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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-70045
15,214,220 SHARES
DIGITAL GENERATION SYSTEMS, INC.
COMMON STOCK
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THIS PROSPECTUS RELATES TO THE PUBLIC OFFERING OF 15,214,220 SHARES
OF THE COMMON STOCK OF DIGITAL GENERATION SYSTEMS, INC.
THIS OFFERING IS NOT BEING UNDERWRITTEN.
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INVESTING IN THE COMMON STOCK INVOLVES CONSIDERABLE RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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From time to time, the shares (the "Shares") of Common Stock (the
"Common Stock") may be offered by certain shareholders (the "Selling
Shareholders") of Digital Generation Systems, Inc. ("DG Systems" or the
"Company") in transactions (i) on the Nasdaq National Market, (ii) in privately
negotiated transactions, or (iii) by a combination of such methods of sale. Such
sales may occur at fixed prices that are subject to change, at prevailing market
prices or at negotiated prices.
Selling Shareholders may sell Shares through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholders, the purchasers of the Shares, or
both. Selling Shareholders may also sell Shares to broker-dealers buying for
their own account, and these broker-dealers may receive similar compensation
from such Selling Shareholders. Compensation received by such broker-dealers may
exceed that which is considered customary. See "Selling Shareholders" and "Plan
of Distribution."
DG Systems will not receive any of the proceeds from the sale of the
Shares by the Selling Shareholders. We have agreed to bear certain expenses in
connection with the registration and sale of the Shares being offered by the
Selling Shareholders.
The Selling Shareholders and any broker-dealers or agents that
participate with the Selling Shareholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
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On February 8, 1999, the closing bid price of the Company's Common Stock
on the Nasdaq National Market was $5.75 per share. The Common Stock is traded on
the Nasdaq National Market under the symbol "DGIT."
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THE DATE OF THIS PROSPECTUS IS FEBRUARY 12, 1999
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Prospectus Summary...................................................................... 3
Risk Factors............................................................................ 4
Use of Proceeds......................................................................... 14
Selling Shareholders.................................................................... 15
Plan of Distribution.................................................................... 19
Description of Capital Stock............................................................ 20
Legal Matters........................................................................... 23
Experts................................................................................. 23
Available Information................................................................... 23
Information Incorporated by Reference................................................... 24
</TABLE>
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information appearing elsewhere in this Prospectus and the document incorporated
by reference in this Prospectus.
This Prospectus, including the documents incorporated by reference
herein, contains forward-looking statements. Statements contained in this
Prospectus or incorporated by reference herein that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended ("the Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including
without limitation statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to DG Systems on the date hereof,
and we assume no obligation to update any such forward-looking statements. A
forward-looking statement involves a prediction, the accuracy of which is
subject to risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those set forth in this
Prospectus under "Risk Factors." You should carefully consider the risks
described in the "Risk Factors" section, in addition to the other information
set forth in this Prospectus and incorporated by reference herein, before making
an investment decision.
THE COMPANY
Digital Generation Systems, Inc. ("DG Systems" or the "Company") was
incorporated in 1991. We operate a nationwide multimedia network designed to
provide media distribution and related services to the broadcast industry by
linking content providers to radio and television stations. We primarily provide
electronic and physical distribution of audio and video spot advertising to
radio and television stations, and advertising agencies and production studios
generate most of our revenue. Our principal executive offices are located at 875
Battery Street, San Francisco, California 94111, and our telephone number is
(415) 276-6600.
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RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
addition to the other information contained in this Prospectus, prospective
investors should carefully consider the following risk factors before investing
in the Common Stock. All statements, trend analysis and other information
contained in this Prospectus and in the documents incorporated by reference in
this Prospectus relative to markets for the Company's products and services and
trends in total revenues, gross margin and anticipated expense levels, as well
as other statements incorporating words such as "anticipate," "believe," "plan,"
"estimate," "expect" and "intend" and other similar expressions, constitute
forward-looking statements. These forward-looking statements are subject to
business and economic risks, and our actual results of operations may differ
materially from those contained in the forward-looking statements. The
cautionary statements apply to all forward-looking statements wherever they
appear in this Prospectus and in the documents incorporated by reference in this
Prospectus.
HISTORY OF LOSSES; FUTURE OPERATING RESULTS UNCERTAIN
DG Systems was founded in 1991 and has been unprofitable since its
inception. We expect to continue to generate net losses for much of the next
twelve months. As of September 30, 1998, our accumulated deficit was $88.5
million. Although the Company has recently experienced significant growth, a
significant portion of such growth is due to acquisitions. In addition, such
growth rates may not be sustainable and you should not use such growth rates as
an indication of future sales growth, if any, or as an indication of future
operating results. Our future success also depends in part on obtaining
continued reductions in delivery and service costs, particularly our ability to
continue to automate order processing and to reduce telecommunications costs. As
a result of the foregoing factors, there can be no assurance that our sales will
grow or that our sales will be sustained in future periods. In addition, there
can be no assurance that we will be able to reduce delivery and service costs,
or that we will achieve or sustain profitability in any future period.
DEPENDENCE ON ELECTRONIC VIDEO ADVERTISING DELIVERY SERVICE DEPLOYMENT
We have made a substantial investment in upgrading and expanding our
network operating center and in populating television stations with the units
necessary for the receipt of electronically delivered video advertising content.
However we cannot assure you that the placement of these units will cause this
service to achieve adequate market acceptance among customers that require video
advertising content delivery. Our inability to place units in an adequate number
of stations or our inability to capture market share among content delivery
customers which may be the result of price competition, new product
introductions from competitors or otherwise would seriously harm our business,
operating results and financial position.
In addition, we believe that in order to more fully address the needs of
potential video delivery customers we will need to develop a set of ancillary
services that typically are provided by dub and ship houses. These ancillary
services include physical archiving, closed captioning, modification of slates
and format conversions. Such services will need to be provided on a localized
basis in each of the major cities in which we provide services directly to
agencies and advertisers. We currently have the capability to provide such
services through our facilities in New York, Los Angeles and Chicago. However,
we cannot assure you that we will be able to successfully contract for and
provide these services in each or any major metropolitan area or that we will be
able to provide competitive video distribution services in other U.S. markets.
Also, although we are taking the steps we believe are required to achieve the
network capacity and scalability necessary to deliver video content reliably and
cost effectively as video advertising delivery volume grows, we cannot assure
you that we will achieve such goals and our failure to do so may seriously harm
our business, operating results and financial position. In addition, we may be
unable to retain current audio delivery customers or attract future audio
delivery customers who may ultimately demand delivery of both media content
unless we can successfully continue to develop and provide video transmission
services. The failure to retain such customers could seriously harm our results
of operations and financial condition.
