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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________.
COMMISSION FILE NUMBER: 0-27644
DIGITAL GENERATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3140772
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
875 BATTERY STREET
SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 276-6600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting Common Stock held by non-
affiliates of the registrant, based upon the closing sale price of the Common
Stock on March 15, 2000, as reported on the Nasdaq National Market, was
approximately $108,782,282. Shares of Common Stock held by each officer and
director of the registrant and by each person who may be deemed to be an
affiliate have been excluded. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 15, 2000, the registrant had 27,942,184 shares of Common Stock,
without par value, outstanding.
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AMENDMENT NO. 1
The undersigned Registrant hereby amends Part III, to read in full as
follows:
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages as of
March 31, 2000, their positions and offices held with the Company and certain
biographical information are set forth below.
<TABLE>
<CAPTION>
OFFICERS AND DIRECTORS AGE POSITIONS AND OFFICES HELD WITH THE COMPANY
- ---------------------------------- --- -------------------------------------------
<S> <C> <C>
Scott K. Ginsburg(2) 47 Chairman of the Board
Matthew E. Devine 51 Chief Executive Officer and Director
Omar A. Choucair 37 Chief Financial Officer
Dan F. Dent 52 Vice President, Operations
Lawrence D. Lenihan, Jr. (1) (2) 35 Director
Michael G. Linnert (1) 29 Director
David M. Kantor (1) (2) 43 Director
</TABLE>
_____________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Scott K. Ginsburg joined the Company in December 1998 as Chief
Executive Officer and Chairman of the Board. In July 1999, Matthew E. Devine
assumed the responsibilities of Chief Executive Officer, but Mr. Ginsburg
remains the Company's Chairman. Mr. Ginsburg is also the Chairman of Starguide
Digital Networks and, most recently, served as Chief Executive Officer and
Director of Chancellor Media Corporation (now AMFM, Inc.). Mr. Ginsburg founded
Evergreen Media Corporation in 1988, and was the co-founder of Statewide
Broadcasting, Inc. and H&G Communications, Inc. Mr. Ginsburg earned a B.A. from
George Washington University in 1974 and a J.D. from the George Washington
University Law Center in 1978.
Matthew E. Devine joined the Company in July 1999 as Chief Executive
Officer and Director. Prior to joining the Company, Mr. Devine served as Chief
Financial Officer of Chancellor Media Corporation (now AMFM, Inc.) and served as
Chief Financial Officer, Executive Vice President, Treasurer, Secretary and
Director for Evergreen Media Corporation. Between 1975 and 1988, Mr. Devine
served in various finance positions at AMR Corporation, parent company to
American Airlines.
Omar A. Choucair joined the Company as Chief Financial Officer in July
1999. Prior to joining the Company, Mr. Choucair served as Vice President of
Finance for Chancellor Media (now AMFM, Inc.), and served as Vice President of
Finance for Evergreen Media before it was acquired by Chancellor Media in 1997.
Prior to entering the media industry, Mr. Choucair was a Senior Manager at KPMG
LLP, where he
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specialized in media and telecommunications clients. Mr. Choucair received a
B.B.A. from Baylor University and is a Certified Public Accountant.
Dan F. Dent joined the Company as Vice President, Operations in
September 1999. From 1993 until joining the Company, Mr. Dent served as Vice
President/General Manager of CCI/Triad, a retail software manufacturer. From
1977 until 1993, Mr. Dent served in various engineering and customer service
management positions at Motorola and Tektronix, Inc.
Lawrence D. Lenihan, Jr. has been a member of the Board of Directors
of the Company since July 1997. Mr. Lenihan is a Managing Director of Pequot
Capital Management, Inc. He joined the predecessor to this firm, Dawson-Samberg
Capital Management, in 1996. He is also a Managing Member of the General Partner
of Pequot Private Equity Fund II, L.P. Prior to joining Pequot, Mr. Lenihan was
a principal at Broadview Associates, LLC, from 1993 to 1996. Prior to joining
Broadview, Mr. Lenihan held several positions at IBM, most recently as the
leader of an interactive multimedia software product business. Mr. Lenihan
graduated from Duke University with a B.S. in Electrical Engineering and he
holds an M.B.A. from the Wharton School of Business at the University of
Pennsylvania. He currently serves as director of several public and private
companies including SkyOnline, Interpacket Group Inc., Performaworks, FlexiGift,
Inc., and Mediaplex, Inc.
