October 1, 2001. The Baur Note is also payable in installments, with
the first of such installments due and payable in the amount of $350,000 on July
30, 1997, and the second and all subsequent installments due and payable in
equal installments of $200,000 on the first day of each successive calendar
quarter thereafter, commencing on January 1, 1998. The Baur Note matures on
January 1, 2000.
Prior to the foregoing transaction, no material relationship existed
between IndeNet or Mediatech and the Registrant or any of its affiliates, any
director or officer of the Registrant, or any associate of any such director or
officer.
The Registrant drew upon two sources of funds to finance the cash
portion of the consideration for the Mediatech Acquisition. An entity affiliated
with Kleiner Perkins Caufield and Byers ("Kleiner Perkins") and another
affiliated with Dawson-Samberg Capital Management, Inc. ("Dawson-Samberg") each
provided the Registrant with a $3.0 million cash loan in exchange for a
promissory note, each in the aggregate principal amount of $3.0 million and
bearing interest at the rate of 10% per annum. The Registrant funded the
remaining portion of the cash consideration for the Mediatech Acquisition from
its internal cash reserves.
On July 14, 1997, the Registrant entered into a Preferred Stock Purchase
Agreement, as amended on July 23, 1997, (as amended, the "Stock Purchase
Agreement"), with certain investors listed on Exhibit A thereto, pursuant to
which the Registrant agreed to issue and sell, in two tranches, up to an
aggregate of 4,950,495 shares of its Series A Convertible Preferred Stock for
aggregate consideration of approximately $17.5 million in cash, or $3.535 per
share. The Registrant closed the first of such tranches
<PAGE> 3
on July 28, 1997 in which the Registrant issued and sold an aggregate of
2,012,376 shares of its Series A Convertible Preferred Stock for aggregate
consideration of approximately $7,113,751 in cash. The Registrant used the
proceeds of this first tranch to repay the entire amount owned under the
promissory notes issued by the registrant in favor of Kleiner Perkins and
Dawson-Samberg in connection with the Mediatech Acquisition. Due to the
requirements of the National Association of Securities Dealers (the "NASD"), the
closing of the second of such tranches, in which the Registrant intended to
issue and sell up to an aggregate of 2,938,119 additional shares of its Series A
Convertible Preferred Stock, is contingent upon obtaining shareholder approval
therefor. The holders of a majority of the issued and outstanding shares of its
capital stock entitled to vote thereon entered into a voting agreement pursuant
to which such shareholders agreed to vote in favor of the issuance of shares of
Series A Convertible Preferred Stock in connection with such second tranche. By
letter dated August 1, 1997, the NASD gave its approval to close the second
tranche, subject to certain conditions. Upon the satisfaction of such
conditions, the Registrant closed the second tranche on August 26-27, 1997 in
which the Registrant issued and sold an aggregate of 2,938,119 shares of its
Series A Convertible Preferred Stock for aggregate consideration of $10,386,251
in cash. The Registrant used the proceeds from the sale of such shares in the
second tranche to replenish the cash reserves expended by the Registrant to fund
a portion of the cash consideration for the Mediatech Acquisition.
In connection with the transactions contemplated by the Stock Purchase
Agreement, the Registrant granted certain rights to the investors purchasing
shares of its Series A Convertible Preferred Stock under the Stock Purchase
Agreement with respect to registration under the Securities Act of the Common
Stock underlying such shares of Series A Convertible Preferred Stock. Such
rights are substantially similar to the registration rights granted to IndeNet
in connection with the Mediatech Acquisition, as described above.
The Registrant's issuance, pursuant to the Stock Purchase Agreement, of
shares of its Series A Convertible Preferred Stock in the first and second
tranche described above were exempt from the registration requirements of the
Securities Act in reliance upon the exemption from registration provided by Rule
506 of Regulation D promulgated under the Securities Act.
ITEM 5. OTHER EVENTS
Item 5 is amended and restated in its entirety as follows:
The Registrant entered into the Stock Purchase Agreement described above
pursuant to which the Registrant issued and sold an aggregate of 2,012,376
shares of its Series A Convertible Preferred Stock on July 28, 1997, and an
additional 2,938,119 shares of its Series A Convertible Preferred Stock on
August 26-27, 1997.
The Mediatech Purchase Agreement provides for an adjustment of the
purchase price paid to IndeNet based on a comparison of Mediatech's financial
position on July 18, 1997, with its financial position at a specified date
prior to its acquisition by the Registrant. The Registrant and IndeNet are
currently engaged in discussions to determine whether and to what extent such
an adjustment will be made. In connection with these discussions, the
Registrant is reviewing the Mediatech financial records relating to its
financial position as of July 18, 1997. The Registrant does not believe that it
will be required to pay any additional amounts to IndeNet as a result of these
discussions.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Item 7 is amended and restated in its entirety as follows:
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
The audited combined financial statements of Mediatech, Inc. and
Starcom Television Services, Inc. for the years ended March 31, 1997
and 1996 and the unaudited combined financial statements of Mediatech,
Inc. and Starcom Television Services, Inc. for the three months ended
June 30, 1997 and 1996 are attached hereto as Exhibit 7.1.
<PAGE> 4
(b) PRO FORMA FINANCIAL INFORMATION
The unaudited condensed pro forma combined financial statements of
Digital Generation Systems, Inc., PDR Productions, Inc., and Mediatech, Inc.,
the pro forma financial information required by Item 7(b) is attached hereto as
Exhibit 7.2.