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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. Our marketing task
requires us to overcome buyer inertia related to the diffuse and relatively low
level decision making regarding an agency's choice of delivery services and long
standing relationships with existing 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 such market grows at all. If
the market fails to grow, or grows more slowly than anticipated, our business,
operating results and financial condition would be seriously harmed. Even if the
market does grow, we cannot assure you that our products and services will
achieve commercial success. Although we intend to conform our products and
services to meet existing and emerging standards in the market for the
electronic delivery of digital audio and video transmissions, we cannot assure
you that we will be able to conform our products to such standards in a timely
fashion, or that we be able to conform our products to such standards at all. We
believe that our future growth will depend, in part, on our ability to add these
services and additional customers in a timely and cost-effective manner.
However, we cannot assure you that we will be successful in developing such
services, or in obtaining new customers for such services. See "Dependence on
New Product Introductions." Furthermore, we cannot assure you that we will be
successful 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
expanding and increasing the integration of our network, including our field
receiving equipment and rooftop satellite antennae.
Our marketing efforts to date with regard to our 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. We cannot assure you
that we have correctly identified such markets or that our planned products and
services will address the needs of such markets. Furthermore, we cannot assure
you that our 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
our products and services will require us to overcome significant market
development hurdles, many of which may not currently be foreseen.
OTHER RISKS ASSOCIATED WITH NASDAQ NATIONAL MARKET LISTING QUALIFICATION
The holders of the registered Common Stock of DG Systems currently enjoy
a substantial benefit in terms of liquidity by having such Common Stock listed
on the Nasdaq National Market trading system. This benefit would be lost if we
were to be delisted from the Nasdaq National Market. On November 25, 1998, we
received notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that, on the basis
of our Quarterly Report on Form 10-Q for the quarter ending September 30, 1998,
our net tangible assets had fallen below the level required for continued
inclusion of our common stock on the Nasdaq National Market trading system. On
December 10, 1998, we submitted information to Nasdaq that we had raised
approximately $11 million and, therefore, believed that we were once again in
compliance with all of the requirements for continued listing on the Nasdaq
National Market. Nasdaq subsequently requested additional information regarding
our August 1998 and December 1998 financing activities as well as our
acquisition of substantially all of the assets of Digital Courier International,
Inc. ("DCI") in order to ascertain our compliance with applicable corporate
governance rules. On December 17, 1998, we submitted additional information to
Nasdaq in response to this request. While we believe we are in compliance with
Nasdaq's continued listing requirements and corporate governance rules, we
cannot assure you that Nasdaq will make such a finding or that we will be able
to continue to have our registered Common Stock listed on the Nasdaq National
Market or similar public securities exchange.
UNCERTAINTIES RELATING TO INTEGRATION OF OPERATIONS
We effected the recent acquisitions of PDR Productions, Inc. ("PDR"), a
media duplication and distribution company, Starcom Mediatech, Inc.
("Mediatech"), a company with services typical of a traditional dub and ship
house, and DCI, a supplier of electronic distribution and communications
services for the radio broadcast industry in
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the United States and Canada, with the expectation that such strategic
acquisitions would result in enhanced efficiencies for the combined company. To
date we have not fully completed the integration of PDR, Mediatech or DCI with
DG Systems. Achieving the anticipated benefits of these acquisitions will depend
in part upon whether the integration of the organizations and businesses of PDR,
Mediatech and DCI with those of DG Systems is achieved in an efficient,
effective and timely manner. However, we cannot assure you that such an
integration will occur. The successful integration and expansion of our business
following our acquisition of PDR, Mediatech and DCI requires communication and
cooperation among the senior executives and key technical personnel of DG
Systems, PDR, Mediatech and DCI. Given the inherent difficulties involved in
completing a business combination, we cannot assure you that such cooperation
will occur or that the integration of the respective organizations will be
successful and will not result in disruptions in one or more sectors of our
business. The failure to effectively accomplish the integration of the
operations of PDR, Mediatech and DCI with those of DG Systems could seriously
harm our results of operations and financial condition. In addition, we cannot
assure you that all of our current and potential customers will favorably view
our services as offered through PDR, Mediatech and DCI or that we will realize
any of the other anticipated benefits of the acquisitions. Moreover, as a result
of these acquisitions, certain of our customers may perceive PDR, Mediatech or
DCI to be a competitor, and this could affect such customers' willingness to do
business with us in the future. The loss of significant customers would
seriously harm our results of operations and financial condition.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
We intend to continue making capital expenditures to produce and install
Record Sent Terminals ("RSTs"), ADvantage Receive Playback Terminals ("RPTs"),
Video Record Transmission Systems ("VRTSs") and ADvantage Digital Video Playback
Systems ("DVPS") units and to introduce additional services. In addition, we
continually analyze the costs and benefits of acquiring certain businesses,
products or technologies that we may from time to time identify, and our related
ability to finance such acquisitions. Assuming that we do not pursue one or more
additional acquisitions funded by internal cash reserves, we anticipate that our
existing capital, cash from operations, and funds available under existing term
loan and line of credit agreements should be adequate to satisfy our capital
requirements until the fourth quarter of 1999. However, we cannot assure you
that we will not require additional capital sooner than currently anticipated or
that any such additional funds will be adequate to fund our capital needs, which
capital needs depend upon numerous factors, including:
o the progress of our product development activities;
o the cost of increasing our sales and marketing activities; and
o the amount of revenues generated from operations.
None of the foregoing factors can be predicted with certainty. In addition, we
are unable to predict the precise amount of future capital that we will require,
particularly if we pursue one or more such acquisitions. Furthermore, we can not
assure you that either additional financing will be available to us, or if it is
available, that such additional financing will be available on acceptable terms.
Our inability to obtain financing for such acquisitions on acceptable terms may
prevent us from completing advantageous acquisitions and consequently could
seriously harm our prospects and future rates of growth. Our inability to obtain
additional funding for continuing operations or an acquisition would seriously
harm our business, financial condition and results of operations. Consequently,
we could be required:
o to significantly reduce or suspend our operations,
o to seek a merger partner, or
o to sell additional securities on terms that are highly dilutive to our
existing investors.
DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS
The market for the distribution of digital audio and video transmissions is
characterized by rapidly changing technology. Our success will depend, in part,
on the technological quality of our products and processes relative to those of
our competitors and our ability to develop and introduce new and enhanced
products and services at competitive prices and in a timely and cost-effective
fashion. Our development efforts have been focused on:
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o Satellite transmission technology;
o Video compression technology;
o TV station systems interfaces; and
o Reliability and throughput enhancements to the network.
The growth of our electronic video delivery services also depends on our
ability to obtain reliable and cost-effective satellite delivery capability.
Development efforts in satellite transmission technology are oriented to
development and deployment of software to lower transmission costs and increase
delivery reliability. Development efforts in video compression technology are
directed toward integration of emerging broadcast quality compression systems
within our existing network, thereby continuing to improve picture quality while
maintaining compliance with industry standards. TV station system interface
implementation includes various system control protocols and improvements of the
system throughput and reliability. We have an agreement with Hughes Network
Systems, Inc. ("Hughes") giving us access to Hughes' satellite capacity for
electronic delivery of digital audio and video transmissions by that media. We
have developed and incorporated the software designed to enable the current
DVPSs to receive digital satellite transmissions over the Hughes satellite
system. However, the Hughes satellite system may not have the capacity to meet
our future delivery commitments and broadcast quality requirements on a
cost-effective basis, if at all. See "Dependence on Certain Suppliers."