Michael G. Linnert has been a member of the Board of Directors of the
Company since July 1999. Mr. Linnert is a General Partner with Technology
Crossover Ventures, a venture capital firm, which specializes in emerging
Internet and communications companies. He currently serves as a board member of
petopia.com. Prior to joining Technology Crossover Ventures, Mr. Linnert was a
member of the investment banking division at Goldman, Sachs & Co. Mr. Linnert
holds a B.S.E.E. from the University of Notre Dame and an MBA from Stanford
Graduate School of Business.
David M. Kantor has been a member of the Board of Directors of the
Company since August 1999. Mr. Kantor is Senior Vice President for Network
Operations of AMFM, Inc. (formerly Chancellor Media Corporation) and is
President of AMFM Radio Networks. Prior to joining AMFM, he was President of ABC
Radio Network, having previously served as Executive Vice President. Prior to
joining ABC Radio Networks, he held executive positions with Cox Cable and
Satellite Music Network. Mr. Kantor holds a B.S. from the University of
Massachusetts and an MBA from Harvard Business School.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than 10% of the Company's outstanding Common
Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, which require them to file reports
with respect to their ownership of the Company's Common Stock and their
transactions in such Common Stock. Based upon (i) the copies of Section 16(a)
reports that the Company received from such persons for their 1999 fiscal year
transactions in the Common Stock and their Common Stock holdings and (ii) the
written representations received from one or more of such persons that no annual
Form 5 reports were required to be filed by them for the 1999 fiscal year, the
Company believes that all reporting requirements under Section 16(a) for such
fiscal year were met in a timely manner by its executive officers, Board members
and greater than ten-percent shareholders at any time during the 1999 fiscal
year.
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ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by each person who served as the Company's Chief Executive Officer at any
time during the year and the four other most highly compensated executive
officers (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
--------------------------------------- -------------------------------------------
Name and Other Annual Restricted Securities
Principal Position Year Salary(1) Bonus Compensation Stock Awards Underlying Options
- ------------------------------ ---- ------------ -------- --------------- ------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Scott K. Ginsburg 1999 $ 52,083 $ - $301,243(2) - -
Chairman of the Board 1998 $ 1 $ - $ 39,607(2) - 1,548,460
(former Chief 1997 $ - $ - $ - - -
Executive Officer)
Matthew E. Devine 1999 $ 52,083 $ - $ - - 1,000,000
Chief Executive 1998 $ - $ - $ - - -
Officer 1997 $ - $ - $ - - -
Omar A. Choucair 1999 $ 31,250 $ - $ - - 250,000
Chief Financial 1998 $ - $ - $ - - -
Officer 1997 $ - $ - $ - - -
Dan F. Dent 1999 $ 48,904 $10,000 $ - - 150,000
Vice President, 1998 $ - $ - $ - - -
Operations 1997 $ - $ - $ - - -
Henry W. Donaldson 1999 $300,000 $50,000 $181,982(3) - -
former President 1998 $298,374 $50,000 $ 4,953(4) - 350,000
and Chief Operating 1997 $225,000 $50,000 $ 162 - 80,000
Officer
Paul W. Emery, II 1999 $190,000 $ - $ - - 50,000
former Vice President, 1998 $186,647 $35,000 $ 990(5) 50,000 150,000
Sales 1997 $ - $ - $ - - -
</TABLE>
- -----------------------------
(1) Salary includes amounts deferred under the Company's 401(k) Plan.
(2) For 1999, represents various perquisites, including reimbursement of
premiums for life insurance ($13,243), automobile expense ($18,000)
and travel expenses ($270,000). For 1998, represents various
perquisites, including $30,000 for travel expenses.