(C) EXHIBITS
2.1* Stock Purchase Agreement, dated as of July 18, 1997, by and
between IndeNet, Inc., a Delaware corporation, and Digital
Generation Systems, Inc., a California corporation.
2.2* Preferred Stock Purchase Agreement, dated as of July 14, 1997,
by and among Digital Generation Systems, Inc. and the parties
listed on the Schedule of Purchasers attached as Exhibit A
thereto.
2.3* Amendment to Preferred Stock Purchase Agreement, dated as of
July 23, 1997, by and among Digital Generation Systems, Inc.
and the purchasers listed on Exhibit A thereto.
2.4* Certificate of Determination of Rights of Series A Convertible
Preferred Stock of Digital Generation Systems, Inc., filed by
the Secretary of State of the State of California on July `6,
1997.
7.1** The audited combined financial statements of Mediatech, Inc.
and Starcom Television Services, Inc. for the years ended
March 31, 1997 and 1996 and the unaudited combined financial
statements of Mediatech, Inc. and Starcom Television Services,
Inc. for the three months ended June 30, 1997 and 1996.
7.2** The unaudited condensed pro forma combined financial
statements of Digital Generation Systems, Inc., PDR
Productions, Inc., and Mediatech, Inc.
- -------------------
* Incorporated by reference to the exhibit bearing the same number filed
with registrant's Form 8-K which was filed August 1, 1997.
** Filed herewith.
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: September 29, 1997 BY: /S/ THOMAS P. SHANAHAN
----------------------------
THOMAS P. SHANAHAN
VICE PRESIDENT & CHIEF
FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND CHIEF
ACCOUNTING OFFICER)
<PAGE> 1
EXHIBIT 7.1
Mediatech, Inc. and Starcom
Television Services, Inc.
(Wholly Owned Subsidiaries
of IndeNet, Inc.)
Combined Financial Statements
Years Ended March 31, 1997 and 1996 and Three Months Ended
June 30, 1997 (Unaudited) and 1996 (Unaudited)
<PAGE> 2
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
CONTENTS
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
Combined Balance Sheets 4
Combined Statements of Operations 5
Combined Statements of Stockholder's Equity 6
Combined Statements of Cash Flows 7-8
NOTES TO COMBINED FINANCIAL STATEMENTS 9-19
2
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
Mediatech, Inc. and Starcom Television Services, Inc.
Chicago, Illinois
We have audited the accompanying combined balance sheet of Mediatech, Inc. and
Starcom Television Services, Inc. (wholly owned subsidiaries of IndeNet, Inc.)
as of March 31, 1997 and the related combined statements of operations,
stockholder's equity and cash flows for the year then ended. We also audited the
accompanying combined balance sheet of Mediatech, Inc. and Starcom Television
Services, Inc. as of March 31, 1996 and the related statements of operations,
stockholder's equity and cash flows for Mediatech, Inc. for the year then ended
and for Starcom Television Services, Inc. for the two months ended March 31,
1996 (see Note 1). These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mediatech, Inc. and Starcom
Television Services, Inc. at March 31, 1997 and 1996, and the results of their
operations and cash flows for the years then ended, as described above, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
May 30, 1997, except for Summary of Significant Accounting Policies,
Notes 3, 8, 9 and 10 which are dated July 18, 1997
3
<PAGE> 4
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
<TABLE>
<CAPTION>
June 30, March 31,
------------- ---------------------------
1997 1997 1996
- ------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS (Note 4)
CURRENT ASSETS
Cash $ -0- $ 27,144 $ 126,096
Accounts receivable, net 5,451,303 4,790,495 4,194,158
Inventory 296,402 304,552 343,324
Prepaid expenses 132,879 144,666 109,798
- ------------------------------------------------------------------------------------
Total current assets 5,880,584 5,266,857 4,773,376
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PROPERTY AND EQUIPMENT, net (Note 2) 10,099,420 10,718,161 12,257,505
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OTHER ASSETS
Goodwill, net 2,926,103 2,967,706 5,733,697
Capitalized costs, net 110,792 110,792 36,882
Other long-term assets 114,582 124,530 320,049
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Total other assets 3,151,477 3,203,028 6,090,628
- ------------------------------------------------------------------------------------
$19,131,481 $19,188,046 $23,121,509
====================================================================================
</TABLE>
<PAGE> 5
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
-------------- -------------------------------
1997 1997 1996
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable (Note 5) $ 3,700,542 $ 3,754,205 $ 3,968,101
Accrued expenses 444,619 473,595 1,285,166
Lines of credit (Note 4) 2,892,933 2,191,213 3,038,605
Payables to related parties (Notes 3 and 5) 2,612,090 2,612,074 1,616,008
Note payable - current portion (Note 4) 954,337 972,615 379,791
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Total current liabilities 10,604,521 10,003,702 10,287,671
LONG-TERM DEBT, less current portion (Note 4) 2,081,690 2,289,408 2,781,349
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TOTAL LIABILITIES 12,686,211 12,293,110 13,069,020
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COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY (Note 5)
Common stock, no par value; authorized 6,000
shares; issued and outstanding 1,810 shares 773,100 773,100 773,100
Additional paid-in capital 12,419,295 12,419,295 10,734,857
Accumulated deficit (6,747,125) (6,297,459) (1,455,468)
- ---------------------------------------------------------------------------------------------------------
Total stockholder's equity 6,445,270 6,894,936 10,052,489
- ---------------------------------------------------------------------------------------------------------
$ 19,131,481 $ 19,188,046 $ 23,121,509
=========================================================================================================
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE> 6
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
June 30, March 31,
---------------------- ---------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $5,835,949 $5,681,532 $23,340,674 $19,097,356
COST OF SALES 3,046,224 2,402,297 10,531,609 8,567,297