The introduction of new products can render existing products obsolete or
unmarketable. We may not be successful in identifying, developing, contracting
for the manufacture of, and marketing product enhancements or new products that
respond to technological change. In addition, we may experience difficulties
that could delay or prevent the successful development, introduction and
marketing of any new products or product enhancements, and these products may
not adequately meet the requirements of the marketplace and achieve market
acceptance. Delays in the introduction of new products and services or
enhancements to existing products and services may result in customer
dissatisfaction and delay or loss of revenue. The inability to develop and
introduce new products and services or enhancements of existing products and
services in a timely manner or with a significant degree of market acceptance
could seriously harm our business, financial condition and results of
operations.
DEPENDENCE ON RADIO ADVERTISING
Prior to our acquisitions of PDR and Mediatech, our revenues were 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. We expect the delivery of such services to
continue to account for a significant portion of our revenues for some time. A
decline in demand for, or average selling prices of, our radio advertising
delivery services for any of the following reasons, or otherwise, would
seriously harm our business, financial condition and results of operations:
o competition from new advertising media;
o new product introductions or price competition from competitors;
o a shift in purchases by customers away from our premium services, such as
DG Priority or DG Express; and
o a change in the technology used to deliver such services.
Additionally, we are dependent on our relationship with the radio stations in
which we have installed communications equipment. Should a substantial number of
these stations go out of business, experience a change in ownership, or
discontinue the use of our equipment in any way, it could seriously harm our
business, financial condition and results of operations.
ABILITY TO MAINTAIN AND IMPROVE SERVICE QUALITY
Our business is dependent on our ability to make cost-effective deliveries
to broadcast stations within the time periods requested by customers. Any
failure to do so, whether or not within our control, could result in an
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advertisement not being run and in the station losing air-time which it could
have otherwise sold. Although we disclaim any liability for lost air-time,
claims by stations for lost air-time may nevertheless be asserted in these
circumstances and dissatisfied advertisers may refuse to make further deliveries
through DG Systems in the event of a significant occurrence of lost deliveries,
either of which would seriously harm our business, financial condition and
results of operations. Although we maintain insurance against business
interruption, such insurance may not be adequate to protect us from significant
loss in these circumstances or from the effects of a major catastrophe (such as
an earthquake or other natural disaster) which could result in a prolonged
interruption of our business. In particular, our 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 our network operating center. In addition, our 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:
o Equipment failure;
o Interruption in services by telecommunications service providers; and
o The inability to maintain our installed base of RSTs, RPTs, VRTSs and
DVPS video units that comprise our distribution network.
Failure to make timely deliveries for whatever reason could result in
dissatisfied advertisers refusing to make further deliveries through DG Systems
which would seriously harm our business, financial condition and results of
operations.
COMPETITION
We currently compete 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 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 us 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 we have. In September
1998, we acquired substantially all of the assets of DCI, a supplier of
electronic distribution and communications services for the radio broadcast
industry in the United States and Canada. This acquisition has resulted in:
o Expansion of our customer base;
o An increase in the number of radio stations included in our network; and
o An improvement in our ability to provide a point to point delivery
service between the radio stations and groups.
o We believe that we now offer the only nationwide electronic delivery
option for audio spot distribution. In the market for the distribution of
video content to television stations, we encounter competition from
numerous large and small dub and ship houses and production studios,
certain of which currently function as marketing partners with DG Systems
in the audio distribution market.
To the extent that we are successful in entering new markets, such as the
delivery of other forms of content to radio and television stations, we would
expect to face competition from companies in related communications markets
and/or package delivery markets. Some of these companies in related markets
could offer products and services with functionality similar or superior to that
offered by our products and services. Telecommunications providers such as AT&T,
MCI Worldcom and Regional Bell Operating Companies could also enter the market
as competitors with materially lower electronic delivery transportation costs.
We 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.
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Many of our 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 DG Systems. We may
not be able to compete successfully against current and future competitors based
on these and other factors. We expect that an increasingly competitive
environment will result in price reductions that could result in lower profits
and loss of market share, all of which would seriously harm our business,
financial condition and results of operations. 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 our competitors to devote significantly greater resources to the
development and marketing of new competitive products and services. We expect
that competition will increase substantially as a result of these and other
industry consolidations and alliances, as well as the emergence of new
competitors. Accordingly, we may not be able to compete successfully with new or
existing competitors, and the effects of such competition could seriously harm
our business, financial condition and results of operations.
ABILITY TO MANAGE GROWTH
We have recently experienced a period of rapid growth that has resulted in
new and increased responsibilities for management personnel and that has placed
and continues to place a significant strain on our operating, management and
financial systems and resources. To accommodate this recent growth and to
compete effectively and manage future growth, if any, we must continue to
implement and improve our operational, financial and management information
systems, procedures and controls on a timely basis and to expand, train,
motivate and manage our work force. In particular, we believe that to achieve
these objectives we must complete the following:
o Automation of the customer order entry process;
o Integration of the delivery fulfillment process into the customer billing
system; and
o Combination of these systems with those of PDR, Mediatech and DCI.
Our personnel, systems, procedures and controls may not be adequate to support
our existing and future operations. Any failure to implement and improve our
operational, financial and management systems or to expand, train, motivate or
manage our employees could seriously harm our business, financial condition and
results of operations.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date codes fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, many such
currently installed computer systems and software products used by many
companies will need to be upgraded to enable such systems and computer hardware
and software products to avoid the potential effects associated with this year
2000 coding problem. We have done a preliminary internal assessment of the
components and applications of our network and have determined that a number of
these components are year 2000 compliant. To further identify potential issues,
we have hired a third party consulting firm to inventory the various internal
and external systems and related applications upon which we may be dependent and
to assess both the level of dependence and the exposure in each area to year
2000 risks. This study is not yet complete, and we have not yet fully completed
our assessment of the full range of risks. A complete action plan awaits the
completion of this report and is expected to be in place early in 1999.
In the interim, we are continuing to take the steps we believe are
necessary to address the network and related applications we have identified
that are not year 2000 compliant. These issues will be addressed primarily
through internal development efforts. Although we have direct programming
control over our network applications, our computer hardware and software
products may not contain all necessary code changes in their date code fields to
avoid any or all damaging interruptions and other problems associated with date
entry limitations. We are also dependent upon other third parties, in particular
our telephone and satellite transmission suppliers, in order to provide our
electronic distribution services. See "Dependence on Certain Suppliers." We are
in the process of obtaining relevant information from these suppliers in order
to increase awareness of potential issues. If such vendors' systems are not year
2000 compliant it could have a material adverse effect on our operations. At
this time
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we have not fully quantified the potential impact of third party vendor year
2000 issues. We currently do not anticipate that the direct resource
requirements or expenses related to resolving year 2000 issues will have a
significant adverse effect on our operating results or financial position.
