<PAGE>
As filed with the Securities and Exchange Commission on September 15, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DIGITAL GENERATION SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
California 7319 94-3140772
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification No.)
of Incorporation or Classification Code
Organization) Number)
--------------
5221 North O'Connor Boulevard, Suite 950
Irving, TX 75039
(972) 402-4800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Office)
--------------
Matthew E. Devine
Chief Executive Officer
5221 North O'Connor Boulevard, Suite 950
Irving, TX 75039
(972) 402-4800
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
--------------
Copies to:
<TABLE>
<S> <C> <C>
David R. Earhart, Esq. Robert M. Smith, Esq. Eric L. Bernthal, Esq.
Gardere & Wynne, L.L.P. Dewey Ballantine LLP Latham & Watkins
1601 Elm Street 800 Menlo Avenue, Suite 215 1001 Pennsylvania Avenue, N.W.
Dallas, TX 75201-4761 Menlo Park, CA 94005 Washington, D.C. 20004
(214) 999-3000 (650) 462-7444 (202) 637-2200
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger of SG Nevada Merger Sub Inc. ("SG Nevada"), a Nevada
corporation and a newly formed, wholly-owned subsidiary of Digital Generation
Systems, Inc. ("DG Systems"), with and into StarGuide Digital Networks, Inc.
("StarGuide"), a Nevada corporation, pursuant to the Agreement and Plan of
Merger, dated as of July 7, 2000, as may be amended and restated from time to
time, by and among DG Systems, SG Nevada and StarGuide, described in the
enclosed Proxy Statement/Prospectus, have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of each Class of Proposed Maximum Offering Proposed Maximum Amount of
Scuritieseto be Registered Amount to be Registered(1) Price Per Security Aggregate Offering Price(2) Registration Fee(3)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
without par
value............. 51,440,537 N/A $10,096.47 $100.00
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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(1) Based on the anticipated number of shares to be issued in connection with
the merger calculated as the product of (A) 30,289,429, the aggregate
number of shares of StarGuide common stock, on a fully-diluted, as-
converted basis, outstanding on September 15, 2000, and (B) an exchange
ratio of 1.6983 shares of DG Systems common stock for each share of
StarGuide common stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) promulgated under the Securities Act of
1933, computed based on one-third of the principal amount, par value per
share of the StarGuide common stock to be cancelled in the merger. Solely
for the purposes of calculating the registration fee in accordance with
Rule 457(f)(2) promulgated under the Securities Act, such number was
calculated by multiplying (A) $.00033333, representing one-third of the
par value per share of StarGuide common stock, by (B) 30,289,429,
representing the aggregate number of StarGuide common stock to be
cancelled in the merger.
(3) This fee represents the minimum registration fee. Calculation of the
registration fee in accordance with Rule 457(f)(2) under the Securities
Act yields a registration fee of less than the minimum.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on the date that the Commission, acting under
Section 8(a), determines.
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<PAGE>
[LOGO OF DG SYSTEMS]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
[ ], 2000
Dear Fellow Shareholder:
The Board of Directors of Digital Generation Systems, Inc. has unanimously
approved a merger agreement, which provides for the merger of SG Nevada Merger
Sub Inc., a wholly-owned subsidiary of DG Systems, with and into StarGuide
Digital Networks, Inc. In this merger, the holders of StarGuide common stock
will receive for each share of StarGuide common stock approximately 1.6983
shares of DG Systems common stock, and the holders of DG Systems common stock
will continue to hold their shares. Upon consummation of the merger, holders
of StarGuide common stock will own approximately 59.25% of DG Systems on a
fully-diluted basis, and the holders of DG Systems common stock prior to the
merger will own approximately 40.75% of DG Systems on a fully-diluted basis.
We describe in detail the terms of the merger in the accompanying proxy
statement/prospectus under the caption "THE MERGER," on page 32 which we urge
you to read carefully.
Before we can proceed with the merger, the shareholders of DG Systems must
vote in favor of the proposed transaction. You should carefully consider the
risk factors beginning on page 14 of this proxy statement/prospectus before
voting your DG Systems shares.
Upon the recommendation of a special committee appointed by the DG Systems
Board of Directors, the DG Systems Board of Directors has unanimously adopted
and approved the merger agreement and the merger and recommends that the
shareholders vote FOR the adoption and approval of the merger agreement and
the merger. At the annual meeting of our shareholders, you will have the
opportunity to vote on the proposal. You may vote on the proposal at the
annual meeting either in person or by using the enclosed proxy card. We will
hold the annual meeting on , 2000 at a.m., local time, at the La Cima
Club, 5215 North O'Connor Boulevard, Suite 2600, Irving, Texas, 75039.
Your vote is very important. Whether or not you plan to attend the annual
meeting, please take the time to vote your shares. You may vote your shares by
completing, signing, dating and returning the enclosed proxy card as promptly
as possible in the enclosed postage-prepaid envelope.
Sincerely,
[SIGNATURE]
Scott K. Ginsburg
Chairman of the Board
This proxy statement/prospectus is dated [ ], 2000, and we first
mailed this proxy statement/prospectus to shareholders of DG Systems on or
about [ ], 2000.
<PAGE>
[LOGO OF STARGUIDE]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
[ ], 2000
Dear Fellow Shareholder:
The Board of Directors of StarGuide Digital Networks, Inc. has agreed to
merge StarGuide with a wholly-owned subsidiary of Digital Generation Systems,
Inc. In this merger, the holders of StarGuide common stock, regardless of the
class of common stock held, will receive for each share of StarGuide common
stock approximately 1.6983 shares of DG Systems common stock. Upon
consummation of the merger, shareholders of StarGuide common stock will own
approximately 59.25% of DG Systems on a fully-diluted basis. You will receive
publicly tradable DG Systems common stock in the merger which will be listed
on the Nasdaq National Market under the symbol "DGIT." We describe in detail
the terms of the merger in the accompanying information statement/prospectus
under the caption "THE MERGER," on page 32, which we urge you to read
carefully.
Before we can proceed with the merger, the shareholders of StarGuide must
vote in favor of the proposed transaction. You should carefully consider the
risk factors beginning on page 14 of this proxy statement/prospectus before
voting your StarGuide shares.
The StarGuide Board of Directors has unanimously approved and adopted the
merger agreement and the merger and recommends that the shareholders vote FOR
the approval and adoption of the merger agreement and the merger. We have
scheduled a special meeting of our shareholders to vote on the proposal. You
may vote on the proposal at the special meeting either in person or by using
the enclosed proxy card. We will hold the special meeting on , 2000 at
a.m., local time, at the La Cima Club, 5215 North O'Connor Boulevard, Suite
2600, Irving, Texas, 75039.
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote your shares. You may vote your shares by
completing, signing, dating and returning the enclosed proxy card as promptly
as possible in the enclosed postage-prepaid envelope.
Sincerely,
[Signature]
Scott K. Ginsburg
Chairman of the Board
Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued under this information
statement/prospectus or determined if this information statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal
offense.
This information statement/prospectus is dated [ ], 2000, and we
first mailed this information statement/prospectus to shareholders of
StarGuide on or about [ ], 2000.
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about DG Systems from documents that DG Systems filed with the Securities and
Exchange Commission and that DG Systems has not included in or delivered with
this document. This information is available to you without charge upon your
written or oral request. You can obtain documents incorporated by reference in
this document by requesting them in writing or by telephone from DG Systems at
the following address:
Digital Generation Systems, Inc.
Investor Relations
5221 North O'Connor Boulevard, Suite 950
Irving, Texas 75039
(972) 402-4800
To obtain timely delivery of requested documents prior to the annual meeting
of DG Systems shareholders, you must request documents no later than [ ],
2000. If you request any incorporated documents, we will mail the documents
you request by first class mail, or another equally prompt means, by the next
business day after we have received your request.
See "WHERE YOU CAN FIND MORE INFORMATION" for more information about the
documents incorporated by reference in this proxy statement/prospectus.
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
5221 NORTH O'CONNOR BOULEVARD
IRVING, TEXAS 75039
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ ], 2000
To the Shareholders of Digital Generation Systems, Inc.:
We will hold the annual meeting of the shareholders of Digital Generation
Systems, Inc., a California corporation, on , 2000 at a.m., local time,
at the La Cima Club, 5215 North O'Connor Boulevard, Suite 2600, Irving, Texas
75039, for the following purposes:
1. To consider and vote on a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 7, 2000, by and among Digital
Generation Systems, Inc., SG Nevada Merger Sub Inc., and StarGuide
Digital Networks, Inc., under which, among other things, SG Nevada, a
wholly-owned subsidiary of DG Systems, would merge with and into
StarGuide, and holders of StarGuide common stock would receive for each
share of StarGuide common stock approximately 1.6983 shares of DG
Systems common stock. Upon consummation of the merger, shareholders of
StarGuide common stock will own approximately 59.25% of DG Systems on a
fully-diluted basis.
2. To consider and vote upon a proposal to approve the reincorporation of
DG Systems from California to Delaware;
3. To consider and vote upon a proposal to amend the articles of
incorporation to increase the number of authorized shares of common
stock to 200,000,000 in the event the proposal to reincorporate as a
Delaware corporation is not approved;
4. To elect a board of directors for the ensuing year;
5. To consider and vote upon a proposal to approve an amendment to the 1992
stock option plan to increase the number of shares available for
issuance thereunder;
6. To ratify the selection of KPMG LLP as auditors for the fiscal year
ending December 31, 2000; and
7. To transact such other business as may properly come before the annual
meeting or any adjournment or postponement.
We describe each proposal more fully in the accompanying proxy
statement/prospectus, which you should read in its entirety before voting. A
copy of the merger agreement is set forth as Appendix A to the accompanying
proxy statement/prospectus.
Upon the recommendation of a special committee appointed by the DG Systems
Board of Directors, the DG Systems Board of Directors has unanimously approved
the merger agreement and recommends that you vote FOR approval and adoption of
the merger agreement. The approval and adoption of the merger agreement will
require the affirmative vote of the holders of a majority of the outstanding
shares of DG Systems common stock. The DG Systems Board of Directors also
recommends that you vote FOR the proposal to reincorporate as a Delaware
corporation, the proposal to amend the articles of incorporation, the proposal
to approve an amendment to the 1992 stock option plan, the proposal to ratify
the selection of KPMG LLP as auditors, and the election of the nominees of the
Board of Directors for election as directors as set forth in the accompanying
proxy statement/prospectus.
The close of business on [ ], 2000 has been fixed by the DG Systems Board
of Directors as the record date for the determination of shareholders entitled
to notice of and to vote at the annual meeting or any adjournment or
postponement thereof. Only holders of record of DG Systems common stock at the
close of business on the record date may vote at the annual meeting. A list of
such shareholders will be at DG Systems, located at 5221 North O'Connor
Boulevard, Suite 950, Irving, Texas, during ordinary business hours for the
ten-day period prior to the annual meeting.
<PAGE>
All shareholders are cordially invited to attend the annual meeting in
person. However, to ensure your representation at the annual meeting, you are
urged to complete, sign and return the enclosed proxy card as promptly as
possible in the enclosed postage-prepaid envelope. You may revoke your proxy
in the manner described in the accompanying proxy statement/prospectus at any
time before it is voted at the annual meeting. Executed proxies with no
instructions indicated thereon will be voted "FOR" approval and adoption of
the merger agreement, the proposal to reincorporate as a Delaware corporation,
the proposal to amend the articles of incorporation, each of the nominees for
director as set forth in the accompanying proxy statement/prospectus, the
proposal to approve an amendment to the 1992 stock option plan, the proposal
to ratify the selection of KPMG LLP as auditors for the fiscal year ending
December 31, 2000 and, in the discretion of the proxy holders, on each of the
other proposals that may properly come before the annual meeting.
By Order of the Board of Directors,
[SIGNATURE]
Omar A. Choucair
Chief Financial Officer and
Secretary
Irving, Texas
[ ], 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
SUMMARY................................................................... 4
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA FINANCIAL DATA....... 8
DG Systems Selected Historical Financial Data........................... 8
StarGuide Selected Historical Financial Data............................ 9
Selected Pro Forma Condensed Consolidated Financial Data................ 11
COMPARATIVE PER SHARE DATA................................................ 12
MARKET PRICE INFORMATION.................................................. 13
RISK FACTORS.............................................................. 14
Risks Relating to the Merger............................................ 14
Risks Relating to DG Systems............................................ 17
Risks Relating to StarGuide............................................. 24
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................ 31
THE MERGER................................................................ 32
Background of the Merger................................................ 32
Recommendation of the Board of Directors of DG Systems; DG Systems'
Reasons for the Merger................................................. 34
Opinion of Financial Advisor to DG Systems.............................. 36
Analysis of StarGuide................................................... 38
Analysis of DG Systems.................................................. 39
Pro Forma Merger Analysis............................................... 40
Recommendation of the Board of Directors of StarGuide; StarGuide's
Reasons for the Merger................................................. 42
Opinion of Financial Advisor to StarGuide............................... 43
Interests of Executive Officers and Directors of DG Systems and
StarGuide in the Merger................................................ 47
Directors of DG Systems Following the Merger............................ 49
Certain Fees Associated with the Merger................................. 50
Accounting Treatment.................................................... 50
Material United States Federal Income Tax Consequences of the Merger.... 50
Regulatory Approvals.................................................... 52
Dissenters' Rights...................................................... 52
Resales of DG Systems Common Stock Issued in Connection with the Merger;
Affiliate Agreements................................................... 54
COMBINED COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS............................................................... 55
THE MERGER AGREEMENT...................................................... 64
General................................................................. 64
The Merger.............................................................. 64
Effective Time and Closing of the Merger................................ 65
Procedure to Exchange Certificates...................................... 65
Dissenting Shares....................................................... 66
Employee Stock Options and Equity Incentives............................ 66
Conversion of StarGuide Common Stock Equivalents........................ 66
Representations and Warranties.......................................... 67
Covenants Relating to Conduct of Business............................... 68
No Solicitation......................................................... 70
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Superior Proposal........................................................ 70
Additional Agreements.................................................... 70
Conditions Precedent to the Merger....................................... 73
Termination; Amendment and Waiver........................................ 75
ADDITIONAL AGREEMENTS...................................................... 76
Lock-up Agreements....................................................... 76
Voting Agreements........................................................ 76
THE DG SYSTEMS ANNUAL MEETING.............................................. 78
Date, Time, Place........................................................ 78
Purpose Of Meeting....................................................... 78
Voting Rights And Solicitation Of Proxies................................ 78
Proposal to Approve Reincorporation of DG Systems........................ 80
Proposal to Amend Articles of Incorporation.............................. 84
Proposal to Amend the 1992 Stock Option Plan............................. 85
Proposal to Ratify Accountants........................................... 89
Proposal To Elect Directors.............................................. 90
Executive Officers and Directors of DG Systems........................... 91
Executive Compensation And Related Information........................... 93
Option Grants In Last Fiscal Year........................................ 94
Aggregate Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values.................................................................. 94
Employment Contracts and Change in Control Arrangements.................. 95
Compensation Committee Report............................................ 95
Compensation Committee Interlocks And Insider Participation.............. 97
Stock Performance Table.................................................. 97
Security Ownership of Certain Beneficial Owners and Management........... 99
Certain Relationships And Related Transactions........................... 100
MEETING OF STARGUIDE SHAREHOLDERS.......................................... 101
DG SYSTEMS BUSINESS........................................................ 102
Industry Background...................................................... 102
The Company.............................................................. 103
Products and Services.................................................... 104
The DG Systems Network................................................... 106
Markets and Customers.................................................... 108
Sales, Marketing and Customer Service.................................... 109
Competition.............................................................. 110
Intellectual Property and Proprietary Rights............................. 111
Employees................................................................ 111
Properties............................................................... 112
Legal Proceedings........................................................ 112
DG Systems' Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 112
STARGUIDE BUSINESS......................................................... 120
Overview................................................................. 120
StarGuide Digital Information Distribution............................... 120
StarGuide Strategy....................................................... 123
CoolCast(TM)............................................................. 124
Musicam Express.......................................................... 129
Sales and Marketing...................................................... 129
Competition.............................................................. 130
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Research and Development................................................. 130
Proprietary Rights....................................................... 131
Employees................................................................ 131
Properties............................................................... 131
Legal Proceedings........................................................ 131
StarGuide's Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 132
DESCRIPTION OF DG SYSTEMS CAPITAL STOCK.................................... 136
General.................................................................. 136
Common Stock............................................................. 136
Preferred Stock.......................................................... 136
DESCRIPTION OF DG SYSTEMS WARRANTS......................................... 138
DESCRIPTION OF STARGUIDE WARRANTS.......................................... 138
DESCRIPTION OF STRATEGIC INVESTMENTS IN DG SYSTEMS STOCK................... 138
COMPARISON OF SHAREHOLDER RIGHTS........................................... 139
LEGAL MATTERS.............................................................. 152
EXPERTS.................................................................... 152
DG SYSTEMS SHAREHOLDER PROPOSALS........................................... 152
WHERE YOU CAN FIND MORE INFORMATION........................................ 153
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
AGREEMENT AND PLAN OF MERGER............................................... A-1
OPINION OF CHASE SECURITIES INC............................................ B-1
OPINION OF MORGAN STANLEY & CO. INCORPORATED............................... C-1
SECTIONS 92A.300 THROUGH 92A.500 OF THE NEVADA REVISED STATUTES............ D-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the proposed transaction?
A: SG Nevada, a wholly-owned subsidiary of DG Systems, will merge with and
into StarGuide, after which StarGuide will continue as a wholly-owned
subsidiary of DG Systems. The holders of StarGuide common stock,
irrespective of the class of common stock held, will receive for each
share of StarGuide common stock approximately 1.6983 shares of DG
Systems common stock, so that after the merger, holders of StarGuide
common stock will own approximately 59.25% of DG Systems on a fully-
diluted basis. Holders of DG Systems common stock before the merger will
continue to hold their shares following the merger, when they will
collectively own approximately 40.75% of DG Systems on a fully-diluted
basis.
Q: When do you expect to complete the merger?
A: We expect to complete the merger as soon as possible following the DG
Systems annual meeting. Because the merger is subject to governmental
approvals, however, we cannot predict the exact timing.
Q: What will I receive for one share of StarGuide common stock as a
StarGuide shareholder?
A: Each share of StarGuide common stock you own will be converted into and
exchanged for approximately 1.6983 shares of DG Systems common stock.
This is the merger consideration. DG Systems will not issue fractional
shares to you. Instead, DG Systems will pay you cash for any fractional
shares of DG Systems common stock you otherwise would have received.
Q: Will I be able to trade the DG Systems common stock that I receive in
the merger?
A: Yes, except for certain shareholders who are affiliates of StarGuide and
DG Systems or who are subject to lock-up agreements with respect to
their DG Systems shares. The DG Systems common stock will be listed on
the Nasdaq National Market under the symbol "DGIT."
Q: Will my rights as a DG Systems shareholder change following the merger?
A: If the proposal to reincorporate DG Systems in Delaware is approved,
your shareholder rights will be governed by Delaware law and will be
subject to DG Systems' Delaware certificate of incorporation and by-
laws, as described in the attached proxy statement/prospectus. If the
proposal to reincorporate DG Systems in Delaware is not approved, your
shareholder rights will still be governed by California law and will
still be subject to DG Systems' articles of incorporation and by-laws
prior to the merger, except as they may be modified as described in the
attached proxy statement/prospectus.
Q: Will my rights as a StarGuide shareholder change as a result of the
merger?
A: Yes. Nevada law no longer will govern your shareholder rights. As a
result of the merger, your shareholder rights will be governed by
California law or, if the proposal to reincorporate DG Systems in
Delaware is approved, by Delaware law. In addition, once you receive
shares of DG Systems common stock in exchange for your shares of
StarGuide common stock, you will become a shareholder of DG Systems and
DG Systems' articles of incorporation and by-laws also will govern your
shareholder rights. DG Systems intends to reincorporate in Delaware or,
if that proposal is not approved by the shareholders, to amend its
articles of incorporation immediately prior to the merger, therefore,
after the merger, DG Systems' Delaware certificate of incorporation or
amended articles of incorporation and by-laws will govern your rights as
a DG Systems shareholder.
Q: Will there be a special meeting of StarGuide shareholders to consider
and approve the merger?
A: Yes. The special meeting for StarGuide shareholders will be held on ,
2000 at a.m., local time, at the La Cima Club, 5215 North O'Connor
Boulevard, Suite 2600, Irving, Texas 75039. Scott K. Ginsburg, chairman
of StarGuide, holds, through direct ownership and as trustee of a voting
trust, the rights to vote the requisite number of shares to approve the
merger. Mr. Ginsburg has agreed to vote in favor of the merger at the
special meeting.
1
<PAGE>
Q: How do I vote my shares of DG Systems common stock?
A: If you hold your shares of DG Systems common stock directly, you should
simply indicate on your proxy card how you want to vote, and sign and
mail your signed proxy card in the enclosed postage-prepaid return
envelope as soon as possible to ensure representation of your shares at
the annual meeting. If you sign and send in your proxy card and do not
indicate how you want to vote, your proxy will be counted as a vote in
favor of the merger agreement, the proposal to amend the articles of
incorporation, each of the nominees for director as set forth in the
accompanying proxy statement/prospectus, the proposal to approve an
amendment to the 1992 stock option plan, to ratify the selection of KPMG
LLP as auditors for the fiscal year ending December 31, 2000, and, in
the discretion of the proxy holder, on each of the other proposals that
may properly come before the annual meeting, except if your shares are
held in a brokerage account. Shareholders may also vote in person at the
annual meeting. If you send in your proxy, or attend the annual meeting
in person, but abstain from voting, the effect will be to vote against
the merger agreement.
Q: If my shares of DG Systems common stock are held in a brokerage account,
will my broker vote my shares for me?
A: If a broker holds your shares of DG Systems common stock in "street
name" or another nominee holds your shares, you must instruct your
broker or nominee to vote your shares. A "broker non-vote" will be
counted for purposes of determining if a quorum is present, but will not
count against approval of the merger agreement. It is important,
therefore, that you follow the directions provided by your broker
regarding how to instruct your broker to vote your shares.
Q: Can I change how I vote my DG Systems common stock?
A: Yes, if you change your vote before the vote is taken at the DG Systems
annual meeting. You may change your vote before the annual meeting by
delivering, or instructing your broker or other nominee to deliver, a
later-dated, signed proxy card to the Secretary of DG Systems, or, if
you hold your shares directly, by attending the annual meeting and
giving written notification of revocation to the Secretary of DG
Systems, or by attending the annual meeting and voting in person,
although attendance by itself will not constitute revocation of your
proxy.
Q: Should I send in my StarGuide stock certificates now?
A: No. After we complete the merger, DG Systems will send instructions to
StarGuide shareholders whose shares were converted in the merger. These
instructions will explain how to exchange your StarGuide share
certificates for the appropriate DG Systems share certificates. DG
Systems shareholders will continue to own their shares of DG Systems
common stock after the merger and should continue to hold their stock
certificates.
Q: What do I need to do now?
A: Please carefully read and consider the information contained in this
document. If you are currently a DG Systems shareholder, please
complete, sign and mail your proxy card in the enclosed postage-prepaid
return envelope as soon as possible so that your shares of DG Systems
common stock may be represented at the annual meeting. In order to
assure that your shares are voted, please give your proxy in accordance
with the instructions on your proxy card even if you currently plan to
attend the annual meeting and vote in person.
Q: Who can help me or answer my questions?
A: If you have any questions about the merger, including how to complete
and return your proxy card, or if you would like additional copies of
this proxy statement/prospectus, you should contact:
2
<PAGE>
For DG Systems shareholders:
Digital Generation Systems, Inc.
5221 North O'Connor Boulevard, Suite 950
Irving, TX 75039
Attention: Omar A. Choucair
(972) 402-4800
For StarGuide shareholders:
StarGuide Digital Networks, Inc.
300 East Second Street, Suite 1310
Reno, NV 89509
Attention: Jeffrey Dankworth
(775) 686-5050
3
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. For a more complete description of the legal terms of the
merger, you should carefully read the rest of this document and the other
documents to which we refer. See "WHERE YOU CAN FIND MORE INFORMATION" on page
153. We have included page references in parentheses to direct you to a more
complete description of the topics presented in this summary.
The Companies (See Page 102)
Digital Generation Systems, Inc.
5221 North O'Connor Boulevard, Suite 950
Irving, Texas 75039
Telephone: (972) 402-4800
DG Systems is a leading provider of electronic and physical distribution and
post-production services for audio and video content to advertising agencies,
production studios and broadcast stations throughout the United States and
parts of Canada. DG Systems has developed a digital network, providing high-
quality, cost-effective and reliable electronic transmission of audio and video
spots to and from both advertisers and broadcasters. DG Systems also provides
audio and video duplication services and a variety of other post-production
services through its facilities in New York, Chicago, Louisville, Los Angeles
and Vancouver.
StarGuide Digital Networks, Inc.
300 East Second Street, Suite 1510
Reno, Nevada 89509
Telephone: (775) 686-5050
StarGuide is a leading designer of high-speed digital audio information
transmission and distribution systems. Through StarGuide's proprietary store-
and-forward system, Transportal 2000(TM), StarGuide has developed a high-speed
electronic media delivery system serving the broadcast industry. StarGuide also
seeks to become a leading provider of Internet-related video and content
delivery through its proprietary CoolCast(TM) system. CoolCast(TM) allows
viewers to access high-quality audio and video streaming content through their
personal computers.
Summary of Transaction (See Page 64)
In the merger, SG Nevada will merge with and into StarGuide. As a result, SG
Nevada will cease to exist as a separate corporate entity and StarGuide will
continue as the surviving corporation and a wholly-owned subsidiary of DG
Systems. Immediately after the merger, current StarGuide shareholders will own
approximately 59.25% of DG Systems' approximately 86.8 million post-merger,
fully-diluted outstanding shares, while existing DG Systems shareholders will
own approximately 40.75%.
In the merger, each holder of StarGuide common stock will receive
approximately 1.6983 shares of DG Systems common stock, regardless of the class
of StarGuide common stock held, for each share of StarGuide common stock.
DG Systems Annual Meeting (See Page 78)
DG Systems will hold its annual meeting on , 2000 at a.m., local time,
at the La Cima Club, 5215 North O'Connor Boulevard, Suite 2600, Irving, Texas
75039. At the annual meeting, DG Systems will ask its shareholders to consider
and vote upon proposals to approve and adopt the merger agreement, to
reincorporate in Delaware, to amend its articles of incorporation, to elect a
board of directors for the ensuing year, to approve an amendment to the 1992
stock option plan, to ratify the selection of KPMG LLP as auditors for the
fiscal year ending December 31, 2000 and other matters that may properly come
before the annual meeting or any postponements or adjournments of the meeting.
4
<PAGE>
Record Date; Voting Power (See Page 78)
DG Systems shareholders are entitled to one vote per share of common stock
held on the record date. Only holders of DG Systems common stock at the close
of business on [ ], 2000 will receive notice of and may vote at the DG
Systems annual meeting. On that date, there were [ ] holders of record
holding [ ] shares of DG Systems common stock outstanding.
Vote Required (See Page 79)
The affirmative vote of the holders of record of a majority of the
outstanding shares of DG Systems common stock is required to approve and adopt
the merger agreement, assuming the presence of a quorum.
Certain holders of DG Systems common stock, holding approximately 43% of all
outstanding DG Systems common stock, have entered into voting agreements that
obligate them to vote these shares in favor of approval and adoption of the
merger agreement, unless the merger agreement is terminated. Scott K. Ginsburg,
as a shareholder and as the trustee of a voting trust holding voting control of
approximately 94% of all shares of StarGuide common stock, also has entered
into a voting agreement that obligates him to vote these shares in favor of
approval and adoption of the merger agreement, unless the merger agreement is
terminated.
Recommendation to DG Systems Shareholders (See Page 34)
Upon the recommendation of a special committee appointed by the DG Systems
board of directors, the DG Systems board of directors has unanimously concluded
that the merger agreement and the merger are fair to, and in the best interests
of, the DG Systems shareholders, and recommends that the shareholders vote in
favor of approval and adoption of the merger agreement.
Interests of Officers and Directors in the Merger (See Page 47)
Some members of DG Systems' management and the DG Systems board of directors
have interests in the merger that are different from, or in addition to, the
interests of the DG Systems shareholders generally. In addition, some members
of StarGuide's management and the StarGuide board of directors have interests
in the merger that are different from, or in addition to, the interests of the
StarGuide shareholders generally. Each of the DG Systems board and the
StarGuide board was aware of these interests and considered them, among other
matters, when they voted to approve and adopt the merger agreement.
Completion of the Merger (See Page 73)
To complete the merger, a number of conditions must be satisfied. These
include:
. Holders of a majority of the outstanding shares of DG Systems common
stock and holders of a majority of the StarGuide common stock will have
voted to approve the merger agreement;
. Nasdaq will have authorized for listing the DG Systems common stock
issuable in the merger;
. There shall not have been any action by any governmental entity or law
challenging or preventing the merger;
. The waiting period applicable to the merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 will have expired;
. Each of the parties will have performed each of its covenants and
agreements contained in the merger agreement, and each of the
representations and warranties of the parties contained in the merger
agreement will be true and correct;
5
<PAGE>
. The counsel of each of DG Systems and StarGuide will have delivered
legal opinions stating that the merger will qualify as a reorganization
under the Internal Revenue Code; and
. Holders of not more than 10% of the shares of StarGuide common stock, on
a fully-diluted, as-converted basis, issued and outstanding at the time
of the merger will have exercised their appraisal rights.
DG Systems or StarGuide, as applicable, may waive the conditions to the
completion of the merger to the extent that a waiver would be permitted by law.
If either party waives any condition relating to the tax opinions or any other
material condition to the merger, we will amend this proxy statement/
prospectus and resolicit the votes of the DG Systems shareholders.
Termination of the Merger Agreement (See Page 75)
The merger agreement may be terminated and abandoned:
. by the written consent of all parties to the merger;
. by any party if the merger has not occurred on or prior to December 31,
2000;
. by StarGuide if the DG Systems' board of directors agrees to accept a
superior proposal;
. by DG Systems if its special committee recommends acceptance of a
superior proposal and its board of directors enters into an agreement
regarding that superior proposal and further recommends DG Systems'
shareholders to approve the proposal, subject to payment of a $7.5
million termination fee;
. by StarGuide if prior to the merger more than 50% of DG Systems'
outstanding common stock has been transferred to, or tendered for, by
entities other than DG Systems shareholders as of the merger agreement
date;
. by any party, upon failure of satisfaction of a closing condition, so
long as such failure is not caused by the party seeking to terminate or
as a result of such party's breach of any representation or warranty;
and
. by any party, if any final governmental order prohibits the merger.
Fees and Expenses (See Page 71)
If the merger is consummated, DG Systems will pay the costs, expenses and
fees incurred by both parties in connection with the merger. If the merger is
not consummated, for any reason other than DG Systems terminating the merger
agreement because of receipt of a superior proposal, each party will pay its
own costs, expenses and fees.
Accounting Treatment (See Page 50)
The parties will account for the merger by using the purchase method of
accounting in accordance with generally accepted accounting principles. The
purchase method accounts for a merger as an acquisition of one company by
another. Based on the exchange ratio, StarGuide shareholders will obtain a
majority of the voting interest of the combined company and therefore will be
treated as the accounting acquirer. See "COMBINED COMPANY UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS."
Fairness Opinions of Financial Advisors (See Page 36 and Page 43)
DG Systems' financial advisor, Chase Securities Inc., has given a written
opinion to the special committee of DG Systems board of directors that, as of
July 7, 2000, the exchange ratio is fair, from a financial point of view, to DG
Systems and its shareholders. This opinion is subject to the qualifications and
limitations referred to in the opinion. This opinion appears as Appendix B to
this proxy statement/prospectus. We urge you to read this opinion carefully and
in its entirety.
6
<PAGE>
StarGuide's financial advisor, Morgan Stanley & Co. Incorporated, delivered
an opinion to the StarGuide board of directors that, as of July 7, 2000, the
consideration to be received by holders of shares of StarGuide common stock
pursuant to the merger agreement is fair from a financial point of view to such
holders. This opinion is subject to the qualifications and limitations referred
to in the opinion. This opinion appears as Appendix C to this proxy
statement/prospectus. We urge you to read this opinion carefully and in its
entirety.
Material United States Federal Income Tax Consequences (See Page 50)
DG Systems Shareholders. DG Systems shareholders will not receive anything
upon consummation of the merger and will not recognize any gain or loss for
United States federal income tax purposes.