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GROSS PROFIT 2,789,725 3,279,235 12,809,065 10,530,059
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OPERATING EXPENSES
Selling, general and administrative
(Notes 6 and 7) 2,427,880 3,150,201 12,035,041 9,614,119
Depreciation and amortization
(Notes 1 and 2) 685,074 673,465 2,673,279 1,801,247
Write down of goodwill (Note 1) -0- -0- 2,500,000 -0-
Restructuring charges (Note 8) -0- -0- 323,000 -0-
- ------------------------------------------------------------------------------------------------------
Total operating expenses 3,112,954 3,823,666 17,531,320 11,415,366
- ------------------------------------------------------------------------------------------------------
OPERATING LOSS (323,229) (544,431) (4,722,255) (885,307)
- ------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
Interest expense 162,333 104,327 444,066 402,520
Other income (35,896) (159,568) (263,330) (225,826)
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Other expenses (income), net 126,437 (55,241) 180,736 176,694
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Loss before income tax provision
benefit (449,666) (489,190) (4,902,991) (1,062,001)
Income tax provision (benefit) -0- -0- (61,000) 285,200
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NET LOSS $ (449,666) (489,190) (4,841,991) $(1,347,201)
======================================================================================================
</TABLE>
See accompanying notes to combined financial statements
5
<PAGE> 7
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Total
No Par Value Additional Stockholder's
--------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MEDIATECH, INC.
Balance, at April 1, 1995 381 $ 4,100 $ 8,903,403 $ (108,267) $ 8,799,236
Net loss -0- -0- -0- (1,195,193) (1,195,193)
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Balance, at March 31, 1996 381 4,100 8,903,403 (1,303,460) 7,604,043
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STARCOM TELEVISION SERVICES INC.
Acquisition by IndeNet at February 7, 1996 1,429 769,000 1,831,454 -0- 2,600,454
Net loss -0- -0- -0- (152,008) (152,008)
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Balance, at March 31, 1996 1,429 769,000 1,831,454 (152,008) 2,448,446
- ----------------------------------------------------------------------------------------------------------------------
COMBINED BALANCE, at March 31, 1996 1,810 $773,100 $10,734,857 $(1,455,468) $10,052,489
======================================================================================================================
MEDIATECH, INC
Balance, at April 1, 1996 381 $ 4,100 $ 8,903,403 $(1,303,460) $ 7,604,043
Contribution of net assets (Note 5) -0- -0- 1,684,438 -0- 1,684,438
Net loss -0- -0- -0- (1,804,642) (1,804,642)
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Balance, at March 31, 1997 381 4,100 10,587,841 (3,108,102) 7,483,839
- ----------------------------------------------------------------------------------------------------------------------
STARCOM TELEVISION SERVICES, INC.
Balance, at April 1, 1996 1,429 769,000 1,831,454 (152,008) 2,448,446
Net loss -0- -0- -0- (3,037,349) (3,037,349)
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Balance, at March 31, 1997 1,429 769,000 1,831,454 (3,189,357) (588,903)
- ----------------------------------------------------------------------------------------------------------------------
COMBINED BALANCE, at March 31, 1997 1,810 773,100 12,419,295 (6,297,459) 6,894,936
Net loss (Unaudited) -0- -0- -0- (449,666) (449,666)
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COMBINED BALANCE, at June 30, 1997 (Unaudited) 1,810 $773,100 $12,419,295 $ (6,747,125) $ 6,445,270
======================================================================================================================
</TABLE>
See accompanying notes to combined financial statements
6
<PAGE> 8
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, March 31,
------------------------- ------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(449,666) (489,190) (4,841,991) (1,347,201)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 685,074 673,465 2,673,279 1,801,247
Loss (gain) on sale of assets -0- (128,811) (115,595) 1,921
Write down of goodwill and
restructuring charges -0- -0- 2,823,000 -0-
Equity in net loss of 110 Development, Co. 1,248 5,321 13,056 5,741
Changes in assets and liabilities
Increase in accounts receivable (660,808) (65,507) (596,337) 46,820
Decrease in inventories 8,150 (38,528) 38,772 111,339
Increase in prepaid expenses 11,787 (31,594) (99,441) 41,940
Decrease in other assets 9,948 (9,039) 173,237 (200,816)
Decrease in accounts payable
and accrued expenses (87,396) (1,248,826) (1,196,435) 281,766
Increase in payables to related parties 16 2,168,454 1,960,185 755,322
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating expenses (481,647) 835,745 831,730 1,498,079
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets -0- 1,250,000 1,250,000 100
Capital expenditures (21,217) (882,644) (1,032,362) (777,563)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (21,217) 367,356 217,638 (777,463)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 9
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, March 31,
------------------------- -------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayments)
of financing agreement 701,720 -0- 2,191,213 1,230,256
Repayments of long-term debt (226,000) (1,301,487) (6,613,404) (5,974,149)
Proceeds from long-term debt -0- -0- 3,273,871 3,918,000
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 475,720 (1,301,487) (1,148,320) (825,893)
- --------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (27,144) (98,386) (98,952) (105,277)
CASH, at beginning of year 27,144 126,096 126,096 231,373
- --------------------------------------------------------------------------------------------------------------
CASH, at end of year $ -0- $ 27,710 $ 27,144 $ 126,096
==============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $150,818 $ 91,934 $ 497,583 $ 349,007
==============================================================================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
INDE contributed net assets of IndeNet, Inc. with a net book value of
$1,684,438 as additional paid-in capital during September 1997 (Note 5).