We believe that the purchasing pattern of our current and potential
customers may be affected by the year 2000 problem described above in a variety
of ways. For example, as the year 2000 approaches, some of our current customers
may develop concerns about the reliability of our electronic delivery services
and, as a result, shift their delivery work to less technical dub and ship
operations. Likewise, some potential customers with the same concern may elect
not to utilize our electronic delivery services until after year 2000 and
beyond. If any potential customers elect to not utilize our delivery services
for any period of time on the basis of year 2000 concerns, our business and
financial prospects for growth could be adversely affected. If any of our
current customers shift some or all of their delivery work to other delivery
providers, our business, financial condition and results of operations would be
adversely affected. In addition to the foregoing, in the event that we do
experience interruptions and problems with our computer hardware and software
products due to year 2000 limitations, some or all of our current customers may
shift some or all of their delivery work to other delivery providers without
year 2000 problems. Moreover, potential customers of DG Systems may elect not to
utilize our delivery services in the event of any such interruptions and
problems. Any of the foregoing could seriously harm our business, financial
condition and results of operations. At this time we have not fully developed
detailed contingency plans for the possibility of significant disruption due to
year 2000 issues. Preliminary discussions have been held but timing of the
development of such a contingency plan will be dependent upon the findings and
resulting actions taken based on the risk assessment studies discussed above.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
Our quarterly operating results have in the past and may in the future vary
significantly depending on factors such as:
o Volume of advertising in response to seasonal buying patterns;
o Timing of introductions of new products and services;
o Increased competition;
o Timing of our promotional efforts; and
o General economic factors.
For example, we have 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, we believe that period to
period comparisons of our results of operations are not necessarily meaningful
and should not be relied upon as an indication of our future performance. In any
single period, our revenues and delivery costs are subject to variation based on
changes in the volume and mix of deliveries performed during such period. In
particular, our 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, August and
November. The increased volume of these deliveries during such periods and our
relatively higher prices for "Sweeps" advertisements have historically increased
the total revenues and revenues per delivery and tended to reduce relative
delivery costs. Our expense levels are based, in part, on our expectations of
future sales levels. If sales levels are below expectations, operating results
are likely to be seriously harmed. In addition, we have 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 our sales growth rate slows. Due to the unique
nature of our products and services, we believe that we will incur significant
expenses for sales and marketing, including advertising, to educate potential
customers about such products and services.
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DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant degree upon the continuing
contributions of, and on our ability to attract and retain, qualified
management, sales, operations, marketing and technical personnel. We generally
have not entered into employment or noncompetition agreements with any of our
employees. We do not maintain key man life insurance on the lives of any of our
key personnel. The competition for qualified personnel, particularly engineering
staff, is intense, and it possible that we may not be able to continue to
attract and retain qualified management, sales and technical personnel for the
development of its business. If we are unable to attract, hire and retain
qualified personnel in the future, the success of our business could be
impaired, and this could seriously harm our business, operating results and
financial condition.
DEPENDENCE ON CERTAIN SUPPLIERS
We rely on certain single or limited-source suppliers for integral
components used for the assembly of our audio and video units. Although these
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 DG Systems, it would delay
our deployment of audio and video units. This would have the effect of
depressing our business until we were able to establish sufficient component
supply through an alternative source. We believe that there are currently
alternative component manufacturers that could supply the components required to
produce our products, but we are 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 us to
qualify an alternative subcontractor, redesign its products as necessary and
contract for the manufacture of such products. We do not have long-term supply
contracts with our sole- or limited-source vendors, and we purchase our
components on a purchase order basis. We have experienced component shortages in
the past, and material component shortages or production or delivery delays may
occur in the future. The inability to continue 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 seriously harm our business, financial
condition and results of operations.
Pursuant to our development efforts in the area of satellite transmission
technology, we have 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. Our dependence on Hughes'
satellite system entails a number of significant risks. Our business, results of
operations and financial condition would be seriously harmed if Hughes were
unable for any reason to continue to meet our delivery commitments on a
cost-effective basis or if any transmissions failed to satisfy our quality
requirements. In the event that we were unable to continue to use Hughes'
satellite capacity, we would have to identify, qualify and transition deliveries
to an acceptable alternative satellite transmission vendor. Such an alternative
satellite transmission vendor may not be available in a position to satisfy our
delivery requirements on a timely and cost-effective basis, if at all. In the
event that such an alternative satellite transmission vendor were available, the
identification, qualification and transition process could take up to nine
months or longer.
We obtain our local access telephone transmission services through Teleport
Communications Group. We obtain our long distance telephone access through an
exclusive contract with MCI Worldcom, which expires in 2001. Any material
interruption in the supply or a material adverse change in the price of either
local access or long distance carrier service could seriously harm our business,
results of operations and financial condition.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
Our future growth depends on the successful and timely introduction of new
products and services in markets that do not currently exist or are just
emerging. Our goal is to introduce new services, such as media archiving and the
ability to quickly and reliably give an agency the ability to preview and
authorize electronic delivery of video advertising spots. We may not be able to
successfully complete development of such products and services. Even if any
such development is completed, we may not be able to introduce these products
and services and they may not realize market acceptance or meet the technical or
other requirements of potential customers. The failure to
11
<PAGE> 12
successfully development and introduce new products and services could seriously
harm our business, financial condition and results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY, PROTECTION OF TRADEMARKS, COPYRIGHTS, AND
OTHER PROPRIETARY INFORMATION; RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
We consider our trademarks, copyrights, advertising, and promotion design
and artwork to be of value and important to our business. We rely on a
combination of trade secret, copyright and trademark laws and nondisclosure and
other arrangements to protect our proprietary rights. We do not have any patents
or patent applications pending. We generally enter into confidentiality or
license agreements with our employees, distributors and customers, and limit
access to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or obtain and use information that we regard as
proprietary. The steps that we have taken to protect our proprietary information
may not 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 our
proprietary rights to the same extent as do the laws of the United States. While
we believe that our trademarks, copyrights, advertising and promotion design and
artwork do not infringe upon the proprietary rights of third parties, we may
still receive future communications from third parties asserting that we are
infringing, or may be infringing, on the proprietary rights of third parties.
Any such claims, with or without merit, could be time-consuming, require us to
enter into royalty arrangements or result in costly litigation and diversion of
management personnel. If such claims are successful, we may not be able to
obtain any licenses necessary for the operation of our business or, if
obtainable, such licenses may not be able to obtained on commercially reasonable
terms. In the event of a successful claim of infringement and our failure or
inability to license the infringed or similar proprietary information, our
business, financial condition and results of operations could be seriously
harmed.
CONCENTRATION OF STOCK OWNERSHIP; ANTITAKEOVER PROVISIONS
The present executive officers and directors of DG Systems and their
respective affiliates own approximately 46% of our 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
the approval of significant corporate transactions. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
DG Systems. Furthermore, certain provisions of our Amended and Restated Articles
of Incorporation and Bylaws, and of California law, could have the effect of
delaying, deferring or preventing a change in control of DG Systems.
