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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________.
Commission file number: 0-27644
DIGITAL GENERATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 94-3140772
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
875 Battery Street
San Francisco, California 94111
(Address of principal executive offices, including zip code)
(415) 276-6600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Number of shares of registrant's Common Stock, without par value, outstanding as
of June 30, 2000: 28,172,828
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<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
The discussion in this Report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," and similar expressions are used to
identify forward-looking statements. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and we assume no obligation to update any such forward-looking
statements. The Company's 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 discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Business
Considerations" as reported in the Company's Annual Report on Form 10-K filed on
March 28, 2000, as well as those risks discussed in this Report, and in the
Company's other United States Securities and Exchange Commission filings.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements.................................................................. 3
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999.......... 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and July 3, 1999........................................................ 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000
and July 3, 1999...................................................................... 5
Notes to Condensed Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 12
Item 6. Exhibits and Reports on Form 8-K...................................................... 12
SIGNATURES............................................................................ 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,204 $ 5,420
Accounts receivable, less allowance for doubtful accounts of
$2,431 on June 30, 2000 and $1,659 on December 31, 1999 12,277 12,799
Prepaid expenses and other 1,489 1,717
--------------------- ---------------------
Total current assets 16,970 19,936
--------------------- ---------------------
PROPERTY AND EQUIPMENT, at cost:
Network equipment 36,853 35,304
Office furniture and equipment 6,247 5,833
Leasehold improvements 844 793
--------------------- ---------------------
43,944 41,930
Less - Accumulated depreciation and amortization (36,590) (33,772)
--------------------- ---------------------
Property and equipment, net 7,354 8,158
--------------------- ---------------------
GOODWILL AND OTHER ASSETS, net 12,864 13,672
--------------------- ---------------------
TOTAL ASSETS $ 37,188 $ 41,766
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,259 $ 7,781
Accrued liabilities 2,890 3,230
Current portion of long-term debt 2,920 7,689
--------------------- ---------------------
Total current liabilities 10,069 18,700
LONG-TERM DEBT, net of current portion 5,313 2,513
--------------------- ---------------------
TOTAL LIABILITIES 15,382 21,213
--------------------- ---------------------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value --
Authorized -- 15,000,000 shares
Outstanding -- none -- --
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 28,172,828 shares at June 30, 2000
and 27,530,170 shares at December 31, 1999 121,711 119,519
Treasury stock, at cost (101) --
Receivable from issuance of common stock (93) (194)
Accumulated other comprehensive income 65 52
Accumulated deficit (99,776) (98,824)
--------------------- ---------------------
Total shareholders' equity 21,806 20,553
--------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,188 $ 41,766
===================== =====================
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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DIGITAL GENERATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and July 3, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 3, June 30, July 3,
2000 1999 2000 1999
----------------------------- ------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 13,540 $ 12,120 $ 26,250 $ 23,580
--------------- ------------ --------------- -------------
COSTS AND EXPENSES:
Delivery and material costs 3,250 4,769 7,213 9,308
Customer operations 4,082 3,971 8,237 7,528
Sales and marketing 1,250 1,414 2,273 2,651
Research and development 757 680 1,634 1,292
General and administrative 2,310 1,102 4,055 2,609
Depreciation and amortization 1,614 2,435 3,199 4,925
--------------- ------------ --------------- -------------
Total expenses 13,263 14,371 26,611 28,313
--------------- ------------ --------------- -------------
INCOME (LOSS) FROM OPERATIONS 277 (2,251) (361) (4,733)
--------------- ------------ --------------- -------------
OTHER INCOME (EXPENSE):
Interest income 46 58 96 153
Interest expense (406) (508) (686) (1,112)
--------------- ------------ --------------- -------------
NET LOSS $ (83) $ (2,701) $ (951) $ (5,692)
