<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 8, 1996
---------------------------
DIGITAL GENERATION SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 0-27644 94-3140772
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) file no.) Identification No.)
875 Battery Street, San Francisco, California 94111
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number: (415) 276-6600
---------------------------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
The registrant, PDR Productions, Inc. a New York corporation ("PDR"), and
Pat DeRosa, an officer and director and the sole stockholder of PDR, are parties
to a Stock Purchase Agreement dated as of October 15, 1996, as amended (the
"Purchase Agreement"). On November 8, 1996, the registrant acquired all of the
outstanding stock of PDR from Mr. DeRosa pursuant to the Purchase Agreement. The
negotiated value of PDR shares acquired was approximately $9.0 million, subject
to adjustment in accordance with the Purchase Agreement based on the results of
a post-closing audit of PDR. The registrant paid for the PDR shares acquired by
delivering $6.5 million in cash from its working capital and issuing to Mr.
DeRosa a promissory note bearing interest at 8.0% per annum payable at maturity
one year from the closing date.
Prior to this transaction, no material relationship existed between PDR and
the registrant or any of its affiliates, any officer or director of the
registrant, or any associate of any such director or officer.
PDR is engaged in the business of media duplication and distribution, and
the registrant intends to continue this business.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired
The audited financial statements of PDR for the years ended December
31, 1993, 1994 and 1995 and the unaudited financial statements of PDR for the
nine-month periods ended September 30, 1995 and 1996 are attached hereto as
Exhibit 7.1.
(b) Pro Forma Financial Information
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 October 15, 1996, among
Digital Generation Systems, Inc., PDR Productions, Inc. and
Pat DeRosa.
2.2** Amendment to Stock Purchase Agreement dated November 8,
1996, among Digital Generation Systems, Inc., and Pat
DeRosa.
7.1*** Audited financial statements of PDR Productions, Inc. for
the years ending December 31, 1993, 1994 and 1995; unaudited
financial statements of PDR Productions, Inc. for the
nine-month periods ended September 30, 1995 and 1996.
7.2*** Unaudited condensed pro forma combined financial statements
of Digital Generation Systems, Inc. and PDR Productions,
Inc.
- ------------------
* Incorporated by reference to Exhibit 10.25 to the
registrant's Quarterly Report on Form 10-Q filed November
13, 1996.
** Previously filed.
*** Filed herewith.
<PAGE> 3
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 hereunto duly authorized.
DIGITAL GENERATION SYSTEMS, INC.
(Registrant)
Date: January 21, 1997 By: /s/ Thomas P. Shanahan
--------------------------------
Thomas P. Shanahan,
Chief Financial Officer
<PAGE> 1
EXHIBIT 7.1
PDR PRODUCTIONS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE> 2
PDR PRODUCTIONS, INC.
CONTENTS
DECEMBER 31, 1995
================================================================================
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS:
Balance Sheet 2
Statement of Operations 3
Statement of Shareholder's Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6 - 10
</TABLE>
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
To the Shareholder of
PDR Productions, Inc.
We have audited the accompanying balance sheets of PDR Productions, Inc. as of
December 31, 1993, 1994 and 1995, and the related statements of operations,
shareholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 PDR Productions, Inc. as of
December 31, 1993, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
October 21, 1996
<PAGE> 4
PDR PRODUCTIONS, INC.
BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash (Note 1) $ 88,242 $ 34,636 $ 40,065 $ 54,428
Accounts receivable, net of
allowance for doubtful accounts
of $15,000 1,042,024 1,298,368 1,325,922 1,110,294
Due from shareholder (Note 4) 3,000 -- 39,500 --
Prepaid expenses 6,473 10,875 19,083 8,574
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,139,739 1,343,879 1,424,570 1,173,296
Property and Equipment, at cost,
net of accumulated depreciation
and amortization (Notes 1 and 2) 609,121 590,602 512,136 588,579
Security Deposits 31,255 31,255 31,255 31,255
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,780,115 $1,965,736 $1,967,961 $1,793,130
========================================================================================================
LIABILITIES AND
SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 263,604 $ 321,009 $ 355,966 $ 235,304
Other current liabilities (Note 3) 50,959 50,412 100,879 111,463
Due to shareholder (Note 4) -- 96,800 -- --
Deferred income taxes payable
(Notes 1 and 7) 27,000 26,000 22,000 --
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 341,563 494,221 478,845 346,767
- --------------------------------------------------------------------------------------------------------
Deferred Income Taxes Payable
(Notes 1 and 7) 6,000 6,000 6,000 7,000
- --------------------------------------------------------------------------------------------------------
Commitments (Note 5)
Shareholder's Equity:
Common stock - no par value;
authorized 200 shares, issued
and outstanding 180 shares 2,000 2,000 2,000 2,000
Retained earnings 1,430,552 1,463,515 1,481,116 1,437,363
- --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY 1,432,552 1,465,515 1,483,116 1,439,363
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $1,780,115 $1,965,736 $1,967,961 $1,793,130
========================================================================================================
</TABLE>
See Notes to Financial Statements
2
<PAGE> 5
PDR PRODUCTIONS, INC.
STATEMENT OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1993 1994 1995 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales (Note 1) $7,128,799 $8,241,836 $7,863,548 $5,568,876 $5,415,926
Cost of goods sold 4,852,375 5,810,162 5,861,106 4,267,777 4,139,293
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 2,276,424 2,431,674 2,002,442 1,301,099 1,276,633
Selling, general and administrative
expenses 2,235,972 2,351,711 1,952,841 1,436,100 1,290,386
- ------------------------------------------------------------------------------------------------------------------------
Income before provision for income
taxes 40,452 79,963 49,601 (135,001) (13,753)
Provision for income taxes (Notes 1 and 7) 53,000 47,000 32,000 23,000 30,000
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12,548) $ 32,963 $ 17,601 $ (158,001) $ (43,753)
========================================================================================================================
Net income (loss) per common share $ (69.71) $ 183.13 $ 97.78 $ (877.78) $ (243.07)
========================================================================================================================
Number of common shares outstanding
(Note 1) 180 180 180 180 180
========================================================================================================================
Pro forma information (unaudited) (Note 7):
Net income (loss) $ (11,548) $ 21,963 $ 8,601 $ (118,001) $ (38,753)
========================================================================================================================
Net income (loss) per common share $ (64.16) $ 122.02 $ 47.78 $ (655.56) $ (215.29)
========================================================================================================================
Number of common shares outstanding
(Note 1) 180 180 180 180 180
========================================================================================================================
</TABLE>
See Notes to Financial Statements
3
<PAGE> 6
PDR PRODUCTIONS, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
NUMBER OF RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 180 $2,000 $1,443,100 $1,445,100
Net loss -- -- (12,548) (12,548)
- ----------------------------------------------------------------------------------------------
Balance at December 31, 1993 180 2,000 1,430,552 1,432,552
Net income -- -- 32,963 32,963
- ----------------------------------------------------------------------------------------------
Balance at December 31, 1994 180 2,000 1,463,515 1,465,515
Net income -- -- 17,601 17,601
- ----------------------------------------------------------------------------------------------
Balance at December 31, 1995 180 2,000 1,481,116 1,483,116
(Unaudited):
Net loss -- -- (43,753) (43,753)
- ----------------------------------------------------------------------------------------------
Balance at September 30, 1996 180 $2,000 $1,437,363 $1,439,363
==============================================================================================
</TABLE>
See Notes to Financial Statements
4
<PAGE> 7
PDR PRODUCTIONS, INC.
STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1993 1994 1995 1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (12,548) $ 32,963 $ 17,601 $(158,001) $ (43,753)
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Depreciation and amortization 239,652 246,695 206,477 154,858 152,459
Deferred portion of provision for
income taxes -- (1,000) (4,000) (21,000)
Changes in operating assets
and liabilities:
(Increase) decrease in accounts
receivable 30,100 (256,344) (27,554) 237,084 215,628
(Increase) decrease in prepaid
expenses 50 (4,402) (8,208) (40,998) 10,509
Increase (decrease) in accounts payable 70,735 57,405 34,957 (44,021) (120,662)
Increase (decrease) in other current
liabilities 23,874 (547) 50,467 79,742 10,584
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 351,863 74,770 269,740 228,664 203,765
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment -
net (316,520) (228,176) (128,011) (94,846) (228,902)
Loans from (to) shareholder (3,000) 99,800 (136,300) (96,800) 39,500
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES (319,520) (128,376) (264,311) (191,646) (189,402)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 32,343 (53,606) 5,429 37,018 14,363
Cash at beginning of period 55,899 88,242 34,636 34,636 40,065
- --------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 88,242 $ 34,636 $ 40,065 $ 71,654 $ 54,428
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period
for income taxes $ 40,503 $ 57,500 $ 48,243 $ 36,573 $ 14,675
================================================================================================================================
</TABLE>
See Notes to Financial Statements
5
<PAGE> 8
PDR PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
================================================================================
1. BUSINESS PDR Productions, Inc. (the "Company") provides
ACTIVITY AND video and audio duplication and distribution to
SIGNIFICANT advertising agencies, cable networks and
ACCOUNTING syndicators primarily in the New York City
POLICIES: metropolitan area.
Revenue is recognized when services are performed.
Depreciation and amortization of property and
equipment is provided for by the straight-line
method over the estimated useful lives of the
related assets.
For income tax purposes, the shareholder has
elected that the Company be treated as a small
business corporation (S Corporation) under the
applicable sections of the Internal Revenue Code
and New York State corporate franchise tax law.
Accordingly, there is no provision for federal
income taxes as earnings of the Company flow
through directly to its shareholder. The Company
is subject to New York State income taxes at
reduced rates as well as local income taxes.
The Company maintains its cash in bank deposit
accounts which, at times, exceed federally insured
limits. The Company has not experienced any losses
in such accounts. The Company believes it is not
exposed to any significant credit risk on cash.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimates by
management affecting the reported amounts of
assets and liabilities and revenue and expenses
and the disclosure of contingent assets and
liabilities. Actual results could differ from
these estimates.
The accompanying unaudited interim financial
statements include all adjustments (consisting
only of those of a normal recurring nature) which,
in the opinion of management, are necessary for a
fair presentation of the results of the interim
periods.
Income taxes are based upon amounts included in
the statement of operations. Deferred income taxes
result from the differences between the time
certain income and expenses are recognized for
financial reporting purposes and the time when the
items are actually reported for income tax
purposes.
Net income (loss) per common share is calculated
by dividing net income (loss) by the number of
shares of common stock outstanding during each
period.
6
<PAGE> 9
PDR PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
================================================================================
2. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the
following:
<TABLE>
<CAPTION>
December 31, September 30, Estimated
1993 1994 1995 1996 Useful Life
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Machinery and
equipment $ 1,692,011 $ 1,875,480 $ 1,998,681 $ 2,221,415 5 to 7 years
Furniture and
fixtures 78,928 87,428 92,238 99,590 7 years
Automobiles 72,518 72,518 72,518 31,476 5 years
Leasehold
improvements 7,764 43,971 43,971 43,971 Life of lease
-----------------------------------------------------------------------------------------
1,851,221 2,079,397 2,207,408 2,396,452
Less accumulated
depreciation and
amortization (1,242,100) (1,488,795) (1,695,272) (1,807,873)
-----------------------------------------------------------------------------------------
$ 609,121 $ 590,602 $ 512,136 $ 588,579
=========================================================================================
</TABLE>
3. OTHER CURRENT Other current liabilities consist of the following:
LIABILITIES:
<TABLE>
<CAPTION>
December 31, September 30,
1993 1994 1995 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued professional fees $ 5,379 $13,185 $ 15,000 $ 19,371
Accrued payroll -- -- 18,547 28,302
Profit-sharing plan contribution
payable -- -- 20,000 --
Income taxes payable 11,325 1,425 -- 24,913
Payroll taxes payable 21,102 25,546 25,069 27,240
Sales taxes payable 13,153 10,256 9,437 11,637
Other -- -- 12,826 --
----------------------------------------------------------------------------------------
$50,959 $50,412 $100,879 $111,463
========================================================================================
</TABLE>
4. RELATED PARTY During the years ended December 31, 1993 and 1995,
TRANSACTIONS: the Company provided the shareholder with a
short-term, noninterest-bearing loan amounting to
$3,000 and $39,500, respectively.