During fiscal 1997, the Companies purchased equipment through an affiliate
totaling $1,114,805. The transaction resulted in an increase in intercompany
payables.
See accompanying notes to combined financial statements
8
<PAGE> 10
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF DESCRIPTION OF BUSINESS
SIGNIFICANT
ACCOUNTING Mediatech, Inc. ("Mediatech") and Starcom
POLICIES Television Services, Inc. ("Starcom") (collectively
the "Companies") are primarily duplicators and
distributors of video-based program materials. The
Companies' customers are located throughout the
United States and are serviced by four operating
facilities located in Chicago, Illinois; New York,
New York; North Hollywood, California; and
Louisville, Kentucky.
The Companies are wholly-owned subsidiaries of
IndeNet, Inc. ("INDE"). The results of the
Companies' operations are included in the
consolidated results of operations of INDE.
Mediatech was acquired by IndeNet on February 3,
1995, resulting in the step-up of equipment to its
fair value by $4.9 million and in goodwill of $4.1
million. Starcom was acquired by IndeNet on
February 7, 1996, resulting in the step-up of
equipment to its fair value by $2.9 million and in
goodwill of $2.0 million.
During September 1996, INDE contributed the net
assets of its IndeNet Digital Network Division,
amounting to $1,684,438, to Mediatech. The
transaction was recorded as an addition to paid-in-
capital by Mediatech. The IndeNet Digital Network
Division began operations in June 1995 and the
results of those operations are reflected in the
accompanying financial statements since inception.
Mediatech management managed the operations of the
IndeNet Digital Network Division since inception.
On April 3, 1997, Mediatech merged into Starcom.
9
<PAGE> 11
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF PRINCIPLES OF COMBINATION
SIGNIFICANT
ACCOUNTING The combined financial statements include the
POLICIES accounts of Mediatech and Starcom for the years
(CONTINUED) ended March 31, 1997 and 1996. The combined
statement of operations for the year ended March
31, 1996 include Mediatech's results of operations
for the entire fiscal year and Starcom's results of
operations from its acquisition date (February 7,
1996) to March 31, 1996. All significant
intercompany accounts and transactions have been
eliminated.
PUSH-DOWN ACCOUNTING
The financial statements presented reflect the
push-down accounting of INDE's cost of acquiring
both Mediatech and Starcom. This accounting
includes the pushdown of goodwill and asset step-up
adjustments totaling $13.9 million and the related
depreciation and amortization expense.
The push-down treatment also resulted in the
recapitalization of stockholder's equity whereby
the retained earnings (deficit) of Mediatech and
Starcom reflect the accumulated results of
operations from the date that each respective
company was acquired by INDE through the end of
each period presented.
INVENTORIES
Inventories are stated at the lower of cost
(first-in, first-out) or market
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided
using the straight-line method. The estimated
useful lives of all property and equipment are
seven years.
10
<PAGE> 12
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF DEFERRED COSTS
SIGNIFICANT
ACCOUNTING Deferred costs, included in other long-term
POLICIES assets, consist of costs associated with the
(CONTINUED) development of a website. These costs will be
amortized on the straight-line method over the
site's estimated useful life.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Companies' lines of
credit and long-term debt is estimated based on the
quoted market price for the same or similar
financial instruments issued, or on the current
rates offered to the Companies for financial
instruments of the same remaining maturities. The
carrying value of related party receivables and
payables cannot be estimated due to their related
party nature.
GOODWILL
Goodwill is being amortized on a straight-line
basis over 20 years. During the fiscal year ended
March 31, 1997, the Companies wrote down goodwill
by $2.5 million as it was determined that the
carrying value of this asset may not be recoverable
due to changes affecting its realization.
Periodically, using an undiscounted cash flow
method, the Companies evaluate the realization and
period of amortization to determine whether events
and circumstances warrant revised estimates of
amortization and whether the goodwill has
continuing value.
INCOME TAXES
The Companies and INDE file a consolidated federal
income tax return.
11
<PAGE> 13
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF INCOME TAXES (CONTINUED)
SIGNIFICANT
ACCOUNTING Mediatech has signed a tax-sharing agreement with
POLICIES INDE. The terms of the agreement state that
(CONTINUED) Mediatech record a liability payable to INDE in the
amount of the liability due as if Mediatech was an
independent entity. This amount will only be
payable when INDE, after calculating its tax
liabilities on a consolidated basis with the net
operating loss carryforwards, is required to pay
income taxes.
ESTIMATES
The financial statements include estimated amounts
and disclosures based on management's assumptions
about future events. Actual results could differ
from those estimates.