PREFERENTIAL RIGHTS OF PREFERRED STOCK
DG Systems presently has 15,000,000 shares of Preferred Stock authorized.
On August 12, 1998, the holders of 4,950,495 shares of Series A Convertible
Preferred Stock, constituting all of the outstanding shares of the Series A
Convertible Preferred Stock, elected to convert such shares into shares of our
Common Stock. Accordingly, pursuant to our Articles of Incorporation, the Board
of Directors has the authority to issue up to 10,049,505 additional shares of
Preferred Stock and may divide such 10,049,505 remaining authorized shares of
Preferred Stock into any number of series, to fix the number of shares of any
such series and to determine the rights, preferences, privileges and
restrictions granted to or imposed upon, any such series.
REGISTRATION RIGHTS
In connection with the recent private placements of shares of our Common
Stock, each as further described in "Description of Capital Stock," we agreed to
use diligent efforts to prepare and file the registration statement on Form S-3,
to which this prospectus forms a part, with the SEC for the purposes of
registering the resale of such shares and to list such shares on the Nasdaq
National Market. Certain other holders of our Common Stock, including former
holders of our Series A Convertible Preferred Stock, previously have been
granted demand and piggy-back registration rights, such that such holders will
be entitled to include their shares in this registration
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<PAGE> 13
process and any other such registration process. In addition, in connection with
the December 9, 1998 issuance of warrants to purchase our Common Stock, as
further described in "Description of Capital Stock," we granted the holders of
such warrants demand registration rights with respect to the shares of Common
Stock issuable upon exercise of such warrants.
Following the successful completion of this registration and listing
processes, the additional shares of DG Systems' Common Stock registered
hereunder will be freely tradable in the public market, subject to volume
limitations applicable to affiliates of DG Systems. The Registration Statement
to which this Prospectus forms a part registers approximately 15,214,220 shares
of our Common Stock, including shares of Common Stock issued upon conversion of
our former Series A Convertible Preferred Stock. Sales of a substantial number
of additional shares in the public market could seriously harm the market price
of DG System's Common Stock and could impair our future ability to raise capital
through the sale of its equity securities.
EXPANSION INTO INTERNATIONAL MARKETS
Although our long-term plans include expansion of our operations to Europe
and Asia, we do 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 us to
incur substantial costs and expend significant managerial resources to obtain
any necessary regulatory approvals and to 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 our products and
services to be redesigned, causing product and service delivery delays that
could seriously harm our operating results. Our ability to successfully enter
these new markets will depend, in part, on our ability to attract personnel with
experience in these locations and to attract partners with the necessary local
business relationships. However, we cannot assure you that our products and
services will achieve market acceptance in foreign countries. Our inability to
successfully establish and expand our international operations may also limit
our ability to obtain significant international revenues and could seriously
harm our business, operating results and financial condition. Furthermore,
international business is subject to a number of country-specific risks and
circumstances, including
o different tax laws,
o difficulties in expatriating profits,
o currency exchange rate fluctuations, and
o the complexities of administering business abroad.
Moreover, to the extent we increase our international sales, our business,
operating results and financial condition could be seriously harmed 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.
POSSIBLE VOLATILITY OF SHARE PRICE
The trading prices of our Common Stock may be subject to wide fluctuations
in response to a number of factors, including:
o variations in operating results,
o changes in earnings estimates by securities analysts,
o announcements of extraordinary events such as litigation or acquisitions,
o announcements of technological innovations or new products or services by
DG Systems or our competitors, and
o 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 our Common
Stock.
13
<PAGE> 14
USE OF PROCEEDS
DG Systems will not receive any proceeds from the sale of the Shares by the
Selling Shareholders.
14
<PAGE> 15
SELLING SHAREHOLDERS
The following table sets forth certain information, as of December 10,
1998, with respect to the number of shares of Common Stock owned by the Selling
Shareholders and as adjusted to give effect to the sale of the Shares offered
hereby. The Shares are being registered to permit public secondary trading of
the Shares, and the Selling Shareholders may offer the Shares for resale from
time to time. See "Plan of Distribution."
The Shares being offered by the Selling Shareholders were acquired from
the Company pursuant to private placement transactions effected on August 14,
1998 and December 9, 1998 and certain other private placement transactions. The
Shares were issued pursuant to the exemption from the registration requirements
of the Securities Act provided by Section 4(2) thereof. Each of the Selling
Shareholders represented to the Company that it was acquiring the Shares for
investment and with no present intention of distributing the Shares.
The Company has filed with the Commission, under the Securities Act, a
Registration Statement on Form S-3, of which this Prospectus forms a part, with
respect to the resale of the Shares from time to time on the Nasdaq National
Market or in privately-negotiated transactions. The Company has agreed to use
commercially reasonable efforts to keep such Registration Statement effective
for the lesser of until the date as to which all of the Shares may be sold by
the holders of such Shares without registration in a single transaction pursuant
to Rule 144(k) or until all Shares have been sold.
The Shares offered by this Prospectus may be offered from time to time
by the Selling Shareholders named below:
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned Prior to Offering After the Offering
----------------------------- -------------------------
Number of Number of Shares Number of
Name and Address of Selling Shareholder Shares Percent(1) Being Offered Shares Percent(1)
- --------------------------------------- ------ ---------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Entities and individuals affiliated 446,428 1.7% 446,428 -- *
with East River Ventures(2)
645 Madison Avenue
New York, NY 10022
Scott K. Ginsburg(3) 4,004,819 15.3% 3,634,419 370,400 1.4%
17340 Club Hill Drive
Dallas, TX 75248
GE Capital Information Technology 933,521 3.6% 933,521 -- *
Solutions
700 Canal Street
Stamford, CT 06902
Entities affiliated with Integral 1,475,448 5.6% 1,475,448 -- *
Capital Partners(4)
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned Prior to Offering After the Offering
----------------------------- -------------------------
Number of Number of Shares Number of
Name and Address of Selling Shareholder Shares Percent(1) Being Offered Shares Percent(1)
- --------------------------------------- ----------- ---------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Entities and individuals affiliated 1,341,738 5.1% 178,572 1,163,166 4.5%
with Glynn Capital Management(5)
Bldg. 4, Suite 235
3300 Sand Hill Road
Menlo Park, CA 94205
Entities affiliated with London 1,783,105 6.8% 495,605 1,287,500 4.9%
Merchant Securities plc(6)
Carlton House
33 Robert Adam Street
London W1M 5AH
ENGLAND
Entities affiliated with 4,746,178 18.2% 4,746,178 -- *
Dawson-Samberg Capital Management,
Inc.(7)
354 Pequot Avenue
Southport, CT 06490-0760
Entities affiliated with Sierra 1,895,464 7.3% 1,295,464 600,000 2.3%
Ventures(8)
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Entities affiliated with Technology 2,785,659 10.7% 1,967,859 817,800 3.1%
Crossover Ventures(9)
56 Main Street
Suite 210
Millburn, NJ 07041
Jeffrey Weinstein 1,250 * 1,250 -- *
800 Keeler Avenue
Berkeley, CA 94708
Bert L. Zaccaria 39,476 * 39,476 -- *
3000 Sand Hill Road
Bldg. 3, Suite 210
Menlo Park, CA 94025
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 19,453,086 74.4% 15,214,220 4,238,866 16.2%
</TABLE>
- ----------------
* Less than 1%
16
<PAGE> 17
(1) Based upon 26,129,525 shares of Common Stock outstanding on December 10,
1998. This Registration Statement shall also cover any additional shares of
Common Stock which become issuable in connection with the shares registered
for sale hereby by reason of any stock dividend, stock split,
recapitalization or other similar transaction effected without the receipt
of consideration which results in an increase in the number of the Company's
outstanding shares of Common Stock.