StarGuide Shareholders. The merger is intended to qualify as a reorganization
under Section 368(a) of the Internal Revenue Code, and it is a condition to
closing the transaction that legal counsel to DG Systems and StarGuide,
respectively, deliver opinions that the merger will constitute a reorganization
within the meaning of Section 368(a). If the merger constitutes a
reorganization within the meaning of Section 368(a), StarGuide shareholders
participating in the transaction will not recognize gain or loss for United
States federal income tax purposes with respect to DG Systems common stock
received in the merger, although StarGuide shareholders will recognize gain or
loss with respect to any cash received for fractional shares.
Tax matters are very complicated, and the tax consequences of the merger to a
particular StarGuide shareholder will depend on the facts of the shareholder's
own situation. Each shareholder should consult his own tax advisor for a full
understanding of the tax consequences to him.
Dissenters' Rights (See Page 52 and Appendix D)
The holders of StarGuide common stock are entitled to dissenters' or
appraisal rights in connection with the merger under applicable Nevada law. The
holders of DG Systems common stock are not entitled to dissenters' or appraisal
rights in connection with the merger under applicable California law.
7
<PAGE>
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
DG Systems Selected Historical Financial Data
The following selected historical consolidated financial data should be read
in conjunction with DG Systems' consolidated financial statements and related
notes and DG Systems' "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the four years ended December 31, 1998, 1997, 1996 and 1995
and the consolidated balance sheet data at December 31, 1998, 1997, 1996 and
1995 are derived from the consolidated financial statements of DG Systems,
which have been audited by Arthur Andersen LLP, independent public
accountants. The consolidated statement of operations data for the year ended
December 31, 1999 and the consolidated balance sheet data at December 31, 1999
is derived from the consolidated financial statements of DG Systems, which
were audited by KPMG LLP, independent public accountants. The summary
financial data as of and for the six month periods ended June 30, 2000 and
July 3, 1999 have been derived from DG Systems' unaudited financial
statements, which in the opinion of DG Systems' management include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results of operations and financial position of DG Systems,
for those periods and as of those dates in accordance with generally accepted
accounting principles. Historical results are not necessarily indicative of
the results to be expected in the future.
Statements of Operations:
<TABLE>
<CAPTION>
Six Months
Ended
----------------
June Year Ended December 31,
30, July 3, ---------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- -------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $26,250 $23,580 $48,724 $ 41,270 $ 29,175 $10,523 $ 5,144
Costs and expenses:
Delivery and material
costs................ 7,213 9,308 17,857 14,630 11,334 3,084 1,810
Customer operations... 8,237 7,528 15,138 14,780 11,388 4,164 2,974
Sales and marketing... 2,273 2,651 4,818 4,970 4,417 3,998 3,406
Research and
development.......... 1,634 1,292 2,577 2,780 2,473 2,092 1,590
General and
administrative....... 4,055 2,609 6,552 4,314 3,169 1,677 1,380
Write down of goodwill
and fixed assets(1).. -- -- -- 17,006 -- -- --
Non-recurring
charges.............. -- -- 370 -- -- -- --
Depreciation and
amortization......... 3,199 4,925 8,591 10,266 9,306 4,331 2,345
------- ------- ------- -------- -------- ------- -------
Total expenses...... 26,611 28,313 55,903 68,746 42,087 19,346 13,505
------- ------- ------- -------- -------- ------- -------
Loss from operations.... (361) (4,733) (7,179) (27,476) (12,912) (8,823) (8,361)
Other income (expense):
Interest income and
other, net........... 96 153 319 253 744 1,422 417
Interest expense...... (686) (1,112) (1,903) (3,014) (2,607) (1,726) (836)
------- ------- ------- -------- -------- ------- -------
Net loss................ $ (951) $(5,692) $(8,763) $(30,237) $(14,775) $(9,127) $(8,780)
======= ======= ======= ======== ======== ======= =======
Basic and diluted net
loss per common
share(2)............... $ (0.03) $ (0.21) $ (0.33) $ (1.97) $ (2.52) $ (.87) $ (9.78)
======= ======= ======= ======== ======== ======= =======
Weighted average number
of common shares
outstanding............ 27,812 26,490 26,653 16,272 11,893 10,488 898
======= ======= ======= ======== ======== ======= =======
</TABLE>
--------
(1) See Note 3 of "Notes to Consolidated Financial Statements" of DG Systems.
(2) See Note 11 of "Notes to Consolidated Financial Statements" of DG Systems.
8
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of December 31,
As of June 30, ------------------------------------------
2000 1999 1998 1997 1996 1995
-------------- ------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents
and short-term
investments............ $ 3,204 $ 5,420 $ 13,025 $ 8,820 $ 20,597 $ 6,205
Working capital......... 6,901 1,236 7,178 (879) 14,200 4,651
Property and equipment,
net.................... 7,354 8,158 11,745 17,566 12,630 5,772
Total assets............ 37,188 41,766 49,792 60,697 45,248 14,459
Long-term debt, net of
current portion........ 5,313 2,513 9,307 11,847 8,495 4,540
Shareholders' equity.... 21,806 20,553 23,710 30,449 26,839 6,373
</TABLE>
StarGuide Selected Historical Financial Data
The following selected historical consolidated financial data should be read
in conjunction with StarGuide's consolidated financial statements and related
notes and StarGuide's "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the years ended December 31, 1999, 1998 and 1997 and the
consolidated balance sheet data at December 31, 1999 and 1998 are derived from
the consolidated financial statements of StarGuide, which were audited by KPMG
LLP, independent public accountants. The summary financial data as of and for
the six month periods ended June 30, 2000 and 1999 have been derived from
StarGuide's unaudited financial statements which in the opinion of StarGuide's
management include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results of operations and
financial position of StarGuide for those periods and as of those dates in
accordance with generally accepted accounting principles. Historical results
are not necessarily indicative of the results to be expected in the future.
9
<PAGE>
Statements of Operations:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- -------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 6,600 $ 5,326 $13,068 $11,819 $23,977 $20,729 $ 8,913
Costs and expenses:
Cost of revenues...... 4,365 3,229 8,128 8,137 14,676 13,567 5,779
Sales and marketing... 1,172 1,967 3,209 2,965 2,823 1,944 1,946
Research and
development.......... 1,480 1,197 3,383 2,547 2,770 1,973 1,797
General and
administrative....... 2,009 1,296 3,087 2,878 3,101 4,497 4,166
Noncash stock
compensation
charges(1)........... 18,375 -- -- -- -- -- --
Depreciation and
amortization......... 433 484 973 1,267 1,014 750 457
-------- ------- ------- ------- ------- ------- -------
Total expenses...... 27,834 8,173 18,780 17,794 24,384 22,731 14,145
-------- ------- ------- ------- ------- ------- -------
Loss from operations.... (21,234) (2,847) (5,712) (5,975) (407) (2,003) (5,231)
Other income (expense):
Equity in losses of
affiliated joint
venture.............. (829) (673) (3,031) (2,282) (3,276) (1,563) --
Interest income and
other, net........... 195 34 289 35 40 27 93
Interest expense...... (17) (293) (547) (628) (815) (380) (136)
Income tax benefit.... -- -- -- -- -- 356 492
-------- ------- ------- ------- ------- ------- -------
Net loss................ $(21,885) $(3,779) $(9,001) $(8,850) $(4,458) $(3,563) $(4,782)
======== ======= ======= ======= ======= ======= =======
Basic and diluted net
loss per share......... $ (0.93) $ (0.17) $ (0.40) $ (0.46) $ (0.23) $ (0.19) $ (0.25)
======== ======= ======= ======= ======= ======= =======
Weighted average number
of common shares
outstanding............ 23,455 22,442 22,607 19,255 19,015 19,000 19,000
======== ======= ======= ======= ======= ======= =======
</TABLE>
--------
(1) See Note 9 of "Notes to Consolidated Financial Statements" of StarGuide.
Balance Sheet Data:
<TABLE>
<CAPTION>
As of December 31,
As of June 30, -------------------------------------------
2000 1999 1998 1997 1996 1995
-------------- -------- ------- ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 5,455 $ 2,145 $ 1,876 $ 338 $ 370 $ 381
Working capital......... 5,725 3,259 (1,691) (1,529) (1,823) 2,146
Property and equipment,
net.................... 773 725 959 1,480 1,163 898
Total assets............ 13,712 14,062 7,847 10,201 11,713 9,108
Long-term debt, net of
current portion........ -- 5,000 5,586 6,234 2,083 1,342
Shareholders' equity
(deficit).............. (6,729) (14,675) (5,982) (5,634) (1,376) 3,268
</TABLE>
10
<PAGE>
Selected Pro Forma Condensed Consolidated Financial Data
The following unaudited selected pro forma condensed consolidated financial
data give effect to the merger, accounted for as a reverse acquisition with
StarGuide considered the accounting acquirer. Additionally, the pro forma
condensed consolidated financial data give effect to the acquisition by
StarGuide of the remaining 50% interest in Musicam Express. See "STARGUIDE
BUSINESS--Musicam Express." The selected pro forma condensed consolidated
balance sheet data has been prepared as if the merger and the Musicam Express
acquisition occurred on June 30, 2000. The selected pro forma condensed
consolidated statement of operations data has been prepared as if the merger
and the Musicam Express acquisition occurred on January 1, 1999. The following
financial statement data does not reflect any anticipated cost savings that
may be realized by the combined company after the merger. The pro forma
information does not purport to represent what the combined company's results
of operations actually would have been if the transactions had occurred on the
date or for the periods presented.
The pro forma condensed consolidated financial data should be read in
conjunction with the historical financial statements of StarGuide and the
historical financial statements of DG Systems as well as the COMBINED COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS appearing
elsewhere in this proxy statement/prospectus.
PRO FORMA STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
Total revenues............................... $ 33,359 $ 62,820
Loss from operations......................... (30,622) (34,402)
Net loss..................................... (31,507) (37,110)
Basic and diluted net loss per share......... (0.46) (0.56)
</TABLE>
The pro forma condensed consolidated statement of operations data (i) for
2000 include an $18.4 million charge recognized by StarGuide for noncash stock
compensation charges associated with warrants and stock purchase rights, and
$1.0 million for an impairment charge recognized by Musicam Express, and (ii)
for 1999 include a $4.1 million impairment charge recognized by Musicam
Express.
PRO FORMA BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
As of
June 30, 2000
-------------
<S> <C>
Cash and cash equivalents......................................... $ 8,754
Current assets.................................................... 29,457
Property and equipment, net....................................... 8,692
Goodwill and other intangibles, net............................... 217,968
Total assets...................................................... 256,548
Long-term debt, net of current portion............................ 5,313
Shareholders' equity.............................................. 201,382
</TABLE>
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following table summarizes certain unaudited historical per share data
of DG Systems and StarGuide and the combined per share data on a pro forma
basis. Neither DG Systems nor StarGuide has declared cash dividends. You
should read the information below along with the Combined Company Unaudited
Pro Forma Condensed Consolidated Financial Statements and the selected
historical financial data included elsewhere in this proxy
statement/prospectus. The pro forma condensed consolidated financial
information is not necessarily indicative of the results of future operations
or the actual results that would have occurred if the merger and the Musicam
Express acquisition had occurred on January 1, 1999.
<TABLE>
<CAPTION>
As of and for the As of and for the
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
------------------------- -------------------------
Historical Pro Forma(1) Historical Pro Forma(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
DG Systems:
Basic and diluted net
loss per share.......... $ (0.03) N/A $ (0.33) N/A
Book value per share..... $ 0.77 N/A $ 0.75 N/A
StarGuide:
Basic and diluted net
loss per share.......... $ (0.93) $ (0.98) $ (0.40) $ (0.60)
Book value (deficit) per
share................... $ (0.28) $ (0.11) $ (0.65) N/A
<CAPTION>
As of and for the As of and for the
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
------------------------- -------------------------
Equivalent Equivalent
Pro Forma Pro Forma Pro Forma Pro Forma
Combined (2) Combined (3) Combined (2) Combined (3)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro Forma Combined:
Basic and diluted net
loss per share.......... $ (0.46) $ (0.78) $ (0.56) $ (0.95)
Book value per share..... $ 2.94 $ 4.99 N/A N/A
</TABLE>
--------
(1) Pro forma amounts for StarGuide give effect to the acquisition by
StarGuide of the remaining 50% interest in Musicam Express as if the
transaction occurred as of June 30, 2000 for book value (deficit) per
share purposes and on January 1, 1999 for basic and diluted loss per share
purposes.
(2) See "COMBINED COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS."
(3) The equivalent pro forma StarGuide combined per share amounts have been
calculated by multiplying the pro forma combined per share amounts by
1.6983. The 1.6983 value is the approximate exchange ratio in the merger
agreement, which represents the number of shares of DG Systems common
stock that a holder of StarGuide common stock will be entitled to receive
for each share of their StarGuide common stock. The exchange ratio is
subject to change based on the relative number of DG Sytems and StarGuide
fully diluted shares outstanding on the effective date of the merger.
12
<PAGE>
MARKET PRICE INFORMATION
DG Systems' common stock has traded on the Nasdaq National Market under the
symbol "DGIT" since February 6, 1996. The table below sets forth, for the
periods indicated, the high and low sale closing sale prices of DG Systems
common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
DG Systems
Common Stock
------------
High Low
------ -----
<S> <C> <C>
Fiscal 1998
First Quarter...................................................... $ 5.13 $1.56
Second Quarter..................................................... $ 4.38 $3.25
Third Quarter...................................................... $ 4.19 $2.38
Fourth Quarter..................................................... $ 5.75 $2.25
Fiscal 1999
First Quarter...................................................... $ 8.13 $3.63
Second Quarter..................................................... $ 9.00 $4.13
Third Quarter...................................................... $ 6.13 $3.38
Fourth Quarter..................................................... $ 7.56 $3.25
Fiscal 2000
First Quarter...................................................... $10.06 $6.38
Second Quarter..................................................... $ 8.25 $4.25
Third Quarter (through September 12, 2000)......................... $ 6.97 $5.50
</TABLE>
13
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before you decide
whether to vote to approve the merger agreement and the merger. You should
also consider the other information in this proxy statement/prospectus and the
additional information in DG Systems' other reports on file with the SEC and
in the other documents incorporated by reference in this proxy
statement/prospectus. See "WHERE YOU CAN FIND MORE INFORMATION" on page 153.
Risks Relating to the Merger
DG Systems' stock price is volatile and the value of the DG Systems common
stock to be issued in the merger will depend on its market price at the time
of the merger; no adjustment in the number of shares of DG Systems common
stock to be issued in the merger will be made as a result of changes in the
market price of DG Systems common stock prior to the merger.
At the closing of the merger, each share of StarGuide common stock will be
exchanged for approximately 1.6983 shares of DG Systems common stock. This
exchange ratio will not be adjusted for changes in the market price of DG
Systems common stock. In addition, neither DG Systems nor StarGuide may
terminate or renegotiate the merger agreement, and neither StarGuide nor DG
Systems may resolicit the vote of its shareholders solely because of changes
in the market price of DG Systems common stock. Consequently, the specific
dollar value of DG Systems common stock that StarGuide shareholders will
receive upon the completion of the merger will depend on the market value of
DG Systems common stock at that time and may vary from the date that any
shareholder votes to approve the merger. You are urged to obtain recent market
quotations for DG Systems common stock. Neither DG Systems nor StarGuide can
predict or give any assurances as to the market price of DG Systems common
stock at any time before or after the merger.
The market price of DG Systems common stock, like that of the shares of many
other high-technology companies, has been and is likely to continue to be
volatile. Some of the factors that may cause the market price of DG Systems
common stock to fluctuate significantly, include:
. the addition or departure of key DG Systems personnel;
. variations in DG Systems' quarterly operating results;
. announcements by DG Systems or its competitors of significant contracts,
new or enhanced products or service offerings, acquisitions,
distribution partnerships, joint ventures or capital commitments;
. changes in financial estimates by securities analysts;
. DG Systems' sales of common stock or other securities in the future;
. changes in market valuations of networking, Internet and
telecommunications companies;
. fluctuations in stock market prices and trading volumes generally;
. sale of shares of DG Systems common stock by significant holders; and
. changes in general economic conditions, including interest rate levels.
If the merger's benefits do not meet the expectations of financial or industry
analysts, the market price of DG Systems common stock may decline.
The market price of DG Systems common stock may decline as a result of the
merger if:
. the integration of DG Systems and StarGuide is unsuccessful;
. DG Systems does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial or industry analysts;
or
. the effect of the merger on DG Systems' financial results is not
consistent with the expectations of financial or industry analysts.
14
<PAGE>
Sales of substantial amounts of DG Systems common stock in the public market
after the proposed merger could materially adversely affect the market price
of DG Systems common stock.
Based on the shares of StarGuide common stock outstanding on July 31, 2000
and assuming all outstanding options and warrants are exercised, DG Systems
would issue 51,440,537 shares of DG Systems common stock to StarGuide
shareholders in the merger. Approximately 23,428,457 shares of DG Systems
common stock outstanding after the merger will be freely tradeable immediately
following the merger and approximately 63,360,673 additional shares of DG
Systems common stock outstanding after the merger will become freely tradable
at various times over the 180-day lock-up period following the merger. The
sale of substantial amounts of these shares (including shares issued upon
exercise of outstanding options) may cause substantial fluctuations in the
price of DG Systems common stock. In addition, once the lock-up period expires
completely, sales of a substantial number of shares of DG Systems common stock
within a short period of time could cause DG Systems' stock price to fall. The
sale of these shares also could impair DG Systems' ability to raise capital
through the sale of additional stock.
If the costs associated with the merger exceed the benefits realized, DG
Systems may experience adverse financial results, including increased losses.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to DG Systems' shareholders resulting from the
issuance of shares in connection with the merger, DG Systems' financial
results could be adversely affected, including increased losses.
DG Systems may not be able to enter into a merger or business combination with
another party at a favorable price because of restrictions in the merger
agreement.
While the merger agreement is in effect, unless the fiduciary duties of the
DG Systems board of directors otherwise require, DG Systems is prohibited from
entering into or soliciting, initiating or encouraging any inquiries or
proposals that may lead to a proposal or offer for a merger, consolidation,
business combination, sale of substantial assets, tender offer, sale of shares
of capital stock or other similar transactions with any person other than
StarGuide. As a result of this prohibition, DG Systems may not be able to
enter into an alternative transaction at a favorable price.
DG Systems may not be able to obtain additional financing to satisfy its
future capital expenditure needs.
We intend to continue making capital expenditures to produce and install
various equipment required by our customers to receive our services and to
introduce additional services. We also expect to make capital expenditures
related to the acquisition of the StarGuide business. In addition, we will
continue to analyze the costs and benefits of acquiring certain additional
businesses, products or technologies that we may from time to time identify,
and DG Systems' related ability to finance these acquisitions. Assuming that
we do not pursue one or more additional acquisitions funded by internal cash
reserves, we anticipate that DG Systems' existing capital, cash from
operations, and funds available under existing term loan and line of credit
agreements should be adequate to satisfy DG Systems' capital requirements,
including those capital requirements related to the StarGuide business,
through December 31, 2000. We may require additional capital sooner than
currently anticipated and may not be able to obtain additional funds adequate
for our capital needs. Our capital needs depend upon numerous factors,
including:
. the progress of DG Systems' product development activities;
. the progress of product development activities related to StarGuide
products;
. the cost of increasing DG Systems' sales and marketing activities; and
. the amount of revenues generated from operations.
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We cannot predict any of the foregoing factors with certainty. In addition,
we cannot predict the precise amount of future capital that we will require,
particularly if we pursue one or more additional acquisitions. Furthermore,
additional financing may not be available to us, or if it is available, it may
not be available on acceptable terms. Our inability to obtain financing for
additional acquisitions on acceptable terms may prevent us from completing
advantageous acquisitions and consequently could seriously harm DG Systems'
prospects and future rates of growth. Our inability to obtain additional
funding for continuing operations or an acquisition would seriously harm DG
Systems' business, financial condition and results of operations.
Consequently, we could be required to:
. significantly reduce or suspend DG Systems' operations;
. seek an additional merger partner; or
. sell additional securities on terms that are highly dilutive to DG
Systems' existing investors.
DG Systems' and StarGuide's officers and directors have conflicts of interest
or commitments that may influence them to support or approve the merger
agreement and the merger.
The vesting of some of the options held by DG Systems' non-employee
directors and a portion of the options held by DG Systems' officers will be
accelerated upon completion of the merger. All of StarGuide's directors and
officers will have continuing indemnification against liabilities. In
addition, certain directors and officers of DG Systems are also directors and
officers of StarGuide. These factors provide both DG Systems' and StarGuide's
officers and directors with interests in the merger that are different from,
or in addition to, yours. In addition, some directors and officers and their
affiliates already have agreed to vote in favor of the merger. The directors
and officers may have been more likely to vote to approve the merger agreement
and the merger than if they did not have these interests. You should consider
whether these interests influenced these directors and officers to support or
recommend the merger. You should read more about these interests under "THE
MERGER--Interests of Executive Officers and Directors of DG Systems and
StarGuide in the Merger" on page 47.
Insiders will have substantial control over DG Systems after the merger which
could limit others' ability to influence the outcome of key transactions,
including changes in control.
Following the merger, we anticipate that the executive officers and
directors of DG Systems and their respective affiliates will own approximately
57% of DG Systems' 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 even if a change of
control is in the best interest of all shareholders.
Uncertainties associated with the merger may cause StarGuide or DG Systems to
lose key personnel.
Current and prospective StarGuide employees may experience uncertainty about
their future roles with DG Systems. DG Systems' current employees also may
experience uncertainty about their future roles with DG Systems after
StarGuide's integration into DG Systems. This uncertainty may adversely affect
StarGuide's or DG Systems' ability to retain key management, sales, marketing
and technical personnel, or to attract qualified personnel in the future.
DG Systems may face challenges in integrating DG Systems and StarGuide and, as
a result, may not realize the expected benefits of the merger.
Integrating the operations and personnel of DG Systems and StarGuide will be
a complex process. DG Systems is uncertain that the integration will be
completed rapidly or that it will achieve the anticipated benefits of the
merger. The successful integration of DG Systems and StarGuide will require,
among other things, integration of DG Systems' and StarGuide's products and
services, network operations and engineering,
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assimilation of sales and marketing groups, integration of the companies'
information and software systems, coordination of employee retention, hiring
and training, and coordination of ongoing and future research and development
efforts. The diversion of the attention of management and any difficulties
encountered in the process of combining the companies could cause the
disruption of, or a loss of momentum in the activities of the combined
company's business. Further, the process of combining DG Systems and StarGuide
could negatively affect employee morale and the ability of DG Systems to
retain some of its or StarGuide's key employees after the merger.
As a result of the merger, the combined company will incur transaction costs
that may exceed our estimates and significant consolidation and integration
expenses that we cannot accurately estimate at this time, either of which may
negatively affect DG Systems' financial condition and operating results.
DG Systems will incur significant transaction costs as a result of the
merger, including investment banking, legal and accounting fees, that may
exceed our current estimates. In addition, DG Systems expects that it will
incur significant consolidation and integration expenses which it cannot
accurately estimate at this time. These costs could include the possible
relocation of certain operations from San Francisco and Reno as well as the
loss of benefits from favorable office leases. DG Systems expects that the
combined company will charge consolidation and integration expenses to
operations in fiscal 2000. Actual transaction costs may substantially exceed
DG Systems' estimates and may have an adverse effect on DG Systems' financial
condition and operating results.
Risks Relating to DG Systems
DG Systems has a history of losses and its future operating results are
uncertain.
DG Systems was founded in 1991 and has been unprofitable since its
inception. We could continue to generate net losses in the near future. As of
June 30, 2000, DG Systems' accumulated deficit was $100 million. Historical
revenue growth rates may not be sustainable and you should not use these
growth rates as an indication of future revenue 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 DG Systems' ability to continue to automate order processing and
to reduce telecommunications costs. As a result of the foregoing factors, DG
Systems' revenues may not grow or may not be sustained in future periods. In
addition, we may not be able to reduce delivery and service costs or achieve
or sustain profitability in any future period.
DG Systems' business is highly dependent on electronic video advertising
delivery service deployment.
We have made a substantial investment in upgrading and expanding DG Systems'
Network Operating Center, or "NOC", 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 DG Systems' 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 DG Systems' business, operating results and financial
position.
In addition, we believe that 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. We will need to provide these services 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 DG Systems' facilities in New York, Los Angeles and Chicago.
However, we may not be able to contract successfully for and provide these
services in those markets or any other major metropolitan area and we may not
be able to provide competitive video distribution services in other United
States markets. Also, although we are taking the steps we believe are required
to achieve the network capacity and scalability necessary to deliver video
content
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reliably and cost effectively as video advertising delivery volume grows, we
may not 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 DG
Systems' results of operations and financial condition.
DG Systems' business is targeted at developing markets. If these markets do
not continue to develop, or do not accept DG Systems' products and services,
our business could be adversely affected.
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. Successful development
of our target markets 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 it grows at all. If the market fails to grow, or grows more
slowly than we anticipate, DG Systems' business, operating results and
financial condition would be seriously harmed. Even if the market does grow,
DG Systems' products and services may not achieve commercial success. Although
we intend to conform DG Systems' products and services to meet existing and
emerging standards in the market for the electronic delivery of digital audio
and video transmissions, we may not be able to conform DG Systems' products to
such standards in a timely fashion, if at all. We believe that DG Systems'
future growth will depend, in part, on DG Systems' ability to add these
services and additional customers in a timely and cost-effective manner.
However, we may not be successful in developing such services or in obtaining
new customers for such services. Furthermore, we may not 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 DG Systems' network, including DG
Systems' field receiving equipment and rooftop satellite antennae.
Our marketing efforts to date with regard to DG Systems' 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 may
not have correctly identified such markets and DG Systems' planned products
and services may not address the needs of such markets. Furthermore, DG
Systems' technologies, in their current form, may not be suitable for specific
applications and further design modifications, beyond anticipated changes to
accommodate different markets, may be necessary. Broad commercialization of DG
Systems' products and services will require us to overcome significant market
development hurdles, many of which we cannot predict.
DG Systems faces risks associated with being delisted from the Nasdaq National
Market.
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. This benefit would be lost if we were to be
delisted from the Nasdaq National Market. While we believe we are in
compliance with Nasdaq's continued listing requirements and corporate
governance rules, and that we will continue to be in compliance following the
merger, we cannot assure you that this is the case or that we will be able to
continue to have DG Systems' registered common stock listed on the Nasdaq
National Market or a similar public securities exchange.
If DG Systems is not able to develop new products and services to respond to
rapid technological changes, its business will be adversely affected.
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 DG Systems' products and processes
relative to those of DG Systems' competitors and DG Systems' ability to
develop and introduce new and
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enhanced products and services at competitive prices and in a timely and cost-
effective fashion. Our development efforts have been focused on:
. satellite transmission technology;
. internet transmission technology;
. video compression technology;
. TV station systems interfaces; and
. reliability and throughput enhancements to our network.
The growth of DG Systems' electronic video delivery services also depends on
DG Systems' 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 DG Systems' 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. giving us access to their
satellite capacity for electronic delivery of digital audio and video
transmissions by satellite. We have developed and incorporated the software
designed to enable some of our current video delivery systems to receive
digital satellite transmissions over the Hughes satellite system. However, the
Hughes satellite system may not have the capacity to meet DG Systems' future
delivery commitments and broadcast quality requirements on a cost-effective
basis, if at all.
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. If we experience delays in introducing new products
and services or enhancements to existing products and services our customers
may begin to use products and services of our competitors resulting in a loss
of revenue. If we are unable to develop and introduce new products and
services or enhancements of existing products and services in a timely manner
and with a significant degree of market acceptance, our business, financial
condition and results of operations will be seriously damaged.
DG Systems' business is highly dependent on radio and television advertising;
if demand for, or margins from, our radio and television advertising delivery
services declines, our business will be adversely affected.
We expect that a significant portion of our revenues will continue to be
derived from the delivery of radio and television advertising spots from
advertising agencies, production studios and dub and ship houses to radio
stations in the United States. A decline in demand for, or average selling
prices of, DG Systems' radio and television advertising delivery services for
any of the following reasons, or otherwise, would seriously harm DG Systems'
business, financial condition and results of operations:
. competition from new advertising media;
. new product introductions or price competition from competitors;
. a shift in purchases by customers away from DG Systems' premium
services; and
. a change in the technology used to deliver such services.
Additionally, we are dependent on our relationship with the radio and
television stations in which we have installed communications equipment.
Should a substantial number of these stations go out of business,
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experience a change in ownership, or discontinue the use of DG Systems'
equipment in any way, it would seriously harm DG Systems' business, financial
condition and results of operations.
If DG Systems is not able to maintain and improve service quality, its
business and results of operations will be adversely affected.
We depend on making cost-effective deliveries to broadcast stations within
the time periods requested by our customers. If we are unsuccessful, for
whatever reason, a station might be prevented from selling air-time which it
otherwise could have sold. Although we disclaim any liability for lost air-
time, stations may nevertheless assert claims for lost air-time 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 DG Systems' 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 DG Systems' business. In particular, DG
Systems' NOC 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 DG Systems' 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 our control, including:
. equipment failure;
. interruption in services by telecommunications service providers; and
. our inability to maintain our installed base of audio and 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 DG Systems' business, financial condition
and results of operations.
The markets in which DG Systems operates are highly competitive and DG Systems
may be unable to compete successfully against new entrants and established
companies with greater resources.
DG Systems currently competes 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. We
compete 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 generally do not
offer electronic delivery, they have long-standing ties to local distributors
that may 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 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
ours. 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 Express if any such companies
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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.
Many of DG Systems' 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 DG
Systems' 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 DG Systems' 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 DG Systems' business, financial condition and
results of operations.
Any failure by DG Systems to manage its growth could adversely affect its
business.
We have experienced rapid growth over the past several years that has
resulted in new and increased responsibilities for management personnel and
that has placed and continues to place a significant strain on DG Systems'
operating, management and financial systems and resources. To accommodate this
growth and to compete effectively and manage future growth, if any, we must
continue to implement and improve DG Systems' operational, financial and
management information systems, procedures and controls on a timely basis and
to expand, train, motivate and manage DG Systems' work force.
Our personnel, systems, procedures and controls may not be adequate to
support DG Systems' existing and future operations. Any failure to implement
and improve DG Systems' operational, financial and management systems or to
expand, train, motivate or manage DG Systems' employees could seriously harm
DG Systems' business, financial condition and results of operations.
DG Systems' sales cycles reflect seasonal buying patterns that can adversely
affect operating results and lead to potential fluctuations in quarterly
performance.
Our quarterly operating results have in the past and may in the future vary
significantly depending on factors such as:
. volume of advertising as a result of seasonal buying patterns;
. timing of introductions of new products and services;
. increased competition;
. timing of promotional efforts; and
. 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 DG Systems' results of operations are not
necessarily meaningful and should not be relied upon as an indication of DG
Systems' future performance. In any single period, DG Systems' revenues and
delivery costs are subject to variation based on changes in the volume and mix
of deliveries performed during such period. In particular, DG Systems'
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 DG Systems'
relatively higher prices for "Sweeps" advertisements have historically
increased the total revenues and revenues per delivery and tended to reduce
relative delivery costs.
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Our expense levels are based, in part, on DG Systems' expectations of future
revenue levels. If revenue 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 revenues and operating results. Fluctuations in revenues due to
seasonality may become more pronounced as DG Systems' revenue growth rate
slows. Due to the unique nature of DG Systems' 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.
DG Systems depends on its key personnel to manage its business effectively,
and if DG Systems is unable to retain its key employees or hire additional
qualified personnel, DG Systems' ability to compete could be harmed.
DG Systems' success depends in substantial part upon the continued
contributions of its senior management team, including Scott K. Ginsburg, DG
Systems' Chairman, Matthew E. Devine, DG Systems' Chief Executive Officer, and
Omar A. Choucair, DG Systems' Chief Financial Officer, and upon DG Systems'
ability to attract and retain qualified management, sales, operations,
marketing and technical personnel. The loss of the services of any of these
individuals or other key personnel could have a material adverse effect on DG
Systems' business, financial condition and results of operations. DG Systems'
future success also depends upon its ability to attract and retain additional
highly qualified management, technical, sales and marketing personnel. DG
Systems believes there is, and will continue to be, intense competition for
personnel with experience in the markets applicable to DG Systems' products
and services. DG Systems may not be able to retain its key personnel or
attract, assimilate or retain other highly qualified technical and management
personnel in the future. The loss of the services of key personnel, or the
inability to attract additional qualified personnel as needed, could have a
material adverse effect upon DG Systems' business, financial condition and
results of operations.