INVESTMENT IN 110 DEVELOPMENT CO.
Mediatech is a limited partner (15% ownership) in
110 Development Co. A board member of Mediatech is
the general partner and an officer is a partner of
110 Development Co. Due to the significant
influence of the Mediatech officer over 110
Development Co.'s operations, Mediatech has
recorded its investment in 110 Development Co.
using the equity method of accounting. This
investment is included in other long-term assets
and amounted to $58,623 and $71,679 at March 31,
1997, and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1997, the Companies adopted Statement of
Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("Statement
121"). Statement 121 requires that long-lived
assets be reviewed for impairment and written down
to fair value whenever events or changes in
circumstances indicate that the carrying value may
not be recoverable.
12
<PAGE> 14
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
SIGNIFICANT
ACCOUNTING The Companies have approximately $2,300,000 of
POLICIES equipment related to the development and
(CONTINUED) implementation of digital satellite technology.
The Companies began placing this equipment into
service during fiscal year 1997 and anticipate
further implementation of this technology during
fiscal year 1998.
For the fiscal year ended March 31, 1997, the
Companies determined that no impairment loss need
be recognized for applicable long-lived assets.
INTERIM FINANCIAL INFORMATION
The interim financial statements for the three
months ended June 30, 1996 and 1997 are unaudited.
In the opinion of management, such statements
reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair
presentation of the results of the interim period.
The results of operations for the three months
ended June 30, 1997 are not necessarily indicative
of the results for the entire year.
13
<PAGE> 15
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
2. PROPERTY AND Property and equipment are stated at cost and
EQUIPMENT consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
------------ -------------------------
1997 1997 1996
-----------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $ -0- $ -0- $ 500,000
Building and improvements -0- -0- 1,352,068
Equipment 13,351,400 13,253,161 12,140,765
Leasehold improvements 346,806 370,742 287,841
Furniture and fixtures 65,741 118,828 134,488
Vehicles 59,596 59,596 59,596
- ----------------------------------------------------------------------------------------------------
13,823,543 13,802,327 14,474,758
Less accumulated depreciation
and amortization 3,724,123 3,084,165 2,217,253
- ----------------------------------------------------------------------------------------------------
$10,099,420 $10,718,162 $12,257,505
</TABLE>
In May 1996, Mediatech sold land and building with
a net book value of $1.03 million for $1.25
million. The gain on the sale, net of disposition
costs, was $128,811.
Depreciation and amortization expense on property
and equipment was $2,407,288 and $1,528,216 for the
years ended March 31, 1997 and 1996, respectively.
3. INCOME TAXES During the fiscal year ended March 31, 1996, the
Companies recorded an income tax provision of
$285,200. During the year ended March 31, 1997, the
Companies recorded an income tax benefit of
$61,000. The provision and payable to INDE in
fiscal 1996 was recorded as if Mediatech was an
independent entity, which realized taxable income
of approximately $734,000. A benefit and
corresponding reduction to that liability was
recorded in fiscal 1997 due to a loss reported by
Mediatech. Starcom also incurred a loss in fiscal
1997, as well as INDE. The provision based on
income before taxes differs from the
14
<PAGE> 16
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
3. INCOME TAXES amount obtained by applying the statutory federal
(CONTINUED) income tax rate to income before taxes as a result
of non-deductible push-down adjustments and net
losses incurred by Starcom and the IndeNet Digital
Network Division. At March 31, 1997 and 1996, the
tax liability payable to INDE was $285,200 and
$224,200 and is included in payables to related
parties.
4. LONG-TERM DEBT Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, March 31,
----------- ----------------------
1997 1997 1996
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
$1,850,000 bank line-of-credit expiring December 31, 1997.