During the year ended December 31, 1994, the
shareholder provided the Company with a short-term,
noninterest-bearing loan amounting to $96,800.
7
<PAGE> 10
PDR PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
================================================================================
5. COMMITMENTS: The Company leases office space under
noncancelable operating leases.
The future minimum rental payments under these
leases are as follows:
<TABLE>
<S> <C>
Three-month period ending December 31, 1996 $ 87,000
Year ending December 31, 1997 362,000
-----------------------------------------------------------------------
$449,000
=======================================================================
</TABLE>
Each lease is subject to escalation for the
Company's share of increases in real estate tax
and related expenses. Rent expense charged to
operations amounted to approximately $239,000,
$269,000 and $356,000 for the years ended December
31, 1993, 1994 and 1995, respectively, and
approximately $263,000 and $272,000 for the
nine-month periods ended September 30, 1995 and
1996, respectively.
6. PROFIT- The Company maintains a profit-sharing plan
SHARING covering all eligible employees. Contributions are
PLAN: funded as accrued and determined at the discretion
of the Company. Contributions to the plan charged
to operations for the years ended December 31,
1993 and 1995 and the nine-month period ended
September 30, 1995 amounted to $71,379, $22,200
and $2,200, respectively. No contributions were
made or charged to operations during the year
ended 1994 and the nine-month period ended
September 30, 1996. The shareholder and an officer
are the trustees of the plan.
7. INCOME TAXES: The tax effects of temporary differences that give
rise to the net deferred income taxes payable are
presented below:
<TABLE>
<CAPTION>
December 31, September 30,
1993 1994 1995 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts receivable $27,000 $26,000 $22,000 --
Property and equipment 6,000 6,000 6,000 $7,000
----------------------------------------------------------------------------------------
DEFERRED INCOME
TAXES PAYABLE $33,000 $32,000 $28,000 $7,000
========================================================================================
</TABLE>
8
<PAGE> 11
PDR PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
================================================================================
The provision for income taxes consists of the following
components:
<TABLE>
<CAPTION>
Nine-month period
Year ended December 31, ended September 30,
1993 1994 1995 1995 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State and local
income taxes:
Current $53,000 $48,000 $36,000 $23,000 $ 51,000
Deferred -- (1,000) (4,000) -- (21,000)
-----------------------------------------------------------------------------------------
TOTAL PROVISION
FOR INCOME TAXES $53,000 $47,000 $32,000 $23,000 $ 30,000
=========================================================================================
</TABLE>
The provision for income taxes differs from the amount
computed using the federal statutory rate of 34% as a
result of the following:
<TABLE>
<CAPTION>
Nine-month period
Year ended December 31, ended September 30,
1993 1994 1995 1995 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax at federal
statutory rate 34 % 34 % 34 % (34)% (34)%
Flow-through of S
Corporation taxable
income to shareholder (34) (34) (34) 34 34
State and local
income taxes 131 59 64 (17) (218)
-----------------------------------------------------------------------------------------
131 % 59 % 64 % (17)% (218)%
=========================================================================================
</TABLE>
Pro forma net income (loss) reflects an income tax
provision (benefit) for the years ended December 31, 1993,
1994 and 1995 and the nine-month periods ended September
30, 1995 and 1996 as if the Company had not elected S
Corporation status.
Pro forma net income (loss) for the years ended December
31, 1994 and 1995 reflects an additional income tax
provision of approximately $11,000 and $9,000,
respectively.