DG Systems depends upon single or limited-source suppliers, and its ability to
produce audio and video distribution equipment could be impacted if those
relationships were discontinued.
We rely on certain single or limited-source suppliers for integral
components used for the assembly of DG Systems' 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 DG Systems' deployment of audio and video units.
This would have the effect of depressing DG Systems' 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 DG Systems' 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 DG Systems' single or
limited-source vendors, and we purchase DG Systems' 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 DG Systems' business, financial
condition and results of operations.
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 DG
Systems' delivery commitments on a cost-effective basis or if any
transmissions failed to satisfy DG Systems' 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 DG Systems'
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.
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We obtain DG Systems' local access telephone transmission services through
Teleport Communications Group. We obtain DG Systems' long distance telephone
access through an exclusive contract with MCI Worldcom, which expires on
December 31, 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 DG Systems' business, results of operations and
financial condition.
DG Systems' business prospects depend on DG Systems' ability to timely meet
rapid technological change with 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 asset
management and the means for a customer quickly and reliably to preview and
authorize electronic delivery of video advertising spots. We may not
successfully complete the development of such products and services. Even if
we complete this development, 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. Our failure to successfully
develop and introduce new products and services could seriously harm our
business, financial condition and results of operations.
DG Systems' business will be adversely affected if it is not able to protect
its intellectual property rights from third-party challenges. DG Systems
cannot assure you that its intellectual property does not infringe on the
proprietary rights of third parties.
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 ours. 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 licenses necessary for the
operation of our business or, if obtainable, such licenses may not be
available 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.
Provisions of DG Systems' charter documents may have certain anti-takeover
effects that could prevent a change in control even if the change would be
beneficial to DG Systems' shareholders.
Certain provisions of our articles of incorporation and by-laws, and of
California law, or, if the proposed reincorporation is approved, our Delaware
certificate of incorporation and by-laws (as described in this proxy
statement/prospectus), and of Delaware law, could have the effect of delaying,
deferring or preventing a change in control of DG Systems, even if doing so
would be beneficial to DG Systems' shareholders.
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Risks Relating to StarGuide
StarGuide has not yet achieved profitability and based on StarGuide's limited
operating history, future profitability is uncertain.
StarGuide's predecessor was organized on November 2, 1994. StarGuide has not
yet achieved profitability and we do not expect it to do so for at least
several years. As of June 30, 2000, StarGuide's accumulated deficit was
approximately $54 million. StarGuide cannot assure you that it will be able to
achieve profitability in the future. Accordingly, StarGuide has only a limited
operating history upon which an evaluation of StarGuide and its prospects can
be based. StarGuide's prospects must be considered in light of the risks,
expenses, and difficulties frequently encountered by companies in new and
rapidly evolving markets. To address these risks, StarGuide must, among other
things, respond to competitive developments, continue to attract, retain and
motivate qualified persons, continue to upgrade its technologies, and begin to
commercialize products incorporating such technologies. StarGuide may not be
successful in addressing any or all of these risks and may not be able to
achieve or sustain profitability. The operating history of StarGuide makes the
prediction of future results of operations impossible. StarGuide's operating
results may in the future vary significantly depending on a variety of
factors. In response to competitive pressures, StarGuide may take certain
pricing or marketing actions that could have a material adverse effect on
StarGuide's business, financial condition and results of operations.
Lengthy sales cycles can adversely affect operating results and lead to
potential fluctuations in quarterly performance.
Due to the complexity and substantial cost associated with providing
integrated product solutions to provide audio, video, data and other
information across a variety of media and platforms, licensing and selling
StarGuide's products to customers typically involves a significant technical
evaluation and commitment of cash and other resources. In addition, there are
frequently delays associated with educating customers as to the productive
applications of StarGuide's products, complying with customers' internal
procedures for approving large expenditures, and evaluating and accepting new
technologies that affect key operations. In addition, certain of StarGuide's
foreign customers have lengthy purchasing cycles that may increase the amount
of time it takes StarGuide to place its products with these customers. For
these and other reasons, the sales cycle associated with the licensing and
selling of StarGuide's products is lengthy and subject to a number of
significant risks, including customers' budgetary constraints and internal
acceptance evaluations, both of which are beyond StarGuide's control. Because
of the lengthy sales cycle and the large size of customers' average orders, if
revenue projected from a specific customer for a particular quarter is not
realized in that quarter, StarGuide's operating results for that quarter could
be materially adversely affected. Due to the length of the sales cycle and
other factors, we expect StarGuide's results of operations to continue to
fluctuate on an annual and quarterly basis as a result of a number of factors,
some of which are outside the control of StarGuide, which affect revenue,
gross margin and operating expenses. We expect revenues to vary significantly
as a result of:
. the timing of product purchases and introductions;
. fluctuations in the rate of development of new markets and new
applications for StarGuide's products;
. the degree of market acceptance of new and enhanced versions of
StarGuide's products;
. the level of use of networking satellite and other transmission systems;
. increased competition;
. fluctuations in seasonal revenue; and
. the general strength of domestic and international economic conditions.
Further, to the extent that some of StarGuide's costs are relatively fixed,
such as personnel and facilities costs, any unanticipated shortfall in revenue
in any fiscal quarter would have an adverse effect on StarGuide's results of
operations in that quarter. StarGuide's quarterly results may also be affected
by fluctuation in demand for and decline in the average selling prices of its
systems and by increases in the costs of critical components used in
manufacturing its systems.
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StarGuide's inability to enter into or develop strategic relationships in its
key industry segments could adversely impact StarGuide's operating results.
StarGuide's strategy depends in part on the development of strategic
relationships with leading companies in key industry segments, including media
broadcasters and digital system providers. StarGuide may not be able to
successfully form or enter into such relationships, which may adversely affect
StarGuide's ability to generate sales of its products or services in those
segments. Specific product lines are dependent to a significant degree on
strategic alliances and joint ventures formed with other companies. This is
particularly true with StarGuide's CoolCast(TM) service, which depends on
relationships with providers of audio and video content and providers of
broadband Internet access. StarGuide may not be able to obtain exclusive
contracts with Internet service providers for deployment of its CoolCast(TM)
service within their networks, and it is possible that many Internet service
providers will allow StarGuide's competitors to install equipment at their
sites and to provide similar broadband services within their networks.
StarGuide's products are targeted at developing markets; if these markets do
not continue to develop, or if new customers do not accept StarGuide's
products, its business could be adversely affected.
To date, StarGuide's products have been purchased primarily by customers in
the broadcast industry. In order to achieve sustained growth, the market for
StarGuide's products must continue to develop and StarGuide must expand this
market to include additional applications within the broadcast market and
develop new products and new applications for existing products in new markets
such as distance learning and training, finance, and retail. StarGuide
believes that its products and services are among the first commercial
products to serve the convergence of several industry segments, including
digital networking, telecommunications, compression products, and Internet
services. However, StarGuide's products may not be accepted by the market. In
addition, it is possible that:
. the convergence of several industry segments may not continue;
. markets may not develop as a result of such convergence; or
. if markets develop, such markets may not develop either in a direction
beneficial to StarGuide's products or product positioning or within the
time frame in which StarGuide expects to launch new products and product
enhancements.
Because the convergence of digital networking, telecommunications,
compression products, and Internet services is new and evolving, we cannot
predict the growth rate, if any, and the size of the potential market for our
products. If markets for our products fail to develop, develop more slowly
than expected, or become served by numerous competitors, or if our products do
not achieve the anticipated level of market acceptance, our business,
operating results and financial condition will be materially adversely
affected.
StarGuide's business will suffer if it is not able to overcome the numerous
risks associated with the use of complex technology.
The networks and the individual components within networks used in providing
StarGuide's distribution and CoolCast(TM) services are highly complex.
StarGuide's services may be subject to errors and defects in software or
hardware. Additional problems in delivery of service could result from a
variety of causes, including human error, physical or electronic security
breaches, natural disasters, power loss, sabotage, or vandalism. Despite
precautions StarGuide may take, or its efforts to remedy such problems or
defects, they could result in loss of or delay in revenues and loss of market
share; loss of customers; failure to attract new customers or achieve market
acceptance; diversion of development resources; loss of credibility; increased
service costs; or legal action by StarGuide's customers. In addition, because
some equipment involved in providing StarGuide's information distribution and
CoolCast(TM) services are located in the facilities of others, such as
broadcast affiliates, Internet service providers and broadband access
providers, StarGuide must rely on third parties to care for equipment needed
to provide StarGuide's services.
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If StarGuide is not able to develop new products and services to respond to
rapid technological changes, its business will be adversely affected.
StarGuide's success will depend to a substantial degree upon its ability to
develop and introduce in a timely manner new products and product enhancements
for new and existing markets that incorporate technological changes and
innovations, meet changing customer or regulatory requirements, or meet
emerging industry standards. StarGuide expects to make significant investments
in research and development and to acquire complementary businesses and
product lines in an effort to continue to enhance existing products, develop
new products which incorporate new and existing technologies, and achieve
market acceptance for such products. However, StarGuide may not successfully
develop new products or product enhancements or, if developed, such new
products or product enhancements may not be developed in time to capture
market opportunities or achieve a significant sustainable level of market
acceptance in new and existing markets. The development of new,
technologically advanced products and product enhancements is a complex and
uncertain process requiring accurate anticipation of technological and market
trends. Furthermore, new or enhanced products offered by StarGuide may contain
defects when they are first introduced or released. Any inability on the part
of StarGuide to successfully define, develop, and introduce new products and
product enhancements or to successfully anticipate market requirements may
adversely affect StarGuide's growth potential and results of operations. In
addition, development and manufacturing schedules for technology products are
difficult to predict, and StarGuide may not achieve timely initial customer
shipments of new products. Further, the distribution channels, technical
requirements, and levels and bases of competition in other markets may be
different than those in StarGuide's current market. StarGuide may not be able
to compete favorably in those other markets.
StarGuide's business will be adversely affected if it is not able to protect
its intellectual property rights from third-party challenges.
The success of StarGuide's business depends to a large extent upon its
ability to protect trade secrets, obtain or license patents, and operate its
business without infringing on the rights of others. StarGuide currently has
numerous patents issued, and more than thirty other patent applications
pending in the United States and abroad. StarGuide also has several trademark
and copyright registrations. StarGuide is in the process of filing additional
patent applications and applications for copyright registration. StarGuide
currently licenses certain aspects of its technology to and from third
parties. Although StarGuide believes that its patents, trademarks and
copyrights have value, StarGuide's patents, trademark and copyright
registrations, or any additional patents, trademarks or copyrights obtained in
the future, may not provide meaningful protection from competition. The value
of StarGuide's products depends substantially on StarGuide's technical
innovation in fields in which there are currently many patent filings.
StarGuide believes that as new patents are issued or as infringement of
others' patents are brought to StarGuide's attention by the holders of such
patents, StarGuide may be required to withdraw products from the market,
negotiate licenses from such patent holders, redesign its products, or pay
damages assessed as a result of litigation. Such events could have a material
adverse effect on StarGuide's business, financial condition, and results of
operations. Although StarGuide believes that its products and other
proprietary rights do not infringe upon the proprietary rights of third
parties, third parties may assert infringement claims against StarGuide and
such claims may be successful. StarGuide could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
StarGuide's business, financial condition, and results of operations.
The future growth and profitability of StarGuide is highly dependent on the
success of its CoolCast(TM) service.
StarGuide's business plans and future growth are highly dependent on the
successful deployment of StarGuide's CoolCast(TM) service. CoolCast(TM) is
still in a preliminary stage of development, and has not yet been fully
deployed commercially. The success of CoolCast(TM) depends in part on the
strength of the intellectual property associated with the CoolCast(TM)
technology, which has not been fully established or tested. In addition,
CoolCast(TM) is subject to significant competition from other companies
seeking to establish businesses based on
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delivery of audio and video content in conjunction with Internet web sites.
StarGuide believes that the technology on which certain of the competing
services depend may infringe on StarGuide's CoolCast(TM) related intellectual
property, but there is no certainty that this is the case or that StarGuide
will be able to prevent such competition on that basis. The rights required to
deliver content using StarGuide's CoolCast(TM) technology, which is in
connection with Internet traffic, may be separate from the rights to deliver
such content over the airwaves, by satellite or by cable. In some cases,
providers of such content to StarGuide may not have such necessary rights,
which may be retained by original creators or programmers of the content.
StarGuide cannot assure you that it will be able to secure the necessary
rights to make CoolCast(TM) commercially viable. In addition, StarGuide may be
required to enter into licenses or other agreements with rights-holders other
than the companies that directly provide the content to StarGuide, which may
increase costs. Deployment of CoolCast(TM) is also highly dependent on
development and utilization of broadband last-mile networks, such as those
employing asynchronous digital subscriber lines. The development of these
networks must be completed by entities other than StarGuide, such as telephone
local exchange carriers. There is no certainty that this will occur, or that
it will occur within a timeframe needed to allow CoolCast(TM) to meet its
business objectives. There currently is no economic model for CoolCast(TM)
that is proven to generate a profit, and StarGuide may not be able to
establish a successful economic model. The inability of StarGuide to
accomplish any of the following could inhibit the profitability of
CoolCast(TM) and could have a material adverse effect on StarGuide's business,
financial condition and results of operations:
. protecting CoolCast(TM) intellectual property from infringement;
. competing effectively in the market for delivery of Internet-related
content;
. obtaining necessary rights to video or audio content (or avoiding the
requirement to expend significant capital in obtaining such rights);
. gaining access to sufficient operational broadband delivery networks; or
. establishing a workable and profitable business model for CoolCast(TM).
The markets in which StarGuide operates are highly competitive and StarGuide
may be unable to compete successfully against new entrants and established
companies with greater resources.
StarGuide believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control, including:
. the price, quality and performance of StarGuide's and its competitors'
products;
. the timing and success of new product introductions by StarGuide and its
competitors;
. the emergence of new technologies;
. the number and nature of StarGuide's competitors in a given market;
. the assertion of intellectual property rights by others; and
. general market and economic conditions.
StarGuide is aware of other companies that are focusing and may commit
significant resources on developing and marketing products and services that
will compete with StarGuide. StarGuide expects competition to continue to
intensify as existing and new competitors begin to offer products, services,
or systems that compete with StarGuide's products. StarGuide's current or
future competitors, many of whom have substantially greater financial
resources, research and development resources, distribution, marketing and
other capabilities than StarGuide, may apply these resources and capabilities
to compete successfully against StarGuide. A number of the markets in which
StarGuide sells its products are also served by technologies that are
currently more widely accepted. StarGuide's potential customers may not be
willing to make the initial capital investment necessary to convert to
StarGuide's products and services. The success of StarGuide's systems against
these competing technologies depends in part upon whether StarGuide's systems
can offer significant improvements in productivity and sound quality in a
cost-effective manner. Competitors may be able to develop
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systems compatible with, or that are alternatives to, StarGuide's proprietary
technology or systems. StarGuide may not be able to compete successfully
against current or future competitors and competitive pressures faced by
StarGuide may adversely affect its business, operating results and financial
condition.
StarGuide may enter into or seek to enter into business combinations and
acquisitions which may be difficult to integrate, disrupt StarGuide's
business, dilute shareholder value or divert management attention.
StarGuide's business strategy includes the acquisition of complementary
businesses and product lines. Any such acquisitions would be accompanied by
the risks commonly encountered in such acquisitions including:
. the difficulty of assimilating the operations and personnel of the
acquired companies;
. the potential disruption of StarGuide's business;
. the inability of StarGuide's management to maximize the financial and
strategic position of StarGuide by the successful incorporation of
acquired technology and rights into StarGuide's product and service
offerings;
. the maintenance of uniform standards, controls, procedures and policies;
. the potential loss of key employees of acquired companies; and
. the impairment of relationships with employees and customers as a result
of changes in management and operational structure.
StarGuide may not be able to successfully complete any acquisition or, if
completed, the acquired business or product line may not be successfully
integrated with StarGuide's operations, personnel or technologies. Any
inability of StarGuide to successfully integrate the operations, personnel,
and technologies associated with an acquired business and/or product line with
the operations and product lines of StarGuide may materially and adversely
affect StarGuide's business and results of operation.
StarGuide depends on its key personnel to manage its business effectively and
if StarGuide is unable to retain its key employees or hire additional
qualified personnel, StarGuide's ability to compete could be harmed.
StarGuide's success depends in substantial part upon the continued
contributions of its senior management team, including Scott K. Ginsburg,
StarGuide's Chairman, Matthew E. Devine, StarGuide's Chief Executive Officer,
Jeffrey A. Dankworth, StarGuide's President, Omar A. Choucair, StarGuide's
Chief Financial Officer, Laurence Fish, StarGuide's Chief Technology Officer,
Robert C. Ryan, StarGuide's Executive Vice President and Chief Legal Officer,
Ian Lerner, StarGuide's Vice President and General Manager, and Dr. Larry
Hinderks, StarGuide's Vice President of Research and Development. The loss of
the services of any of these individuals or other key personnel could have a
material adverse effect on StarGuide's business, financial condition and
results of operations. StarGuide's future success also depends upon its
ability to attract and retain additional highly qualified management,
technical, sales and marketing personnel. StarGuide believes there is, and
will continue to be, intense competition for personnel with experience in the
markets applicable to StarGuide's products and services. StarGuide may not be
able to retain its key personnel or attract, assimilate or retain other highly
qualified technical and management personnel in the future. The loss of the
services of key personnel, or the inability to attract additional qualified
personnel as needed, could have a material adverse effect upon StarGuide's
business, financial condition and results of operations.
Any failure of StarGuide to manage its growth could adversely affect its
business.
To fully exploit the market for its products and services, StarGuide must
rapidly execute its strategy of acquiring complementary businesses and product
lines and further develop StarGuide's products while managing anticipated
growth by implementing effective planning and operating processes. To manage
its anticipated growth, StarGuide must:
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. continue to implement and improve its operational, financial, and
management information systems;
. hire and train additional qualified personnel;
. continue to expand and upgrade its core technologies; and
. effectively manage multiple relationships with various customers, joint
venture and technological partners and other third parties.
Demands on StarGuide's resources have grown rapidly with StarGuide's
expansion, and StarGuide may in the future experience difficulties meeting the
demand for its products and services. Although StarGuide believes that it has
made adequate allowances for the costs and risks associated with this
expansion, our systems, procedures or controls may not be adequate to support
StarGuide's operations and its management may not be able to achieve the rapid
execution necessary to fully exploit the market for StarGuide's products and
services. Any failure of StarGuide to manage its growth effectively could have
a material adverse effect on StarGuide's business, financial condition and
results of operations.
StarGuide faces risks associated with international sales that could adversely
impact its business.
StarGuide derives a portion of its revenues from sales outside of the United
States. StarGuide has increased and plans to continue to increase its
international sales and marketing efforts, and expects that revenues derived
from international sales will continue to grow as a percentage of revenues.
There are a number of risks inherent in StarGuide's international business
activities, including:
. unexpected changes in United States or other government policies
concerning the import and export of goods, services and technology and
other regulatory requirements, tariffs and other trade barriers;
. costs and risks of localizing products for foreign countries;
. longer accounts receivable payment cycles;
. potentially adverse tax consequences; and
. limits on repatriation of earnings and the burdens of complying with or
enforcing contracts under a wide variety of foreign laws.
Fluctuations in currency exchange rates could materially affect revenues
denominated in currencies other than the United States dollar and cause a
reduction in revenues derived from sales in a particular country. The
financial stability of foreign markets could also affect StarGuide's
international sales. These factors may adversely affect StarGuide's results of
operations. In addition, StarGuide's earnings abroad may be subject to
taxation by more than one jurisdiction, which could adversely affect
StarGuide's earnings. Each of these factors could have an adverse effect on
StarGuide's business, financial condition, and results of operations.
StarGuide faces various risks associated with purchasing satellite capacity.
As part of StarGuide's strategy of providing transmittal of audio, video,
data, and other information using satellite technology, StarGuide periodically
purchases satellite capacity from third parties owning satellite systems.
Although StarGuide attempts to match expenditures in this area against
anticipated revenues from sales of StarGuide's products to customers,
StarGuide may not be successful at estimating anticipated revenues, and actual
revenues from sales of StarGuide's products may not exceed StarGuide's
expenditures for satellite capacity. In addition, purchases of satellite
capacity require a significant amount of capital. Any inability on the part of
StarGuide to purchase satellite capacity or to achieve revenues sufficient to
offset the capital expended to purchase satellite capacity, may have a
material adverse effect on StarGuide's business, financial condition, and
results of operations.
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Certain of StarGuide's products depend on satellites; any satellite failure
could result in interruptions of StarGuide's service which could adversely
impact StarGuide's business, financial results and reputation.
Certain of StarGuide's products rely on signals from satellites. Satellites
and their ground support systems are complex electronic systems subject to
weather conditions, electronic and mechanical failures, and possible sabotage.
The satellites have limited design lives and are subject to damage by the
hostile space environment in which they operate. The repair of damaged or
malfunctioning satellites is nearly impossible. If a significant number of
satellites were to become inoperable, there could be a substantial delay
before they are replaced with new satellites. In addition, satellite
transmission can be disrupted by natural phenomena causing atmospheric
interference, such as sunspots. A reduction in the number of operating
satellites or an extended disruption of satellite transmissions would impair
the current utility of the accessible satellite network and the growth of
current and additional market opportunities, both of which would adversely
affect StarGuide's business, financial condition, and results of operations.
StarGuide faces risks associated with its dependence upon suppliers.
StarGuide relies on other companies to supply certain services and key
components of its products. StarGuide's suppliers also sell products to
StarGuide's competitors and may in the future become competitors of StarGuide.
StarGuide's suppliers may enter into exclusive arrangements with StarGuide's
competitors, stop selling their products or components to StarGuide at
commercially reasonable prices or completely stop selling their products or
components to StarGuide. Although StarGuide believes that all of the services
and products that it currently purchases from outside suppliers are presently
available from other sources, if in the future StarGuide were unable to obtain
certain services or components, or develop alternative sources for those
services or components, it could result in delays and increased costs in
producing StarGuide's products and providing StarGuide's services. This, in
turn, could have a material adverse effect on StarGuide's business, financial
condition, and results of operations.
StarGuide may not be able to obtain additional financing to satisfy its
capital expenditure needs.
StarGuide must continue to enhance and expand its network in order to
maintain a competitive position and continue to meet increasing demands for
high-quality, readily available service at competitive prices. StarGuide's
ability to grow depends, to a significant extent, on its ability to
continually expand its operations, and thus on significant capital equipment
expenditures. StarGuide anticipates that it will need to raise additional
funds through public or private debt or equity financings in order to
undertake further expansion of its operations, acquire complementary
businesses or technologies, develop new services, or otherwise respond to
competitive pressures. If additional funds are raised through the issuance of
equity securities, the percentage ownership of current shareholders may be
reduced. Additional financing may not be available to StarGuide, or, if
available, may not be on terms favorable to StarGuide. If adequate funds are
unavailable or are unavailable on acceptable terms, StarGuide may be unable to
expand its operations, develop new services, or otherwise respond to
competitive pressures. Such inability could have a material adverse effect on
StarGuide's business, financial condition, and results of operations.
Scott K. Ginsburg will not exercise voting control of DG Systems following the
merger.
By agreement of most of StarGuide's shareholders, a substantial number of
shares of StarGuide's common stock that are not owned by Scott K. Ginsburg,
the Chairman of StarGuide, are held in a voting trust of which Mr. Ginsburg is
the trustee. As a result, Mr. Ginsburg has voting control over 94% of
StarGuide's outstanding equity. Although the percentage of voting power Mr.
Ginsburg controls could decrease in the future due to the exercise of employee
stock options or of certain warrants issued by StarGuide to the United States
Media Corporation, StarGuide does not expect Mr. Ginsburg's voting interest to
be less than a controlling interest as a result thereof. As a result, Mr.
Ginsburg has the ability to impact the outcome of matters requiring a vote of
shareholders, such as elections of StarGuide's directors, amendments to
StarGuide's articles of incorporation, and certain mergers, asset sales, and
other transactions involving a change in control of StarGuide. In the event
the merger of StarGuide and DG Systems is completed, Mr. Ginsburg will not
retain sufficient control of the combined entity to exercise the same degree
of control over such matters with respect to the combined entity as he
currently exercises with respect to StarGuide.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus and the documents incorporated by reference
herein contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to
risks and uncertainties and are based on the beliefs and assumptions of
management of DG Systems and StarGuide, whose assumptions are based on
information currently available to each company's management. When we use
words such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "should," "likely," "potential" or similar expressions, we are
making forward-looking statements. Forward-looking statements include, but are
not limited to, the information concerning possible or assumed future results
of operations of DG Systems and StarGuide set forth under:
"SUMMARY," "RISK FACTORS," "SELECTED HISTORICAL AND SELECTED UNAUDITED PRO
FORMA FINANCIAL INFORMATION," "THE MERGER--Background of the Merger," "THE
MERGER--Recommendation of the Board of Directors of DG Systems; DG Systems'
Reasons for the Merger," "THE MERGER--Recommendation of the StarGuide Board of
Directors; StarGuide's Reasons for the Merger," "THE MERGER--Opinion of
Financial Advisor to DG Systems," "THE MERGER--Opinion of Financial Advisor to
StarGuide," "COMBINED COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS" "DG SYSTEMS BUSINESS," "DG SYSTEMS BUSINESS--DG Systems
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "STARGUIDE BUSINESS," and "STARGUIDE BUSINESS--StarGuide
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder
values of DG Systems or StarGuide may differ materially from those expressed
in the forward-looking statements. Many of the factors that will determine
these results and values are beyond DG Systems' or StarGuide's ability to
control or predict. Shareholders are cautioned not to put undue reliance on
any forward-looking statements. For these statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
For a discussion of some of the factors that may cause actual results to
differ materially from those suggested by the forward-looking statements,
please read carefully the information under "RISK FACTORS" beginning on page
14. In addition to the risk factors and other important factors discussed
elsewhere in the documents which are incorporated by reference into this proxy
statement/prospectus, you should understand that the following factors could
affect the future results of DG Systems and could cause results to differ
materially from those suggested by the forward-looking statements:
. changes in laws or regulations, third party relations and approvals,
decisions of courts, regulators and governmental bodies which may
adversely affect DG Systems' business or ability to compete;
. DG Systems may encounter greater than expected costs and difficulties
related to combining StarGuide's technology with the technology of DG
Systems; and
. other risks and uncertainties as may be detailed from time to time in DG
Systems' public announcements and SEC filings.
The list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
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THE MERGER
Background of the Merger
As a part of its ongoing efforts to maximize shareholder value, the DG
Systems board from time to time evaluates alternative means of increasing the
value of DG Systems common stock, including strategic acquisitions and
alliances and the undertaking of operating, administrative and financial
measures.
At a meeting held on December 9, 1999, the DG Systems board acted to engage
Chase Securities Inc. as its financial advisor to assist the DG Systems board
in considering its strategic alternatives. Following its engagement, Chase was
advised by DG Systems that a transaction with StarGuide might be an
alternative to be considered. Because of the overlap in management of DG
Systems and StarGuide and the fact that two members of the DG Systems board
were also members of the StarGuide board, as well the DG Systems board's
desire to avoid even the appearance of a conflict of interest, the DG Systems
board, on March 2, 2000, created the special committee and designated Larry
Lenihan as chairman thereof and David Kantor and Michael Linnert as members
thereof.
The special committee was delegated the assignment to evaluate strategic
alternatives available to DG Systems and to recommend to the DG Systems board
a strategy that would maximize DG Systems shareholder value. See "THE MERGER--
Recommendation of the Board of Directors of DG Systems; DG Systems' Reasons
for the Merger." Thereafter, the special committee retained Dewey Ballantine
LLP to act as special counsel to the special committee. The special committee
also determined that Chase, as financial advisor to the DG Systems board,
would report to the special committee.
On March 23, 2000, StarGuide engaged Morgan Stanley & Co. Incorporated to
provide it with financial advisory services in connection with a possible
transaction.
On March 29, 2000, Mr. Lenihan participated in a conference call with
representatives of Chase and Dewey Ballantine to discuss the procedures to be
followed by the special committee and the process of identifying potential
strategic partners. It was agreed that a formal meeting of the special
committee should be convened the following week. Mr. Lenihan subsequently
scheduled a meeting of the special committee for April 4, 2000.
On April 4, 2000, StarGuide submitted a letter to Chase indicating an
interest in combining DG Systems and StarGuide. Also on that date, a meeting
of the special committee was held. At the meeting, Dewey Ballantine explained
the fiduciary duties of the members of the special committee in fulfilling the
mandate established by the DG Systems board. Chase then described the process
it had undertaken to help the special committee identify potential strategic
arrangements, including parties who might be interested in acquiring all or a
part of DG Systems. During the course of the meeting, Dewey Ballantine
apprised the special committee of the filing that afternoon of an amendment to
Mr. Ginsburg's Form 13D, including as an exhibit the letter from StarGuide to
Chase. Following the conclusion of the special committee meeting, Mr. Lenihan
and a representative of Dewey Ballantine telephoned Mr. Devine and a
representative of Latham & Watkins, counsel to StarGuide, to discuss the
filing and the indication of interest. Mr. Lenihan indicated that, although
the special committee was interested in discussing the indication of interest,
the special committee had determined to consider other alternatives as well as
the business combination described in the Ginsburg letter. As a result, Mr.
Lenihan declined to enter into immediate negotiations with StarGuide until the
special committee had concluded its review of other alternatives.
Thereafter, over the next several weeks, under the direction of the special
committee, Chase continued the process of contacting potential strategic
partners and inquiring as to their level of interest in pursuing an
arrangement with DG Systems.
On May 2, 2000, a meeting of the special committee was held to discuss
Chase's preliminary report of various strategic alternatives available to DG
Systems. Chase reported that, under the direction of the special committee, it
had contacted 27 parties regarding their potential interest in a strategic
transaction with DG Systems. Chase also reported that two of the parties
contacted, one of which was StarGuide, had submitted
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proposals involving a strategic combination with DG Systems. Chase then
reported to the special committee the proposed terms of these proposals.
Following this report, the special committee indicated its interest in further
discussions with StarGuide and the other party, instructed Chase to pursue
such discussions and to commence a more detailed due diligence investigation
of the two parties. As part of this due diligence process, Mr. Lenihan and
representatives of Chase visited certain of the interested parties including
StarGuide. In the case of StarGuide, particular focus was placed on
understanding and observing demonstrations of its CoolCast(TM) technology.
On May 7, 2000, a further meeting of the special committee was held at which
Chase updated the special committee on the proposals of the two parties. Chase
reported that StarGuide's proposal provided that, upon consummation of a
business combination, StarGuide's shareholders would hold shares in the
combined entity equal to 70% of the combined entity. The special committee
discussed the terms of the proposed StarGuide transaction as well as the
proposed ownership split proposed by StarGuide and instructed Chase to
continue discussions with StarGuide, particularly with regards to increasing
the DG Systems shareholder ownership split in the combined entity above 30%.
The special committee also instructed Chase to continue discussions with the
other party.
On May 25, 2000, the special committee, Chase and Dewey Ballantine discussed
the status of the two proposals. Chase reported that as a result of
discussions with StarGuide, the proposed ownership split would provide DG
Systems shareholders 40% to 42% of the combined entity depending upon
performance following consummation of the transaction. Chase also reported
that despite continued discussions, the other party was firm with regards to
its proposal and its proposed ownership split of 70% for the other party and
30% for DG Systems. The special committee instructed Chase to focus its
efforts on negotiating the proposed transaction with StarGuide and instructed
Dewey Ballantine to commence negotiation and preparation of transaction
documents upon receipt of proposed transaction documents from StarGuide's
counsel. Chase was instructed to continue discussions with the other party.
On May 30, 2000, Latham & Watkins provided Chase and Dewey Ballantine drafts
of the proposed transaction documents. Thereafter, representatives of Latham &
Watkins and Dewey Ballantine commenced negotiations.
On June 4, 2000, at a meeting of the special committee, Chase and Dewey
Ballantine discussed the progress of the negotiations with StarGuide. Dewey
Ballantine reported to the special committee the status of the negotiations
regarding the proposed transactions. The special committee instructed Dewey
Ballantine to continue to negotiate the terms of the proposed transaction
documents and instructed Chase to continue to negotiate the proposed ownership
split and termination fee set forth in the proposed transaction documents.
On June 9, 2000, a meeting of the special committee was held at which Chase
presented an analysis of the StarGuide proposal from a financial point of
view. Dewey Ballantine reported on the status of the negotiations of the
documentation. Following extensive discussions, the special committee
determined to concentrate its efforts on the StarGuide proposal, although
Chase was instructed to continue discussions with the other party in case an
acceptable arrangement could not be made with StarGuide.