(2) Includes 357,142 shares held in the name of Victory Ventures LLC, all of
which are being offered hereby, and 89,286 shares held in the name of ERV
Partners LLC, all of which are being offered hereby. Walter Carozza and
Alexander Paluch are the co-Presidents and Managing Members of Victory
Ventures LLC and ERV Partners LLC, respectively, and share voting and
dispositive power with respect to the shares owned by such entities. Mr.
Carozza and Mr. Paluch disclaim beneficial ownership of such shares except
to the extent of their pecuniary interests therein.
(3) Includes 2,920,134 shares held in the name of Moon Doggie Family
Partnership. Scott K. Ginsburg, the Company's Chairman and Chief Executive
Officer, is the sole general partner of Moon Doggie Family Partnership.
(4) Includes 653,597 shares held in the name of Integral Capital Partners III,
L.P., all of which are being offered hereby, 147,674 shares held in the name
of Integral Capital Partners International III, L.P., all of which are being
offered hereby, 670,751 shares held in the name of Integral Capital Partners
IV, L.P., all of which are being offered hereby, and 3,426 shares held in
the name of Integral Capital Partners IV MS Side Fund, L.P., all of which
are being offered hereby. Integral Capital Management III, L.P. is the sole
general partner of Integral Capital Partners III, L.P. and the sole
investment general partner of Integral Capital Partners International III,
L.P. Integral Capital Management IV, LLC is the sole general partner of
Integral Capital Partners IV, L.P. ICP MS Management IV, LLC is the sole
general partner of Integral Capital Partners IV MS Side Fund, L.P. Integral
Capital Management III, L.P., Integral Capital Management IV, LLC and ICP MS
Management IV, LLC disclaim beneficial ownership of such shares except to
the extent of their pecuniary interests therein.
(5) Includes 178,572 shares owned directly by Glynn Ventures IV, L.P., all of
which are being offered hereby. Glynn Capital Management II is the
investment advisor to Glynn Ventures IV, L.P. and may be deemed to
beneficially own the shares held by such entity. John W. Glynn, Jr., who
directly owns 80,000 shares with respect to which he has sole voting and
dispositive power, is the sole owner of Glynn Capital Management II. Also
includes the following shares, none of which are being offered hereby:
207,770 shares owned directly by Crown Associates III, L.P., 100,605 shares
owned directly by Crown-Glynn Associates, L.P., 256,825 shares owned
directly by The Crown Trust, 77,500 shares owned directly by Glynn Emerging
Opportunity Fund, 34,600 shares owned directly by Glynn Investment, L.P.,
27,700 shares owned directly by Glynn Buckley Investments, L.P., 109,166
shares owned directly by Glynn Ventures III, L.P., 84,200 shares owned
directly by McMorgan Fund II, L.P., 3,000 shares owned directly by Glynn
Capital Management 401(k) and 8,900 shares owned directly by Glynn
Peterson. Glynn Capital Management, which directly owns 157,900 shares, is
the investment advisor to Glynn Emerging Opportunity Fund, Glynn Buckley
Investments, L.P., McMorgan Fund II, L.P., Glynn Investment, L.P. and Glynn
Ventures III, L.P. and may be deemed to beneficially own the shares held by
such entities. Mr. Glynn is the sole owner of Glynn Capital Management.
Crown Capital Management, Ltd. is the investment advisor to The Crown Trust
and may be deemed to beneficially own the shares held by such entity. David
F. Bellet, who directly owns 10,000 shares with respect to which he has
sole voting and dispositive power, Chester A. Siuda, and Mr. Glynn are the
managing directors (the "Crown Managing Directors") of Crown Capital
Management, Ltd. Crown-Glynn Advisors, Ltd. is the investment advisor to
Crown Associates III, L.P. and Crown-Glynn Associates, L.P. and may be
deemed to beneficially own the shares held by such entities. The Crown
Managing Directors are the managing directors of Crown-Glynn Advisors, Ltd.
Crown Partners III, L.P. is the general partner of Crown Associates III,
L.P. and Messrs. Glynn, Bellet and Siuda as well as Jeffrey S. Hamren,
Darryl Messinger, Steven Rosston, who directly owns 5,000 shares with
respect to which he has sole voting and dispositive power, and Margaret S.
McNamara are general partners (the "Crown General Partners") of Crown
Partners III, L.P. Crown-Glynn Partners, L.P. is the general partner of
Crown-Glynn Associates, L.P., and the Crown General Partners are the
general partners of Crown-Glynn Partners, L.P.
(6) Includes 560,824 shares held in the name of Lion Investments Limited,
130,824 of which are being offered hereby, and 1,222,281 shares held in the
name of Westpool Investment Trust plc, 364,781 of which are being offered
hereby. Lion Investments Limited and Westpool Investment Trust plc are
wholly-owned subsidiaries of London Merchant Securities plc.
(7) Includes 348,201 shares held in the name of Pequot Offshore Private Equity
Fund, Inc., all of which are being offered hereby, 2,750,173 shares held in
the name of Pequot Private Equity Fund, L.P., all of which are being offered
hereby, 823,902 shares held in the name of Pequot International Fund, Inc.,
all of which are being offered hereby, and 823,902 shares held in the name
of Pequot Partners Fund, L.P., all of which are being offered hereby.
Dawson-Samberg Capital Management, Inc. is the investment advisor to Pequot
Offshore Private Equity Fund, Inc., Pequot Private Equity Fund, L.P., Pequot
International Fund, Inc. and Pequot Partners Fund, L.P. and may be deemed to
beneficially own all of such shares. Lawrence D. Lenihan, Jr., a member of
the Company's Board of Directors, is a principal and fund manager of
Dawson-Samberg Capital Management, Inc. Mr. Lenihan disclaims beneficial
ownership of all shares held or beneficially owned by or through such
entity. Effective January 1, 1999, Dawson-Samberg Capital Management, Inc.
spun-off a portion of its investment management business to Pequot Capital
Management, Inc., including the beneficial ownership of all such shares
formerly held by Dawson-Samberg Capital Management, Inc. Mr. Lenihan is a
principal and minority shareholder of Pequot Capital Management.
17
<PAGE> 18
(8) Includes 1,817,792 shares held in the name of Sierra Ventures IV, 1,242,379
of which are being offered hereby, and 77,672 shares held in the name of
Sierra Ventures IV International, 53,085 of which are being offered hereby.