$350,000 of the line bears interest at 8.5%. The
remainder bears interest at the LIBOR rate. The line was
secured by substantially all the assets of Mediatech. The
line was refinanced in February 1997 through another
banking facility. $ -0- $ -0- $1,850,000
Line of credit, interest at the bank's prime rate plus 3%. Borrowings
may not exceed $2,000,000 with availability limited based on
various factors. The agreement was to expire on January 31, 1998
and was subject to renewal. The line was refinanced in February
1997 through another banking facility. -0- -0- 1,188,605
Line of credit, interest at the bank's prime rate plus 2.25% (10.75% at
March 31, 1997). Interest is due monthly. The maximum amount
available under the agreement is the lesser of $2,925,000 or 80% of
the eligible unbilled accounts receivables plus the lesser of
$600,000 or 80% of the eligible unbilled accounts receivable, as
specified in the agreement. The line is secured by substantially
all the assets of Mediatech and secured by a guaranty from INDE. 2,892,933 2,191,213 -0-
Note payable - bank; bearing interest at 8.04%; due in monthly
installments of $31,550 with a balloon payment due in December
1997 for the remaining balance. The note was secured by
substantially all the assets of Mediatech and was refinanced in
February 1997 through another banking facility. -0- -0- 1,253,868
Mortgage payable - bank; bearing interest at 8.04%; due in monthly
installments of $9,272, with a balloon payment due in December
1997 for the remaining balance. This mortgage was paid-off in
May 1996 as a result of the sale of the office building which
secured the mortgage -0- -0- 759,545
</TABLE>
15
<PAGE> 17
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
4. LONG-TERM DEBT
(CONTINUED)
<TABLE>
<CAPTION>
June 30, March 31,
----------- --------------------------
1997 1997 1996
----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Note payable - bank, bearing interest at prime plus 2.25% (10.75% at
March 31, 1997); due in monthly installments of $41,667 through
March 1, 2002. The line is secured by substantially all the assets
of Mediatech. 2,333,333 2,458,333 -0-
Capital lease obligations payable - due in varying monthly installments
totaling $16,701, including interest, with fixed interest rates
ranging from 11.39% to 18.7% through September 2001. These notes are
secured by the equipment with a net book value of $531,297. 462,084 494,244 -0-
Various notes payable to vendors, interest ranging from 0% to 21.07%,
monthly payments ranging from $400 to $7,000, due through
September 1999. 240,610 309,446 1,147,727
Note payable - bank, bearing interest at prime plus 2.25%
(10.75% at March 31, 1997). The amount available is
$500,000. No advances were outstanding at March 31, 1997. -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
5,928,960 5,453,236 6,199,745
Less current portion 3,847,270 3,163,828 3,418,396
- -----------------------------------------------------------------------------------------------------------------------------
Net long-term portion $2,081,690 $2,289,408 $2,781,349
=============================================================================================================================
</TABLE>
16
<PAGE> 18
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
4. LONG-TERM DEBT At March 31, 1997, maturities of long-term debt are
(CONTINUED) as follows:
Year ending March 31,
---------------------------------------------------
1998 $3,163,828
1999 726,462
2000 567,258
2001 524,776
2002 470,912
---------------------------------------------------
$5,453,236
===================================================
5. RELATED PARTY The Companies had transactions with related
TRANSACTIONS parties as follows:
On September 30, 1996, INDE contributed the net
assets related to the development of its digital
satellite technology with a book value of
$1,684,438, to Mediatech.
The Companies have accounts payable to INDE of
$2,612,074 and $1,616,008 at March 31, 1997 and
1996, which includes equipment purchases of
$1,114,805 from an affiliate under common control
and income tax payable (See Note 3).
6. LEASES The Companies lease office and warehouse facilities
under various operating lease agreements. Certain
of these facilities are owned by 110 Development
Co., 112 Development Co. and 116 Development Co.,
all of which are owned or majority owned by a board
member of INDE. In addition to monthly rentals, the
Companies are responsible for insurance, property
taxes, utilities and normal maintenance of the
facilities.
17
<PAGE> 19
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
6. LEASES Future minimum lease payments under noncancelable
(CONTINUED) operating leases as of March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Related Third
Party Party Total
-----------------------------------------------------
<S> <C> <C> <C>
1998 $531,650 $292,580 $ 824,230
1999 -0- 194,380 194,380
2000 -0- 113,700 113,700
2001 -0- 95,520 95,520
2002 -0- 95,520 95,520
Thereafter -0- 405,960 405,960
-----------------------------------------------------
$531,650 $1,197,660 $1,729,310
=====================================================
</TABLE>
Rental expense on operating leases amounted to
approximately $1,208,000 and $1,062,000 for the
years ended March 31, 1997 and 1996, including
approximately $719,000 and $868,000 for the related
party leases described above.
7. 401(K) PLAN The Companies have a 401(k) defined contribution
plan covering substantially all of their full-time
employees. The Companies contribute a percentage of
participants' contributed earnings to the plan.
Contributions amounted to approximately $34,000 and
$30,000 for the years ended March 31, 1997 and
1996, respectively.
18
<PAGE> 20
Mediatech, Inc. and Starcom Television Services, Inc.
(Wholly Owned Subsidiaries of IndeNet, Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
8. RESTRUCTURING In January 1997, INDE announced details of its
CHARGES business integration plan. This plan called for
cost reduction, merging of INDE's subsidiaries and
centralization of marketing and administrative
functions, among others. In conjunction with the
plan, Mediatech and Starcom recorded restructuring
charges totaling $323,000 in the fourth quarter of
fiscal year 1997.
9. PRO-FORMA The following presents the combined operating
FINANCIAL results of Mediatech and Starcom for the year ended
RESULTS March 31, 1996, assuming Starcom had been combined
for the entire period. Appropriate adjustments
have been made for resulting depreciation and
amortization of goodwill and asset step-up from
the acquisition.
Year ended
Proforma March 31, 1996
Combined (unaudited)
----------------------------------------------
Net sales $22,981,342
Cost of sales 11,259,334
Operating and other expense 14,582,820
Income tax provision 285,200
----------------------------------------------
Net loss $(3,146,012)
==============================================
10. SUBSEQUENT EVENTS On July 18, 1997, the Companies were acquired by
Digital Generation Systems, Inc. from IndeNet for
consideration totaling $25.8 million.
19
<PAGE> 1
EXHIBIT 7.2
THE UNAUDITED CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
DIGITAL GENERATION SYSTEMS, INC. AND MEDIATECH, INC.