(3) Represents forgiveness of loan ($175,000) and automobile expense paid
by the Company ($6,982).
(4) Represents automobile lease payments ($4,089) and taxable benefits for
group life insurance paid by the Company ($864).
(5) Includes taxable benefits from premiums for group life insurance paid
by the Company.
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The following table contains information concerning the stock option grants
made to each of the Named Officers for 1999. No stock appreciation rights were
granted to these individuals during such year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term (2)
Options Employees Price Expiration -----------------------------
Name Granted in 1999 Per Share Date 5% 10%
- ---------------- --------------- ----------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Scott K. Ginsburg -- -- -- -- -- --
Matthew E. Devine 1,000,000 49% $ 5.125 7/21/2006 2,086,390 4,862,175
Omar A. Choucair 250,000 12% $ 5.125 7/21/2006 521,597 1,215,544
Dan F. Dent 150,000 7% $3.4063 9/23/2006 208,006 484,742
Henry W. Donaldson -- -- -- -- -- --
Paul W. Emery, II 50,000 2% $ 5.875 2/9/2006 119,586 278,686
</TABLE>
_________________________________
(1) Each of the options listed in the table have a term of 7 years, subject
to earlier termination upon termination of employment. In the event of a
merger of the Company with or into another corporation or other legal
entity, where vested options have not been assumed or substituted by such
successor corporation or other entity, such options will be exercisable
for a period of 15 days from the date of notice thereof, and will
terminate upon the expiration of such period. The Company's 1992 Stock
Option Plan provides that upon a change in control, the unvested options
granted to each of the Company's executive officers will be subject to
accelerated vesting to the extent of 50% of such unvested options. A
change in control is defined as (i) a merger or acquisition of the
Company resulting in a 50% or greater change in the total voting power of
the Company immediately following such transaction, or (ii) certain
changes in the majority composition of the Company's Board of Directors
during a 24-month period, which changes are not initiated by the Board of
Directors.
(2) Potential gains are net of exercise price, but before taxes associated
with exercise. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance provided to any executive officer
or any other holder of the Company's securities that the actual stock
price appreciation over the 7-year option term will be at the assumed 5%
and 10% levels or at any other defined level. Unless the market price of
the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the Named Officers.
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The following table sets forth information concerning option exercises
during the 1999 fiscal year and option holdings as of the end of the 1999 fiscal
year with respect to each of the Named Officers. No stock appreciation rights
were outstanding at the end of that year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money
Options at Fiscal Year Options at Fiscal Year
End End(1)
-------------------------------------------------------------------------------------
Shares Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Scott K. Ginsburg - - - 1,548,460 - $6,000,283
Matthew E. Devine - - - 1,000,000 - 2,000,000
Omar A. Choucair - - - 250,000 - 500,000
Dan F. Dent - - - 150,000 - 557,805
Henry W. Donaldson 54,500 210,050 475,257 62,743 $1,612,937 202,263
Paul W. Emery, II - - 135,937 64,063 488,693 230,306
</TABLE>
(1) Based on the fair market value of the Company's Common Stock at year end,
$7.125 per share, less the exercise price payable for such shares.
DIRECTOR COMPENSATION
Except for grants of stock options, directors of the Company generally do
not receive compensation for services provided as a director other than
reimbursement for documented reasonable expenses incurred in connection with
attendance at meetings of the Company's Board of Directors and the committees
thereof. The Company also does not pay compensation for committee participation
or special assignments of the Board of Directors.
Non-employee Board members are eligible for option grants pursuant to the
provisions of the Company's 1995 Director Option Plan. Under the 1995 Director
Option Plan, each non-employee director of the Company will be automatically
granted an option to purchase 10,000 shares of the Company's Common Stock (the
"First Option") on the date on which the optionee first becomes a non-employee
director of the Company, and each non-employee director will thereafter be
granted an additional option to purchase 2,500 shares of the Company's Common
Stock (the "Subsequent Option") on the next anniversary. The exercise price per
share of all options granted under the 1995 Director Option Plan shall be equal
to the fair
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market value of a share of the Company's Common Stock on the date of grant of
the option. Shares subject to the First Option vest over 36 months, and shares
subject to the Subsequent Option vest over 12 months beginning with the month
following the second anniversary of its date of grant. The terms of the options
granted are ten years.