Thereafter, for the next several weeks, representatives of Chase and Dewey
Ballantine continued negotiations with their counterparts at Morgan Stanley
and Latham & Watkins regarding the proposed business combination.
On June 28, 2000, representatives of Latham & Watkins contacted
representatives of Dewey Ballantine with respect to updated financial
information regarding StarGuide. Thereafter, representatives of Chase met with
representatives of StarGuide and Morgan Stanley to review the updated
financial information. It was agreed that the updated financial information
should be further reviewed to determine the impact on the proposed business
combination.
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<PAGE>
On July 6, 2000, a meeting of the special committee was held at which the
updated financial information regarding StarGuide and DG Systems was reviewed
with the special committee. Dewey Ballantine also reviewed with the special
committee the status of negotiation regarding documentation, including the
existence of a "fiduciary duty out" that permitted the special committee to
terminate the agreement under certain circumstances if there were a superior
proposal. Thereafter, Chase reviewed with the special committee the proposed
DG Systems/StarGuide transaction from a financial point of view. After
extensive deliberations, the special committee agreed to reconvene the
following day. Based on a preliminary determination that it was likely that
negotiations between DG Systems and StarGuide could be successfully resolved,
the special committee determined that it also would be prudent to convene a
meeting of the full DG Systems board at which it could present its
recommendations to the DG Systems board.
On July 7, 2000, a meeting of the special committee was held at which Dewey
Ballantine reported on the successful conclusion of negotiations regarding the
transaction documentation. Thereafter, Chase reconfirmed its financial
analysis rendered at the July 6 meeting. Following discussion, Chase rendered
its oral opinion (to be subsequently confirmed in writing) that the exchange
ratio to be applied in the merger was fair, from a financial point of view, to
DG Systems and its shareholders. Chase was not asked to express, and did not
express, an opinion as to the fairness of the exchange ratio to Messrs.
Ginsburg, Devine and Choucair and their respective affiliated entities.
Following the presentation of its financial and legal advisors, the special
committee unanimously determined to recommend to the full DG Systems board
that it approve the proposed merger.
Following conclusion of the special committee meeting on July 7, 2000, a
meeting of the full DG Systems board was convened. At such meeting, the
recommendations of the special committee were presented. After discussion, the
DG Systems board (including all members of the special committee) unanimously
approved the merger agreement and the merger.
On July 7, 2000, a meeting of the board of directors of StarGuide was held
at which the proposal to approve the proposed merger agreement between
StarGuide and DG Systems was discussed. Thereafter, Morgan Stanley presented
an analysis of the proposed merger from a financial point of view. Following
discussion, Morgan Stanley rendered its oral opinion (to be subsequently
confirmed in writing) that the consideration to be received by the holders of
StarGuide common stock pursuant to the merger agreement was fair from a
financial point of view to the holders of StarGuide common stock. After
further discussion, the StarGuide board of directors unanimously approved the
merger agreement.
Recommendation of the Board of Directors of DG Systems; DG Systems' Reasons
for the Merger
Based in part on the unanimous recommendation of the special committee, the
DG Systems board has unanimously adopted and approved the merger agreement and
has determined that the issuance of shares of common stock to StarGuide
shareholders pursuant to the merger is fair to and in the best interests of DG
Systems and its shareholders and recommend that the holders of DG Systems
common stock vote FOR approval and adoption of the merger agreement. In the
course of reaching its decision to adopt and approve the merger agreement and
the merger and to recommend approval to the board of directors, the special
committee consulted with DG Systems' legal and financial advisors and
considered a number of factors, including, among others, the following
principal factors which were material to the special committee's decision:
. current industry, market and economic conditions, including the
continuing trend of consolidation in the telecommunications industry and
the importance of operational scale and geographic diversity in
remaining competitive in the long term;
. the strategic fit between the two companies and the potential for a
combined company with greater financial strength, including the belief
that the combined company's stronger balance sheet will enable it to
accelerate the expansion of its sales and marketing organization, to
fund additional programs, to acquire additional products and to raise
additional capital;
. the ability of the combined company to offer expanded product and
service offerings;
. the ability to expand DG Systems' and StarGuide's customer bases;
34
<PAGE>
. the complementary nature of the companies' product and service
offerings;
. the operating efficiencies and the earnings power of the combined
company;
. DG Systems' business, financial condition, results of operations,
assets, management, competitive position, operating performance, trading
performance and prospects, including its prospects if it were to
continue as a separate company;
. StarGuide's business, financial condition, results of operations,
assets, management, competitive position, operating performance and
prospects;
. the financial condition of the combined company after the transaction,
including its pro forma market capitalization, revenues, profits and
earnings per share;
. historical and projected financial information concerning the financial
performance and operations of DG Systems and StarGuide; and
. the ability of the combined company, due to its increased size, to
attract and retain skilled personnel.
In the course of deliberations, the special committee also considered a
number of additional factors relevant to the merger, including:
. the possibility of strategic alternatives to the merger for enhancing
long-term shareholder value, including investigating strategic
transactions with other companies;
. the ownership of the combined enterprise by DG Systems shareholders and
former StarGuide shareholders after the merger, including the exchange
ratio resulting therefrom;
. the historical market price of DG Systems common stock and the potential
for an increase or decrease in the market price of DG Systems common
stock in the future;
. the potential for improved trading liquidity for shareholders of the
combined company;
. the opinion of Chase to the effect that, as of the date of the opinion
and based on and subject to the matters described in the opinion, the
exchange ratio provided for in the merger was fair, from a financial
point of view, to DG Systems and its shareholders;
. the fact that Chase conducted a broad-based search for potential
acquirers under the direction of the special committee and such process
did not yield any proposals more attractive to the DG Systems
shareholders from a financial point of view than the StarGuide proposal;
. the terms and conditions of the merger agreement, including the
termination fees and the "fiduciary duty outs," the agreements
contemplated by the merger agreement and the closing conditions;
. the expected qualification of the merger as a reorganization under
Section 368(a) of the Internal Revenue Code;
. the impact of the merger on DG Systems' and StarGuide's customers,
suppliers and employees;
. the likelihood that the merger will be completed;
. the effect of the public announcement of the merger on the market price
of DG Systems common stock; and
. the ability of the combined company to realize certain operating
efficiencies as a result of the merger.
The special committee also identified and considered a number of potentially
negative factors in its deliberations concerning the merger, including:
. the risk that, despite DG Systems' and StarGuide's efforts after the
merger, the combined company may lose key personnel;
. the risk that a significant number of DG Systems' and StarGuide's
customers and suppliers might cease doing business with the combined
company;
35
<PAGE>
. the difficulty of managing operations in the different geographic
locations in which DG Systems and StarGuide operate;
. the risk of potential adverse effects of one-time charges expected to be
incurred in connection with the costs of the merger and the subsequent
integration of the companies;
. the risk of the potential adverse effects on the combined company's
results of operations of amortizing goodwill and other intangible assets
that would be recorded in connection with the merger;
. the risk that the potential benefits of the merger might not be fully
realized;
. the fact that StarGuide's CoolCast(TM) service is in the early
development stage and its initial success is highly reliant on more
widespread availability of DSL, although the technology ultimately
should be capable of utilization with other internet technology such as
cable and fiber optics; and
. the limited compatibility of the DG Systems and CoolCast(TM) platforms.
The special committee determined that DG Systems and StarGuide could avoid
or mitigate these and other risks, and that, overall, these risks were
outweighed by the potential benefit of the merger.
The foregoing discussion of the information and positive and negative
factors considered by the special committee in approving the merger is not
intended to be exhaustive, but includes the factors considered by the special
committee to have been material in its analysis of the merger. In considering
the merger, given the number and diversity of the potentially positive and
negative factors considered, the special committee did not find it practical
or feasible to quantify or otherwise attempt to assign any relative or
specific values to any of the foregoing factors. In making their
determination, individual directors may have accorded different values to
different factors.
Opinion of Financial Advisor to DG Systems
DG Systems engaged Chase to render an opinion as to the fairness to DG
Systems and its shareholders, from a financial point of view, of the exchange
ratio applicable to the exchange of shares of StarGuide common stock for
shares of DG Systems common stock.
On July 7, 2000, Chase delivered its written opinion to the special
committee of the board of directors of DG Systems to the effect that, as of
that date, and based upon the assumptions made, matters considered and limits
of review set forth in its opinion, the exchange ratio was fair to DG Systems
and its shareholders from a financial point of view.
The full text of Chase's opinion, which sets forth the assumptions made,
matters considered and limitations on the scope of review undertaken by Chase
in rendering its opinion, is attached as Appendix B to this proxy
statement/prospectus and is incorporated into this proxy statement/prospectus
by reference. Chase's opinion was provided for the use and benefit of the
special committee in its evaluation of the merger and was directed only to the
fairness of the exchange ratio to DG Systems and its shareholders from a
financial point of view. Chase's opinion is not a recommendation to any
shareholder of DG Systems as to how such shareholder should vote with respect
to the issuance of DG Systems' common stock, or any other matters relating to
the merger. The summary of Chase's opinion set forth below is qualified in its
entirety by reference to the full text of its opinion. DG Systems'
shareholders are urged to read the opinion carefully in its entirety.
In connection with its opinion, Chase, among other things:
. reviewed a draft of the merger agreement in the form provided to it and
assumed that the final form of such agreement would not vary in any
regard that is material to Chase's analysis;
. reviewed certain publicly available business and financial information
Chase deemed relevant relating to DG Systems and StarGuide and the
respective industries in which they operate;
36
<PAGE>
. reviewed internal non-public financial and operating data provided to
Chase by the management of each of DG Systems and StarGuide relating to
their respective businesses, including management's forecast and
projection information as to future financial results of the businesses;
. discussed with members of the senior management of each of DG Systems
and StarGuide, DG Systems' and StarGuide's operations, historical
financial statements and future prospects, before and after giving
effect to the merger, as well as their views of the business,
operational and strategic benefits and other implications of the merger
and other matters Chase deemed necessary or appropriate;
. compared the financial and operating performance of DG Systems and
StarGuide with publicly available information concerning other companies
Chase deemed comparable and reviewed the relevant historical stock
prices and trading activity of DG Systems and the other companies Chase
deemed comparable;
. reviewed the financial terms of recent business combinations and
acquisition transactions Chase deemed comparable to the merger and
otherwise relevant to its inquiry; and
. made other analyses and examinations as Chase deemed necessary or
appropriate.
Chase assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all financial and other
information provided to, discussed with, or reviewed by or for it, or publicly
available, for purposes of its opinion and further relied upon the assurances
of management of DG Systems and StarGuide that they are not aware of any facts
that would make such information inaccurate or misleading. Chase neither made
nor obtained any independent evaluations or appraisals of the assets or
liabilities of DG Systems or StarGuide, nor did Chase conduct a physical
inspection of the properties and facilities of DG Systems or StarGuide. Chase
assumed that the financial forecast and projection information provided to or
discussed with it by or on behalf of DG Systems and StarGuide were reasonably
determined on bases reflecting the best currently available estimates and
judgments of the management of each of DG Systems and StarGuide as to the
future financial performance of such companies, including after giving effect
to the merger. Chase further assumed that, in all material respects, such
forecasts and projections, would be realized in the amounts and times
indicated thereby. Chase expressed no view as to such forecast or projection
information or the assumptions upon which they were based.
For purposes of rendering its opinion, Chase assumed, in all respects
material to its analysis, that the representations and warranties of each
party contained in the merger agreement are true and correct, that each party
would perform all of the covenants and agreements required to be performed by
it under the merger agreement and that all conditions to the consummation of
the merger would be satisfied without being waived. Chase also assumed that
all material governmental, regulatory or other consents and approvals would be
obtained and that in the course of obtaining any necessary governmental,
regulatory or other consents and approvals, or any amendments, modifications
or waivers to any documents to which either of DG Systems or StarGuide are a
party, as contemplated by the merger agreement, no restrictions would be
imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits to DG Systems of the
merger. Chase further assumed that the merger would be accounted for as a
purchase transaction under United States generally accepted accounting
principles and that it would qualify as a reorganization for United States
federal income tax purposes. In addition, Chase also assumed that StarGuide
will not issue any new shares of its common stock other than shares of common
stock to individuals already holding options or warrants to purchase StarGuide
common stock.
Chase's opinion was necessarily based on market, economic and other
conditions as they existed and could be evaluated on the date of its opinion.
Chase's opinion was limited to the fairness, from a financial point of view,
to DG Systems and its shareholders of the exchange ratio in the merger and
Chase expressed no opinion as to the merits of the underlying decision by DG
Systems to engage in the merger. In addition, Chase expressed no opinion as to
the prices at which DG Systems common stock would trade following the
announcement or the consummation of the merger.
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The DG Systems special committee selected Chase to act as its financial
advisor on the basis of Chase's reputation as an internationally recognized
investment banking firm with substantial expertise in transactions similar to
the merger and because it is familiar with DG Systems and its business.
As part of its financial advisory business, Chase is continually engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions and valuations for estate, corporate and other purposes.
Pursuant to a letter agreement, dated December 17, 1999, DG Systems has agreed
to pay Chase customary fees for its services, including the delivery of its
opinion, of approximately $2,540,000. Payment of a significant portion of
these fees is contingent upon the consummation of the merger. DG Systems also
has agreed to reimburse Chase for its reasonable expenses, including the fees
of outside counsel, and to indemnify Chase for certain liabilities arising out
of its engagement.
The Chase Manhattan Corporation and its affiliates, including Chase, in the
ordinary course of business, have from time to time provided, and in the
future may continue to provide, for customary compensation, commercial and
investment banking services to DG Systems and StarGuide. In the ordinary
course of business, Chase or its affiliates may trade or act as a market maker
in the debt and equity securities of DG Systems for its own accounts and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.
The following is a summary of the material financial and comparative
analyses performed by Chase in arriving at its opinion.
Analysis of StarGuide
StarGuide Discounted Cash Flow Analysis
Chase performed a discounted cash flow analysis of StarGuide without
CoolCast(TM) and of the CoolCast(TM) service on a stand-alone basis based upon
(i) forecast and projection information provided to Chase by StarGuide's
management for the years 2000 through 2004 and (ii) a sensitivity analysis
using projections provided by StarGuide's management for the years 2000
through 2004, adjusted to reduce the number of DSL subscribers to 90% of the
amount estimated by StarGuide and to assume a more conservative market
penetration of the CoolCast(TM) service. Utilizing this information, Chase
calculated a present value of the future streams of the unlevered, after-tax
free cash flows in the management case and the sensitivity case.
Chase assumed a discount rate of between 11.0% and 13.0% and terminal
multiples of unlevered projected 2004 EBITDA ranging from 8.0x to 10.0x for
its analysis of StarGuide without CoolCast(TM). Chase assumed a discount rate
of between 18.0% and 22.0% and terminal multiples of unlevered projected 2004
EBITDA ranging from 10.0x to 12.0x for its analysis of the CoolCast(TM)
service on a stand-alone basis. These analyses indicated an implied enterprise
value for StarGuide, without CoolCast(TM), of approximately $30 million to $40
million in both the management case and the sensitivity case and for the
CoolCast(TM) service on a stand-alone basis of approximately $450 million to
$645 million in the management case and of approximately $305 million to
$445 million in the sensitivity case. Chase then determined the implied
enterprise value of the combined StarGuide/CoolCast(TM) entity by adding the
implied enterprise value of StarGuide without CoolCast(TM) to that of
CoolCast(TM) as a stand-alone entity. This indicated an implied enterprise
value of the combined StarGuide/CoolCast(TM) entity of approximately $480
million to $685 million in the management case and of approximately $335
million to $485 million in the sensitivity case.
StarGuide Relative Valuation/Ownership Analysis
Chase performed a relative valuation/ownership analysis of the combined
StarGuide/CoolCast(TM) entity using StarGuide's actual 1999 revenue and
projected revenue for the years 2000 through 2002 provided by StarGuide's
management. Assuming that DG Systems' current market value and market multiple
(based upon DG Systems' share price of $6.34 per share on June 21, 2000 and
using the treasury stock method to determine the StarGuide
38
<PAGE>
valuation) were applied to StarGuide (assuming StarGuide net debt of $3.5
million), Chase's analysis indicated that DG Systems' shareholders would have
the following implied ownership of the combined DG System/StarGuide entity in
the management case and sensitivity case:
<TABLE>
<CAPTION>
Implied DG Ownership
----------------------
Sensitivity Management
Case Case
----------- ----------
<S> <C> <C>
Discounted Cash Flow Analysis......................... 32.9% 25.6%
1999 Revenue (actual)................................. 79.5% 79.5%
2000 Revenue (projected).............................. 70.9% 70.8%
2001 Revenue (projected).............................. 50.7% 44.4%
2002 Revenue (projected).............................. 38.5% 34.1%
</TABLE>
Based upon the foregoing, Chase established an enterprise valuation range
for StarGuide of between $375 million and $600 million.
Analysis of DG Systems
DG Systems Comparable Company Analysis
Chase prepared an analysis of the enterprise value of DG Systems based upon
an analysis of two publicly traded companies Chase deemed to be similar to DG
Systems. These companies were Applied Graphics Technologies, Inc. and VDI
Multimedia. Chase calculated the multiple of enterprise value based on 2000
projected revenue for these companies based on publicly available equity
research reports and found the high, mean and low to be as follows:
<TABLE>
<CAPTION>
Enterprise Value/
Projected 2000
Revenue
-----------------
<S> <C>
High....................................................... 0.98x
Mean....................................................... 0.83x
Low........................................................ 0.69x
</TABLE>
Chase then calculated the implied enterprise value of DG Systems as a
multiple of 2000 projected revenue for the management case and the sensitivity
case, assuming a multiple of between 0.8x and 1.5x. Chase based its
sensitivity case upon DG Systems' management projections, adjusted to assume
that DG Systems does not implement its current new business initiative in the
media asset management business during the periods covered. This analysis
implied an enterprise value of DG Systems of approximately $52 million to $98
million in the management case and of approximately $51 million to $97 million
in the sensitivity case.
Because of inherent differences between the businesses, operations and
prospects of DG Systems and the companies listed above, Chase believes that a
purely quantitative analysis of the selected companies without considering
complex qualitative judgments concerning differences between the financial and
operating characteristics of DG Systems and the selected companies would not
be meaningful in the context of the merger.
Comparable Transactions Analysis
Chase then prepared an analysis of the enterprise value of DG Systems as a
multiple of projected 2000 EBITDA based upon an analysis of publicly available
information relating to three selected acquisition transactions that were
announced between July 1999 and December 1999 with equity values ranging from
$88 million to $281 million. The transactions reviewed by Chase were the Bain
Capital, Inc./VDI Multimedia transaction announced on December 27, 1999, the
Liberty Media Group/Four Media Company transaction announced on November 1,
1999 and the Liberty Media Group/Todd-AO Corporation transaction announced on
July 30, 1999. Chase calculated the enterprise value as a multiple of 2000
EBITDA for these transactions and found the high, mean and low to be as
follows:
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<PAGE>
<TABLE>
<CAPTION>
Enterprise Value/
Projected 2000
EBITDA
-----------------
<S> <C>
High....................................................... 7.9x
Mean....................................................... 7.6x
Low........................................................ 7.2x
</TABLE>
Chase then calculated the implied enterprise value of DG Systems as a
multiple of projected 2000 EBITDA for the management case and the sensitivity
case, assuming a multiple of between 5.0x and 7.0x. Chase based its
sensitivity case upon DG Systems' management projections, adjusted to assume
that DG Systems does not implement its current new business initiative in the
media asset management business during the periods covered. This analysis
implied an enterprise value of DG Systems of approximately $70 million to $98
million in the management case and of approximately $70 million to $97 million
in the sensitivity case.
Because the market conditions, rationale and circumstances surrounding the
selected transactions utilized in Chase's comparable transactions analysis
were specific to each transaction and vary between transactions and because of
inherent differences between the businesses, operations and prospects of DG
Systems and the companies involved in the selected transactions, Chase
believes that a purely quantitative analysis of the selected transactions,
without considering qualitative judgments concerning differences between the
characteristics of the selected transactions and factors specific to DG
Systems, would not be particularly meaningful in the context of the merger.
DG Systems Discounted Cash Flow Analysis
Chase performed a discounted cash flow analysis of DG Systems based upon
forecast and projection information provided to Chase by DG Systems'
management for the years 2000 through 2004. Utilizing this information, Chase
calculated a present value of the future streams of the unlevered, after-tax
free cash flows in the management case and the sensitivity case. Chase assumed
a discount rate of between 10.0% and 12.0% and terminal multiples of unlevered
2004 EBITDA ranging from 8.0x to 10.0x. This analysis indicated an implied
enterprise value for DG Systems of approximately $300 million to $375 million
in the management case and of approximately $225 million to $300 million in
the sensitivity case.
Based upon the foregoing, Chase established an enterprise valuation range
for DG Systems of between $150 million and $300 million.
Pro Forma Merger Analysis
Relative Contribution Analysis
Chase analyzed the relative contribution of each of StarGuide without
CoolCast(TM), the CoolCast(TM) service on a stand-alone basis and DG Systems
to the pro forma combined company based on the information provided by the
management of each of DG Systems and StarGuide. This analysis indicated the
following about the contributions of StarGuide without CoolCast(TM), the
CoolCast(TM) service on a stand-alone basis and DG Systems for the years 2000
and 2004:
<TABLE>
<CAPTION>
DG
StarGuide CoolCast Systems
--------- -------- -------
<S> <C> <C> <C>
2000 Revenue...................................... 22% 7% 71%
2004 Revenue...................................... 5% 71% 24%
2000 Gross Margin................................. 21% -- 79%
2004 Gross Margin................................. 5% 65% 30%
</TABLE>
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Pro Forma Ownership Analysis
Chase calculated a pro forma enterprise value of the combined DG
Systems/StarGuide entity based upon the implied valuation of DG Systems ($150
million to $300 million), StarGuide ($375 million to $600 million) and an
estimated $40 million to $50 million of capitalized synergies. The estimated
capitalized synergies represent Chase's assumption based upon management
estimates of annual synergies of $4 million to $5 million per year. The
estimated capitalized synergies are based upon management projections from
StarGuide and DG Systems. This analysis implied a pro forma enterprise value
of between $565 million and $950 million for the combined company. Chase then
calculated the implied value of DG Systems shareholders' pro forma ownership
of the combined entity assuming that DG Systems shareholders will own 40.75%
of the combined company. Chase further calculated the implied premium to DG
Systems closing stock price of $6.34 per share on June 21, 2000 and to the 1-
week average, the 1-month average, the 52 week high and the 52 week low
through such date. This analysis indicated the implied premiums as compared to
the low, high and mid-point of the implied pro forma enterprise value of the
combined DG Systems/StarGuide entity:
<TABLE>
<CAPTION>
Reference Range
(dollars in millions)
---------------------------
Low Mid High
------- ------- -------
<S> <C> <C> <C>
Pro forma enterprise value of DG
Systems/StarGuide........................... $ 565 $ 757.5 $ 950
Implied value of DG Systems ownership........ $ 224.4 $ 302.8 $ 381.2
Implied DG Systems share price............... $ 7.13 $ 9.32 $ 11.51
% premium to June 21, 2000 price............. 12.4% 46.9% 81.4%
% premium to 1 week average.................. 27.2% 66.3% 105.3%
% premium to 1 month average................. 23.0% 60.7% 98.4%
% premium to 52 week high.................... (32.0%) (11.2%) 9.6%
% premium to 52 week low..................... 128.3% 198.2% 268.2%
</TABLE>
Chase noted that the implied DG Systems share price is a result of a
mathematical calculation and is not an estimate of the post-transaction price
of the combined company.
Premiums Paid Analysis
Based upon publicly available information, Chase then examined 24
acquisition transactions in the Internet, technology and telecommunications
industries in the $250 million to $1 billion dollar range since January 1,
1999. In each case, Chase analyzed the premium paid relative to the closing
share price of the acquired company 1-day, 1-week and 4-weeks prior to the
announcement of the acquisition, the high, low and mean of which are set forth
below:
Internet, Technology and Telecommunications
Transactions ($250 million-$1 billion)
Premium Paid Relative to Target Closing Share Price
<TABLE>
<CAPTION>
1-Day 1-Week 1-Month
----- ------ -------
<S> <C> <C> <C>
High................................................... 148.9% 187.7% 165.9%
Mean................................................... 33.4% 43.8% 60.7%
Low.................................................... 5.4% 5.9% 7.3%
</TABLE>
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<PAGE>
Chase then examined 55 acquisition transactions in the $250 to $400 million
dollar range, and analyzed the premium paid relative to the closing share
price of the acquired company 1-day, 1-week and 1-month prior to the
announcement of the acquisition, the high, low and mean of which are set forth
below:
Internet, Technology and Telecommunications
Transactions ($250-$400 million)
Premium Paid Relative to Target Closing Share Price
<TABLE>
<CAPTION>
1-Day 1-Week 1-Month
----- ------ -------
<S> <C> <C> <C>
High................................................... 132.4% 141.4% 253.8%
Mean................................................... 39.8% 47.0% 67.1%
Low.................................................... 12.5% 6.0% 11.5%
</TABLE>
By comparison, Chase noted that the DG Systems share price implied by the
transaction represented the following premiums over the actual average per
share price of DG Systems stock for 1-day, 1-week and 1-month prior to the
announcement of the transaction:
<TABLE>
<CAPTION>
Reference Range
--------------------
Low Mid High
----- ----- ------
<S> <C> <C> <C>
Implied DG Systems share price (in millions)........... $7.13 $9.32 $11.51
% premium to June 21, 2000 price....................... 12.4% 46.9% 81.4%
% premium to 1 week average............................ 27.2% 66.3% 105.3%
% premium to 1 month average........................... 23.0% 60.7% 98.4%
</TABLE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
summary set forth above is not a complete description of the analyses
performed by Chase in arriving at its opinion, nor is it a complete
description of the presentation by Chase to DG Systems' board of directors.
Chase believes that its analyses must be considered as a whole and that
selecting portions of analyses and of the factors considered by them, without
considering all these factors and analyses, could create a misleading view of
the processes underlying the analyses set forth in its presentation to the DG
Systems' board of directors and in its opinion. Chase did not assign relative
weights to any of its analyses in preparing its opinion, but rather made
qualitative judgments as to the significance and relevance of each analysis
and factor. The matters considered by Chase in its analyses were based on
numerous macroeconomic, operating and financial assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond DG Systems' and StarGuide's control and
involve the application of complex methodologies and educated judgment. Any
estimates incorporated in the analyses performed by Chase are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than these estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at
which businesses or companies may be sold in the future, and these estimates
are inherently subject to uncertainty.
Recommendation of the Board of Directors of StarGuide; StarGuide's Reasons for
the Merger
The StarGuide board believes that the terms of the merger are fair to and in
the best interests of StarGuide and its shareholders. Accordingly, the
StarGuide board has unanimously approved the merger agreement and the
transactions contemplated thereby, and recommends approval of the merger
agreement by the shareholders of StarGuide.
In the course of its deliberations, the StarGuide board considered a number
of factors, including, among others, the following principal factors that were
material to the board's decision to approve the merger agreement and to
recommend that StarGuide's shareholders vote to approve the merger agreement:
. the StarGuide board considered the opportunity of the holders of
StarGuide common stock to participate in the potential growth of the
combined company after the merger as a result of their ownership of DG
Systems common stock;
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<PAGE>
. the StarGuide board considered the strength of DG Systems in the digital
content compression, storage and distribution services markets, and the
ability of the combined company to compete in markets for digital
content compression, storage and distribution services;
. the StarGuide board considered the principal terms and conditions of the
merger agreement and related agreements, including representations,
warranties and covenants and the conditions to each party's obligation
to complete the merger;
. the StarGuide board considered the fact that Scott K. Ginsburg, the
owner and/or voting trustee of StarGuide common stock representing 94%
of the total voting power of all outstanding shares of StarGuide
entitled to voted at the StarGuide special meeting, was willing to agree
to vote his shares of StarGuide common stock in favor of the merger
agreement;
. the StarGuide board assessed the possibility of being part of a combined
company and the risk of continuing to be an independent company, in view
of the increased competition in the digital content compression, storage
and distribution services markets;
. the StarGuide board considered the ability of DG Systems and StarGuide
to complete the merger, including their ability to obtain necessary
regulatory approvals and their obligations to attempt to obtain these
approvals, and determined that there was a strong likelihood that the
merger would be completed;
. the StarGuide board considered the risk that the merger would not be
completed. In evaluating this risk, the StarGuide board considered the
limited circumstances under which DG Systems could terminate the merger
agreement; and
. the StarGuide board took into consideration Morgan Stanley's opinion
that, as of July 7, 2000, the date the merger agreement was approved by
the StarGuide board and based upon and subject to the considerations in
its opinion, the consideration to be received by holders of shares of
StarGuide common stock pursuant to the merger agreement was fair to
holders of StarGuide common stock from a financial point of view.
The foregoing discussions of the information and factors considered by the
StarGuide board is not intended to be exhaustive, but is believed to include
all material factors considered by the StarGuide board. In view of the wide
variety of information and factors considered, the StarGuide board did not
find it practical to, and did not, assign any relative or specific weights to
the foregoing factors, and individual directors may have given differing
weights to different factors.
Opinion of Financial Advisor to StarGuide
Under an engagement letter dated March 23, 2000, StarGuide retained Morgan
Stanley to provide it with financial advisory services and a financial
fairness opinion in connection with the merger. StarGuide's board of directors
selected Morgan Stanley to act as its financial advisor based on Morgan
Stanley's qualifications, expertise and reputation and its knowledge of the
business and affairs of StarGuide. At the meeting of the StarGuide board of
directors on July 7, 2000, Morgan Stanley rendered its oral opinion,
subsequently confirmed in writing, that as of July 7, 2000, based upon and
subject to the various considerations set forth in the opinion, the
consideration to be received by holders of shares of StarGuide common stock
pursuant to the merger agreement was fair from a financial point of view to
holders of StarGuide common stock.
The full text of the written opinion of Morgan Stanley, dated as of July 7,
2000, is attached as Appendix C to this document. The opinion sets forth,
among other things, the assumptions made, procedures followed, matters
considered and limitations on the scope of the review undertaken by Morgan
Stanley in rendering its opinion. We urge you to read the entire opinion
carefully. Morgan Stanley's opinion is directed to StarGuide's board of
directors and addresses only the fairness from a financial point of view of
the consideration to be received pursuant to the merger agreement by the
holders of shares of StarGuide common stock as of the date of the opinion. It
does not address any other aspects of the merger
43
<PAGE>
and does not constitute a recommendation to any holder of StarGuide common
stock as to how to vote at the StarGuide special meeting. The summary of the
opinion of Morgan Stanley set forth in this document is qualified in its
entirety by reference to the full text of the opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things:
. reviewed certain publicly available financial statements and other
information of DG Systems;
. reviewed certain internal financial statements and other financial and
operating data concerning StarGuide and DG Systems prepared by the
management of each of StarGuide and DG Systems, respectively;
. reviewed certain financial projections prepared by the management of
each of StarGuide and DG Systems, respectively;
. discussed the past and current operations and financial condition and
the prospects of StarGuide, including information relating to the
strategic, financial and operational benefits anticipated from the
merger, with senior executives of StarGuide;
. discussed the past and current operations and financial condition and
the prospects of DG Systems, including information relating to the
strategic, financial and operational benefits anticipated from the
merger, with senior executives of DG Systems;
. reviewed the reported prices and trading activity for the DG Systems
common stock;
. compared the financial performance of StarGuide and DG Systems and the
prices and trading activity of DG Systems common stock;
. reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
. participated in discussions and negotiations among representatives of
StarGuide and DG Systems and their financial and legal advisors;
. reviewed the merger agreement and certain related documents; and
. considered such other factors and performed such other analyses as
Morgan Stanley deemed appropriate.
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to financial projections, including information
relating to certain strategic, financial and operational benefits anticipated
from the merger, Morgan Stanley assumed that they were reasonably prepared on
bases reflecting the best currently available estimates and judgments for
future performance of StarGuide and DG Systems. Morgan Stanley also relied
upon, without independent verification, the assessment by the management of
each of StarGuide and DG Systems of:
. the strategic, financial and other benefits expected to result from the
merger;
. the timing and risks associated with the integration of StarGuide and DG
Systems; and
. the validity of, and risks associated with, StarGuide and DG Systems'
existing and future technologies, services or business models.