The unaudited condensed pro forma combined financial statements give effect to
the transactions described in Item 2, the "Mediatech Acquisition" and the
"Preferred Stock Purchase Agreement" as well as the effect of the acquisition of
PDR Productions, Inc., ("PDR") which the Company completed on November 11, 1996
(see also the Company's Form 8-K/A filed January 21, 1997) under the purchase
method of accounting. The condensed pro forma combined balance sheet assumes the
Mediatech Acquisition and the Preferred Stock Purchase Agreement were completed
on June 30, 1997 and combines the registrant's unaudited balance sheet with
Mediatech's unaudited balance sheet at that date as well as the net proceeds of
the Preferred Stock Purchase Agreement. The condensed pro forma combined
statements of operations assume that the Mediatech acquisition took place as of
the beginning of the periods presented and combine the registrant's statement of
operations for the year ended December 31, 1996, the pro forma impact of the
registrant's PDR Acquisition for the year ended December 31, 1996, and the
registrant's unaudited statement of operations for the six months ended June 30,
1997 with the statement of operations of Mediatech for the fiscal year ended
March 31, 1997 and the unaudited statement of operations of Mediatech for the
six calendar months ended June 30, 1997.
The condensed pro forma information is presented for illustrative purposes only
and is not necessarily indicative of operating results or financial position
that would have occurred if the acquisition had been consummated as of the dates
indicated, nor is it necessarily indicative of future operating results or
financial position.
The condensed pro forma combined financial statements should be read in
conjunction with the historical financial statements and the related notes of DG
Systems, which were previously reported in the Annual Report on Form 10-K and
the Quarterly Report on Form 10-Q for the six months ended June 30, 1997, and
the audited combined financial statements of Mediatech, Inc. and Starcom
Television Services, Inc. for the years ended March 31, 1997 and 1996 and the
unaudited combined financial statements of Mediatech, Inc. and Starcom
Television Services, Inc. for the three months ended June 30, 1997 and 1996.
<PAGE> 2
DIGITAL GENERATION SYSTEMS, INC. AND MEDIATECH, INC.
CONDENSED PRO FORMA COMBINED BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
CONSOLIDATED HISTORICAL PRO FORMA PRO FORMA
DG SYSTEMS(a) MEDIATECH ADJUSTMENTS COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,231 $ - $(14,289)(b) $ 8,990
14,048 (g)
Short-term investments 5,947 - 5,947
Accounts receivable, net 3,890 5,451 9,341
Prepaid expenses and other 382 430 812
-------- -------- -------- --------
Total current assets 19,450 5,881 (241) 25,090
-------- -------- -------- --------
PROPERTY AND EQUIPMENT, at cost:
Network equipment 21,169 13,351 (3,428)(f) 28,929
(2,163)(e)
Office furniture and equipment 2,301 125 (118)(f) 2,308
Leasehold improvements 386 347 (178)(f) 555
-------- -------- -------- --------
23,856 13,823 (5,887) 31,792
Less - Accumulated depreciation and amortization (11,309) (3,724) 3,724 (f) (11,309)
-------- -------- -------- --------
Property and equipment, net 12,547 10,099 (2,163) 20,483
-------- -------- -------- --------
GOODWILL AND OTHER ASSETS, net 8,446 3,152 13,751 (f) 25,349
-------- -------- -------- --------
$ 40,443 $ 19,132 $ 11,347 $ 70,922
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 921 $ 3,701 $ $ 4,622
Accrued liabilities 2,397 445 2,842
Lines of credit 2,893 2,893
Note payable from PDR acquisition 2,500 - 2,500
Current portion of long-term debt 5,166 954 1,401 (c) 7,521
-------- -------- -------- --------
Total current liabilities 10,984 7,993 1,401 20,378
-------- -------- -------- --------
LONG-TERM DEBT, net of current portion 9,067 2,082 3,049 (c) 14,198
-------- -------- -------- --------
SHAREHOLDERS' EQUITY:
Convertible preferred stock 14,048 (g) 14,048
Common stock 55,188 15,804 (15,804)(f) 57,094
1,906 (d)
Receivable from issuance of common stock (175) - (175)
Accumulated deficit (34,621) (6,747) 6,747 (34,621)
-------- -------- -------- --------
Total shareholders' equity 20,392 9,057 6,897 36,346
-------- -------- -------- --------
$ 40,443 $ 19,132 $ 11,347 $ 70,922
======== ======== ======== ========
</TABLE>
See accompanying notes to the condensed pro forma combined financial statements.
<PAGE> 3
DIGITAL GENERATION SYSTEMS, INC. AND MEDIATECH, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
CONSOLIDATED HISTORICAL PRO FORMA PRO FORMA
DG SYSTEMS(a) MEDIATECH ADJUSTMENTS COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 10,011 $ 11,946 $ - $ 21,957
-------- -------- -------- --------
COSTS AND EXPENSES:
Delivery and material costs 3,288 5,949 9,237
Customer operations 4,239 4,030 8,269
Sales and marketing 2,141 514 2,655
Research and development 1,268 111 1,379
General and administrative 1,241 678 1,919
Depreciation and amortization 3,733 1,297 336 (i) 5,366
Restructuring expense 323 323
-------- -------- -------- --------
Total expenses 15,910 12,902 336 29,148
-------- -------- -------- --------
INCOME/(LOSS) FROM OPERATIONS (5,899) (956) (336) (7,191)
OTHER INCOME (EXPENSE):
Other income - 71 71
Interest income 466 - 466
Interest expense (1,064) (287) (131)(h) (1,482)
-------- -------- -------- --------
NET INCOME (LOSS) $ (6,497) $ (1,172) $ (467) $ (8,136)
======== ======== ======== ========
NET LOSS PER SHARE $ (0.55) $ (0.69)
======== ========
WEIGHTED AVERAGE
COMMON AND COMMON
EQUIVALENT SHARES 11,710 11,710
======== ========
</TABLE>
See notes to the condensed pro forma combined financial statements.