Directors who are also employees of the Company are eligible to receive
options for Common Stock directly under the 1992 Stock Option Plan and, if
officers of the Company, are also eligible to receive incentive cash bonus
awards and are eligible to participate in the 1996 Employee Stock Purchase Plan.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
None of the Company's current executive officers have employment or
severance agreements with the Company, and their employment may be terminated at
any time at the discretion of the Board of Directors. Henry W. Donaldson, the
Company's former President and Chief Operating Officer, entered into an
employment agreement with the Company on November 20, 1998. Mr. Donaldson
resigned on December 17, 1999. Pursuant to the employment agreement, Mr.
Donaldson's base salary was $300,000. Pursuant to the employment agreement, in
January 1999, Mr. Donaldson was awarded an incentive bonus of $50,000 based on
the financial and operational performance of the Company during 1998, and is
scheduled to receive a bonus of $50,000 with respect to the 1999 fiscal year.
In connection with Mr. Donaldson's resignation, the Company paid Mr. Donaldson
his base compensation through March 31, 2000.
Beginning in 1994, Mr. Donaldson purchased restricted stock from the
Company pursuant to certain restricted stock purchase agreements. Mr. Donaldson
purchased all of the shares under the restricted stock purchase agreements by
delivery of four full recourse promissory notes in the aggregate principal
amount of $175,000. The promissory notes bear interest at various annual
interest rates ranging from 5% to 7.75% and became due and payable at various
dates from March 15, 1999 to March 14, 2000. Each promissory note was secured by
a pledge of the shares acquired with each such note. The largest aggregate
indebtedness during the fiscal year under all of the notes was $175,000, which
was forgiven for accounting purposes by the Company in connection with his
resignation.
On January 21, 1998, the Board of Directors awarded the right to purchase
50,000 shares of the Company's Common Stock to Paul W. Emery II, the Company's
former Vice President, Sales, for a per share purchase price equal to $3.875,
the closing price of the Company's Common Stock on the Nasdaq National Market on
such date. The Board of Directors also approved the extension of a loan to Mr.
Emery in an amount equal to the aggregate purchase price for such shares. The
Company had the right to repurchase the shares of the Company's Common Stock
upon the termination of Mr. Emery's employment with the Company prior to full
vesting. The Company's right to repurchase lapsed and Mr. Emery vested in 25% of
the shares on January 21, 1999 and in the balance in a series of 36 equal
monthly installments thereafter. On December 9, 1998, Mr. Emery entered into a
Restricted Stock Purchase Agreement with the Company to evidence his purchase of
the shares and delivered his full recourse promissory note in the amount of
$193,750 in full payment for the shares. The note bears interest at the rate of
4.52% per annum and originally was due on December 9, 2003. The largest
aggregate indebtedness under the note during the fiscal year and the amount
outstanding on December 31, 1999 was $193,750. Mr. Emery ceased being an active
employee on March 15, 2000. In connection with Mr. Emery's separation from the
Company, the Company
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repurchased 22,917 shares of the 50,000 restricted shares awarded. In
connection with his separation from the Company, the promissory note was amended
to become due and payable on February 28, 2001.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee" or the "Committee") reviews and approves the Company's
compensation policies. The following is the report of the Compensation Committee
describing the compensation policies applicable to the compensation of the
Company's Chief Executive Officer and other executive officers for the 1999
fiscal year.
For the 1999 fiscal year, the process utilized by the Committee in
determining executive officer compensation levels was based on the subjective
judgment of the Committee. Among the factors considered by the Committee were
the recommendations of the CEO with respect to the compensation of the Company's
key executive officers. However, the Committee made the final compensation
decisions concerning such officers.