=============== ============ =============== =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.10) $ (0.03) $ (0.21)
=============== ============ =============== =============
WEIGHTED AVERAGE COMMON SHARES 28,152 26,591 27,812 26,490
=============== ============ =============== =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
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DIGITAL GENERATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and July 3, 1999
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, July 3,
2000 1999
------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (951) $ (5,692)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 2,824 4,492
Amortization of goodwill and intangibles 361 387
Provision for doubtful accounts 789 170
Changes in operating assets and liabilities --
Accounts receivable (267) (244)
Prepaid expenses and other assets 675 (306)
Accounts payable and accrued liabilities (3,862) 790
-------------- --------------
Net cash used in operating activities (431) (403)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,147) (2,589)
-------------- --------------
Net cash used in investing activities (1,147) (2,589)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,192 1,244
Proceeds from line of credit 17,018 1,148
Payments on line of credit (14,790) (1,406)
Proceeds from issuance of long-term debt 3,000 --
Payments on long-term debt (8,070) (4,602)
-------------- --------------
Net cash used in financing activities (650) (3,616)
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES 12 (30)
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,216) (6,638)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,420 13,025
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,204 $ 6,387
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 686 $ 1,391
Acquisition of property and equipment through capital lease $ 873 $ --
Treasury stock purchased in exchange for cancellation of note $ 101 $ --
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
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DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Digital
Generation Systems, Inc. (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Effective for fiscal 2000, beginning January 1, the Company elected to
adjust its fiscal quarters so that each quarter ends on a calendar quarter.
Quarters end on March 31, June 30, and September 30. The Company's fiscal year
will continue to end on December 31.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results of
operations and cash flows for the three and six month periods ended June 30,
2000 and July 3, 1999. The results for the three and six month periods ended
June 30, 2000 are not necessarily indicative of the results expected for the
full fiscal year.
Certain reclassifications were made to the 1999 condensed consolidated
financial statements to conform to the 2000 presentation. The reclassifications
have no significant effect on previously reported financial position, results of
operations, or cash flows.
2. DEBT TRANSACTIONS
On April 6, 2000, the Company entered into a long-term loan and security
agreement with Foothill Capital Corporation for a revolving credit facility
providing borrowings up to a maximum of $11 million. The credit facility is
secured primarily by accounts receivable and has a term of three years. The
amount available to the Company is based on eligible receivables less
outstanding letters of credit, as defined in the revolving credit facility
agreement. As of June 30, 2000, $2.2 million was outstanding under the
revolving credit facility and an additional $2.3 million was available for
borrowing.
3. EQUITY TRANSACTIONS
During the six months ended June 30, 2000, 642,658 shares of common stock
were issued pursuant to the exercise of options and warrants for $2,191,475.
6
<PAGE>
4. RECONCILIATION FOR BASIC AND DILUTIVE LOSS PER SHARE ("EPS")
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 3, June 30, July 3,
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Basic:
Net Loss $ (83) $(2,701) $ (951) $(5,692)
Weighted average shares
outstanding 28,152 26,591 27,812 26,490
------- ------- -------- -------
Loss per share $ (0.00) $ (0.10) $ (0.03) $(0.021)
======= ======= ======== =======
Diluted:
Net loss $ (83) $(2,701) $ (951) $(5,692)
Weighted average shares
outstanding 28,152 26,591 27,812 26,490
Add: Net effect of potential
dilutive shares - - - -
------- ------- -------- -------
Total 28,152 26,591 27,812 26,490
------- ------- -------- -------
Loss per share $ (0.00) $ (0.10) $ (0.03) $ (0.21)
======= ======= ======== =======
</TABLE>
At June 30, 2000 and July 3, 1999, warrants to purchase 3,891,070 shares of
common stock at a weighted average exercise price of $3.57 were outstanding but
were not included in the computation of diluted loss per share because the
effect of these outstanding warrants would be antidilutive.
At June 30, 2000 and July 3, 1999, options to purchase 3,284,639 and
2,814,209 shares of common stock at a weighted average exercise price of $4.78
and $3.98, respectively, were outstanding but were not included in the
computation of diluted loss per share because the effect of these outstanding
options would be antidilutive.