Morgan Stanley did not make any independent valuation or appraisal of the
assets or liabilities or technology of StarGuide, nor was it furnished with
any such appraisals. Morgan Stanley assumed that in connection with the
receipt of all the necessary regulatory approvals for the proposed merger, no
restrictions will be imposed that would have a material adverse effect on the
contemplated benefits expected to be derived from the merger. In addition,
Morgan Stanley assumed that the merger will be consummated in accordance with
the terms set forth in the merger agreement, including, among other things,
that the merger will be treated as a reorganization pursuant to the Internal
Revenue Code of 1986. Morgan Stanley's opinion is necessarily based on
financial, economic, market and other conditions as in effect on, and the
information made available to it as of July 7, 2000. In arriving at its
opinion, Morgan Stanley was not authorized to solicit, and did not solicit,
interest from
44
<PAGE>
any party with respect to the acquisition, business combination or other
extraordinary transaction involving StarGuide.
The following is a brief summary of the material financial analyses
performed by Morgan Stanley in connection with its oral opinion and the
preparation of its written opinion letter dated July 7, 2000. Some of these
summaries of financial analyses include information presented in tabular
format. To fully understand the financial analyses used by Morgan Stanley, the
tables must be read together with the text of each summary. The tables alone
do not constitute a complete description of the financial analyses.
Potential Value of StarGuide and CoolCast(TM) Businesses. To evaluate the
expected total value of the combined entity, and the resulting value
attributed to the current holders of StarGuide common stock and DG Systems
common stock in accordance with the merger, Morgan Stanley first determined a
range of indicative values for StarGuide's digital media transmission
solutions business referred to as the StarGuide Business and its CoolCast(TM)
Internet-related video and audio content delivery business referred to as the
CoolCast(TM) Business.
StarGuide Business. With respect to the StarGuide Business, Morgan Stanley
relied on the values implied by both discounted cash flow analysis and
comparable company analysis to derive an indicative value range.
Discounted Cash Flow Analysis. Morgan Stanley performed an analysis of the
present value of the StarGuide Business on a stand alone basis based on the
StarGuide Business' projected future cash flow based on projections prepared
by the management of StarGuide. Morgan Stanley calculated an implied value
range of $42 million to $53 million based on a discount rate of 13% and a
range of perpetual growth rates of 5% to 7%.
Comparable Company Analysis. Morgan Stanley performed an analysis of the
implied value of the StarGuide Business based on the application of the public
trading multiples of DG Systems. Morgan Stanley noted that the ratio of
aggregate value to revenue for DG Systems was 4.3x and 3.6x for 2000 and 2001,
respectively. The implied values for the StarGuide Business after applying
these multiples to its 2000 and 2001 projected revenues are approximately $75
million and $87 million, respectively. Morgan Stanley further noted that the
ratio of aggregate value to earnings before interest, depreciation and
amortization, referred to as EBITDA, for DG Systems was 17.9x for 2001 and the
implied value for the StarGuide Business after applying this multiple to its
2001 projected EBITDA is approximately $64 million. Based on the foregoing
analyses, Morgan Stanley came to a judgment as to an indicative value range
for the StarGuide Business of $40 million to $60 million.
CoolCast(TM) Business. With respect to the CoolCast(TM) Business, Morgan
Stanley relied on the values implied by both discounted cash flow analysis and
discounted equity value analysis to derive a consensus value range.
Discounted Cash Flow Analysis. Morgan Stanley performed an analysis of the
present value of the CoolCast(TM) Business on a stand alone basis based on the
CoolCast(TM) Business' projected future cash flow as per projections prepared
by the management of StarGuide. Morgan Stanley calculated an implied value
range of $230 million to $301 million based on a discount rate of 25% and a
range of perpetual growth rates of 16% to 18%.
Discounted Equity Value Analysis. Morgan Stanley performed an analysis of
the implied present value of the CoolCast(TM) Business on a stand alone basis
based on various projections for the CoolCast(TM) Business' future net income
as per projections prepared by the management of StarGuide. For purposes of
this analysis Morgan Stanley calculated an implied present value of $418
million to $554 million using a net income multiple of 25.0x and discount
rates of 20% to 30%. Based on the foregoing analyses, Morgan Stanley came to a
judgment as to an indicative value range for the CoolCast(TM) Business of $350
million to $450 million.
Theoretical Premium Analysis. Assuming a range of potential values for both
the StarGuide Business and the CoolCast(TM) Business, Morgan Stanley
calculated the implied premium delivered to the DG Systems share price based
on the agreed upon 59.25% and 40.75% ownership split for StarGuide and DG
Systems, respectively.
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<PAGE>
The following table outlines the implied premiums to the DG Systems share
price over various time periods ending July 7, 2000 assuming a consolidated
value for StarGuide of $400 to $450.
<TABLE>
<CAPTION>
Implied Premium
to DG Systems
Assuming
Indicative
StarGuide Value
Average DG of:
Systems ---------------
Share $400 $450
Period ending July 7, 2000 Price million million
-------------------------- ---------- ------- -------
<S> <C> <C> <C>
July 7, 2000........................................ $6.81(1) 14.1% 28.4%
June 9, 2000 (4 weeks prior)........................ $6.06(1) 28.3% 44.3%
Last one month...................................... $6.42 21.2% 36.4%
Last three months................................... $5.89 32.1% 48.6%
Last six months..................................... $6.85 13.5% 27.7%
Last one year....................................... $5.70 36.4% 53.5%
Since initial public offering....................... $5.75 35.2% 52.1%
</TABLE>
--------
(1) Actual closing price on indicated date.
Morgan Stanley further noted that this implied average premia paid over the
stock price four weeks prior to announcement for precedent acquisition
transactions in the United States involving all stock consideration from
January 1, 1988 to March 31, 2000 was approximately 43%. Morgan Stanley
further noted that this average premia of 43% was near the high end of the
range of 28.3% to 44.3% premium paid to the four weeks prior DG Systems share
price of $6.06 implied by a value range of $400 million to $450 million for
StarGuide and CoolCast(TM), as noted in the above chart.
Relative Contribution Analysis. Morgan Stanley compared StarGuide's and DG
Systems' respective percentage contribution to the combined company using
revenues, EBITDA and net income over various applicable periods based on
projections prepared by the management of each of StarGuide and DG Systems,
respectively. Morgan Stanley noted that StarGuide's implied pro forma
ownership percentage ranged from 31% to 70% using estimated revenues for 2001
to 2003, 31% to 71% using estimated EBITDA for 2003 and 2004 and 21% to 75%
using estimated net income for 2003 and 2004. Morgan Stanley noted that the
pro forma StarGuide ownership of the combined company of 59.25% agreed upon in
the merger was greater than most of the implied pro forma ownership
percentages calculated by Morgan Stanley based on the relative contribution
analyses. Morgan Stanley also noted that additional funding would likely be
required for either company to achieve the projections for revenue and gross
profit.
Implied Pro Forma Ownership Analysis. Morgan Stanley analyzed the implied
pro forma ownership of DG Systems in the combined entity by assuming a
consolidated value for StarGuide of $400 million to $450 million and the
implied equity values for DG Systems applying a 20% to 40% control premium to
its equity value as of July 7, 2000. Morgan Stanley noted that this analysis
implied DG Systems ownership ranges from 36% to 46%. Morgan Stanley further
noted that if a 15% liquidity discount were applied to the indicative value of
StarGuide of $400 million to $450 million, the implied DG Systems ownership
ranges from 40% to 50%. Morgan Stanley further noted that the pro forma DG
Systems ownership of the combined company of 40.75% agreed upon in the merger
was less than most of the implied pro forma ownership percentages implied by
this analysis.
In connection with the review of the merger by StarGuide's board of
directors, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of rendering its opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to a partial
analysis or summary description. In arriving at its opinion, Morgan Stanley
considered the results of all of its analyses as a whole and did not attribute
any particular weight to any analysis or factor it considered. Morgan Stanley
believes that selecting any portion of its analyses, without considering all
analyses as a whole, would create an incomplete view of the process underlying
its analyses and opinion. In addition, Morgan Stanley may have given various
analyses and factors
46
<PAGE>
more or less weight than other analyses and factors, and may have deemed
various assumptions more or less probable than other assumptions. As a result,
the ranges of valuations resulting from any particular analysis described
above should not be taken to be Morgan Stanley's view of the actual value of
StarGuide and DG Systems. In performing its analyses, Morgan Stanley made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters. Many of these assumptions are
beyond the control of StarGuide and DG Systems. Any estimates contained in
Morgan Stanley's analyses are not necessarily indicative of future results or
actual values, which may be significantly more or less favorable than those
suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its
analysis of the fairness of the consideration pursuant to the merger agreement
from a financial point of view to holders of shares of StarGuide common stock
and in connection with the delivery of its opinion to the StarGuide board of
directors. These analyses do not purport to be appraisals or to reflect the
prices at which shares of common stock of DG Systems might actually trade.
The consideration pursuant to the merger agreement was determined through
arm's length negotiations between StarGuide and DG Systems and was approved by
StarGuide's board of directors. Morgan Stanley provided advice to StarGuide
during these negotiations. Morgan Stanley did not, however, recommend any
specific level of consideration to StarGuide or that any specific level of
consideration constituted the only appropriate consideration for the merger.
In addition, Morgan Stanley's opinion and its presentation to StarGuide's
board of directors was one of many factors taken into consideration by
StarGuide's board of directors in deciding to approve the merger.
Consequently, the analyses as described above should not be viewed as
determinative of the opinion of StarGuide's board of directors with respect to
the merger or of whether StarGuide's board of directors would have been
willing to agree to a different level of consideration.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking and financial
advisory business, is continuously engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate, estate
and other purposes. In the ordinary course of Morgan Stanley's trading and
brokerage activities, Morgan Stanley or its affiliates may at any time hold
long or short positions, may trade or otherwise effect transactions, for its
own account or for the account of customers in the equity and other securities
of StarGuide, DG Systems or any other parties involved in the merger.
Under an engagement letter, Morgan Stanley provided financial advisory
services and a financial fairness opinion in connection with the merger, and
StarGuide agreed to pay Morgan Stanley a fee of $2.5 million. StarGuide has
also agreed to reimburse Morgan Stanley for its expenses incurred in
performing its services. In addition, StarGuide has agreed to indemnify Morgan
Stanley and its affiliates, their respective directors, officers, agents and
employees and each person, if any, controlling Morgan Stanley or any of its
affiliates against certain liabilities and expenses, including certain
liabilities under the federal securities laws, related to or arising out of
Morgan Stanley's engagement.
Interests of Executive Officers and Directors of DG Systems and StarGuide in
the Merger
Some members of the StarGuide board of directors and some executive officers
of StarGuide have interests in the merger that are in addition to the
interests of the StarGuide shareholders generally. In considering the fairness
of the merger to the shareholders of StarGuide, the StarGuide board took these
considerations into account. In addition, some members of the DG Systems board
of directors and some executive officers of DG Systems have interests in the
merger that are in addition to the interests of the DG Systems shareholders
generally. In considering the fairness of the merger to the shareholders of DG
Systems, the DG Systems board took these considerations into account and took
into account and relied upon the recommendation of the special committee. See
"THE MERGER--Background of the Merger." You should be aware of these
interests.
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<PAGE>
Executive Officers; Board of Directors
Certain management personnel of StarGuide also work on behalf of DG Systems
in similar capacities. These individuals also are shareholders in both
StarGuide and DG Systems. The following chart sets forth the officers and
directors of DG Systems, their position with StarGuide and DG Systems, and
their respective interests in the two companies before and after the
completion of the merger. The individuals listed below will retain their
current positions with each company after the completion of the merger.
<TABLE>
<CAPTION>
% interest in % interest in % interest in
Current Position at DG Systems StarGuide DG Systems
DG Systems/StarGuide pre-merger(1) pre-merger(1) post-merger(1)
-------------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Scott K. Ginsburg....... Chairman of the Board 20.5 49.9(2) 38.2
Matthew E. Devine....... Chief Executive Officer/Director 3.1 1.0(2) 1.9
Omar A. Choucair........ Chief Financial Officer .7 .3(2) .5
Dan F. Dent............. Chief Operating Officer (DG Systems) -- -- .1
Lawrence D. Lenihan,
Jr.(3) ................ Director (DG Systems) 14.7 -- 6.0
Michael G. Linnert (4).. Director (DG Systems) 8.6 -- 3.5
David M. Kantor......... Director (DG Systems) -- -- --
</TABLE>
--------
(1) On a fully diluted basis. Percentages include options and warrants.
(2) Prior to completion of the merger agreement, Mr. Ginsburg entered into
agreements to sell shares of StarGuide Class B common stock owned by him
to certain individuals. The total number of shares of StarGuide Class B
common stock to be sold pursuant to these agreements is 800,000 shares, of
which 400,000 shares are to be sold to Matthew E. Devine, who is the chief
executive officer and a director of DG Systems and of StarGuide, and
400,000 shares are to be sold to Eric L. Bernthal. Mr. Ginsburg has also
agreed in principle to sell 175,000 additional shares of StarGuide Class B
common stock to Mr. Devine, and to sell 50,000 shares of StarGuide Class B
common stock to Omar A. Choucair, who is chief financial officer of DG
Systems and StarGuide. Upon completion of these sales, the percentage of
StarGuide capital stock owned by Mr. Ginsburg would decrease to 46.6%, the
percentage of DG Systems capital stock owned by Mr. Ginsburg following the
merger would decrease to 36.2%, the percentage of StarGuide capital stock
owned by Mr. Devine would increase to 2.8%, the percentage of DG Systems
capital stock owned by Mr. Devine following the merger would increase to
3.0%, the percentage of StarGuide capital stock owned by Mr. Choucair
would increase to 0.5%, and the percentage of DG Systems capital stock
owned by Mr. Choucair following the merger would increase to 0.6%. All
shares of Class B common stock of StarGuide expected to be sold by Mr.
Ginsburg pursuant to these agreements would become subject to the voting
trust agreement upon sale, and would thus remain subject to Mr. Ginsburg's
voting agreement with respect to the merger.
(3) Mr. Lenihan disclaims beneficial ownership of these securities. Such
securities are beneficially owned by affiliated entities of Pequot Capital
Management, Inc. See Note 8 on page 100.
(4) Mr. Linnert disclaims beneficial ownership of these securities. Such
securities are beneficially owned by affiliated entities of Technology
Crossover Ventures. See Note 9 on page 100.
Indemnification
StarGuide currently maintains a directors and officers liability insurance
policy covering all of its directors and officers. After completing the
merger, DG Systems will be required to indemnify, to the fullest extent that
StarGuide would have been permitted under its articles of incorporation and
by-laws, each former director and officer of StarGuide for all actions taken
by them in their capacities as such or at the request of StarGuide, against
all claims arising out of or pertaining to matters existing prior to or at the
completion of the merger.
In addition, for not less than six years after completing the merger, DG
Systems will also provide officer's and director's liability insurance for
each individual that was at the time of completion of the merger covered under
StarGuide's officer and director liability insurance. DG Systems will not be
required to pay, in total, an annual premium for the insurance described in
this paragraph in excess of 110% of the current annual premium paid by
StarGuide for its coverage existing prior to the merger.
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<PAGE>
Options; Warrants
The individuals listed below have option or warrant interests in either or
both of DG Systems and StarGuide. Under the merger agreement, all options and
warrants of StarGuide will be assumed by DG Systems; the resulting interests
are set forth in the table below.
<TABLE>
<CAPTION>
Options in Options in Warrants of Warrants of Options in Warrants in
DG Systems StarGuide DG Systems StarGuide DG Systems DG Systems
pre-merger pre-merger pre-merger pre-merger post-merger post-merger
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Scott K. Ginsburg....... -- 250,000 3,008,527 2,250,000 424,575 6,829,702
Matthew E. Devine....... 1,000,000 250,000 -- -- 1,424,575 --
Omar A. Choucair........ 250,000 100,000 -- -- 419,830 --
Dan F. Dent............. 150,000 -- -- -- 150,000 --
Bob Howard.............. 150,000 -- -- -- 150,000 --
Lawrence D. Lenihan, Jr.
(1).................... 15,000 -- 207,692 -- 15,000 207,692
Michael G. Linnert (2).. 10,000 -- 115,385 -- 10,000 115,385
David M. Kantor......... 10,000 -- -- -- 10,000 --
--------- ------- --------- --------- --------- ---------
Total................. 1,585,000 600,000 3,331,604 2,250,000 2,603,980 7,152,779
========= ======= ========= ========= ========= =========
</TABLE>
--------
(1) Mr. Lenihan disclaims beneficial ownership of these securities. Such
securities are beneficially owned by affiliated entities of Pequot Capital
Management, Inc. See Note 8 on page 100.
(2) Mr. Linnert disclaims beneficial ownership of these securities. Such
securities are beneficially owned by affiliated entities of Technology
Crossover Ventures. See Note 9 on page 100.
In addition, the following individuals own options of DG Systems the vesting
of which will, upon the consummation of the merger, accelerate with respect to
50% of the unvested portion thereof: Matthew E. Devine; Omar A. Choucair; Dan
F. Dent; and Bob Howard.
Directors of DG Systems Following the Merger
Under the merger agreement, StarGuide has the right to designate additional
persons to serve on the board of directors of DG Systems upon completing the
merger. Each director is elected for a one-year term, as set forth in the by-
laws.
StarGuide has designated Cappy R. McGarr, Robert J. Schlegel, Kevin C. Howe,
Jeffrey A. Dankworth, and Omar A. Choucair as nominees for members of the DG
Systems board of directors upon the completion of the merger.
Set forth below is information with respect to the executive officers and
members of the board of directors of DG Systems following the merger. Please
see, "THE DG SYSTEMS ANNUAL MEETING--Executive Officers and Directors of DG
Systems" for additional information on the current directors of DG Systems
listed below.
<TABLE>
<CAPTION>
Position with DG
Current Position with Systems
Name Age StarGuide or DG Systems After the Merger
---- --- ----------------------- ----------------
<S> <C> <C> <C>
Scott K. Ginsburg....... 47 Chairman of the Board Chairman of the Board
of StarGuide and DG Systems
Matthew E. Devine....... 51 Chief Executive Officer Chief Executive Officer
and Director of StarGuide and Director
and DG Systems
Omar A. Choucair........ 38 Chief Financial Officer of Chief Financial Officer
StarGuide and DG Systems and Director
Lawrence D. Lenihan, 35 Director of DG Systems Director
Jr. ...................
Michael G. Linnert...... 29 Director of DG Systems Director
David M. Kantor......... 44 Director of DG Systems Director
Cappy R. McGarr......... 49 N/A Director
Robert J. Schlegel...... 50 N/A Director
Kevin C. Howe........... 51 N/A Director
Jeffrey A. Dankworth.... 46 President and Director of StarGuide Director
</TABLE>
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<PAGE>
Certain Fees Associated with the Merger
DG Systems has agreed to pay Chase for its financial advisory services an
aggregate fee equal to $2,540,250, plus normal reimbursement of expenses.
StarGuide has agreed to pay Morgan Stanley for its financial advisory services
an aggregate fee equal to $2,500,000, plus reimbursement of expenses incurred
in performing its services.
Accounting Treatment
The merger will be accounted for using the purchase method of accounting.
Based on the exchange ratio, StarGuide shareholders will obtain a majority of
the voting interest of the combined company and will be the acquirer for
financial accounting purposes. Under the purchase method of accounting, the
purchase price will be allocated to DG Systems' assets and liabilities. The
excess of purchase price over the fair value of the identifiable tangible
assets acquired and liabilities assumed will be recorded as goodwill and other
intangibles and amortized on a straight-line basis over periods ranging from 4
to 20 years. The results of operations of the combined company will not
include DG Systems results prior to the merger. See "COMBINED COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS."
Material United States Federal Income Tax Consequences of the Merger
Tax Treatment of DG Systems Shareholders
DG Systems shareholders will not receive anything upon consummation of the
merger and will not recognize any gain or loss for United States federal
income tax purposes.
Tax Treatment of StarGuide Shareholders
The following discussion summarizes the material United States federal
income tax consequences of the merger to United States persons who hold shares
of StarGuide stock as capital assets and participate in the merger
transaction. This discussion is based upon current provisions of the Internal
Revenue Code of 1986, or the Code, currently applicable Treasury regulations,
administrative decisions and rulings, court decisions and certain factual
assumptions. We cannot assure you that there will not be changes in the legal
authorities on which this discussion is based (which changes could be
retroactive), or that there will not be a change in the facts or the validity
of the factual assumptions underlying this discussion that could alter or
modify the statements and conclusions set forth below and could affect the tax
consequences of the merger.
This discussion does not purport to be a complete analysis or description of
all potential United States federal income tax consequences of the merger or
to deal with all aspects of United States federal income taxation that may
affect particular StarGuide shareholders in light of their individual
circumstances, and is not intended for StarGuide shareholders subject to
special treatment under the United States federal income tax law. StarGuide
shareholders subject to special treatment include:
. insurance companies;
. tax-exempt organizations;
. non-resident aliens;
. foreign corporations;
. foreign partnerships;
. foreign trusts;
. financial institutions;
. broker-dealers;
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<PAGE>
. StarGuide shareholders who hold their common stock as part of a hedge,
straddle or conversion transaction, and
. StarGuide shareholders who have acquired their common stock upon the
exercise of options or otherwise as compensation.
In addition, this discussion does not consider the effect of any applicable
foreign, state, local or other tax laws. We encourage each StarGuide
shareholder to consult its own tax advisors as to its particular tax
consequences from the merger, including the applicability and effect of any
state, local, foreign or other tax laws, and of changes in applicable tax
laws.
Neither DG Systems nor StarGuide plans to obtain any rulings from the IRS
concerning tax issues with respect to the merger. However, consummation of the
merger is conditioned upon, among other things, each of DG Systems and
StarGuide receiving an opinion of its tax counsel on the date of the merger.
Dewey Ballantine is acting as tax counsel to DG Systems and Latham & Watkins
is acting as tax counsel to StarGuide. The opinions of tax counsel will be
dated as of the date of the merger and will be based on the United States
federal income tax laws in effect as of that date. The opinions will state
that, on the basis of the facts, certain representations to be made by DG
Systems and StarGuide, among others, and assumptions set forth in the
opinions, the merger will be treated for United States federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
An opinion of tax counsel represents counsel's legal judgment, but has no
binding effect or official status of any kind. The IRS may assert contrary
positions. Moreover, contrary positions may be adopted by a court, if the
positions are litigated.
Subject to the foregoing, assuming the opinions of Dewey Ballantine and
Latham & Watkins are rendered to DG Systems and StarGuide, respectively, the
material United States federal income tax consequences of the merger to the
StarGuide shareholders are expected to be as follows:
. You will not recognize gain or loss upon the exchange of StarGuide
common stock for DG Systems common stock pursuant to the merger (except
as described below with respect to any cash received in lieu of
fractional shares of DG Systems common stock).
. If you receive cash in lieu of a fractional share of DG Systems common
stock, you will recognize gain or loss equal to the difference between
the cash you receive and the portion of your tax basis in the StarGuide
common stock surrendered that is allocated to the fractional share. Any
such gain or loss generally will be capital gain or loss.
. Your tax basis in the DG Systems common stock you receive pursuant to
the merger will be the same as the tax basis of the StarGuide common
stock you surrender in the merger, less any proportionate part of your
basis allocable to any fractional share interest for which you receive
cash.
. Your holding period for the DG Systems common stock that you receive
will include the holding period of the StarGuide common stock you
surrender in the merger.
Reporting Requirements and Backup Withholding
Each StarGuide shareholder receiving DG Systems common stock as a result of
the merger will be required to retain certain records and file with its
federal income tax return a statement setting forth certain facts relating to
the merger.
Backup withholding at a rate of 31% may apply with respect to cash payments
received by StarGuide shareholders unless the recipient (a) is a corporation
or other exempt recipient and when required demonstrates this fact or (b)
provides a correct taxpayer identification number, certifies as to no loss to
exemption from back-up withholding and otherwise complies with applicable
requirements of the backup withholding rules. A StarGuide
51
<PAGE>
shareholder who does not provide DG Systems with its correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any
amounts withheld under the backup withholding rules may be allowed as a refund
or a credit against the shareholder's federal income tax liability provided
that certain required information is furnished to the IRS.
Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR
Act, and the regulations thereunder, DG Systems and StarGuide may not complete
the merger unless Notification and Report Forms have been filed with the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and the United States Federal Trade Commission (the "FTC"), and the
waiting period requirements have expired or are otherwise earlier terminated
by the Antitrust Division and the FTC. On , DG Systems and StarGuide
received notification that the waiting period under the HSR Act had been
terminated.
Dissenters' Rights
The following is a summary of the principal steps that a shareholder of
StarGuide must take to exercise dissenters' rights. This summary does not
purport to be complete, and all StarGuide shareholders are encouraged to read
Sections 92A.300 through 92A.500 of the Nevada Revised Statutes, which are
attached as Appendix D. Failure to take any one of the required steps may
terminate the shareholder's dissenters' rights under Nevada law. Because of
the complexity of the procedures in exercising dissenters' rights,
shareholders who exercise such rights should seek the advice of legal counsel.
All references in Section 92A.300 through 92A.500 and in this summary to a
"shareholder" or "holder" are to the record holder of the shares of StarGuide
common stock as to which dissenters' rights are asserted.
Under Sections 92A.300 through 92A.500, any record holder of StarGuide
common stock who does not wish to accept the shares of DG Systems common stock
for its shares of StarGuide common stock, as provided in the merger agreement,
has the right to be paid the fair value for its shares of StarGuide common
stock if the shareholder complies with the provisions of Sections 92A.300
through 92A.500. DG System's and StarGuide's obligation to effect the merger
is conditioned on the holders of no more than 10% of the outstanding shares,
on a fully diluted, as-converted basis, of StarGuide common stock exercising
dissenters' rights.
Record holders of shares of StarGuide common stock who do not vote in favor
of the merger and who otherwise comply with the procedures described in
Sections 92A.300 through 92A.500 will be entitled to dissenters' rights under
Sections 92A.300 through 92A.500. These procedures are summarized below. A
person having a beneficial interest in shares of StarGuide common stock held
of record by or in the name of another person, such as a broker or nominee,
must act promptly to cause the record holder to follow the steps summarized
below properly and in a timely manner to perfect dissenters' rights.
Under Sections 92A.300 through 92A.500, a dissenting holder of shares of
StarGuide common stock that follows the procedures set forth in Sections
92A.300 through 92A.500, will be entitled to receive payment in cash of the
fair value, plus accrued interest, of such dissenters' shares.
Under Sections 92A.300 through 92A.500, if a plan of merger is to be
submitted for approval at a meeting of shareholders, the corporation must
notify each of its shareholders of the availability of dissenters' rights and
must include in this notice a copy of Sections 92A.300 through 92A.500. This
information statement/prospectus is the notice to the holders of StarGuide
common stock required by Sections 92A.300 through 92A.500, and the text of
Sections 92A.300 through 92A.500 is attached as Appendix D to this information
statement/prospectus.
Any shareholders who wishes to exercise dissenters' rights or who wishes to
preserve its right to do so should review the following description and
Appendix D carefully. The failure to timely, properly and strictly comply with
the required procedures will result in the loss of dissenters' rights.
52
<PAGE>
A holder of StarGuide common stock wishing to exercise dissenters' rights
must not vote in favor of the adoption of the merger agreement and must
deliver to StarGuide prior to the vote on the merger agreement at the
StarGuide special meeting, a written notice of the intent to demand payment of
such holder's shares. This written demand for payment is in addition to and
separate from any proxy or vote abstaining from or against the merger. This
demand must reasonably inform StarGuide of the identity of the shareholder and
of the shareholder's intent thereby to demand payment of his, her or its
shares of StarGuide common stock.
A shareholder of record may assert dissenter's rights as to fewer than all
of the shares held in his name only if he dissents with respect to all shares
beneficially owned by any one person and if he notifies StarGuide in writing
of the name and address of each person on whose behalf he asserts dissenter's
rights. The rights of a partial dissenter are determined as if the shares for
which he dissents and his other shares were registered in the names of
different shareholders. A shareholder who holds shares of StarGuide common
stock beneficially, and not of record, may assert dissenters' rights for the
beneficially owned shares of StarGuide common stock only by submitting a
written consent of the shareholder of record along with the written notice of
dissent. This applies to shares held in a voting trust, as to which the
trustee is the holder of record whose written consent is required. A
shareholder exercising dissenters' rights with respect to shares of StarGuide
common stock that it owns beneficially may not exercise dissenters' rights for
fewer than all the shares of StarGuide common stock held by the owner of
record over which the beneficial owner has power to direct the vote.
All written notices of the intent to demand payment should be delivered to
StarGuide Digital Networks, Inc., 300 East Second Street, Suite 1510, Reno,
Nevada 89509, Attention: Secretary.
If the merger is approved by the StarGuide shareholders, within 10 days
after the effective time of the merger, StarGuide will deliver a written
dissenters' notice to all shareholders who satisfied the requirements to
assert dissenters' rights under Sections 92A.300 through 92A.500. The
dissenters' notice must:
. state where the demand for payment must be sent;
. state where and when certificates, if any, must be deposited;
. state the restrictions on transfer of shares that are not evidenced by a
certificate once demand has been made;
. supply a form on which to demand payment;
. set a date by which demand must be received; and
. include a copy of Sections 92A.300 through 92A.500.
Unless a shareholder acquired its shares after StarGuide sends the
dissenters' notice, StarGuide must calculate the fair value of such shares
plus interest, and within 30 days of the date StarGuide receives the demand
for payment, pay this amount to any StarGuide shareholder that properly
exercised dissenters' rights and deposited certificates with StarGuide. If
StarGuide does not pay within 30 days, a shareholder who is entitled to
payment may enforce in court StarGuide's obligation to pay. The payment must
be accompanied by:
. StarGuide's financial statements;
. a statement of the fair market value of the shares;
. an explanation of how the interest was calculated;
. a statement of the dissenters' rights to demand payment; and
. a copy of Sections 92A.300 through 92A.500.
Within 30 days of when StarGuide pays a dissenting shareholder for its
shares, the shareholder has the right to challenge StarGuide's calculation of
the fair value of the shares and interest due, and must state the amount that
the shareholder believes to represent the true fair value of the shares and
interest due. If StarGuide and the shareholder are not able to settle on an
amount for the fair value and interest due, StarGuide may petition a court
53
<PAGE>
within 60 days after receiving the demand for payment and petition the court
to determine the fair value of the shares and accrued interest. If StarGuide
does not either settle on an amount with the shareholder or petition a court
within 60 days after receiving the demand for payment, StarGuide is obligated
to pay the shareholder the amount demanded that exceeds StarGuide's
calculation of fair value plus accrued interest.
Resales of DG Systems Common Stock Issued in Connection with the Merger;
Affiliate Agreements
Subject to the lock-up provisions contained in the merger agreement, DG
Systems common stock issued in connection with the merger will be freely
transferable. See "ADDITIONAL AGREEMENTS--Lock-up Agreements." However, shares
of DG Systems common stock received by persons who are deemed to be
"affiliates," as such term is defined by Rule 144 under the Securities Act of
1933, of StarGuide at the effective time of the merger, may be resold by them
only in transactions permitted by the resale provisions of Rule 145 under the
Securities Act of 1933 or as otherwise permitted under the Securities Act of
1933.
54
<PAGE>
COMBINED COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Under the terms of the merger agreement, the holders of StarGuide common
stock will receive approximately 1.6983 shares of DG Systems common stock for
each StarGuide share, which number may change based on the relative number of
DG Systems and StarGuide fully diluted shares outstanding on the effective
date of the merger. Based on the exchange ratio, StarGuide shareholders will
obtain a majority of the voting interest of the combined company.
DG Systems will be the parent of StarGuide, and will be the surviving
registrant in the merger. However, for accounting purposes, StarGuide is
deemed the acquirer and, accordingly, the merger will be accounted for as a
reverse acquisition of DG Systems under the purchase method of accounting.
Under this method of accounting, the combined company's historical results for
periods prior to the merger will be those of StarGuide. On the date of the
merger, the assets and liabilities of DG Systems will be recorded at their
estimated fair values.
The following combined company unaudited pro forma condensed consolidated
financial statements utilize the unaudited pro forma financial statements of
StarGuide and the historical financial statements of DG Systems for the
periods presented. The unaudited pro forma financial statements of StarGuide
give effect to the acquisition by StarGuide of the remaining 50% interest in
Musicam Express. See "STARGUIDE BUSINESS--Musicam Express." The combined
company unaudited pro forma condensed consolidated financial statements give
effect to the merger and the Musicam Express acquisition as if the
transactions had occurred on June 30, 2000 for purposes of the combined
company unaudited pro forma condensed consolidated balance sheet, and on
January 1, 1999 for purposes of the combined company unaudited pro forma
condensed consolidated statements of operations.