GENERAL COMPENSATION PHILOSOPHY. The Company's philosophy in setting its
compensation policies for executive officers is to maximize shareholder value
over time. The primary goal of the Company's executive compensation program is,
therefore, to closely align the interests of the executive officers with those
of the Company's shareholders. To achieve this goal, the Company attempts to
(i)offer compensation opportunities that attract and retain executives whose
abilities are critical to the long-term success of the Company, motivate
individuals to perform at their highest level and reward outstanding
achievement, (ii) maintain a portion of the executive total compensation at
risk, with payment of that portion tied to achievement of financial,
organizational and management performance goals, and (iii) encourage executives
to manage from the perspective of owners with an equity stake in the Company.
The Compensation Committee currently uses salary, incentive cash bonus awards
and long-term stock-based incentives to meet these goals.
BASE SALARY. The base salary component of total compensation is primarily
designed to attract, motivate, reward and retain highly skilled executives and
to compensate executives competitively within the industry and the marketplace.
In establishing base salaries of executive officers, the Compensation Committee
evaluates each executive's salary history, scope of responsibility at the
Company, prior experience, past performance for the Company, expected
contribution to the Company's future success and recommendations from
management. The Compensation Committee also takes into account the salaries for
similar positions at comparable companies in the Company's industry, based on
each individual Committee member's industry experience, and the position of each
executive officer's base pay relative to the total compensation package,
including cash incentives and long-term incentives. In making its salary
decisions, the Compensation Committee exercised its discretion and judgment
based upon these factors. No specific formula was applied to determine the
weight of each factor.
INCENTIVE CASH BONUSES. Each executive officer's annual bonus is based on
qualitative and quantitative factors and is intended to motivate and reward
executive officers by directly linking the amount of the bonus to performance
targets. In addition, incentive bonuses for executive officers are intended to
reflect the Compensation Committee's belief that the compensation of each
executive officer should be contingent upon the overall performance of the
Company. To carry out this philosophy, the Board of Directors reviews and
approves the financial goals for the fiscal year. The Compensation Committee
then
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evaluates the overall performance of the Company and approves performance
bonuses based on the extent to which the goals of the Board of Directors have
been achieved. The Company achieved record revenues in 1999 of $48.7 million,
and substantially increased its EBITDA (Earnings before interest, tax,
depreciation and amortization) to $1.7 million for the year, both of which were
important milestones for the Company.
LONG-TERM INCENTIVE COMPENSATION. The Compensation Committee views stock
option grants as an important component of its long-term, performance-based
compensation philosophy. The Company provides long-term incentives to its Chief
Executive Officer and its other executive officers. During fiscal 1999, the
Board of Directors and/or the Compensation Committee, in their discretion, made
option grants to Messrs, Devine, Choucair, Dent and Emery. The purpose of such
option grants is to attract and retain the best employee talent available and to
create a direct link between executive compensation and the long-term
performance of the Company. The Compensation Committee believes that stock
options directly motivate its executive officers to maximize long-term
shareholder value. The options also utilize vesting periods that encourage key
executives to continue in the employ of the Company. All options granted to
executive officers to date have been granted at the fair market value of the
Company's Common Stock on the date of grant. Accordingly, the option will
provide a return to the executive officer only if he or she remains in the
Company's employ, and then only if the market price of the Company's Common
Stock appreciates over the option term. The Board of Directors and/or the
Compensation Committee consider the grant of each option subjectively,
considering factors such as the individual performance of the executive officer
and the anticipated contribution of the executive officer to the attainment of
the Company's long-term strategic performance goals. Applying these principles,
a significant grant was made to Mr. Emery in connection with the commencement of
his employment.
CEO COMPENSATION. On December 13, 1998, Mr. Ginsburg was appointed the
Chief Executive Officer of the Company. At Mr. Ginsburg's request, his initial
compensation consisted of base salary in the amount of $1, plus reimbursement of
expenses. In addition, an entity affiliated with Mr. Ginsburg received a
warrant to purchase up to 1,548,460 shares of the Common Stock of the Company in
connection with the commencement of his employment. The warrant was intended to
induce Mr. Ginsburg to join the Company as its new Chairman of the Board and
Chief Executive Officer and to place a significant portion of his total
compensation at risk, because the warrant does not become exercisable, and thus
has no value, unless and until the Company's Common Stock exceeds certain price
thresholds. Effective August 1, 1999, Mr. Ginsburg's annual salary was
established at $125,000.