5. SEGMENT INFORMATION
The Company operates predominantly in one industry segment: digital and
physical distribution and post-production services for audio and video content,
and its operations are managed primarily by geographic areas. The Company has
defined its reportable segments based on these geographic areas.
7
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DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The information in the following tables is derived directly from the
segments' internal financial reporting used for corporate management purposes.
The expenses, assets and liabilities attributable to corporate activity are not
allocated to the operating segments. As of June 30, 2000, 5% of the Company's
operating assets were located outside of the United States. The assets of the
Company's Los Angeles segment were maintained as a part of the Chicago segment
in 1999 and it is impractical to break out such assets separately as of July 3,
1999.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 2000
(In $000's)
--------------------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Consolidated
--------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue $ 5,828 $3,331 $3,656 $ 725 $13,540
Net income (loss) $(3,882) $1,354 $2,040 $ 405 $ (83)
Total identifiable assets $23,119 $8,875 $3,500 $1,694 $37,188
For the Three Months Ended July 3, 1999
(In $000's)
--------------------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Consolidated
--------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue $ 5,502 $2,961 $3,125 $ 532 $12,120
Net income (loss) $(2,434) $ 358 $ (452) $(173) $(2,701)
Total identifiable assets $24,605 $9,938 $6,695 $ -- $41,238
For the Six Months Ended June 30, 2000
(In $000's)
--------------------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Consolidated
--------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue $10,947 $6,228 $7,594 $1,480 $26,250
Net income (loss) $(8,359) $2,381 $4,293 $ 734 $ (951)
For the Six Months Ended July 3, 1999
(In $000's)
--------------------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Consolidated
--------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue $10,734 $5,901 $6,173 $ 772 $23,580
Net income (loss) $(5,174) $ 798 $ (777) $(539) $(5,692)
</TABLE>
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those indicated
in the forward-looking statements as a result of various factors.
Revenues
Revenues were $13,540,000 for the three months ended June 30, 2000, a 12%
increase from $12,120,000 for the three months ended July 3, 1999, and revenues
for the six months ended June 30, 2000 were $26,250,000, an 11% increase from
$23,580,000 for the six months ended July 3, 1999. Revenues increased primarily
due to increased volume as a result of greater acceptance of the Company's video
delivery and postproduction services and the expanded network of Company
equipment located in television stations.
Delivery and Material Costs
Delivery and material costs were $3,250,000 for the three months ended June
30, 2000, a 32% decrease from the $4,769,000 for the three months ended July 3,
1999. Delivery and material costs were $7,213,000 for the six months ended June
30, 2000, a 23% decrease from $9,308,000 for the six months ended July 3, 1999.
As a percentage of revenue, delivery and material costs decreased to 24% from
39% for the three months ended June 30, 2000 and July 3, 1999, respectively, and
decreased to 27% of revenues from 39% of revenues in the six months ended June
30, 2000 compared to the six months ended July 3, 1999. The decrease in costs
in each period versus the same period of the prior year is a result of the
elimination of duplicate telecommunication costs resulting from the Company's
integration of the Vancouver distribution Networking Operating Center ("NOC")
into the San Francisco NOC. Telecommunication costs were $1,188,000 and
$2,395,000 for the three months ended June 30, 2000 and July 3, 1999,
respectively, and $2,873,000 and $4,641,000 for the six months ended June 30,
2000 and July 3, 1999, respectively. Delivery and material costs include
telecommunication costs associated with online video and audio deliveries, video
and audio tapes along with the related packaging and shipping costs required
when physically duplicating and distributing a video or audio spot. In
addition, delivery and material costs include the direct material and fees paid
to other service providers in connection with postproduction services and other
services offered by the Company.
The Company expects that delivery costs will increase in absolute dollars
and may fluctuate as a percentage of revenues in future periods, influenced
principally by volumes, average sales prices and scale economies as video
deliveries increase in volume.