SV Associates IV, L.P. is the sole general partner of Sierra Ventures IV and
Sierra Ventures IV International. Jeffrey M. Drazan, a member of the
Company's Board of Directors, is a general partner of SV Associates IV, L.P.
Mr. Drazan disclaims beneficial ownership of all shares held or beneficially
owned by or through such entity except to the extent of his pecuniary
interest therein arising from general partnership interests therein. On or
about January 20, 1999, 575,413 shares held in the name of Sierra Ventures
IV, none of which are being offered hereby, were distributed to its general
and limited partners and 24,587 shares held in the name of Sierra Ventures
IV International, none of which are being offered hereby, were distributed
to its general and limited partners. Subsequent to such distribution,
1,242,379 shares are held in the name of Sierra Ventures IV, all of which
are being offered hereby, 53,085 shares are held in the name of Sierra
Ventures IV International, all of which are being offered hereby, 2,543
shares are held in the name of Jeffrey M. Drazan, none of which are being
offered hereby, and 597,457 shares are being held in the names of the
general and limited partners of Sierra Ventures IV, Sierra Ventures IV
International and/or SV Associates IV, L.P., none of which are being offered
hereby.
(9) Includes 875,890 shares held in the name of Technology Crossover Ventures,
L.P., 607,820 of which are being offered hereby, 69,365 shares held in the
name of Technology Crossover Ventures, C.V., 48,135 of which are being
offered hereby, 28,599 shares held in the name of TCV II, V.O.F., 20,387 of
which are being offered hereby, 880,402 shares held in the name of
Technology Crossover Ventures II, L.P., 627,582 of which are being offered
hereby, 676,864 shares held in the name of TCV II (Q), L.P., 482,493 of
which are being offered hereby, 120,118 shares held in the name of TCV II
Strategic Partners, L.P., 85,624 of which are being offered hereby, and
134,421 shares held in the name of Technology Crossover Ventures II, C.V.,
95,818 of which are being offered hereby. Technology Crossover Management,
L.L.C. is the sole general partner of Technology Crossover Ventures, L.P.
and the sole investment general partner of Technology Crossover Ventures,
C.V. Technology Crossover Management II, L.L.C. is the sole general partner
of Technology Crossover Ventures II, L.P., TCV II (Q), L.P. and TCV II
Strategic Partners, L.P. and the sole investment general partner of TCV II,
V.O.F. and Technology Crossover Ventures, C.V. Technology Crossover
Management, L.L.C. and Technology Crossover Management II, L.L.C. disclaim
beneficial ownership of such shares except to the extent of their pecuniary
interests therein.
18
<PAGE> 19
PLAN OF DISTRIBUTION
The Company will receive no proceeds from this offering. The Shares
offered hereby may be sold by the Selling Shareholders from time to time in
transactions in the over-the-counter market, on the Nasdaq National Market, in
privately negotiated transactions, or by a combination of such methods of sale,
at fixed prices which may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at negotiated prices. The
Selling Shareholders may effect such transactions by selling the Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Shareholders
and/or the purchasers of the Shares for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). For the
purposes of this Prospectus, the term "Selling Shareholders" shall include
partners, donees, pledgees and other assignees selling Shares received from a
Selling Shareholder named herein as well as any partners, members and other
assignees selling Shares received from any of such partners, donees, pledgees or
assignees.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
The Selling Shareholders and any broker-dealers or agents that
participate with the Selling Shareholders in the distribution of the Shares may
under certain circumstances be deemed to be "underwriters" within the meaning of
the Securities Act, and any commissions received by them and any profit realized
on the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Selling Shareholders may
agree to indemnify such broker-dealers against certain liabilities, including
liabilities under Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from the Selling Shareholders (and, if it acts as agent for
the purchase of such Shares, from such purchaser). Broker-dealers may agree with
the Selling Shareholders to sell a specified number of Shares at a stipulated
price per share, and, to the extent such a broker-dealer is unable to do so
acting as agent for the Selling Shareholders, to purchase as principal any
unsold Shares. Brokers-dealers who acquire Shares as principal may thereafter
resell such Shares from time to time in transactions (which may involve crosses
and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, on the Nasdaq National Market, in privately negotiated
transactions, or by a combination of such methods of sale, at fixed prices that
may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Shares commissions computed as described above.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market making activities with respect to the Common Stock of the Company for
a period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, the Selling Shareholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Shareholders.
The Selling Shareholders will pay all commissions and other expenses
associated with the sale of Shares by it. The Shares offered hereby are being
registered pursuant to contractual obligations of the Company, and the Company
has agreed to bear certain expenses in connection with the registration and sale
of the Shares being offered by the Selling Shareholders. The Company has not
made any underwriting arrangements with respect to the sale of Shares offered
hereby.
19
<PAGE> 20
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock, without par value, and 15,000,000 shares of Preferred
Stock, without par value.
COMMON STOCK
On August 14, 1998, the Company issued 4,589,287 shares of Common Stock
to certain existing institutional and closely associated investors in a private
placement transaction pursuant to the terms of the Common Stock Subscription
Agreement, effective August 14, 1998. These additional shares of Common Stock
were issued at $2.80 per share, and the total proceeds to the Company, net of
issuance costs, was approximately $12.7 million.
On December 9, 1998, the Company issued 3,843,212 shares of Common Stock
to certain other existing institutional and closely associated investors,
2,920,134 of which were issued pursuant to the terms of that certain Common
Stock Subscription Agreement, dated September 29, 1998, at a price per share of
$2.7396, and 923,078 of which were issued pursuant to that certain Common Stock
and Warrant Subscription Agreement, dated December 9, 1998, at a price per share
of $3.25. The gross proceeds to the Company from the issuance of these
additional shares were approximately $11 million.
As of December 10, 1998, there were 26,129,525 shares of Common Stock
outstanding that were held of record by approximately 143 shareholders. The
holders of Common Stock are entitled to one vote per share on all matters to be
voted upon by the shareholders. Subject to preferences that may be applicable to
any outstanding Preferred Stock, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of the liquidation, dissolution, or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable, and the shares of Common Stock
to be issued upon completion of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorizes 15,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the rights, preferences, privileges, and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences, and the number of shares constituting any series or the designation
of such series, without further vote or action by the shareholders. The issuance
of Preferred Stock may have the effect of delaying, deferring, or preventing a
change in control of the Company without further action by the shareholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK
All 4,950,495 outstanding shares of the Company's Series A Convertible
Preferred Stock were converted to Common Stock pursuant to the terms of the
Series A Preferred Stock Conversion Agreement effective August 12, 1998. Each
holder of Series A Preferred Stock received 1.1 shares of Common Stock for each
Preferred share converted. The conversion of the Series A Convertible Preferred
Stock to Common Stock at a ratio greater than 1:1 resulted in a deemed dividend
equal to the value of the additional shares granted to the holders of Series A
Convertible Preferred Stock on the date of conversion. This deemed dividend was
considered a reduction in earnings in the computation of basic and diluted
earnings per share for the quarter ended September 30, 1998 and the twelve
months ended December 31, 1998.