On July 22, 1999, Mr. Devine was appointed the Chief Executive Officer of
the Company. Effective August 1, 1999, Mr. Devine's annual salary was
established at $125,000.
TAX LIMITATION. Under the Federal tax laws, a publicly held company such as
the Company will not be allowed a federal income tax deduction for compensation
paid to certain executive officers to the extent that compensation exceeds $1
million per officer in any year. To qualify for an exemption from the $1 million
deduction limitation, the shareholders were asked to approve a limitation under
the Company's 1992 Stock Option Plan on the maximum number of shares of Common
Stock for which any one participant may be granted stock options per calendar
year. Because this limitation was adopted, any compensation deemed paid to an
executive officer when he or she exercises an outstanding option under the 1992
Stock Option Plan with an exercise price equal to the fair market value of the
option shares on the grant date will
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qualify as performance-based compensation that will not be subject to the $1
million limitation. Since the cash compensation paid to the Company's executive
officers for the 1999 fiscal year did not exceed the $1 million limit per
officer and it is not expected that the cash compensation to be paid to any
executive officer for the 2000 fiscal year will exceed this limit, the Committee
will defer any decision on whether to limit the dollar amount of all other
compensation payable to the Company's executive officers to the $1 million cap.
Compensation Committee:
Scott K. Ginsburg
Lawrence D. Lenihan, Jr.
David M. Kantor
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Ginsburg, Lenihan and
Kantor. In addition, during 1999, Jeffrey M. Drazan and Leonard S. Matthews
also served on the Compensation Committee. Other than Mr. Ginsburg, the
Company's Chairman of the Board and former Chief Executive Officer, none of
these individuals was at any time during 1999, or at any other time, an officer
or employee of the Company.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total shareholder return
on the Company's Common Stock between February 6, 1996 (the date the Company's
Common Stock commenced public trading) and December 31, 1999 with the cumulative
total return of (i) the Nasdaq Non-Financial Stocks Index and (ii) the Nasdaq
Computer and Data Processing Services Stocks Index, over the same period. This
graph assumes the investment of $100.00 on February 6, 1996 in the Company's
Common Stock, the Nasdaq Non-Financial Stocks Index and the Nasdaq Computer and
Data Processing Services Stocks Index, and assumes the reinvestment of
dividends, if any.
The comparisons shown in the graph below are based upon historical data.
The Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's Common Stock. Information used in the graph was obtained from
the CRSP Total Return Index published by Nasdaq and SG Cowen, sources believed
to be reliable, but the Company is not responsible for any errors or omissions
in such information.
[TABLE APPEARS HERE]
<TABLE>
<CAPTION>
CRSP Total Returns Index for: 02/1996 12/1996 12/1997 12/1998 12/1999
---------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
DIGITAL GENERATION SYSTEMS, INC. 100.0 74.4 22.2 49.4 63.3
Nasdaq Non-Financial Stocks 100.0 116.9 136.9 201.0 396.6
Nasdaq Computer and Data Processing 100.0 120.7 148.2 264.5 582.9
Stocks SIC 7370-7379 US & Foreign
</TABLE>
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<TABLE>
2/6/96 12/31/96 12/31/97 12/31/98 12/31/99
------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Digital Generation Systems, Inc. $ 100 $ 74 $ 22 $ 49 63
Nasdaq Non-Financial Stocks $ 100 117 137 201 397
Index
Nasdaq Computer and Data $ 100 121 148 265 583
Processing Services Stocks Index
</TABLE>
The Company effected its initial public offering of Common Stock on
February 6, 1996. For purposes of this presentation, the Company has assumed
that the initial public offering price of $11.00 per share would have been the
closing price on February 5, 1996, the day prior to the commencement of trading.