The combined company unaudited pro forma condensed consolidated balance
sheet and statements of operations do not purport to represent what the
financial position or results of operations actually would have been if the
merger and the Musicam Express transaction had occurred as of such dates, or
what such results will be for any future periods.
The combined company unaudited pro forma condensed consolidated financial
statements are derived from the historical financial statements of DG Systems,
StarGuide and Musicam Express and the assumptions and adjustments described in
the accompanying notes. The pro forma adjustments are based on preliminary
estimates and assumptions that DG Systems and StarGuide believe are reasonable
under the circumstances. As described above, the exchange ratio is subject to
change based on the relative number of DG Systems and StarGuide fully diluted
shares outstanding on the effective date of the merger. Accordingly, a final
measurement date for determining the total purchase price will not occur until
such date that the exchange ratio becomes fixed without subsequent revision.
The preliminary allocation of the estimated purchase price to the assets and
liabilities of DG Systems reflects the assumption that assets and liabilities
are carried at historical amounts which approximate fair market values. The
actual allocation of the purchase price may differ from that reflected in the
combined company unaudited pro forma condensed consolidated financial
statements after a more extensive review of the fair value of the assets and
liabilities is completed. The combined company unaudited pro forma financial
information should be read in conjunction with the historical financial
statements and the accompanying notes thereto of DG Systems, StarGuide and
Musicam Express appearing elsewhere in the proxy statement/prospectus. The
combined company unaudited pro forma condensed consolidated financial
statements do not reflect any cost savings or other economic efficiencies
which may result from the merger.
55
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Pro
Pro forma Historical Pro forma forma
StarGuide DG Systems Adjustments Combined
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents....... $ 5,550 $ 3,204 $ $ 8,754
Accounts receivable, net........ 4,506 12,277 (306)(b) 16,477
Inventory....................... 2,191 -- 2,191
Other current assets............ 546 1,489 2,035
-------- -------- --------- --------
Total current assets 12,793 16,970 (306) 29,457
Property and equipment, net...... 1,338 7,354 8,692
Goodwill and other intangible
assets.......................... 10,799 12,864 (12,864)(a) 217,968
207,169(a)
Other assets..................... 431 -- 431
-------- -------- --------- --------
Total assets..................... $ 25,361 $ 37,188 $ 193,999 $256,548
======== ======== ========= ========
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable and accrued
liabilities.................... $ 3,546 $ 7,149 $ 12,000(a) $ 22,389
(306)(b)
Deferred revenue................ 3,201 -- 3,201
Current portion of long-term
debt........................... -- 2,920 2,920
Bank line of credit............. 9,597 -- 9,597
Other........................... 779 -- 779
-------- -------- --------- --------
Total current liabilities...... 17,123 10,069 11,694 38,886
Deferred revenue................. 10,967 -- 10,967
Long-term debt................... -- 5,313 5,313
-------- -------- --------- --------
Total liabilities.............. 28,090 15,382 11,694 55,166
Shareholders' equity (deficit):
Common stock.................... 24 121,711 52,404(a) 257,682
(121,711)(a)
206,124(a)
(870)(a)
Paid-in capital................. 52,404 -- (52,404)(a) --
Accumulated deficit............. (54,186) (99,776) 99,776(a) (54,186)
Treasury stock.................. (971) (101) 971(a) (101)
Receivables from issuance of
common stock................... -- (93) (93)
Unearned compensation........... -- -- (1,920)(a) (1,920)
Accumulated other comprehensive
income......................... -- 65 (65)(a) --
-------- -------- --------- --------
Total shareholders' equity
(deficit)..................... (2,729) 21,806 182,305 201,382
-------- -------- --------- --------
Total liabilities and
shareholders' equity......... $ 25,361 $ 37,188 $ 193,999 $256,548
======== ======== ========= ========
</TABLE>
See accompanying "Notes to Combined Company Unaudited Pro Forma Condensed
Consolidated Financial Statements."
56
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro
Pro forma Historical Pro forma forma
StarGuide DG Systems Adjustments Combined
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues......................... $ 7,109 $26,250 $ 33,359
Costs and expenses:
Cost of revenues................ 4,850 15,450 20,300
Sales and marketing............. 1,172 2,273 3,445
Research and development........ 1,480 1,634 3,114
General and administrative...... 2,245 4,055 443(a) 6,743
Noncash stock compensation
charges........................ 18,375 -- 18,375
Impairment charge............... 972 -- 972
Depreciation and amortization... 1,106 3,199 6,727(a) 11,032
-------- ------- ------- --------
Total costs and expenses....... 30,200 26,611 7,170 63,981
-------- ------- ------- --------
Loss from operations............. (23,091) (361) (7,170) (30,622)
Other income (expense):
Interest and other income....... 212 96 308
Interest expense................ (507) (686) (1,193)
-------- ------- ------- --------
Total other income (expense)... (295) (590) (885)
-------- ------- ------- --------
Net loss...................... $(23,386) $ (951) $(7,170) $(31,507)
======== ======= ======= ========
Basic and diluted net loss per
share........................... $ (0.98) $ (0.03) $ (0.46)
======== ======= ========
Weighted average common shares
outstanding..................... 23,855 27,812 16,658(c) 68,325
======== ======= ======= ========
</TABLE>
See accompanying "Notes to Combined Company Unaudited Pro Forma Condensed
Consolidated Financial Statements."
57
<PAGE>
COMBINED COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro
Pro forma Historical Pro forma forma
StarGuide DG Systems Adjustments Combined
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues........................ $ 14,096 $48,724 $ 62,820
Costs and expenses:
Cost of revenues............... 9,080 32,995 42,075
Sales and marketing............ 3,220 4,818 8,038
Research and development....... 3,383 2,577 5,960
General and administrative..... 3,635 6,552 886(a) 11,073
Impairment charge.............. 4,055 -- 4,055
Depreciation and amortization.. 3,371 8,591 13,689(a) 25,651
Non-recurring charges.......... -- 370 370
-------- ------- -------- --------
Total costs and expenses...... 26,744 55,903 14,575 97,222
-------- ------- -------- --------
Loss from operations............ (12,648) (7,179) (14,575) (34,402)
Other income (expense):
Interest and other income...... 320 319 639
Interest expense............... (1,444) (1,903) (3,347)
-------- ------- -------- --------
Total other income (expense).. (1,124) (1,584) (2,708)
-------- ------- -------- --------
Loss before cumulative effect of
change in accounting
principle...................... $(13,772) $(8,763) $(14,575) $(37,110)
======== ======= ======== ========
Basic and diluted loss before
cumulative effect of change in
accounting principle per
share.......................... $ (0.60) $ (0.33) $ (0.56)
======== ======= ========
Weighted average common shares
outstanding.................... 23,007 26,653 16,066(c) 65,726
======== ======= ======== ========
</TABLE>
See accompanying "Notes to Combined Company Unaudited Pro Forma Condensed
Consolidated Financial Statements."
58
<PAGE>
NOTES TO COMBINED COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(a) To record the merger. The merger will be accounted for as a purchase
business combination with StarGuide treated as the accounting acquirer. In
addition, the pro forma entries adjust the historical capital structure of
StarGuide to the capital structure of DG Systems, the legal surviving
corporation in the merger.
The outstanding shares of DG Systems at June 30, 2000 have been valued at
$6.50 per share, resulting in a value assigned to the shares of $183.1
million. The $6.50 per share is based on the five day share price average
of DG Systems with July 10, 2000 as the midpoint. The value of the merger
consideration was determined based on DG Systems' traded market price per
share because StarGuide's common stock is not publicly traded. Since the
exchange ratio is subject to change up to the date of the merger in the
event that either DG Systems or StarGuide issue additional common stock,
options, warrants or other forms of equity prior to the merger, the
ultimate measurement date for accounting purposes for determining the
purchase price will be the earliest date on which the exchange ratio
becomes fixed without subsequent revision.
The outstanding options and warrants of DG Systems have been valued using
the Black-Scholes model. The combined company expects to incur direct
acquisition costs in connection with the merger totaling approximately
$12.0 million. The following table summarizes the estimated purchase price
(in thousands):
<TABLE>
<S> <C>
Fair value of outstanding common shares.......................... $183,124
Fair value of outstanding options................................ 14,000
Fair value of outstanding warrants............................... 9,000
--------
Fair value of merger consideration............................... 206,124
Estimated merger costs........................................... 12,000
--------
Total purchase price........................................... $218,124
========
</TABLE>
The following table summarizes the pro forma net assets acquired in
connection with the merger and the preliminary allocation of the purchase
price (in thousands):
<TABLE>
<S> <C>
Working capital.................................................. $ 6,901
Property, plant, and equipment................................... 7,354
Non-current liabilities.......................................... (5,313)
Unearned compensation (contra equity)............................ 1,920
Other equity (contra equity)..................................... 93
Goodwill and other intangibles................................... 207,169
--------
Total purchase price........................................... $218,124
========
</TABLE>
Unearned compensation is recorded for the portion of the intrinsic value of
DG Systems' options outstanding related to the future service period
required for the options to fully vest. Unearned compensation will be
amortized to expense over 26 months, the weighted average remaining vesting
period of the options. The pro forma condensed consolidated statements of
operations have been adjusted to give effect to the additional compensation
expense.
As set forth in the following table, a preliminary estimate of intangible
assets relating to the merger are comprised of the following amounts (in
thousands):
<TABLE>
<S> <C>
Workforce........................................................ $ 5,300
Customer accounts................................................ 18,400
Brand name....................................................... 6,400
Goodwill......................................................... 177,069
--------
Total intangible assets........................................ $207,169
========
</TABLE>
59
<PAGE>
Goodwill and other intangibles amortization for purposes of the pro forma
financial statements is based on a weighted average life of 14.6 years,
with estimated lives ranging from 4 to 20 years. The pro forma condensed
consolidated statements of operations have been adjusted to give effect to
the additional amortization.
The purchase price allocation and lives assigned to the assets is
preliminary. After the closing of the merger, DG Systems, with the
assistance of valuation consultants, will complete its evaluation of the
fair value and the lives of the assets acquired. Accordingly, the
allocation of the purchase price and the lives of the assets acquired may
differ from the final purchase price allocation and final lives assigned to
the assets.
(b) To eliminate receivables and payables between StarGuide and DG Systems
relating to shared office costs.
(c) To recognize incremental shares from conversion of StarGuide shares to DG
Systems shares at an exchange ratio of 1.6983 to 1.00.
60
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Historical
Historical Musicam Pro forma Pro forma
StarGuide Express Adjustments StarGuide
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash.......................... $ 5,455 $ 95 $ 5,550
Accounts receivable, net...... 4,333 173 4,506
Inventory..................... 2,191 -- 2,191
Other current assets.......... 537 9 546
-------- -------- ------- --------
Total current assets........ 12,516 277 12,793
Property and equipment, net..... 773 565 1,338
Goodwill and other intangible
assets......................... -- -- 10,799(1) 10,799
Other assets.................... 422 9 431
-------- -------- ------- --------
Total assets................ $ 13,711 $ 851 $10,799 $ 25,361
======== ======== ======= ========
Liabilities and shareholders'
deficit
Current liabilities:
Accounts payable and accrued
liabilities.................. $ 3,298 $ 248 $ 3,546
Deferred revenue.............. 3,201 -- 3,201
Other current liabilities..... 291 488 779
Bank line of credit........... -- 9,597 9,597
-------- -------- --------
Total current liabilities... 6,790 10,333 17,123
Deferred revenue................ 10,967 -- 10,967
Due to affiliate................ -- 4,026 (4,026)(2) --
Excess of losses over
investments in and amounts due
from joint venture............. 2,683 -- (2,683)(3) --
-------- -------- ------- --------
Total liabilities........... 20,440 14,359 (6,709) 28,090
Shareholders' deficit:
Common stock.................. 24 -- 24
Additional paid in capital.... 48,404 -- 4,000(4) 52,404
Accumulated deficit........... (54,186) (13,508) 13,508(1) (54,186)
Treasury stock................ (971) -- (971)
-------- -------- ------- --------
Total shareholders'
deficit.................... (6,729) (13,508) 17,508 (2,729)
-------- -------- ------- --------
Total liabilities and
shareholders' deficit.... $ 13,711 $ 851 $10,799 $ 25,361
======== ======== ======= ========
</TABLE>
--------
(1) To eliminate Musicam Express equity accounts and record the excess of the
purchase price over assets acquired and liabilities assumed as goodwill
and other intangible assets. The purchase price allocation is preliminary
and is subject to change.
(2) To eliminate the amount due from Musicam Express to StarGuide.
(3) To eliminate investment account.
(4) To record the issuance of 400,000 shares of Class B common stock at
$10.00 per share for the purchase of 50% interest in Musicam Express from
Infinity and Westwood One. The transaction is expected to close in the
fourth quarter of 2000.
61
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
Historical Musicam Pro forma Pro forma
StarGuide Express Adjustments StarGuide
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues...................... $ 6,600 $ 613 $ (104)(1) $ 7,109
Costs and expenses:
Cost of revenues............ 4,365 553 (68)(1) 4,850
Sales and marketing......... 1,172 -- 1,172
Research and development.... 1,480 -- 1,480
General and administrative.. 2,009 236 2,245
Noncash stock compensation
charges.................... 18,375 -- 18,375
Impairment charge........... -- 972 972
Depreciation and
amortization............... 433 403 270(2) 1,106
--------- -------- ------ ---------
Total costs and expenses.. 27,834 2,164 202 30,200
--------- -------- ------ ---------
Operating loss............ (21,234) (1,551) (306) (23,091)
Equity in losses of joint
venture...................... (829) -- 829(3) --
Interest and other income..... 195 17 212
Interest expense.............. (17) (490) (507)
--------- -------- ------ ---------
Net loss.................... $ (21,885) $ (2,024) $ 523 $ (23,386)
========= ======== ====== =========
Basic and diluted net loss per
share........................ $ (0.93) $ (0.98)
========= =========
Weighted average common shares
outstanding.................. 23,455 400(4) 23,855
========= ====== =========
</TABLE>
--------
(1) To eliminate intercompany product sales and related cost of revenues.
(2) To record amortization of goodwill and other intangibles which arose in
connection with the Musicam Express purchase transaction using an estimated
20 year life.
(3) To eliminate equity in losses of joint venture.
(4) To record shares issued to purchase the 50% interest in Musicam Express
from Infinity and Westwood One.
62
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
Historical Musicam Pro forma Pro forma
StarGuide Express Adjustments StarGuide
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.......................... $13,068 $ 1,609 $ (581)(1) $ 14,096
Costs and expenses:
Cost of revenues................ 8,128 1,490 (538)(1) 9,080
Sales and marketing............. 3,209 11 3,220
Research and development........ 3,383 -- 3,383
General and administrative...... 3,087 548 3,635
Impairment charge............... -- 4,055 4,055
Depreciation and amortization... 973 1,860 538(2) 3,371
-------- ------- ------ --------
Total costs and expenses...... 18,780 7,964 26,744
-------- ------- ------ --------
Operating loss................ (5,712) (6,355) (581) (12,648)
Equity in losses of joint
venture.......................... (3,031) -- 3,031(3) --
Interest and other income......... 290 30 320
Interest expense.................. (547) (897) (1,444)
-------- ------- ------ --------
Loss before cumulative effect of
change in accounting
principle...................... $ (9,000) $(7,222) $2,450 $(13,772)
======== ======= ====== ========
Basic and diluted loss before
cumulative effect of change in
accounting principle per share... $ (0.40) $ (0.60)
======== ========
Weighted average common shares
outstanding...................... 22,607 400(4) 23,007
======== ====== ========
</TABLE>
--------
(1) To eliminate intercompany product sales and related cost of revenues
(2) To record the amortization of goodwill and other intangibles in connection
with the Musicam Express purchase transaction using an estimated 20 year
life.
(3) To eliminate equity in losses of joint venture.
(4) To record shares issued to purchase the 50% interest in Musicam Express
from Infinity and Westwood One.
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THE MERGER AGREEMENT
General
The following is a description of the material terms of the merger
agreement. This description is qualified in its entirety by reference to the
merger agreement. A copy of the merger agreement is attached as Appendix A to
this proxy statement/prospectus and is incorporated in this proxy
statement/prospectus by reference. You should read the full text of the merger
agreement because it, and not this proxy statement/prospectus, is the legal
document that governs the merger.
The Merger
Under the merger agreement, SG Nevada, a wholly-owned subsidiary of DG
Systems, will merge with and into StarGuide. As a result, SG Nevada will cease
to exist as a separate corporate entity and StarGuide will continue as the
surviving corporation and a wholly-owned subsidiary of DG Systems. The merger
will have the effects specified in the applicable provisions of the Nevada
Revised Statutes.
Each share of SG Nevada capital stock, issued and outstanding immediately
before the merger, will be converted into and become one validly issued, fully
paid and non-assessable share of StarGuide common stock, par value $.001 per
share, and these shares will, collectively represent all of the issued and
outstanding capital stock of StarGuide.
Each share of StarGuide common stock issued and outstanding immediately
before the merger, other than those held in the treasury of StarGuide or owned
by a wholly-owned subsidiary of StarGuide, will be converted into the number
of validly issued, fully paid and non-assessable shares of DG Systems common
stock, without par value, excluding fractional shares, equal to the sum of (a)
the total number of shares of DG Systems common stock issued and outstanding
immediately before the merger and (b) the total number of shares of DG Systems
common stock issuable upon conversion of any options or warrants for the
purchase of DG Systems common stock, and any other securities of DG Systems
convertible into shares of DG Systems common stock, multiplied by 1.454, and
divided by the sum of (x) the total number of shares of StarGuide common stock
issued and outstanding immediately before the merger and (y) the total number
of shares of StarGuide common stock issuable upon conversion of any options or
warrants for the purchase of StarGuide common stock, and any other securities
of StarGuide convertible into shares of StarGuide common stock. Based upon the
number of shares of DG Systems common stock outstanding and issuable upon
conversion or exercise of warrants and options as of July 31, 2000 and the
number of shares of StarGuide common stock outstanding and issuable upon
conversion or exercise of warrants and options as of July 31, 2000, each share
of StarGuide common stock will be convertible into approximately 1.6983 shares
of DG Systems common stock.
The number of shares of DG Systems common stock issued upon the conversion
of each share of StarGuide common stock will be adjusted to reflect any change
in the number or class of outstanding shares of DG Systems common stock that
occurs prior to the merger as a result of any declared or completed stock
dividend, subdivision, reclassification, recapitalization, split, combination
or exchange of shares.
No fractional shares of DG Systems common stock will be issued as a result
of the conversion. In lieu of the issuance of any fractional shares of DG
Systems common stock, each holder who would otherwise be entitled to receive a
fractional share of DG Systems common stock will receive cash equal to the
product of (a) the fraction of the share of DG Systems common stock that would
otherwise be issued and (b) the closing price for a share of DG Systems common
stock on the Nasdaq National Market on the closing date.
All shares of StarGuide common stock that are converted will be canceled and
retired. Each holder of a certificate representing any shares of StarGuide
common stock will no longer have any rights regarding StarGuide common stock.
Shares of StarGuide common stock (a) held in the treasury of StarGuide or (b)
owned by a wholly owned subsidiary of StarGuide will be canceled without any
payment.
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The officers and directors of StarGuide immediately prior to the merger will
be the officers and directors of the surviving corporation until their
successors are elected or appointed. The articles of incorporation and by-laws
of StarGuide in effect immediately prior to the merger will be the articles of
incorporation and by-laws of the surviving corporation until StarGuide amends
or changes either document.
Effective Time and Closing of the Merger
Promptly after the satisfaction or waiver of the conditions to closing set
forth in the merger agreement, DG Systems, SG Nevada, and StarGuide will file
articles of merger with the Secretary of State of Nevada in accordance with
the Nevada Revised Statutes. The merger will be effective when the articles of
merger are filed. However, DG Systems, SG Nevada, and StarGuide may agree to
another date or time and specify that date or time in the articles of merger.
We expect to complete the merger during the fourth quarter of 2000.
Procedure to Exchange Certificates
DG Systems has designated ChaseMellon Shareholder Services, L.L.C. to act as
exchange agent. The exchange agent will mail letters of transmittal and
instructions regarding the exchange process to each record holder of shares of
StarGuide common stock promptly following the merger. Upon surrender of
StarGuide common stock certificates, the StarGuide record holders will receive
certificates representing whole shares of DG Systems common stock. If a
transfer of ownership of StarGuide common stock occurred which is not
registered in the transfer records of StarGuide, the exchange agent may issue
a certificate representing the proper number of shares of DG Systems common
stock to a person other than the person in whose name the surrendered
certificate is registered. The holder of the surrendered certificate will pay
any applicable transfer taxes or establish that any transfer tax has been
paid. Until surrendered, each StarGuide common stock certificate will
represent only the right to receive upon surrender a certificate representing
the appropriate number of whole shares of DG Systems common stock, cash in
lieu of any fractional shares of DG Systems common stock, and any dividends to
the extent provided below. No interest will be paid or will accrue on any cash
payable in lieu of any fractional shares of DG Systems common stock.
Once the holders of certificates previously representing StarGuide common
stock surrender these certificates in exchange for certificates representing
whole shares of DG Systems common stock, they will receive, at the time of
surrender, any cash payable in lieu of a fractional share of DG Systems common
stock and any dividends or other distributions on whole shares of DG Systems
common stock that have a record date after the merger and a payment date
before the holder surrenders the StarGuide common share certificate. However,
DG Systems will not pay any dividends or make any cash payment in lieu of
fractional shares until the holder of the StarGuide share certificate
surrenders that certificate. The holder will also receive, at the appropriate
payment date, any dividends or other distributions with a record date after
the merger but before the surrender, and a payment date after the surrender on
whole shares of DG Systems common stock. In each case, taxes will be withheld
as required. No interest will be paid or accrued on unpaid dividends or
distributions, if any, which will be paid at the time of surrender of
StarGuide common share certificates.
All shares of DG Systems common stock issued upon the surrender and exchange
of StarGuide common stock certificates will be considered issued and paid in
full satisfaction of all rights associated with the shares of StarGuide common
stock except for the surviving corporation's obligation to pay any dividends
or other distributions with a record date prior to the merger. After the
merger, StarGuide will not record any further transfer of shares of StarGuide
common stock outstanding prior to the merger. If, after the merger, any holder
presents StarGuide certificates to the surviving corporation, the exchange
agent or DG Systems, these certificates will be canceled and exchanged as
described above.
The exchange agent will deliver to DG Systems any DG Systems common share
certificates issued in the merger and any dividends or distributions that DG
Systems deposited with the exchange agent which former StarGuide shareholders
do not claim within six months after the merger. Any former StarGuide
shareholder who has not complied with the exchange procedures before the six-
month anniversary of the merger may only look to
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DG Systems for payment of DG Systems common stock, any cash in lieu of
fractional shares of DG Systems common stock and any unpaid dividends and
distributions on DG Systems common stock. Neither StarGuide, DG Systems, SG
Nevada, the exchange agent nor any other person will be liable to you for any
amount properly delivered to a public official under applicable abandoned
property, escheat or similar laws. The exchange agent shall invest any cash
included in the exchange fund, as directed by DG Systems, on a daily basis. DG
Systems shall receive any interest and other income resulting from these
investments.
The exchange agent will deliver DG Systems common stock, any cash in lieu of
fractional shares and unpaid dividends or distributions on DG Systems common
stock to which the holder is entitled in exchange for lost, stolen, or
destroyed StarGuide common stock certificates if the holder of these StarGuide
common stock certificates signs an affidavit of loss, theft or destruction. DG
Systems may also, in its discretion, require the holder of a lost, stolen or
destroyed certificate to deliver a bond in reasonable sum as indemnity against
any claim that any claimant might make against DG Systems regarding the
alleged lost, stolen or destroyed certificate.
Dissenting Shares
Shares of StarGuide common stock that are outstanding immediately prior to
the merger will not be converted or represent the right to receive any DG
Systems common stock if they are held by shareholders who have:
. not consented to the merger;
. demanded appraisal for the shares; and
. neither failed to perfect nor effectively withdrawn demand nor otherwise
lost their appraisal rights.
Holders of dissenting shares will be entitled to have the shares appraised
in accordance with the applicable provisions of the Nevada Revised Statutes.
StarGuide will give DG Systems prompt notice of any demands for appraisals,
withdrawals of demands for appraisal, and any other instruments received by
StarGuide, and the opportunity to participate in all negotiations and
proceedings relating to demands for appraisal. StarGuide will not, without DG
Systems' prior written consent, make any payment relating to any demands for
appraisal, or offer to settle or settle any demand for appraisal rights.
Employee Stock Options and Equity Incentives
Simultaneously with the merger, each outstanding option to purchase a share
of StarGuide common stock under StarGuide's stock option plans will be
converted into an option to purchase the number of shares of DG Systems common
stock equal to the product of (1) the number of shares of StarGuide common
stock which could have been obtained prior to the merger upon the exercise of
such option, multiplied by (2) the number of shares of DG Systems common stock
to be issued for each share of StarGuide common stock pursuant to the merger.
The converted options will have an exercise price per share equal to the
exercise price for such option under StarGuide's stock option plans divided by
the number of shares of DG Systems common stock to be issued for each share of
StarGuide common stock pursuant to the merger.
DG Systems will assume StarGuide's obligations under the StarGuide stock
option plans. The other terms of each option, and the plans under which they
were issued, will continue to apply, including any acceleration provisions. In
addition, DG Systems will reserve for issuance the number of shares of its
common stock that will become subject to the StarGuide stock option plans
specified in the merger agreement.
Conversion of StarGuide Common Stock Equivalents
Simultaneously with the merger all StarGuide common stock equivalents (i.e.,
each outstanding StarGuide option or warrant for the purchase of StarGuide
common stock, or any other StarGuide security convertible into
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shares of StarGuide common stock, other than employee stock options) will be
converted into a DG Systems common stock equivalent of like character and for
the number of shares of DG Systems common stock equal to the product of (1)
the number of shares of StarGuide common stock which could have been obtained
prior to the merger upon the exercise of such StarGuide common stock
equivalent, multiplied by (2) the number of shares of DG Systems common stock
to be issued for each share of StarGuide common stock pursuant to the merger.
The StarGuide common stock equivalents converted into DG Systems common
stock equivalents will have an exercise price per share equal to the exercise
price of such StarGuide common stock equivalent divided by the number of
shares of DG Systems common stock to be issued for each share of StarGuide
common stock pursuant to the merger.
Representations and Warranties
Except as discussed in the paragraphs below, the merger agreement contains
essentially reciprocal representations and warranties made by and among
StarGuide, DG Systems, and SG Nevada. These representations and warranties
relate to the following matters:
. due organization, power and standing, and other corporate matters;
. capital structure;
. authority to enter into the merger agreement;
. financial statements;
. brokers' fees and expenses with respect to the merger;
. interests in other entities;
. dividends; and
. fairness opinions.
StarGuide also made additional representations and warranties to DG Systems
and SG Nevada relating to the following matters:
. required consents and approvals, and absence of violations of law;
. liabilities;
. intellectual property and proprietary rights;
. material contracts, agreements, and licenses;
. benefit plans, including ERISA matters;
. sufficiency of assets;
. actions and proceedings;
. compliance with applicable laws;
. tax matters;
. environmental matters;
. accuracy of information furnished to DG Systems;
. title to properties;
. labor matters; and
. insurance.
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Covenants Relating to Conduct of Business
Unless the other party agrees in writing, StarGuide and DG Systems each have
agreed that, during the period from the date of the merger agreement through
the earlier of the merger or the termination of the merger agreement,
StarGuide and DG Systems each will:
. carry on its business in the ordinary course and consistent with past
practices;
. use commercially reasonable efforts to preserve intact its goodwill;
. use commercially reasonable efforts to preserve intact its current
relationships with its officers, employees, customers, suppliers and
others with significant and recurring business dealings with it; and
. maintain its books of account and records in the usual, regular, and
ordinary manner consistent with past practices.
Unless the other party agrees in writing, StarGuide and DG Systems each have
agreed that, during the period from the date of the merger agreement through
the earlier of the merger or the termination of the merger agreement,
StarGuide and DG Systems each will not:
. redeem or repurchase any of its outstanding shares of common stock;
. split, combine, reclassify or recapitalize any shares of any class of
its common stock or any of its other securities or any of its
subsidiaries' securities;
. declare, set aside or pay any dividend or other distribution on any
class of its common stock or any of its other securities or any of its
subsidiaries' securities;
. redeem, repurchase or otherwise acquire any of its common stock or any
of its other securities or any of its subsidiaries' securities;
. sell, abandon or make any other disposition of any of its assets other
than in the ordinary course of business consistent with past practice;
. except in the ordinary course of business, incur or assume any
liability;
. make any acquisition of all or any part of the capital stock or all or
substantially all of the assets, properties or businesses of any
individual, general or limited partnership, firm, corporation, limited
liability company, association, trust, unincorporated organization, or
any other entity in an amount in excess of $500,000;
. change or agree to rearrange in any material respect the character of
its business;
. knowingly waive any right of material value;
. make any material write down of inventory or material write off as
uncollectible of accounts receivable;
. increase any wage, salary, bonus or other compensation payable to or to
become payable to any of its employees, or make any accrual for or
commitment to make or pay the same, other than increases in wages,
salary, bonuses or other compensation made in the ordinary course of
business consistent with past practice, and those required by any
existing contract or federal, state, county, provincial, local or
foreign statute, law ordinance, regulation, rule, code, or rule of
common law;
. make any commitment to pay any severance or termination pay to any of
its employees or any of its independent contractors, consultants,
agents, or other representatives, other than commitments to pay its
employees in the ordinary course of business consistent with past
practice;
. unless otherwise required by law, make or revoke any material tax
election, settle or compromise any material tax liability, change or
make a request to any taxing authority to change any material aspect of
its method of accounting for tax purposes or waive or extend the statute
of limitations regarding any material taxes;
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. knowingly violate or knowingly fail to perform any material obligation
or duty imposed upon it or any of its subsidiaries by any applicable
federal, state, county, provincial, local or foreign statute, law,
ordinance, regulation, rule, code, or rule of common law;
. take any action, other than reasonable and usual actions in the ordinary
course of business consistent with past practice, regarding accounting
policies or procedures and other than actions required to be taken by
generally accepted accounting principles in the United States;
. enter into any joint venture, production or marketing arrangement
without the other party's prior written consent; or
. enter into any contract, agreement, commitment or arrangement to take
any action prohibited by the foregoing restrictions.
In addition, unless DG Systems agrees in writing, StarGuide has agreed that,
during the period from the date of the merger agreement through the earlier of
the merger or the termination of the merger agreement, StarGuide will not:
. other than in conjunction with the issuance and sale for cash of up to
$100 million of StarGuide common stock, authorize for issuance, issue,
sell, pledge, deliver or commit to issue, sell, pledge or deliver any of
its common stock, including any options to acquire its common stock, or
any securities convertible into or exchangeable for any class of its
common stock;
. amend its articles of incorporation or its by-laws;
. unless otherwise required by applicable federal, state, county,
provincial, local or foreign statute, law ordinance, regulation, rule,
code, or rule of common law or the merger agreement, adopt, enter into
or amend any arrangement which is, or would be a deferred compensation,
bonus or other incentive compensation, stock purchase or other equity
compensation or ownership plan, program, agreement or arrangement, a
severance or termination pay, medical, surgical, hospitalization, life
insurance and other welfare plan, fund or program, a profit sharing,
stock bonus or other pension plan, fund or program, an employment,
retention, consulting, termination or severance agreement, or other
employee benefit plan, fund, program, agreement or arrangement that is
sponsored, maintained or contributed to or required to be contributed to
by StarGuide or its subsidiaries; or
. make any change in any actuarial methods or assumptions used in funding
any of the above plans or in the assumptions or factors used in
determining benefit equivalencies under the plans.
In addition, unless StarGuide agrees in writing, DG Systems has agreed that,
during the period from the date of the merger agreement through the earlier of
the merger or the termination of the merger agreement, DG Systems will not:
. authorize for issuance, sell, pledge, deliver or commit to issue, sell,
pledge or deliver any of its common stock including any options to
acquire any of its common stock or any securities convertible into or
exchangeable for any class of its common stock;
. amend its articles of incorporation or its by-laws, permit any amendment
to SG Nevada's articles of incorporation or SG Nevada's by-laws, or take
any other action that would cause SG Nevada to cease being a wholly-
owned subsidiary of DG Systems;
. unless otherwise required by applicable federal, state, county,
provincial, local or foreign statute, law, ordinance, regulation, rule,
code, or rule of common law or the merger agreement, adopt, enter into
or amend any arrangement which is, or would be, an employment, bonus,
incentive compensation, deferred compensation, pension, profit sharing,
retirement, stock purchase, stock option, stock ownership, stock
appreciation rights, phantom stock, equity or equity-based, leave or
absence, layoff, vacation, day or dependent care, legal services,
cafeteria, life, health, medical, accident, disability, workmen's
compensation or other insurance, severance, separation, termination,
change of control or other benefit plan, agreement, practice, policy or
arrangement; or
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. make any change in any actuarial methods or assumptions used in funding
any of the above plans or in the assumptions or factors used in
determining benefit equivalencies under the plans.