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CERTAIN PROVISION OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of law and the Company's Articles of Incorporation
and Bylaws could make the acquisition of the Company by means of a tender offer,
a proxy contest, or otherwise and the removal of incumbent officers and
directors more difficult. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to first negotiate
with the Company. The Company's Articles of Incorporation also provide that so
long as the Company shall have a class of stock registered pursuant to the
Securities Exchange Act of 1934, as amended, shareholder action can be taken
only at an annual or special meeting of shareholders and may not be taken by
written consent.
REGISTRATION RIGHTS
As of December 10, 1998, the holders of up to approximately 20,000,000
shares of Common Stock (assuming no exercise of options outstanding) (the
"Registrable Securities") were entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreements between the Company and the holders of such Registrable Securities,
if the Company proposed to register any of its securities under the Securities
Act, either for its own account or, for certain such holders, for the account of
other security holders exercising registration rights, such holders are entitled
to notice of such registration and are entitled to include shares of such Common
Stock therein. Additionally, certain of such holders are also entitled to
certain demand registration rights pursuant to which they may require the
Company to file a registration statement under the Securities Act at its expense
with respect to their shares of Common Stock, and the Company is required to use
its reasonable efforts to effect such registration. Further, certain such
holders may require the Company to file additional registration statements on
Form S-3. All of these registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares included in such registration.
WARRANTS
In connection with certain financing and leasing transactions made in
1993 through 1996, the Company issued warrants to purchase at fair market value
an aggregate of 35,000 shares of Series A Preferred Stock with exercise prices
at a range of $2.00 to $3.00 per share in January 1993 and April 1994, 71,174
shares of Series B Preferred Stock at an exercise price of $2.70 per share in
October 1994, 60,000 shares of Series C Preferred Stock at an exercise price of
$6.00 per share in June 1995 and 67,500 shares of Series D Preferred Stock at an
exercise price of $8.00 per share in January 1996. On December 31, 1995,
warrants to purchase 15,000 shares of Series C Preferred Stock were canceled
pursuant to the terms of the warrant agreement. A total of 29,161 of warrants to
purchase Series A Preferred Stock were exercised in return for surrender of the
remaining 5,839 warrants upon the closing of the Company's initial public
offering in February 1996. The remaining warrants to purchase Series B, Series C
and Series D Preferred Stock, which expire on the earlier of ten years from the
date of the related warrant agreement or five years from the effective date of
the Company's initial public offering, were converted into warrants to purchase
Common Stock of the Company as per the conversion terms of the respective
agreements.
In December 1996, the Company issued warrants to purchase 9,351 shares
of Common Stock at an exercise price of $8.02 per share in connection with an
increase in an existing lease line. The warrants expire in 2006.
In January 1997, the Company completed an agreement to finance an
additional $6.0 million of equipment purchases through a long-term credit
facility which can be drawn against through December 31, 1997. In December 1997,
the term of the agreement was extended to June 30, 1998. Warrants to purchase
112,500 shares of the Company's Common Stock at an exercise price of $8.00 per
share were issued to the lender per the terms of the agreement and the warrants
were subsequently repriced at an exercise price of $4.42 per share in return for
the extension of the agreement.
In December 1997, warrants to purchase 186,652 shares of the Company's
Common Stock were issued at an exercise price of $4.42 in connection with a new
loan agreement to finance an additional $2 million of equipment
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purchases and $3.5 million of working capital through a long-term facility which
can be drawn upon through December 1998.
In December 1998, warrants to purchase 1,921,607 shares of the Company's
Common Stock were issued at an exercise price of $3.25 in connection with the
private placement of Common Stock to certain existing institutional and other
closely associated investors. The warrants are not exercisable for a minimum of
one year and, thereafter, their exercisability is based on the performance of
the Company's Common Stock. The warrants expire in December 2001.
In December 1998, a warrant to purchase 1,548,460 shares of the
Company's Common Stock were issued at an exercise price of $3.25 in connection
with the appointment of the Company's new Chairman of the Board and Chief
Executive Officer. The warrant is not exercisable for a minimum of one year and,
thereafter, its exercisability is based on the performance of the Company's
Common Stock and the continued service of the Company's Chief Executive Officer.
The warrant expires in December 2003.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
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LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K of Digital Generation Systems, Inc.
for the year ended December 31, 1997 have been so incorporated in reliance on
the report of Arthur Andersen LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
No dealer, salesperson, Selling Stockholders or any other person has
been authorized to give any information or make any representations in
connection with this offering other than those contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company, the Selling Stockholders or any other
person. This Prospectus does not constitute an offer to sell or a solicitation
of any offer to buy any of the securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date of the Prospectus.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the Commission's following Regional
Offices: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004. Reports, proxy
and information statements and other information filed electronically by the
Company with the Commission are available at the Commission's world wide web
site at http://www.sec.gov.
The Company has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments, exhibits and schedules, referred
to as the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act") with the Commission, with respect to the Shares offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and to
which reference is hereby made. Statements contained in this Prospectus
regarding the contents of any contract or other document to which reference is
made are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon the payment of the fees prescribed by the Commission.
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INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed by the Company with the
Commission pursuant to the Exchange Act are hereby incorporated by reference in
this Prospectus and made a part hereof:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed with the Commission on March 31, 1998.
2. The Company's Quarterly Report on Form 10-Q, dated March 31,
1998, filed with the Commission on May 15, 1998.
3. The Company's Quarterly Report on Form 10-Q, dated June 30, 1998,
filed with the Commission on August 14, 1998.
4. The Company's Quarterly Report on Form 10-Q, dated September 30,
1998, filed with the Commission on November 16, 1998.
5. The Company's Current Report on Form 8-K, dated January 8, 1998,
filed with the Commission on January 26, 1998.
6. The Company's Current Report on Form 8-K, dated September 25,
1998, filed with the Commission on October 13, 1998, and as
amended November 12, 1998.
7. The Company's Current Report on Form 8-K, dated December 3, 1998,
filed with the Commission on December 3, 1998.
8. The Company's Current Report on Form 8-K, dated December 11,
1998, filed with the Commission on December 28, 1998.
9. The company's Definitive Proxy Statement as filed with the
Commission on March 31, 1998.
10. The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A as filed with the Commission
on January 26, 1996.
All documents filed with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in any document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus.
Upon written or oral request, the Company will provide without charge to
each person to whom a copy of the Prospectus is delivered a copy of the
documents incorporated by reference herein (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference
herein). Requests should be directed to Investor Relations, Digital Generation
Systems, Inc., 875 Battery Street, San Francisco, California 94111, (415)
276-6600.
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DGS, Digital Generation Systems and the DG logo are trademarks of the
Company. All other trademarks or trade names referred to herein are the property
of their respective owners.
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YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
15,214,220 SHARES
DIGITAL GENERATION SYSTEMS, INC.
COMMON STOCK
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FEBRUARY 12, 1999
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