<PAGE> 4
DIGITAL GENERATION SYSTEMS, INC., PDR PRODUCTIONS, INC. AND MEDIATECH, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
PDR AND PRO FORMA
HISTORICAL PRO FORMA CONSOLIDATED HISTORICAL PRO FORMA PRO FORMA
DG SYSTEMS ADJUSTMENTS DG SYSTEMS MEDIATECH ADJUSTMENTS COMBINED
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 10,523 $ 6,409 $ 16,932 $ 23,341 $ $ 40,273
-------- -------- -------- -------- ------- --------
COSTS AND EXPENSES:
Delivery and material costs 3,084 1,584 4,668 10,532 15,200
Customer operations 4,164 3,141 7,305 8,358 15,663
Sales and marketing 3,998 449 4,447 1,205 5,652
Research and development 2,092 -- 2,092 755 2,847
General and administrative 1,677 975 2,652 1,717 4,369
Depreciation and amortization 4,331 179 4,510 2,673 574(i) 7,757
365(j) 365 365
Write down of goodwill 2,500 (2,500)(l) --
Restructuring charges 323 323
-------- -------- -------- -------- ------- --------
Total expenses 19,346 6,693 26,039 28,063 (1,926) 52,176
-------- -------- -------- -------- ------- --------
INCOME/(LOSS) FROM OPERATIONS (8,823) (284) (9,107) (4,722) 1,926 (11,903)
OTHER INCOME (EXPENSE):
Other Income -- -- -- 263 263
Interest income 1,422 (383)(k) 1,039 -- 1,039
Interest expense (1,726) -- (1,726) (444) (349)(h) (2,519)
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) BEFORE TAX (9,127) (667) (9,794) (4,903) 1,577 (13,120)
INCOME TAX BENEFIT -- -- -- 61 -- 61
-------- -------- -------- -------- -------- --------
NET INCOME $ (9,127) $ (667) $ (9,794) $ (4,842) $ 1,577 $(13,059)
======== ======== ======== ======== ======= ========
NET LOSS PER SHARE $ (0.79) $ (0.84) $ (1.13)
======== ======== ========
WEIGHTED AVERAGE
COMMON AND COMMON
EQUIVALENT SHARES 11,594 11,594 11,594
======== ======== ========
</TABLE>
See accompanying notes to the condensed pro forma combined financial statements.
<PAGE> 5
DIGITAL GENERATION SYSTEMS INC. AND MEDIATECH, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Historical Consolidated DG Systems balances and operating results for
the period ended June 30, 1997 include the balances and the operating
results of PDR Productions, Inc.
(b) Represents cash used to fund the Mediatech Acquisition payment, which
aggregated approximately $14 million plus and an additional $300,000 for
deal costs, primarily legal and other professional fees.
(c) Represents promissory notes issued for the Mediatech purchase. The $2.2
million Company Note is payable in equal quarterly installments of
$150,000 beginning 10/1/97. The $2.2 million Baur Note has an initial
payment of $350,000 due July 30, 1997 and subsequent quarterly
installments of $200,000 beginning January 1, 1998.
(d) Represents the value of common stock issued to IndeNet in connection
with the Mediatech purchase (324,355 shares at $5.85 per share).
(e) Approximately $2.2 million of fixed assets related to Mediatech's entry
into the electronic distribution market are to be written off based on
the Company's determination that such assets had no realizable value due
to DG Systems' existing network structure.
(f) Estimated valuation adjustments, including reversal of the Historical
Mediatech Goodwill balance, resulting from the preliminary allocation of
the purchase price and the elimination of stockholders' equity. The
aggregate purchase price (including acquisition costs and assumed debt)
is estimated to be approximately $25.8 million.
(g) Represents the net proceeds of the Stock Purchase Agreement. A total of
4,950,495 shares at $3.535 per share were issued, less 14% of the gross
proceeds which remains in escrow contingent upon the the Company meeting
certain sales and performance goals by December 31, 1997. Proceeds are
also net of broker fees of approximately $900,000 and legal fees of
approximately $100,000.
(h) Interest expense associated with the Company Note ($2.2 million at 9%
per annum) and the Baur Note ($2.2 million at 9% per annum) for the
purchase of Mediatech.
(i) Estimated net increase in amortization of the excess of cost over fair
value of Mediatech's net assets acquired assuming the acquisition had
taken place on the first day of the fiscal year period presented. Excess
of cost over fair value of net assets acquired is being amortized by the
straight-line method over twenty years.
(j) Estimated amortization of the excess of cost over fair value of net
assets acquired of PDR assuming the acquisition had taken place on the
first day of the fiscal year period presented. Excess of cost over fair
value of net assets acquired is being amortized by the straight-line
method over twenty years.
(k) Reduction of interest income due to the use of cash to fund the
acquisition of PDR.
(l) Reversal of valuation adjustment recorded based on assessment of
realizability prior to the acquisition of Mediatech by DG Systems.
In the future, Mediatech and PDR will be subject to approximately
the same income tax rates as DG Systems.