No Solicitation
Subject to the provisions relating to a superior proposal in the next
section, during the period from the date of the merger agreement to the
merger, DG Systems and StarGuide each agree that neither it nor its
subsidiaries, representatives, or agents will encourage, solicit, make or
accept any offers for or engage in any discussions or negotiations regarding
any combinations of it or any of its subsidiaries with, or a sale of any
assets or securities of it or any of its subsidiaries to, any third party.
Superior Proposal
Prior to the merger, if DG Systems' special committee or board of directors
determines by a majority disinterested vote, in the good faith exercise of its
fiduciary duties, that it would be in the best interests of DG Systems or its
shareholders, DG Systems may participate in discussions or negotiate with, and
provide non-public information and access to its properties, books, records,
officers, employees and representatives to any third party after the third
party has provided DG Systems with a proposal to acquire all or a portion of
DG Systems' assets or business, which the special committee or the board of
directors determines by a majority disinterested vote, in its good faith
reasonable judgment, would be more favorable to DG Systems or its shareholders
than the merger.
If DG Systems receives a superior proposal and DG Systems' special committee
or board of directors determines in good faith by a majority disinterested
vote that it is appropriate to do so, the special committee may recommend and
the board of directors may execute or enter into any agreement relating to the
superior proposal and may recommend the superior proposal to its shareholders.
In this event, DG Systems' special committee or its board of directors may
withdraw, modify or refrain from making its recommendation in favor of the
merger and may terminate the merger agreement. However, DG Systems agrees to:
. notify StarGuide within 24 hours after receipt of a superior proposal
that DG Systems' special committee or board of directors has received a
superior proposal. In the notice, DG Systems will specify the material
terms and conditions of the superior proposal and identify the entity
that made the superior proposal;
. terminate the merger agreement by written notice to StarGuide no earlier
than 48 hours after StarGuide's receipt of a copy of the superior
proposal; and
. pay StarGuide $7,500,000 if the merger is not concluded because of the
superior proposal. In addition DG Systems will pay all of StarGuide's
transaction costs and expenses incurred in connection with the merger
agreement and the transactions contemplated by the merger agreement. DG
Systems will make the payment by wire transfer of immediately available
funds promptly after DG Systems' board of directors has determined to
recommend the superior proposal.
DG Systems' special committee or board of directors may take and disclose to
DG Systems shareholders a position as required by Rules 14d-9 and 14e-2 under
the Securities Exchange Act of 1934 with regard to any tender or exchange
offer. However, the disclosure must state that no action will be taken by the
special committee or the board of directors that violates the merger agreement
provisions relating to the superior proposal.
Additional Agreements
Fulfillment of Conditions by StarGuide. StarGuide agrees to take all
commercially reasonable actions to cause the conditions precedent to DG
Systems' and SG Nevada's merger obligations to be satisfied or fulfilled.
StarGuide will not knowingly take or fail to take any action that would cause
the conditions to StarGuide's or DG Systems' and SG Nevada's merger
obligations not to be satisfied or fulfilled.
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Fulfillment of Conditions by DG Systems and SG Nevada. DG Systems and SG
Nevada each agree to take all commercially reasonable actions to cause the
conditions precedent to StarGuide's merger obligations to be satisfied or
fulfilled. DG Systems and SG Nevada each will not knowingly take or fail to
take any action that would cause the conditions to StarGuide's or DG Systems'
and SG Nevada's merger obligations to not be satisfied or fulfilled.
StarGuide Shareholder Approval. StarGuide agrees to cause at least 90% of
its issued and outstanding shares of common stock to vote in favor of the
merger and the transactions contemplated by the merger agreement.
Preparation of Registration Statement and Proxy Statement; DG Systems
Shareholder Approval. DG Systems agrees to: (1) prepare and file with the
United States Securities and Exchange Commission a proxy statement and a
registration statement; (2) use reasonable efforts to have the filing declared
effective under the Securities Act of 1933; (3) use reasonable efforts to
cause the proxy statement to be mailed to DG Systems' shareholders after the
filing is declared effective; (4) take any required action under any
applicable state securities laws; (5) obtain shareholder approval of the
merger and the transactions contemplated by the merger agreement; and (6)
recommend to its shareholders that they approve the merger and the
transactions contemplated by the merger agreement.
Access to Information. Subject to the confidentiality agreement between the
parties, StarGuide and DG Systems each have agreed that, during the period
from the date of the merger agreement to the earlier of the merger or the
termination of the merger agreement, each will permit the other, and its
authorized agents and representatives, to have reasonable access, upon
reasonable notice and during normal business hours, to its employees, assets
and all relevant books, records and documents, and will provide any reasonably
requested information, data, financial records and other documents. StarGuide
and DG Systems have agreed to permit the other and its agents and
representatives reasonable access to its accountants, auditors and suppliers
for reasonable consultation or verification of any information obtained and
will use all commercially reasonable efforts to cause the accountants,
auditors and suppliers to cooperate in the consultations and in verifying the
information.
Designation of Directors. As of the time of the merger, DG Systems has
agreed to take all actions necessary to ensure that the individuals designated
by StarGuide are properly installed as directors of DG Systems. In addition,
DG Systems has agreed to take all actions necessary to increase the number of
authorized directors to accommodate the additional directors.
Transaction Costs. DG Systems has agreed to pay, directly to the applicable
payee, all transaction costs and expenses that DG Systems, SG Nevada and
StarGuide incur in connection with the merger agreement and the transactions
contemplated by the merger agreement if the merger is completed. Except as
discussed in the superior proposal above, if the transactions are not
completed, (1) StarGuide will pay all of its transaction costs and expenses,
and (2) DG Systems will pay all of its and SG Nevada's transaction costs and
expenses.
Reasonable Efforts. StarGuide, DG Systems, and SG Nevada each have agreed to
use its commercially reasonable best efforts to take all actions, and to do
all things, necessary, proper or advisable to conclude the merger and any
transactions that the merger agreement contemplates, including, among other
things:
. obtaining all consents, approvals, actions, or waivers by governmental
entities;
. obtaining all necessary consents, approvals or waivers from third
parties;
. defending any lawsuits or legal proceedings that challenge the merger
agreement; and
. executing and delivering any additional instruments, certificates and
other documents.
Hart-Scott-Rodino. StarGuide, DG Systems and SG Nevada have each agreed to
provide all information and documents requested by any governmental entity
with antitrust enforcement jurisdiction necessary, proper or advisable to
conclude the merger and any transactions that the merger contemplates and to
file any Notification
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and Report Form and related materials under the HSR Act. In addition,
StarGuide, DG Systems and SG Nevada each have agreed to use its commercially
reasonable best efforts to:
. obtain any governmental clearances;
. respond to any government request for information;
. contest and resist any action and have vacated, lifted, reversed or
overturned any statute, rule, regulation, order, judgment, injunction,
decree, stipulation or determination that challenges the merger
agreement; and
. cause the relevant governmental entity to vacate, modify or suspend any
injunction or order that would prohibit, prevent, delay or otherwise
restrain the merger and any transaction that the merger contemplates.
Securities and Exchange Commission. DG Systems has agreed to file all
reports required to be filed by DG Systems with the SEC during the period from
the date of the merger agreement to the earlier of the merger or the
termination of the merger agreement.
DG Systems Special Committee. StarGuide, DG Systems, and SG Nevada each have
agreed that any action to be taken by DG Systems or SG Nevada concerning the
merger agreement or the merger will be subject to approval by a majority of a
special committee of DG Systems' board of directors. These actions will not
require approval by a majority of DG Systems' board of directors.
Publicity. StarGuide, DG Systems, and SG Nevada each have agreed to
cooperate in the development and distribution of all news releases and other
public disclosures relating to the merger and the transactions contemplated by
the merger agreement. Neither StarGuide, DG Systems nor SG Nevada will issue
or make any press release or public announcement without the consent of the
other parties.
Employees and Benefits. DG Systems or the surviving corporation will retain
all of StarGuide's employees. DG Systems or the surviving corporation will
employ each StarGuide employee whose employment is not covered by a collective
bargaining agreement at a salary and on terms and conditions that are at least
as favorable in the aggregate as those provided by StarGuide. DG Systems will
provide credit to employees not covered by a collective bargaining agreement
for (a) eligibility and vesting under DG System's employee benefit plans, and
(b) any and all pre-existing condition limitations and eligibility waiting
periods under DG System's group health plans. DG Systems also will provide a
credit for any deductible out-of-pocket expenses incurred by the employees
during the portion of the calendar year prior to the employees participation
in DG System's health plans. StarGuide employees who are covered by a
collective bargaining agreement will receive benefits according to the terms
of their agreement.
Confidentiality. Prior to the merger agreement, DG Systems and StarGuide
entered into a Reciprocal Non-Disclosure Agreement dated October 12, 1999. In
addition to the provisions of that agreement, DG Systems, SG Nevada and
StarGuide agree that each will not, except as required by law, directly or
indirectly:
. make any disclosure relating to the merger;
. make any disclosure regarding the content of the merger agreement;
. disclose that StarGuide, DG Systems and SG Nevada have entered into the
merger agreement;
. in the case of StarGuide, disclose any information received from DG
Systems or SG Nevada in connection with the merger; and
. in the case of DG Systems or SG Nevada, disclose any information
received from StarGuide in connection with the merger.
The parties further agree that the following information will not be subject
to these non-disclosure requirements: (1) information that is or becomes
publicly available other than as a result of a breach of these
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non-disclosure requirements; (2) information that is or becomes available on a
non-confidential basis from a source that is not prohibited from disclosing
the information; or (3) information that was known by the receiving party
prior to any prohibited disclosure.
Indemnification; Directors and Officers Insurance. DG Systems has agreed to,
and agreed to cause the surviving corporation to:
. indemnify and hold harmless each former director and officer of
StarGuide against any and all demands, claims, complaints, actions, or
causes of action, suits, proceedings, investigations, arbitrations,
assessments, losses, fees, damages, liabilities, obligations, and any
out-of-pocket costs and expenses incurred by any director or officer in
connection with any debt, obligation or liability or any claim, action,
suits, proceeding or investigation related to matters existing at or
prior to the merger to the fullest extent permitted under StarGuide's
articles of incorporation and by-laws, and advance reasonable expenses
as incurred; and
. maintain in effect, for a period of six years following the merger, a
directors' and officers' liability insurance policy covering those
persons who are currently covered by StarGuide's directors' and
officers' liability insurance policy with coverage at least as favorable
as StarGuide's existing coverage. However, DG Systems will not be
required to pay an annual premium for the coverage in excess of 110% of
the amount of StarGuide's annual premiums as of the date of the merger
agreement.
State Takeover Laws. DG Systems and StarGuide each agree that if any "fair
price," "business combination," or "control share acquisition" statute becomes
applicable to the merger or the transactions contemplated by the merger
agreement, DG Systems, StarGuide and each of their boards of Directors will
use their reasonable best efforts to grant any approvals and take any actions
that are necessary to conclude the merger and the transactions contemplated by
the merger agreement.
Conditions Precedent to the Merger
DG Systems, SG Nevada and StarGuide are required to complete the merger only
if each of the following conditions is met or waived at or prior to the
merger:
. Shareholder Approval. The holders of StarGuide and DG Systems common
stock have approved the merger agreement and all transactions
contemplated by the merger agreement;
. Hart-Scott-Rodino Act. The waiting period under the HSR Act, has
terminated or expired;
. Listing on the Nasdaq National Market. The Nasdaq National Market has
authorized for listing the DG Systems common stock to be issued in the
merger;
. Registration Statement. The SEC has declared effective the registration
statement on Form S-4 of which this proxy statement/prospectus is a
part. The SEC has not issued any stop order suspending the effectiveness
of this registration statement. DG Systems has received all necessary
state securities or "blue sky" authorizations;
. No Governmental Action/Order. There is no temporary restraining order,
preliminary or permanent injunction or other order issued by any court
or governmental entity that challenges or enjoins the merger. No court
or governmental entity has issued any order or injunction that makes the
merger or other transactions contemplated by the merger agreement
illegal; and
. Dissenting Shares. The aggregate amount of dissenting shares of
StarGuide will not exceed ten percent of the total number of shares of
StarGuide common stock, on a fully diluted, as-converted basis, issued
and outstanding immediately prior to the merger.
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Additionally, the merger agreement requires DG Systems, SG Nevada, and
StarGuide to complete the merger only if the following conditions are met or
waived at or prior to the merger:
. Other than with respect to the lock-up agreements discussed in this
proxy statement/prospectus under "ADDITIONAL AGREEMENTS--Lock-up
Agreements," the other parties have performed and complied in all
material respects with their agreements and covenants contained in the
merger agreement that they are required to perform at or before
completion of the merger;
. Each of the representations and warranties of the other parties in the
merger agreement is true and correct in all material respects as if made
on and as of the merger date, except for those representations and
warranties made as of a specified date, which will be true and correct
in all material respects as of the specified date only; and
. Each party has received an opinion of tax counsel indicating that the
merger will qualify for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
The merger agreement also requires StarGuide to complete the merger only if
the following conditions are met or waived at or prior to the merger:
. The actions of DG Systems and SG Nevada in connection with the merger
and the merger agreement will not conflict with or be a material
violation of, or material default under, or result in a right of
termination, amendment, modification, acceleration or cancellation or
any material obligation or loss of any material benefit under, create
any prohibited encumbrance on any DG Systems or SG Nevada assets, or
require DG Systems or SG Nevada to obtain any consent, waiver, approval
or action, make any filing with, or give any notice to any entity under
the terms and provisions of:
(a) DG Systems' articles of incorporation or by-laws, or SG Nevada's
articles of incorporation or by-laws;
(b) any contract to which DG Systems is a party or is bound, except
where no material adverse effect would result; and
(c) any law or governmental order that would bind or obligate DG
Systems, except where no material adverse effect would result.
. No consent, waiver, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with any
governmental authority will be required by DG Systems or SG Nevada in
connection with the merger and the merger agreement except (a) where the
failure to obtain consents and approvals or to make registrations or
filings would not reasonably be expected to have a material adverse
effect and (b) for consents, waivers, approvals, registrations or
filings required under:
(a)the HSR Act;
(b)state securities or "blue sky" laws;
(c)the Securities Act of 1933;
(d)the Securities Exchange Act of 1934;
(e) the General Corporation Laws of the State of Nevada with respect to
filing and recordation of appropriate merger documents; or
(f)antitrust or merger laws of other jurisdictions.
. Except as disclosed in DG Systems' SEC reports, there are no pending
actions known to DG Systems by any entity or governmental authority
against DG Systems or SG Nevada or any current or former employees other
than those that would not reasonably be expected to have a material
adverse effect;
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. During the period since March 31, 2000, (a) except for the execution and
delivery of the merger agreement and the completion of the transactions
contemplated by the merger agreement, DG Systems and its subsidiaries
will have conducted their business only in the ordinary course,
consistent with past practice, and (b) DG Systems and its subsidiaries
will not have taken any action or omitted to take any action, or entered
into any contract or agreement to take any action or omit to take any
action which would violate the terms of the merger agreement; and
. During the period since March 31, 2000, DG Systems will not have
experienced a material adverse effect.
Termination; Amendment and Waiver
Conditions to Termination. The merger agreement and the transactions
contemplated by the merger agreement may be terminated and abandoned:
. by StarGuide or DG Systems and SG Nevada at any time prior to the merger
with the written mutual consent of the other party or parties;
. unless the merger has not occurred as a result of a breach of the merger
agreement by the party or parties seeking termination, by StarGuide or
DG Systems and SG Nevada if the merger has not occurred on or prior to
December 31, 2000;
. by StarGuide if the DG Systems' board of directors agrees to accept a
superior proposal;
. in the event that the special committee of DG Systems recommends
acceptance of a superior proposal and the board of directors of DG
Systems enters into an agreement regarding that superior proposal and
further recommends that the shareholders of DG Systems approve the
proposal, subject to payment of a $7.5 million termination fee;
. by StarGuide if between the date of the merger agreement and the merger,
more than 50% of the issued and outstanding DG Systems common stock has
been assigned or transferred to entities who were not DG Systems
shareholders as of the date of the merger agreement, or if a tender
offer for assignment or transfer is made;
. unless caused by the party or parties seeking termination or as a result
of the party's or parties' representation or warranty being or becoming
untrue, upon a failure of a closing condition in existence as of the
closing date; and
. by either StarGuide or DG Systems and SG Nevada, if any governmental
authority issues a final and nonappealable order permanently enjoining,
restraining or prohibiting the merger and the party or parties has used
all commercially reasonable best efforts to oppose or vacate the order.
Effect of Termination. If the merger agreement is terminated, the agreement
will become null and void and none of the parties will have any further
liability except that the provisions relating to publicity, transactions
costs, superior proposals, and survival and indemnification will remain in
full force and effect. Each party also will remain liable to each other party
for any breach of its obligations under the merger agreement prior to the
termination. Additionally, if either DG Systems or StarGuide breaches its
obligations under the merger agreement and the shareholders of the breaching
party have voted to approve the transactions contemplated by the merger
agreement, then the non-breaching party has the right to seek and will be
entitled to obtain specific performance. If the non-breaching party does not
obtain specific performance, the breaching party will remain liable as if the
non-breaching party had not sought specific performance.
Amendment and Waiver. The merger agreement may not be modified or amended
except in writing signed by the party or parties against whom enforcement is
sought. The terms of the merger agreement may be waived only by a written
instrument signed by the party or parties waiving compliance.
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ADDITIONAL AGREEMENTS
Lock-up Agreements
From the date of the merger until 180 days after the merger, certain holders
of DG Systems common stock and StarGuide common stock, including Scott K.
Ginsburg, Pequot Capital Management, Technology Crossover Ventures, Matthew E.
Devine, and Omar A. Choucair will agree, with respect to any share of DG
Systems common stock that the holders currently beneficially own or may
beneficially own in the future, that the holder will not:
. issue, sell, offer or agree to sell the shares;
. grant any option for the sale of the shares;
. pledge, make any short sale or maintain any short position;
. establish or maintain an open "put equivalent position;"
. enter into any swap, derivative transaction or other arrangement that
transfers to another any of the economic consequences of ownership; or
. otherwise dispose of any DG Systems common stock or any securities
convertible into, exercisable for or exchangeable for DG Systems common
stock or other DG Systems capital stock.
Each of the lock-up shareholders will execute and deliver a lock-up agreement
to StarGuide's legal counsel. Each lock-up agreement will be subject to the
following conditions: (1) there will be no waiver of any term or condition of a
lock-up agreement unless a majority of DG Systems board of directors has voted
in favor of the waiver, and (2) if a waiver is obtained as to any term or
condition of any lock-up agreement, then the term or condition that has been
waived will automatically be waived for each lock-up shareholder.
During the lock-up period, shares of DG Systems common stock beneficially
held by each lock-up shareholder will be subject to the lock-up according to
the following schedule:
(1) Until 60 days after the merger, 100% of the lock-up shares are
subject to the lock-up;
(2) From 60 days after the merger until 90 days after the merger, 85%
of the lock-up shares are subject to the lock-up;
(3) From 90 days after the merger until 120 days after the merger, 70%
of the lock-up shares are subject to the lock-up;
(4) From 120 days after the merger until 150 days after the merger, 50%
of the lock-up shares are subject to the lock-up;
(5) From 150 days after the merger until 180 days after the merger, 25%
of the lock-up shares are subject to the lock-up;
(6) 180 days after the merger, the lock-up shares are no longer subject
to the lock-up.
Voting Agreements
To mutually induce StarGuide and DG Systems to enter into the merger
agreement, three DG Systems shareholders: Scott K. Ginsburg, Pequot Capital
Management, and Technology Crossover Ventures, and StarGuide shareholder Scott
K. Ginsburg have each entered into a voting agreement. Each of these
shareholders has agreed to:
(1) attend the StarGuide or DG Systems shareholder meeting, as applicable,
in person or by proxy, or by written consent in lieu of a shareholders
meeting; and
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(2) vote all shares, either beneficially held by him, or it, or for which
he, or it, has the right to vote, in favor of adoption and approval of
the merger agreement, the merger, and any other matters necessary to
complete the transactions contemplated by the merger agreement.
Under the terms of the voting agreement, from the date of the voting
agreement through the earlier of the merger or the termination of the merger
agreement, each of the DG Systems shareholders and the StarGuide shareholder
party to a voting agreement has also agreed with respect to the shares of DG
Systems common stock or StarGuide common stock, as applicable, subject to the
voting agreement that each shareholder will not:
. sell, transfer, pledge, encumber or otherwise dispose of such
shareholder's shares or any voting interest in the shares; or
. enter into any agreement or arrangement or alter, amend or terminate any
existing agreement or arrangement if it would impair the shareholder's
ability to effectuate, carry out, or comply with all of the terms of the
voting agreement.
Any transfer of shares will be null and void, and the transferee will have
no rights as a shareholder of DG Systems or StarGuide, as applicable. Each
shareholder revokes any and all proxies granted by the shareholder for the
shareholder's shares, and further agrees to execute and deliver any additional
instruments and other documents and to take any further actions as may be
necessary or appropriate to effectuate, carry out, and comply with each
shareholder's obligations under the voting agreement.
Each of the shareholders subject to the voting agreement represents and
warrants that:
. the shareholder has full power and authority to enter into the
agreements described in the voting agreement;
. the voting agreement has been duly executed and delivered and
constitutes a valid and binding obligation of the shareholder,
enforceable against the shareholder according to its terms; and
. the shares listed on the schedule to the voting agreement are the only
voting securities, or voting rights in capital stock of DG Systems or
StarGuide, as applicable, owned by the shareholder as of the date of the
voting agreement.
Each shareholder agrees that DG Systems and/or StarGuide will be entitled to
injunctive relief to prevent breaches of the voting agreement or to
specifically enforce the terms and provisions of the voting agreement, in
addition to any other remedy available. If the merger agreement is terminated,
the voting agreements will automatically terminate and be of no further force
or effect. Upon termination of the merger agreement, except for any rights DG
Systems or StarGuide may have relating to any breach, the shareholder will
have no further obligation or liability.
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THE DG SYSTEMS ANNUAL MEETING
Date, Time, Place
The annual meeting of shareholders of DG Systems will be held on , 2000
at a.m., local time, at the La Cima Club, 5215 North O'Connor Boulevard,
Suite 2600, Irving, Texas 75039.
Purpose Of Meeting
At the annual meeting, shareholders of DG Systems will be asked to:
. approve and adopt the merger agreement;
. approve the reincorporation of DG Systems from California to Delaware;
. amend the articles of incorporation to increase authorized shares of
common stock to 200,000,000 in the event the proposal to reincorporate
as a Delaware corporation is not approved;
. approve an amendment to the 1992 stock option plan to increase the
number of shares available for issuance thereunder;
. ratify the appointment of KPMG LLP as DG Systems' independent public
accountants for the year ending December 31, 2000;
. elect five directors;
. act on any other matter that may be properly brought before the meeting
or any adjournment or postponement; and
. if necessary, approve any postponements or adjournments of the annual
meeting without further notice except by announcement that the meeting
has been postponed or adjourned.
The DG Systems board of directors has unanimously approved the merger
agreement and recommends that the DG Systems shareholders vote FOR approval
and adoption of the merger agreement. In addition, the DG Systems board of
directors recommends that DG Systems shareholders vote FOR the proposal to
reincorporate as a Delaware corporation, FOR the amendment of the articles of
incorporation, FOR the proposal to approve the amendment to the 1992 stock
option plan, FOR the five nominees for director and for the ratification of
KPMG LLP as DG Systems' independent accountants for the year ending December
31, 2000.
Voting Rights And Solicitation Of Proxies
DG Systems' common stock is the only type of security entitled to vote at
the annual meeting. On , 2000, the record date for determination of
shareholders entitled to vote at the annual meeting, there were shares of
common stock outstanding. Each shareholder of record on , 2000 is entitled
to one vote for each share of common stock held by such shareholder on that
date. Shares of common stock may not be voted cumulatively. All votes will be
tabulated by the inspector of election appointed for the meeting, who will
separately tabulate affirmative and negative votes, abstentions and broker
non-votes.
Quorum Required
DG Systems' by-laws provide that the holders of a majority of DG Systems'
common stock issued and outstanding and entitled to vote at the annual
meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at the annual meeting. Abstentions and broker
non-votes will be counted as present for the purpose of determining the
presence of a quorum.
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Votes Required
Approval of the merger agreement requires the affirmative vote of holders of
a majority of the outstanding shares of DG Systems common stock. Abstentions
and broker non-votes are not affirmative votes and, therefore, will have the
same effect as votes against adoption of the merger agreement.
Approval of the reincorporation requires the affirmative vote of holders of
a majority of the outstanding shares of DG Systems common stock. Abstentions
and broker non-votes are not affirmative votes and therefore, will have the
same effect as votes against adoption of the reincorporation.
Amendments to the articles of incorporation require approval of the board of
directors and the affirmative vote of holders of a majority of the outstanding
shares. Abstentions and broker non-votes are not affirmative votes and,
therefore, will have the same effect as votes against the proposal.
Approval of the adoption of the amendment to the 1992 stock option plan
requires the affirmative vote of a majority of those shares present in person,
or represented by proxy, and voting at the annual meeting, provided that such
shares voting affirmatively must also constitute at least a majority of the
required quorum. Abstentions are not affirmative votes and, therefore, will
have the same effect as votes against the proposal. Broker non-votes will not
be treated as voting on the matter and thus, will not affect the outcome of
the voting on the proposal.
Directors are elected by a plurality of the affirmative votes cast by
holders of those shares present in person, or represented by proxy, and
entitled to vote at the annual meeting. The ten nominees for director
receiving the highest number of affirmative votes will be elected. Abstentions
and broker non-votes will not be counted toward a nominee's total.
Shareholders may not cumulate votes in the election of directors.
Ratification of the appointment of KPMG LLP as DG Systems' independent
accountants for the year ending December 31, 2000 requires the affirmative
vote of holders of a majority of those shares present in person, or
represented by proxy, and cast either affirmatively or negatively at the
annual meeting, provided that such shares voting affirmatively must also
constitute at least a majority of the required quorum. Abstentions and broker
non-votes will not be counted as having been voted on the proposal.
Proxies
Whether or not you are able to attend DG Systems' annual meeting, you are
urged to complete and return the enclosed proxy, which is solicited by DG
Systems' board of directors and which will be voted as you direct on your
proxy when properly completed. In the event no directions are specified, such
proxies will be voted FOR the merger agreement, FOR the nominees of the board
of directors, FOR the ratification of the appointment of KPMG LLP as DG
Systems' independent accountants for the year ending December 31, 2000, FOR
the proposal to reincorporate in Delaware, and FOR the amended articles of
incorporation, and in the discretion of the proxy holders as to other matters
that may properly come before the annual meeting. You may also revoke or
change your proxy at any time before the annual meeting. To do this, send a
written notice of revocation or another signed proxy with a later date to the
Secretary at DG Systems' principal executive offices before the beginning of
the annual meeting. You may also automatically revoke your proxy by attending
the annual meeting and voting in person. All shares represented by a valid
proxy received prior to the annual meeting will be voted.
Solicitation of Proxies
DG Systems will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this proxy
statement/prospectus, the proxy and any additional soliciting material
furnished to shareholders. Copies of solicitation material will be furnished
to brokerage houses, fiduciaries and custodians
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holding shares in their names that are beneficially owned by others so that
they may forward this solicitation material to such beneficial owners. In
addition, DG Systems may reimburse such persons for their costs of forwarding
the solicitation material to such beneficial owners. The original solicitation
of proxies by mail may be supplemented by solicitation by telephone, telegram
or other means by directors, officers, employees or agents of DG Systems. No
additional compensation will be paid to these individuals for any such
services. DG Systems does not presently intend to solicit proxies other than
by mail.
Proposal to Approve Reincorporation of DG Systems
DG Systems' board of directors has determined that it is in the best
interests of DG Systems and its shareholders to change its state of
incorporation from California to Delaware. The board of directors has approved
the reincorporation, which will be effected pursuant to a plan of merger for
reincorporation. Under the plan of merger for reincorporation, DG Systems'
shareholders will become shareholders of Digital Generation, Systems, Inc., a
Delaware corporation ("DG Delaware"). DG Delaware will continue to operate DG
Systems' business. Pursuant to the plan of merger for reincorporation, each
outstanding share of DG Systems common stock will automatically be converted
into one share of DG Delaware's common stock, no par value.
If approved by DG Systems shareholders, it is anticipated that the
reincorporation merger will become effective as soon as practicable following
the annual meeting.
Delaware law and the certificate of incorporation and by-laws of DG Delaware
differ from California law and DG Systems existing articles of incorporation
and by-laws. Therefore, approval of the reincorporation proposal will also
have the effect of:
. approving an increase in the number of authorized shares of common stock
from 100,000,000 to 200,000,000; and
. approving other provisions of the certificate of incorporation and
bylaws of DG Delaware.
Principal Reasons for the Proposed Reincorporation
As DG Systems plans for the future, the board of directors believes that it
is essential to be able to draw upon well established principles of corporate
governance in making legal and business decisions. The prominence and
predictability of Delaware corporate law provide a reliable foundation on
which DG Systems governance decisions can be based and the DG Systems board of
directors believes that shareholders will benefit from the responsiveness of
Delaware corporate law to their needs and to those of the corporation they
own. DG Systems board of directors also believes that reincorporation in
Delaware may reduce the cost and time involved in raising capital and engaging
in other business transactions because investors and other companies and their
counsel are generally more familiar with Delaware law.
Prominence, Predictability and Flexibility of Delaware Law. Delaware has for
many years followed a policy of encouraging incorporation in that state and
has been a leader in adopting, construing and implementing comprehensive,
flexible corporate laws responsive to the legal and business needs of
corporations organized under its laws. Many corporations have chosen Delaware
initially as a state of incorporation or have subsequently changed corporate
domicile to Delaware in a manner similar to that proposed by DG Systems' board
of directors. The Delaware courts have developed considerable expertise in
dealing with corporate law issues and a substantial body of case law has
developed construing Delaware law and establishing public policies with
respect to corporate legal affairs.
Well Established Principles of Corporate Governance. There is substantial
judicial precedent in the Delaware courts as to the legal principles
applicable to measures that may be taken by a corporation and as to the
conduct of the board of directors under the business judgment rule. DG Systems
board of directors believes that shareholders will benefit from the well
established principles of corporate governance that Delaware law affords.
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Authorized Capital
As a part of the reincorporation, DG Systems authorized capital stock will
increase. DG Systems' articles of incorporation currently authorize the
issuance of up to 100,000,000 shares of common stock, no par value, and
15,000,000 shares of preferred stock, no par value. The certificate of
incorporation of DG Delaware will authorize 200,000,000 shares of common
stock, no par value, and 15,000,000 shares of preferred stock, no par value.
The objectives of the increase in the authorized number of shares of common
stock are to ensure that DG Systems has sufficient shares available for future
issuances of common stock or securities convertible into common stock. DG
Systems' board of directors believes that it is prudent to increase the
authorized number of shares of common stock to the proposed levels in order to
provide a reserve of shares available for issuance to meet business needs as
they arise. Such future activities may include, without limitation,
financings, establishing strategic relationships with corporate partners,
providing equity incentives to employees, officers or directors, or effecting
stock splits or dividends. The additional shares of common stock authorized
may also be used to acquire or invest in complementary businesses or products.
DG Systems will continue to evaluate possible issuances of additional shares
of common stock in conjunction with potential acquisitions of or investments
with or by third parties. In the event that DG Systems' board of directors
does undertake a plan, or otherwise enter into an agreement, understanding or
arrangement, to issue additional shares of common stock or securities
convertible into shares of the common stock, DG Systems' board of directors
intends to issue such shares of its capital stock only upon terms and
conditions that the board deems advisable and in the best interests of DG
Systems and its shareholders.