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this report
or future filings made by the Company under those statutes, the Compensation
Committee Report and Stock Performance Graph shall not be deemed filed with the
Securities and Exchange Commission and shall not be deemed incorporated by
reference into any of those prior filings or into any future filings made by the
Company under those statutes.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 31, 2000 (except where
otherwise noted), certain information with respect to shares beneficially owned
by (i) each person who is known by the Company to be the beneficial owner of
more than five percent of the Company's outstanding shares of Common Stock, (ii)
each of the Company's directors and the executive officers named in the Summary
Compensation Table and (iii) all current directors and executive officers as a
group. Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share the
power to vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire shares (for example, upon exercise of an option or warrant) within sixty
(60) days of the date as of which the information is provided; in computing the
percentage ownership of any person, the amount of shares is deemed to include
the amount of shares beneficially owned by such person (and only such person) by
reason of such acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person's actual voting power at any particular date.
11
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned
as of January 31, 2000(1)(2)
--------------------------------------
Beneficial Owner Number of Shares Percentage of Class
---------------- ---------------- --------------------
<S> <C> <C>
Entities and individuals affiliated with
Integral Capital Partners (3)............... 1,475,448 5.4%
2750 Sand Hill Road
Menlo Park, California 94025
Entities and individuals affiliated with
London Merchant Securities plc (4).......... 1,578,105 5.9%
Carlton House
33 Robert Adam Street
London WIM 5AH, England
Entities and individuals affiliated with
Pequot Capital Management, Inc. (5)......... 4,987,911 18.1%
354 Pequot Avenue
Southport, Connecticut 06490
Entities and individuals affiliated with
Technology Crossover Ventures (6)........... 2,930,699 10.6%
56 Main Street, Suite 210
Millburn, New Jersey 07041
Scott K. Ginsburg(7)............................... 4,246,552 15.4%
Moon Doggie Family Partnership
17340 Club Hill Drive
Dallas, Texas 75248
Matthew E. Devine.................................. 96,693 *
Omar A. Choucair................................... -- *
Dan F. Dent........................................ -- --
Henry W. Donaldson(8).............................. 962,757 3.0%
Paul W. Emery, II (9).............................. 185,937 *
Lawrence D. Lenihan, Jr. (10)...................... 4,995,966 18.1%
Michael G. Linnert(11)............................. 2,932,087 10.6%
David Kantor....................................... -- *
All current directors and executive officers as a 12,255,862 44.5%
group.............................................
</TABLE>
12
<PAGE>
-----------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. To the Company's knowledge, the entities named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Unless otherwise indicated,
the business address of each beneficial owner listed is 875 Battery
Street, San Francisco, California 94111.
(2) The number of shares of Common Stock deemed outstanding includes shares
issuable pursuant to stock options that may be exercised within sixty
(60) days after January 31, 2000.
(3) Includes 653,597 shares held in the name of Integral Capital Partners
III, L.P., 147,674 shares held in the name of Integral Capital Partners
International III, L.P., 670,751 shares held in the name of Integral
Capital Partners IV, L.P. and 3,426 shares held in the name of Integral
Capital Partners IV MS Side Fund, L.P. 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.
(4) Based on a filing with the Securities and Exchange Commission, dated
February 14, 2000, indicating beneficial ownership as of such date.
Includes 480,824 shares held in the name of Lion Investments Limited and
1,097,281 shares held in the name of Westpool Investment Trust plc. Lion
Investments Limited and Westpool Investment Trust plc are wholly owned
subsidiaries of London Merchant Securities plc.