Pro forma net loss for the year ended December 31, 1993
and the nine-month periods ended September 30, 1995 and
1996 reflects an income tax benefit of approximately
$1,000, $40,000 and $5,000, respectively.
9
<PAGE> 12
PDR PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
================================================================================
8. SUBSEQUENT On October 16, 1996, the shareholder of the Company
EVENT: entered into an agreement to sell 100% of his common stock
to Digital Generation Systems, Inc. for an estimated
purchase price of $8,500,000, subject to various
post-closing adjustments.
10
<PAGE> 1
EXHIBIT 7.2 UNAUDITED CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
OF DIGITAL GENERATION SYSTEMS, INC. AND PDR PRODUCTIONS, INC.
The unaudited condensed pro forma combined financial statements give effect to
the acquisition described in Item 2 (the "Acquisition") under the purchase
method of accounting. The condensed pro forma combined balance sheet assumes the
acquisition took place on September 30, 1996 and combines the registrant's
unaudited balance sheet with PDR's unaudited balance sheet at that date. The
condensed pro forma combined statements of operations assume that the
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, 1995
and the registrant's unaudited statement of operations for the nine months ended
September 30, 1996 with the statement of operations of PDR for the year ended
December 31, 1995 and the unaudited statement of operations of PDR for the nine
months ended September 30, 1996.
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 Registration Statement on Form
S-1 and the Quarterly Report on Form 10-Q for the nine months ended September
30, 1996, and the December 31, 1995 financial statements and related notes of
PDR (see Item 7 (a)).
<PAGE> 2
DIGITAL GENERATION SYSTEMS INC. AND PDR PRODUCTIONS INC.
CONDENSED PRO FORMA COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO
HISTORICAL PDR FORMA PRO FORMA
DG SYSTEMS PRODUCTIONS ADJUSTMENTS COMBINED
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,418 $ 54 $(6,899)(a) $ 9,573
Short-term investments 12,968 -- 12,968
Accounts receivable, net 1,763 1,110 2,873
Prepaid expenses and other 323 9 332
-------- ------- ------- --------
Total current assets 31,472 1,173 (6,899) 25,746
-------- ------- ------- --------
PROPERTY AND EQUIPMENT, at cost: 16,079 2,397 (1,808)(c) 16,668
Less - Accumulated depreciation
and amortization (6,569) (1,808) 1,808 (c) (6,569)
-------- ------- ------- --------
Property and equipment, net 9,510 589 0 10,099
-------- ------- ------- --------
OTHER ASSETS, net 687 31 7,960 (c) 8,678
-------- ------- ------- --------
$ 41,669 $ 1,793 $ 1,061 $ 44,523
======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 445 $ 235 $ $ 680
Accrued liabilities 1,880 1,880
Notes payable 2,500 (b) 2,500
Current portion of long-term debt 3,034 112 3,146
-------- ------- ------- --------
Total current liabilities 5,359 347 2,500 8,206
-------- ------- ------- --------
LONG-TERM DEBT, net of current portion 7,246 7,246
-------- ------- ------- --------
DEFERRED INCOME TAXES PAYABLE 7 7
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value --
Authorized -- 5,000,000 shares at
September 30, 1996
Outstanding -- none outstanding at
September 30, 1996
Common stock, no par value -- 55,108 2 (2)(c) 55,108
Authorized
-- 30,000,000 shares Outstanding
-- 11,623,807 shares at
September 30, 1996
Receivable from issuance of common stock (175) (175)
Accumulated deficit (25,869) 1,437 (1,437)(c) (25,869)
-------- -------- -------- -------
Total shareholders' equity 29,064 1,439 (1,439) 29,064
-------- -------- -------- -------
$ 41,669 $ 1,793 $ 1,061 $ 44,523
======== ======== ======== ========
</TABLE>
See accompanying notes to the pro forma condensed financial statements.