Customer Operations
Customer operations expenses were $4,082,000 and $3,971,000 for the
quarters ended June 30, 2000 and July 3, 1999, respectively, and $8,237,000 and
$7,528,000 for the six months ended June 30, 2000 and July 3, 1999,
respectively. The increase in 2000 versus 1999 is primarily due to the
additional personnel necessary to respond to the greater volume of orders and
deliveries.
Customer operations expenses as a percentage of revenues decreased to 30%
from 33% for the three months ended June 30, 2000 and July 3, 1999,
respectively, and decreased to 31% for the six months ended June 30, 2000, as
compared to 32% of revenues for the six months ended July 3, 1999. These
decreases are primarily due to process improvements associated with integrating
the Company's NOC and customer service center.
The Company expects that customer operations expenses will increase in
absolute dollars and may fluctuate as a percentage of revenues in future
periods. Moreover, the Company believes that in order to compete effectively
and manage future growth, it will be required to continue to implement
changes that improve and increase the efficiency of its customer operations.
9
<PAGE>
Sales and Marketing
Sales and marketing expenses were $1,250,000 for the three months ended
June 30, 2000, a 12% decrease from $1,414,000 for the three months ended July 3,
1999, and decreased 14% to $2,273,000 from $2,651,000 for the six months ended
June 30, 2000 and July 3, 1999, respectively. These decreases in sales and
marketing expense are the result of improved efficiency of the Company's sales
and marketing efforts, as well as the consolidation of the Company's sales and
marketing efforts among all of its locations. Sales and marketing costs as a
percentage of revenues decreased to 9% from 11% for the three and six months
ended June 30, 2000 and July 3, 1999, respectively, as a result of these
improved efficiencies and reorganization efforts.
The Company expects to continue to expand sales and marketing programs
designed to introduce the Company's services to the marketplace and to attract
new customers for its services. The Company expects that sales and marketing
expenses will increase in absolute dollars and may fluctuate as a percentage of
revenue in future periods.
Research and Development
Research and development expenses increased 11% to $757,000 for the quarter
ended June 30, 2000 from $680,000 for the quarter ended July 3, 1999, and
increased 26% to $1,634,000 for the six months ended June 30, 2000 from
$1,292,000 for the six months ended July 3, 1999. The increase in research and
development expense is primarily due to the capitalization of certain salaries
and benefits during the six months ended July 3, 1999 for personnel involved in
developing software used to integrate the Company's NOC with that of its
Vancouver subsidiary. As a percentage of revenues, research and development
expenses remained relatively unchanged at 6% and 5% of revenues for the six
months ended June 30, 2000 and July 3, 1999, respectively.
The Company expects that additional research and development spending will
be necessary to remain competitive and that its future success will depend in
significant part upon the technological quality of its products and processes
relative to those of its competitors and its ability to develop both new and
enhanced products and services.
General and Administrative
General and administrative expenses increased 110% to $2,310,000 for the
quarter ended June 30, 2000 from $1,102,000 for the quarter ended July 3, 1999,
and increased 55% to $4,055,000 from $2,609,000 for the six months ended June
30, 2000 and July 3, 1999, respectively. The increase is primarily due to the
increased use of temporary labor and professional fees associated with filling
open positions and cost of integrating the Company's financial systems. In
addition, the Company increased its allowance for doubtful accounts receivable.
General and administrative expenses have increased to 17% and 15% of revenues
for the quarter and six months ended June 30, 2000 from 9% and 11% for the
quarter and six months ended July 3, 1999. The Company expects that general
and administrative expenses will increase in absolute dollars and may fluctuate
as a percentage of revenues in future periods.