(5) Includes 375,367 shares held in the name of Pequot Offshore Private
Equity Fund, Inc., 2,964,740 shares held in the name of Pequot Private
Equity Fund, L.P., 823,902 shares held in the name of Pequot
International Fund, Inc. and 823,902 shares held in the name of Pequot
Partners Fund, L.P. Pequot 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. (the "Pequot Funds") and may be deemed to beneficially own all
of such shares. Pequot Capital Management, Inc. acquired beneficial
ownership of such shares from Dawson-Samberg Capital Management, Inc.,
the former investment advisor to the Pequot Funds. On 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 of such shares formerly held by
Dawson-Samberg Capital Management, Inc. Lawrence D. Lenihan, Jr., a
member of the Company's Board of Directors, is a principal and minority
shareholder of Pequot Capital Management, Inc. Mr. Lenihan disclaims
beneficial ownership of all shares held or beneficially owned by or
through such entity.
(6) Includes 875,890 shares held in the name of Technology Crossover
Ventures, L.P., 69,365 shares held in the name of Technology Crossover
Ventures, C.V., 30,853 shares held in the name of TCV II,
13
<PAGE>
V.O.F., 949,785 shares held in the name of Technology Crossover Ventures
II, L.P., 730,207 shares held in the name of TCV II (Q), L.P., 129,585
shares held in the name of TCV II Strategic Partners, L.P. and 145,014
shares held in the name of Technology Crossover Ventures II, C.V.
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.
(7) Based on a filing with the Securities and Exchange Commission, dated
April 4, 2000, indicating beneficial ownership as of such date. Includes
2,920,134 shares held in the name of Moon Doggie Family Partnership, L.P.
Scott K. Ginsburg, the Company's Chairman of the Board, is the sole
general partner of Moon Doggie Family Partnership, L.P. Does not include
an additional 3,008,527 shares of Common Stock which are subject to
warrants issued to Moon Doggie Family Partnership, L.P. The warrants are
not currently exercisable because their exercise is subject to certain
conditions based on the trading price of the underlying Common Stock,
which conditions have not been satisfied as of April 4, 2000.
(8) Includes options exercisable into 475,257 shares of Common Stock.
(9) Includes options exercisable into 135,937 shares of Common Stock.
(10) Includes 4,987,911 shares beneficially owned by affiliated entities of
Pequot Capital Management, Inc., of which Mr. Lenihan disclaims
beneficial ownership except as set forth above (see footnote 5). Includes
options exercisable into 8,055 shares of Common Stock.
(11) Includes 2,930,699 shares beneficially owned by affiliated entities of
Technology Crossover Ventures, of which Mr. Linnert disclaims beneficial
ownership except as set forth above (see footnote 6). Includes options
exercisable into 1,388 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 17, 1999, the Company issued 725,199 shares of Common Stock to
certain existing institutional and closely associated investors pursuant to the
terms of that certain Common Stock Subscription Agreement, dated December 17,
1999, at a price per share of $5.171. Pursuant to that Agreement, 241,733 shares
were issued to Scott K. Ginsburg, the Company's current Chairman of the Board,
96,693 shares were issued to Matthew E. Devine, the Company's current Chief
Executive Officer, 241,733 shares were issued to entities affiliated with Pequot
Capital Management, Inc. and 145,040 shares were issued to entities affiliated
with Technology Crossover Ventures. The gross proceeds to the Company from the
issuance of these additional shares were approximately $3.75 million.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DIGITAL GENERATION SYSTEMS, INC.
Dated: April 28, 2000 By: /s/ MATTHEW E. DEVINE
---------------------
Matthew E. Devine
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934,
this Amendment was signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ SCOTT K. GINSBURG Chairman of the Board and April 28, 2000
- -------------------------------------- Director (Principal Executive
Scott K. Ginsburg Officer)
* Chief Executive Officer and April 28, 2000
- -------------------------------------- Director
Matthew E. Devine
* Chief Financial Officer April 28, 2000
- -------------------------------------- (Principal Financing and
Omar A. Choucair Accounting Officer)
* Director April 28, 2000
- --------------------------------------
David M. Kantor
* Director April 28, 2000
- --------------------------------------
Michael G. Linnert
* Director April 28, 2000
- --------------------------------------
Lawrence D. Lenihan, Jr.
*By: /s/ SCOTT K. GINSBURG
---------------------------------
Scott K. Ginsburg, Attorney-in-Fact
</TABLE>
15