<PAGE> 3
DIGITAL GENERATION SYSTEMS INC. AND PDR PRODUCTIONS INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
DG PDR PRO FORMA PRO FORMA
SYSTEMS PRODUCTIONS ADJUSTMENTS COMBINED
--------- --------- ---------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 6,518 $ 5,416 $ $11,934
------- ------- ------- -------
COSTS AND EXPENSES:
Delivery and material costs 2,021 1,339 3,360
Customer operations 2,772 2,655 5,427
Sales and marketing 2,858 385 3,243
Research and development 1,527 -- 1,527
General and administrative 1,187 928 2,115
Depreciation and amortization 2,955 153 320 (d) 3,428
------- -------- ----- -------
Total expenses 13,320 5,460 320 19,100
------- -------- ----- -------
INCOME/(LOSS) FROM OPERATIONS (6,802) (44) (320) (7,166)
------- -------- ------ -------
OTHER INCOME (EXPENSE):
Interest income 1,096 (336)(e) 760
Interest expense (1,166) (1,166)
------- -------- ------- -------
NET INCOME (LOSS) $(6,872) $ (44) $ (656) $(7,572)
------- -------- -------- ------
PRO FORMA NET LOSS PER SHARE $ (0.59) $(243.07) $ (0.65)
======= ======== ======
PRO FORMA WEIGHTED AVERAGE
COMMON AND COMMON 11,577 180 (180)(c) 11,577
EQUIVALENT SHARES ======= ======== ========== ======
</TABLE>
See accompanying notes to the pro forma condensed financial statements.
<PAGE> 4
DIGITAL GENERATION SYSTEMS INC. AND PDR PRODUCTIONS INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
DG PDR PRO FORMA PRO FORMA
SYSTEMS PRODUCTIONS ADJUSTMENTS COMBINED
---------- ---------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 5,144 $ 7,864 $ $13,008
-------- ------- ----- -------
COSTS AND EXPENSES:
Delivery and material costs 1,810 2,133 3,943
Customer operations 2,974 3,533 6,507
Sales and marketing 3,406 583 3,989
Research and development 1,590 -- 1,590
General and administrative 1,380 1,392 2,772
Depreciation and amortization 2,345 206 426 (d) 2,977
------- ------- ----- -------
Total expenses 13,505 7,847 426 21,778
------- ------- ----- -------
INCOME/(LOSS) FROM OPERATIONS (8,361) 17 (426) (8,770)
------- ------- ----- -------
OTHER INCOME (EXPENSE):
Interest income 417 (324)(e) 93
Interest expense (836) (200)(f) (1,036)
------- ------- ----- -------
NET INCOME (LOSS) $(8,780) $ 17 $(950) $(9,713)
======= ======= ===== =======
PRO FORMA NET LOSS PER SHARE $ (0.94) $ 97.78 $ (1.04)
======== ======= =======
PRO FORMA WEIGHTED AVERAGE 9,360 180 (180)(c) 9,360
======= ======= ===== =======
COMMON AND COMMON
EQUIVALENT SHARES
</TABLE>
See accompanying notes to the pro forma condensed financial statements.
<PAGE> 5
DIGITAL GENERATION SYSTEMS INC. AND PDR PRODUCTIONS INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Represents cash used on the acquisition date to fund the acquisition
payment, which aggregated approximately $6.5 million; and an additional
$425,000 for deal costs, primarily legal and other professional fees.
(b) Represents promissory note issued for the PDR purchase. The note is due one
year from the closing which occurred on November 8, 1996.
(c) Estimated valuation adjustments of PDR assets resulting from the preliminary
allocation of the purchase price and the elimination of stockholder's equity.
The aggregate purchase price (including acquisition costs) is estimated to be
approximately $9.4 million.
(d) Estimated amortization of the excess of cost over net assets acquired
assuming the acquisition had taken place on the first day of the fiscal year
period presented. Excess of cost over net assets acquired is being amortized by
the straight-line method over twenty years.
(e) Reduction of interest income due to the use of cash to fund the acquisition.
(f) Interest expense associated with the promissory note ($2.5 million 8% per
annum) issued for purchase of PDR. The note is due one year from the closing
which occurred on November 8, 1996.
In the future, PDR will be subject to approximately the same income tax
rates as DG Systems.