Depreciation and Amortization
Depreciation and amortization expenses decreased 33% to $1,614,000 in the
three months ended June 30, 2000 from $2,435,000 in the three months ended July
3, 1999, and decreased 35% to $3,199,000 in the six months ended June 30, 2000
from $4,925,000 in the six months ended July 3, 1999. The Company acquired the
bulk of its assets prior to December 31, 1997; therefore, beginning in fiscal
year 1999, there has been a higher percentage of fixed assets which are reaching
or have reached the end of their depreciable lives.
The Company recorded goodwill amortization expense of $206,000 and $361,000
for the quarter and six months ended June 30, 2000, and $192,000 and $387,000
for the quarter and six months ended July 3, 1999.
10
<PAGE>
Interest Income and Interest Expense
Interest income decreased 21% to $46,000 for the quarter ended June 30,
2000 from $58,000 for the quarter ended July 3, 1999, and decreased 37% to
$96,000 in the six months ended June 30, 2000 from $153,000 for the six months
ended July 3, 1999. This decrease is primarily the result of a decreased level
of cash and cash equivalents in the first six months of 2000 as compared to the
first six months of 1999.
Interest expense decreased 20% to $406,000 for the quarter ended June 30,
2000 from $508,000 for the quarter ended July 3, 1999, and decreased 38% to
$686,000 for the six months ended June 30, 2000, from $1,112,000 in the six
months ended July 3, 1999. The decrease is primarily the result of a decrease
in the Company's outstanding debt. Debt outstanding decreased to $8.2 million
at June 30, 2000 from $14.1 million at July 3, 1999.
Liquidity and Capital Resources
Net cash used in operating activities remained relatively unchanged at $0.4
million in the six months ended June 30, 2000 and July 3, 1999.
The Company made capital additions of $1.1 million during the six months
ended June 30, 2000 versus $2.6 million in the six months ended July 3, 1999.
The capital additions in both periods were a result of the Company's continued
expansion of its network. Principal payments on long-term debt were $8.1
million in the six months ended June 30, 2000 versus $4.6 million in the six
months ended July 3, 1999.
The Company expects to continue to invest in the expansion of its network.
In particular, the Company is in the process of expanding its infrastructure
within the television broadcast industry that will require additional DG Video
Transmission Systems and Digital Video Playback Systems ("DVPSs") to be built
and installed in production studios and television stations.
At June 30, 2000, the Company's current sources of liquidity included cash
and cash equivalents of $3.2 million. Based on management's current plans and
forecasts, the Company believes that its existing sources of liquidity will
satisfy the Company's projected working capital, capital lease and revolving
loan commitments, and other cash requirements through the foreseeable future.
On April 6, 2000, the Company entered into a long-term loan and security
agreement with Foothill Capital Corporation for a revolving credit facility
providing borrowings up to a maximum of $11 million. The credit facility is
secured primarily by accounts receivable and has a term of three years. The
amount available to the Company is based on eligible receivables less
outstanding letters of credit, as defined in the revolving credit facility
agreement. As of June 30, 2000, $2.2 million was outstanding under the
revolving credit facility and an additional $2.3 million was available for
borrowing.
On April 7, 2000, the Company entered into a long-term debt agreement to
refinance $3 million in outstanding loans and capital leases. The term of the
new agreement is two years and it expires in 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has some operations in Canada and, therefore, is subject to the
risk that the Canadian dollar/US dollar exchange rates will adversely impact the
Company's results of operations. The Company believes this risk to be immaterial
to the Company's results of operations.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation proceedings incidental to the
conduct of its business. The Company does not believe that any such proceedings
presently pending will have a material adverse effect on its financial
condition or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibit Title
-------------- -------------
27 /(a)/ Financial Data Schedule.
__________
/(a)/ Filed herewith
(b) Report on Form 8-K
Current Report on Form 8-K filed on July 14, 2000 regarding the proposed merger
between Digital Generation Systems, Inc. and StarGuide Digital Networks, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL GENERATION SYSTEMS, INC.
Dated: August 14, 2000 By /s/ OMAR A. CHOUCAIR
-----------------------------------
Omar A. Choucair
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
12