The increase in the authorized number of shares of common stock could also
have certain anti-takeover effects. For example, although DG Systems has no
present intention to do so, shares of common stock and/or securities
convertible into common stock could be issued in a private placement or public
offering, or rights to purchase shares of common stock and/or securities
convertible into common stock could be issued, to create voting impediments to
or otherwise frustrate third party attempts to effect a takeover or otherwise
gain control of DG Systems through a public tender offer, proxy contest or
other means. In addition, the increase in the authorized number of shares of
common stock could discourage an attempt by a third party to acquire control
of DG Systems through a public tender offer, proxy contest or other means and,
therefore, could deprive the shareholders of benefits that could result from
such an attempt to takeover, or otherwise gain control of, DG Systems. Such
benefits could include, among other things, the realization of a premium over
the market price of their shares of capital stock in a tender offer, or even
the temporary increase in the market price for such shares that such an
attempt could cause. The board, however, is not aware of any present efforts
or attempt to takeover, or otherwise gain control of, DG Systems through a
public tender offer, proxy contest or any other means.
Despite the potential anti-takeover effects of the increase in the
authorized number of shares of common stock described above, the DG Systems
board of directors believes that the increased financial flexibility and other
benefits offered by the increase far outweigh any of the disadvantageous anti-
takeover effects of such amendment.
Other Provisions of the Certificate of Incorporation and By-laws of DG
Delaware
The provisions of the DG Delaware certificate of incorporation and by-laws
are similar to those of DG Systems articles of incorporation and by-laws in
most respects. Changes in the rights of shareholders and powers of management
are the result of the application of Delaware law. See "Antitakeover
Implications" and "Significant Differences Between the Corporation Laws of
California and Delaware."
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Antitakeover Implications
Delaware, like many other states, permits a corporation to adopt a number of
measures that are designed to reduce a corporation's vulnerability to
unsolicited takeover attempts. These measures are not included in the
certificate of incorporation or by-laws of DG Delaware. The reincorporation
proposal is not being proposed in order to prevent a change in control, nor is
it in response to any present attempt known to the board of directors to
acquire control of DG Systems or to obtain representation on the board of
directors.
The reincorporation proposal has antitakeover implications because, by
operation of law, Section 203 of the Delaware General Corporation Law
restricts "business combinations" with "interested shareholders" for three
years following the date that a person becomes an interested shareholder,
unless the board of directors approves the business combination.
Aside from the possible antitakeover effect of the increased capitalization,
as discussed in "Authorized Capital" above, DG Systems board of directors is
not proposing any provisions for the certificate of incorporation or bylaws of
DG Delaware that have antitakeover provisions.
No Change in the Business, Management, Employee Plans or Location of
Principal Facilities
The reincorporation proposal will not effect a change in DG Systems name but
will effect a change in the legal domicile and other changes of a legal nature
as described in this proxy statement/ prospectus. The proposed reincorporation
will not result in any change in the business, management, fiscal year, assets
or liabilities or location of principal facilities. All of DG Systems
obligations will become the obligations of DG Delaware. DG Systems employee
benefit arrangements will also be continued by DG Delaware upon the terms and
subject to the conditions currently in effect. After the reincorporation
merger, the shares of common stock of DG Delaware will continue to be traded,
without interruption, in the same principal market as the shares of common
stock of DG Systems are traded prior to the reincorporation merger.
If the reincorporation proposal is approved, the directors of DG Systems who
are elected at the annual meeting of shareholders will continue as the
directors of DG Delaware after the proposed reincorporation is consummated and
until their successors have been duly elected and qualified.
Prior to the effective date of the reincorporation merger, DG Systems will
obtain any consents required for the reincorporation merger from parties with
whom it may have contractual arrangements. As a result, the rights and
obligations under DG Systems contractual arrangements will continue and be
assumed by DG Delaware.
Significant Differences Between the Corporation Laws of California and
Delaware
The corporation laws of California and Delaware differ in many respects.
Although all the differences are not set forth in this proxy
statement/prospectus, the differences that could materially affect the rights
of shareholders are discussed in "COMPARISON OF SHAREHOLDER RIGHTS" on page
139 of this proxy statement/prospectus.
Appraisal Rights
DG Systems shareholders do not have appraisal rights in connection with the
reincorporation.
Material United States Federal Income Tax Consequences of the Proposed
Reincorporation
The following discussion summarizes the material United States federal
income tax considerations that may be relevant to holders of DG Systems common
stock who hold shares of DG Systems common stock as capital assets and receive
DG Delaware common stock in exchange for their DG Systems common stock as a
result of the proposed reincorporation. This discussion is based on current
provisions of the Code, current applicable Treasury regulations,
administrative decisions and rulings, court decisions and certain factual
assumptions. We
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cannot assure you that there will not be changes in the legal authorities on
which this discussion is based (which changes could be retroactive), or that
there will not be a change in the facts or the validity of the factual
assumptions underlying this discussion that could alter or modify the
statements and conclusions set forth below and could affect the tax
consequences of the proposed reincorporation. The discussion does not address
all of the United States federal income tax consequences of the proposed
reincorporation that may be relevant to particular DG Systems shareholders in
light of their individual circumstances, and is not intended for DG Systems
shareholders subject to special treatment under United States federal income
tax law, such as:
. insurance companies;
. tax-exempt organizations;
. non-resident aliens;
. foreign corporations;
. foreign partnerships;
. foreign trusts;
. financial institutions;
. broker-dealers;
. StarGuide shareholders who hold their common stock as part of a hedge,
straddle or conversion transaction; and
. StarGuide shareholders who have acquired their common stock upon the
exercise of options or otherwise as compensation.
In addition, this discussion does not address the tax consequences to holders
of options or warrants to acquire DG Systems common stock. Furthermore, no
foreign, state or local tax considerations are addressed herein. EACH
SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE PROPOSED REINCORPORATION, INCLUDING THE APPLICABILITY
OF FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX
LAWS.
Subject to the limitations, qualifications and exceptions described herein,
DG Systems believes the proposed reincorporation qualifies as a reorganization
within the meaning of Section 368(a) of the Code, and that therefor the
following United States federal income tax consequences generally will result:
. No gain or loss will be recognized by holders of DG Systems common stock
upon the exchange of DG Systems common stock for DG Delaware common
stock pursuant to the proposed reincorporation;
. The aggregate tax basis of the DG Delaware common stock received by each
shareholder in the proposed reincorporation will be equal to the
aggregate tax basis of DG Systems common stock surrendered in exchange
therefor;
. The holding period of the DG Delaware common stock received by each
shareholder of DG Systems will include the period for which the
shareholder held DG Systems common stock surrendered in exchange
therefor; and
. DG Systems will not recognize gain or loss for federal income tax
purposes as a result of the proposed reincorporation, and DG Delaware
will succeed to the federal income tax attributes of DG Systems.
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The DG Systems board unanimously recommends that the DG Systems shareholders
vote "FOR" the approval of the reincorporation of DG Systems from California
to Delaware.
Proposal to Amend Articles of Incorporation
DG Systems' board of directors has determined that it is in the best
interests of DG Systems and its shareholders to amend its articles of
incorporation to increase the number of authorized shares of common stock of
DG Systems from 100,000,000 to 200,000,000 shares. Accordingly, the DG
Systems' board of directors has unanimously approved the proposed amendment to
the articles of incorporation to increase the number of authorized shares of
common stock to 200,000,000 shares and hereby solicits the approval of DG
Systems' shareholders for this amendment. If the shareholders approve the
amendment to the articles of incorporation, DG Systems' board of directors
intends to file a certificate of amendment to the articles of incorporation
with the Secretary of State of the State of California as soon as practicable
following shareholder approval. If the amendment to the articles of
incorporation is not approved by the shareholders, the existing articles of
incorporation will continue in effect. If the preceding proposal to
reincorporate DG Systems from California to Delaware is approved, DG Systems'
Delaware certificate of incorporation will include authorization of
200,000,000 shares of DG Systems common stock, and this proposal to increase
the authorized shares will be unnecessary and will not be implemented.
The objectives of the increase in the authorized number of shares of common
stock are to ensure that DG Systems has sufficient shares available for future
issuances of common stock or securities convertible into common stock. DG
Systems' board of directors believes that it is prudent to increase the
authorized number of shares of common stock to the proposed levels in order to
provide a reserve of shares available for issuance to meet business needs as
they arise. Future activities may include, without limitation, financings,
establishing strategic relationships with corporate partners, providing equity
incentives to employees, officers or directors, or effecting stock splits or
dividends. The additional shares of common stock authorized may also be used
to acquire or invest in complementary businesses or products. Although DG
Systems has no current plans or proposals to issue additional shares of common
stock (except pursuant to approval of the merger and any employee stock
incentive plans), it may continue to evaluate potential acquisitions of or
investments with third parties. In the event that DG Systems' board of
directors does undertake a plan, or otherwise enter into an agreement,
understanding or arrangement, to issue additional shares of common stock or
securities convertible into shares of the common stock, DG Systems' board of
directors intends to issue the additional shares of its capital stock only
upon terms and conditions that the board deems advisable and in the best
interests of DG Systems and its shareholders.
Summary of Authorized and Outstanding Capital Stock
DG Systems' authorized capital stock currently consists of 100,000,000
shares of common stock and 15,000,000 shares of preferred stock. DG Systems'
common stock is not subject to any preemptive rights. The articles of
incorporation provide that DG Systems' preferred stock may be divided into any
number of series, and that the board may fix the number of, and determine the
rights, preferences, privileges and restrictions granted to or imposed upon,
any series. The DG Systems board has designated 5,000,000 shares of the
authorized preferred stock as Series A preferred stock. As of , 2000 there
were [ ] shares of common stock issued and outstanding, and no shares of
preferred stock issued and outstanding. Accordingly, the total number of
shares of common stock available for future issuance, whether upon the
conversion of outstanding convertible securities, the exercise of outstanding
options to purchase shares of common stock, or otherwise, is [ ] shares, the
total number of shares of Series A preferred stock available for future
issuance is 5,000,000 shares and the total number of shares of undesignated
preferred stock available for future issuance is 10,000,000. In addition, as a
result of the merger we will issue additional shares of common stock and
will only have shares of common stock available for future issuance.
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If the proposed amendment to the articles of incorporation is adopted by DG
Systems' shareholders at the annual meeting, DG Systems will have available
for issuance [ ] shares of common stock, 5,000,000 shares of Series A
preferred stock and 10,000,000 shares of undesignated preferred stock.
Effects of the Proposed Amendment to the Articles of Incorporation
If the shareholders approve the proposed amendment to the articles of
incorporation, the board may cause the issuance of additional shares of common
stock without further vote of the shareholders of DG Systems, except as
provided under California corporate law or under the rules of any securities
exchange on which shares of common stock are then listed. Current holders of
common stock have no preemptive or similar rights, which means that current
shareholders do not have a prior right to purchase any new issue of common
stock in order to maintain their appropriate ownership of the common stock.
The issuance of additional shares of common stock would decrease the
proportionate equity interest of the current shareholders and, depending upon
the price paid for the additional shares, could result in dilution to the
current shareholders.
The proposed amendment to the articles of incorporation increasing the
authorized number of shares of the common stock could also have certain anti-
takeover effects. For example, although DG Systems has no present intention to
do so, shares of common stock and/or securities convertible into common stock
could be issued in a private placement or public offering, or rights to
purchase shares of common stock and/or securities convertible into common
stock could be issued, to create voting impediments to or otherwise frustrate
third party attempts to effect a takeover or otherwise gain control of DG
Systems through a public tender offer, proxy contest or other means. In
addition, the proposed amendment to the articles of incorporation could
discourage an attempt by a third party to acquire control of DG Systems
through a public tender offer, proxy contest or other means and, therefore,
could deprive the shareholders of benefits that could result from an attempt
to takeover, or otherwise gain control of, DG Systems. Those benefits could
include, among other things, the realization of a premium over the market
price of their shares of capital stock in a tender offer, or even the
temporary increase in the market price for their shares that a takeover
attempt could cause. The board, however, is not aware of any present efforts
or attempt to takeover, or otherwise gain control of, DG Systems through a
public tender offer, proxy contest or any other means.
Despite the potential anti-takeover effects of the proposed amendment to the
articles of incorporation described above, the board believes that the
increased financial flexibility and other benefits offered by the proposed
amendment far outweigh any of the disadvantageous anti-takeover effects of the
amendment.
To the extent that the proposed amendment may have certain anti-takeover
effects, the board believes that the proposed amendment and the anti-takeover
effects may encourage third parties seeking to acquire or otherwise gain
control over DG Systems to negotiate directly with the board. In this regard,
the board further believes that these negotiations will enable the board to
consider a takeover transaction proposed by a third party in a non-disruptive
atmosphere and to effectively discharge its fiduciary obligation to consider
and act upon any proposed takeover transaction in a manner that best serves
the interests of the shareholders by maximizing shareholder value.
The DG Systems board unanimously recommends that the DG Systems shareholders
vote "FOR" the approval of the amendment to the articles of incorporation to
authorize an additional 100,000,000 shares of common stock.
Proposal to Amend the 1992 Stock Option Plan
DG Systems' 1992 stock option plan was originally adopted by the board of
directors in October 1992 and approved by the shareholders in May 1993. To
date, a total of 4,950,000 shares of common stock have been reserved for
issuance under the option plan.
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On September 11, 2000, the DG Systems board of directors approved an
amendment to the option plan to reserve an additional 10,000,000 shares of
common stock for issuance thereunder, thereby increasing the number of shares
of common stock reserved for issuance thereunder from 4,950,000 shares to
14,950,000 shares. At the annual meeting, DG Systems' shareholders will be
asked to approve the proposed amendment to the option plan described above. DG
Systems believes that the proposed increase in the number of shares reserved
for issuance under the option plan is necessary in order to provide the means
for incentivising eligible employees by aligning their interests directly with
those of shareholders. DG Systems also believes that its ability to grant
stock options is critical to its success in attracting and retaining
experienced and qualified employees and independent contractors.
The principal terms and provisions of the option plan are summarized below.
The summary, however, is not intended to be a complete description of all the
terms of the option plan. A copy of the option plan will be furnished by DG
Systems to any shareholder upon written request to the corporate secretary at
the executive offices in Irving, Texas.
Summary of Terms of 1992 Stock Option Plan
Purpose. The purposes of the option plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to employees and consultants, and to promote the success
of DG Systems' business.
Administration. The Compensation Committee of DG Systems' board of directors
administers the option plan. As the administrator of the option plan, the
Compensation Committee has complete discretion, within the limits set forth in
the option plan, to determine the terms of the options granted thereunder,
including the exercisability of such options, the number of shares issuable
upon the exercise of such options, the exercise price of such options, and the
form of consideration payable upon such exercise. The Compensation Committee
is constituted in a manner intended to comply with the requirements of Rule
16-b3 promulgated under the Exchange Act, pertaining to the disinterested
administration of employee benefit plans. If the option plan satisfies the
disinterested administration and other requirements of Rule 16b-3,
discretionary grants of options under the option plan to persons subject to
liability under Section 16(b) of the Exchange Act will be exempt from such
liability to the extent provided by Rule 16b-3. Members of the Compensation
Committee receive no additional compensation for their services in connection
with the administration of the option plan.
Eligibility. The option plan provides for grants to employees, including
officers and employee directors, of "incentive stock options," as defined in
Section 422 of the Internal Revenue Code, as well as grants of nonstatutory
stock options to employees (including officers and employee directors) and
consultants. However, no incentive stock options may be granted to any
individual employee which, when aggregated with all other incentive stock
options granted to such employee, would result in shares of DG Systems' common
stock having an aggregate fair market value in excess of $100,000 becoming
first available for purchase by such employee upon the exercise of incentive
stock options during any calendar year. The board of directors will determine
the number of options to be granted to an employee at his or her initial
service and the grants during any one fiscal year.
Terms of Options. Each option granted under the option plan is evidenced by
a written stock option agreement between DG Systems and the optionee thereof,
and is generally subject to the terms and conditions set forth below. The
specific terms of any individual option granted under the option plan,
however, may vary from those terms set forth below.
(a) Exercise of the Option. The Compensation Committee determines when
options granted under the option plan may be exercised. The form of the stock
option agreement employed by DG Systems to grant options under the option plan
provides that options will become exercisable as determined by the board of
directors. An option granted under the option plan is exercised by giving
written notice of exercise to DG Systems, specifying the number of shares of
DG Systems' common stock to be purchased upon such exercise, and tendering to
DG Systems full payment of the purchase price therefor. The terms of the
option plan specify that the permissible form of payment for shares issuable
upon the exercise of an option granted thereunder will be set forth in the
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stock option agreement relating thereto and may consist of cash, check,
promissory note, exchange of shares of DG Systems' common stock held for more
than six months, consideration received by DG Systems under a cashless
exercise program implemented in connection with the option plan, a reduction
in the amount of any liability of DG Systems to the option holder exercising
such option, any combination of the foregoing methods of payment, or such
other consideration and method of payment for the issuances of the shares to
the extent permitted by applicable laws. The form of stock option agreement
currently employed by DG Systems to grant options under the option plan,
however, only permits payment for shares upon exercise of the option by cash,
check, surrender of other shares of DG Systems' Common Stock, or cashless
exercise procedure.
(b) Option Price. Subject to the following limitations, the exercise price
for options granted under the option plan is determined by the board of
directors or the Compensation Committee in accordance with the terms of the
option plan. The option price of incentive stock options may not be less than
100% of the fair market value of DG Systems' common stock on the date of grant
thereof. With respect to any participant under the option plan who owns voting
securities of DG Systems possessing more than 10% of the voting power of all
classes of outstanding capital stock (a "10% shareholder"), however, the
exercise price of any incentive stock option granted under the option plan
must equal at least 110% of the fair market value of common stock on the date
of grant thereof.
The exercise price of nonstatutory stock options granted under the option
plan is determined by the board of directors. However, the exercise price of
nonstatutory stock options granted under the option plan intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of
the Internal Revenue Code may not be less than 100% of the fair market value
of DG Systems common stock on the date of grant thereof.
(c) Termination of Employment. Options granted under the option plan
generally must be exercised within thirty days (or such other period of time,
not exceeding three months in the case of an incentive stock option or six
months in the case of a nonstatutory stock option, as is determined by the
board of directors at the date of grant) after the termination of the option
holder's status as an employee or consultant, but in no event later than the
expiration of the option term thereof.
(d) Death or Disability. Options granted under the option plan must be
exercised within six months (or such other period of time, not exceeding
twelve months, as is determined by the board of directors) after the
termination of the option holder's employment as a result of death or
disability, but in no event later than the expiration of the option term
thereof.
(e) Termination of Options. The maximum term of an option granted under the
option plan may not exceed ten years from the date of grant thereof, or five
years in the case of an "incentive stock option" granted to a 10% shareholder.
Under the form of stock option agreement currently employed by DG Systems to
grant options under the option plan, each option has a term of seven years
from the date of grant thereof. No option may be exercised by any person after
the expiration of such term.
(f) Nontransferability of Options. Options granted under the option plan are
not generally transferable by the option holder thereof except by will or by
the laws of descent or distribution, and are exercisable during the lifetime
of the option holder only by such option holder.
(g) Adjustment upon Changes in Capitalization. In the event any change, such
as a stock split or dividend, is made in respect of DG Systems' capital stock
which results in an increase or decrease in the number of issued and
outstanding shares of DG Systems' common stock without receipt of
consideration by DG Systems, an appropriate adjustment will be made in the
exercise price and in the number of shares issuable upon the exercise of each
outstanding option granted under the option plan.
(h) Merger or Sale of All Assets. Except as described below, in the event of
a merger of DG Systems with or into another corporation or other legal entity,
or the sale of substantially all of the assets of DG Systems, each outstanding
option granted under the option plan will be assumed, or an equivalent option
or right will be substituted, by the successor corporation or entity, or a
parent or subsidiary thereof. In the event that an
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outstanding option granted under the option plan is not assumed or substituted
as described above, the option holder thereof will have the right to exercise
such option, to the extent such option holder was otherwise entitled to
exercise such option, for a period of 15 days after receiving notice of such
merger or sale, and such option will terminate upon the expiration of such
period.
(i) Change in Control. Upon a change in control (as defined below), 50% of
the shares underlying any unvested options granted to each of DG Systems'
executive officers under the option plan will be subject to accelerated
vesting as of the date of such change in control. For purposes of this
provision, a "change in control" is defined in the option plan, generally as
(1) a merger or acquisition of DG Systems resulting in a 50% or greater change
in the total voting power of DG Systems immediately following such transaction
or (2) certain changes in the majority composition of DG Systems board of
directors during a 24-month period, which changes are not initiated by the
board of directors. The acceleration of options in the event of a merger or
sale of all assets may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt, or other efforts
to gain control of DG Systems.
(j) Amendment and Termination. DG Systems board of directors may, at any
time and from time to time, amend or terminate the option plan as and in any
manner it deems appropriate; provided, however, that DG Systems must obtain
shareholder approval of the following amendments to the option plan: (1) any
increase in the number of shares reserved for issuance thereunder, other than
in connection with an adjustment pursuant to changes in capitalization,
dissolution or liquidation, or a merger, sale of substantially all assets or a
change in control of DG Systems or (2) any change in the designation of the
class of persons eligible to be granted options thereunder. In addition, DG
Systems must obtain shareholder approval of any amendment to the option plan
in such a manner and to the extent necessary to comply with applicable laws
and regulations.
Plan Benefits
As of July 31, 2000, options to purchase an aggregate of 3,259,639 shares,
having average exercise prices of $.30 to $10.125 per share and expiring from
May 1, 2001 to August 16, 2009, were outstanding under the option plan, and
966,437 shares remained available for future grant thereunder. The market
value of the common stock underlying the options issued under the option plan
at July 31, 2000 was $18,335,469 based on a fair market value of $5.625 per
share.
The following table represents options granted from the option plan for the
twelve months ended December 31, 1999:
<TABLE>
<CAPTION>
Option Grants During
Fiscal Year Ended
December 31, 1999 Value of Option Grants
-------------------- ----------------------
<S> <C> <C>
Scott K. Ginsburg.............. -- $ --
Henry W. Donaldson............. -- --
Paul W. Emery, II.............. 50,000 293,750
Matthew E. Devine.............. 1,000,000 5,125,000
Omar O. Choucair............... 250,000 1,281,250
Dan F. Dent.................... 150,000 510,945
--------- ----------
Current Executive Officers, as
a group....................... 1,450,000 7,210,945
--------- ----------
Lawrence D. Lenihan............ 2,500 11,250
Michael G. Linnert............. 10,000 50,000
David M. Kantor................ 10,000 43,750
--------- ----------
Non-Employee Directors, as a
group......................... 22,500 105,000
--------- ----------
Non-officer Employees, as a
group......................... 552,000 2,704,800
--------- ----------
Total........................ 2,024,500 $9,938,245
========= ==========
</TABLE>
Under the option plan, the following Named Officers have been granted
options exercisable into shares of common stock: Paul W. Emery, II--50,000,
Matthew E. Devine--1,000,000, Omar O. Choucair--250,000, and
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Dan F. Dent--150,000. Mr. Ginsburg has not been granted any options out of the
option plan. All current executive officers, as a group, have been granted
options exercisable into 1,450,000 shares of common stock. The following non-
employee directors have been granted options exercisable into shares of common
stock: Lawrence D. Lenihan--2,500, Michael G. Linnert--10,000, and David M.
Kantor--10,000. Non-employee directors, as a group, have been granted options
exercisable into 22,500 shares of common stock. All employees, other than
executive officers, as a group, have been granted options exercisable into
552,000 shares of common stock. No options were granted to Named Officers
during the seven months ended July 31, 2000.
Federal Income Tax Information
Options granted under the option plan may be either "incentive stock
options," as defined in Section 422 of the Internal Revenue Code, or
nonstatutory stock options. An optionee who is granted an incentive stock
option will not recognize taxable income either at the time the option is
granted or upon its exercise, although the exercise of an option granted under
the option plan may subject the option holder to the alternative minimum tax.
Any gain or loss realized by a former option holder upon the sale or exchange
of the shares purchased by exercising an incentive stock option granted under
the option plan more than two years after the grant of such option and one
year after the exercise of such option will be treated as long- term capital
gain or loss. If these holding periods are not satisfied, the former option
holder will recognize ordinary income at the time of sale or exchange of such
shares equal to the difference between the exercise price of the option
exercised to acquire such shares, and the lower of (1) the fair market value
of such shares at the date of the exercise of such option and (2) the sale
price of such shares.
All options that do not qualify as "incentive stock options" under the
Internal Revenue Code are referred to as nonstatutory stock options. An
optionee will not recognize any taxable income at the time he is granted a
nonstatutory stock option. However, upon the exercise of such option, the
option holder thereof will recognize taxable income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price therefor. DG Systems will be entitled to a tax deduction in the same
amount as the ordinary income recognized by the option holder with respect to
shares acquired upon exercise of a nonstatutory stock option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and DG Systems with respect to the grant and exercise of
options under the option plan and does not purport to be complete. Reference
should be made to the applicable provisions of the Internal Revenue Code for a
more complete explanation of the tax treatment of the grant and exercise of
options under the option plan. In addition, this summary does not discuss the
tax consequences of an option holder's death, or the income tax laws of any
municipality, state or foreign country in which an option holder may reside.
The DG Systems board unanimously recommends that the DG Systems shareholders
vote "FOR" the approval of the amendment to the 1992 stock option plan.
Proposal to Ratify Accountants
DG Systems is asking the shareholders to ratify the appointment of KPMG LLP
as DG Systems' independent public accountants for the fiscal year ending
December 31, 2000. The affirmative vote of the holders of a majority of shares
present or represented by proxy and voting at the annual meeting will be
required to ratify the appointment of KPMG LLP.
In the event the shareholders fail to ratify the appointment, DG Systems'
board will reconsider its selection. Even if the appointment is ratified, DG
Systems' board, in its discretion, may direct the appointment of a different
independent accounting firm at any time during the year if the board feels
that such a change would be in DG Systems' and its shareholders' best
interests.
KPMG LLP has audited DG Systems' financial statements since 1999. Its
representatives are expected to be present at the annual meeting, will have
the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions.
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The DG Systems board unanimously recommends that the DG Systems shareholders
vote "FOR" the ratification of the selection of KPMG LLP to serve as DG
Systems' independent public accountants for the fiscal year ending December
31, 2000.
Proposal To Elect Directors
DG Systems currently has five directors serving on its board. At the annual
meeting, holders of common stock will elect five directors to serve DG Systems
for a period of one year or until their successors have been elected and
qualified at the next annual meeting. The board's nominees are Scott K.
Ginsburg, Matthew E. Devine, Lawrence D. Lenihan, Jr., Michael G. Linnert and
David M. Kantor. Each of the nominees is currently a member of DG Systems'
board. This board, when elected, will be DG Systems' board of directors for
the next year if the proposed merger with StarGuide is not completed.
If the merger is completed, five additional individuals who have been
nominated by StarGuide pursuant to the merger agreement will be appointed to
serve as directors. These nominees are Cappy R. McGarr, Robert J. Schlegel,
Kevin C. Howe, Jeffrey A. Dankworth and Omar A. Choucair. See "THE MERGER--
Directors of DG Systems following the Merger."
Board of Directors Meetings and Committees
During the fiscal year ended December 31, 1999, DG Systems board of
directors held four meetings and acted by written consent in lieu of a meeting
on three occasions. For the fiscal year, each of the directors during the term
of their tenure, attended or participated in at least 75% of the aggregate of
(1) the total number of meetings or actions by written consent of the board
and (2) the total number of meetings held by all committees of the board on
which each such director served. DG Systems' board of directors has two
standing committees: the Audit Committee and the Compensation Committee.
During the fiscal year ended December 31, 1999, the Audit Committee of DG
Systems' board held one meeting. The Audit Committee reviews, acts on and
reports to the board with respect to various auditing and accounting matters,
including the selection of DG Systems' accountants, the scope of the annual
audits, fees to be paid to the DG Systems' accountants, the performance of DG
Systems' accountants and the accounting practices of DG Systems. The members
of the Audit Committee in 1999 were Messrs. Lenihan, Linnert and Kantor.
During the fiscal year ended December 31, 1999, the Compensation Committee
of DG Systems' board held one meeting. The Compensation Committee reviews the
performance of the executive officers of DG Systems and reviews the
compensation programs for other key employees, including salary and cash bonus
levels, option grants under the 1992 Stock Option Plan and non-plan option
grants. The members of the Compensation Committee in 1999 were Messrs.
Ginsburg, Lenihan and Kantor.
Director Compensation
Except for grants of stock options, directors of DG Systems 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 DG Systems' board of directors and the committees
thereof. DG Systems 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 DG Systems' 1995 Director Option Plan. Under the 1995 Director
Option Plan, each non-employee director of DG Systems will be automatically
granted an option to purchase 10,000 shares of DG Systems' common stock (the
"First Option") on the date on which the optionee first becomes a non-employee
director of DG Systems, and each non-employee director will thereafter be
granted an additional option to purchase 2,500 shares of DG Systems' common
stock
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(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 market value of a share of DG Systems' 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 DG Systems are eligible to receive
options for common stock directly under the 1992 Stock Option Plan and, if
officers of DG Systems, are also eligible to receive incentive cash bonus
awards and are eligible to participate in the 1996 Employee Stock Purchase
Plan.
The DG Systems board unanimously recommends that the DG Systems shareholders
vote to elect the nominees for director.
Executive Officers and Directors of DG Systems
The executive officers and directors of DG Systems and their ages as of July
31, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Title(s)
---- --- --------
<S> <C> <C>
Scott K. Ginsburg(1).................. 47 Chairman of the Board
Matthew E. Devine..................... 51 Chief Executive Officer and Director
Omar Choucair......................... 38 Chief Financial Officer
Dan F. Dent........................... 52 Chief Operating Officer
Lawrence D. Lenihan, Jr.(1)(2)........ 35 Director
Michael G. Linnert(2)................. 29 Director
David M. Kantor(1)(2)................. 44 Director
</TABLE>
--------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The biographies of the nominees for the director positions are set forth
below:
Scott K. Ginsburg joined DG Systems 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 DG
Systems' Chairman. He has also been the Chairman of the Board of StarGuide
Digital Networks since December 8, 1998, and, most recently, served as Chief
Executive Officer and Director of Chancellor Media Corporation (which later
became AMFM Inc. and has since merged into Clear Channel Communications). 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 DG Systems in July 1999 as Chief Executive Officer
and Director. He has also been the Chief Executive Officer and a Director of
StarGuide Digital Networks since August 1, 1999. Prior to joining DG Systems,
Mr. Devine served as Chief Financial Officer of Chancellor Media Corporation
(which later became AMFM Inc. and has since merged into Clear Channel
Communications) 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 DG Systems as Chief Financial Officer in July 1999.
He has also been the Chief Financial Officer of StarGuide Digital Networks
since July 1999. Prior to joining DG Systems, Mr. Choucair served as Vice
President of Finance for Chancellor Media (which later became AMFM Inc. and
has since merged into Clear Channel Communications), 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 specialized in media and telecommunications
clients. Mr. Choucair received a B.B.A. from Baylor University and is a
Certified Public Accountant.
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<PAGE>
Dan F. Dent joined DG Systems as Vice President, Operations in September
1999. From 1993 until joining DG Systems, 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 DG
Systems 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, L.L.C. 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 a 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 DG Systems
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. 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 DG Systems
since August 1999. Mr. Kantor was formerly Senior Vice President for Network
Operations of AMFM, Inc. (which has since merged into Clear Channel
Communications) and managed 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 Network, 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.
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<PAGE>
Executive Compensation And Related Information
The following Summary Compensation Table sets forth the compensation earned
by each person who served as DG Systems' Chief Executive Officer during the
last fiscal year and the four other most highly compensated executive officers
(collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Awards Number of
Compensation Securities
-------------- -----------------------
Name and Principal Other Annual Restricted Underlying All Other
Position Year Salary(1) Bonus Compensation Stock Options Compensation
------------------ ---- --------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott K. Ginsburg....... 1999 $ 52,083 $ -- $ 301,243(2) -- 1,548,460 $ 0
Chairman of the board
and Former 1998 $ 1 $ -- $ 39,607(2) -- -- $ --
Chief Executive Officer 1997 $ -- $ -- $ -- -- -- $ --
Matthew E. Devine(5).... 1999 $ 52,083 $ -- $ -- -- 1,000,000 $ --
Chief Executive Officer 1998 $ -- $ -- $ -- -- -- $ --
1997 $ -- $ -- $ -- -- -- $ --
Omar A. Choucair(6)..... 1999 $ 31,250 $ -- $ -- -- 250,000 $ --
Chief Financial Officer 1998 $ -- $ -- $ -- -- -- $ --
1997 $ -- $ -- $ -- -- -- $ --
Dan F. Dent............. 1999 $ 48,904 $ 10,000 $ -- -- 150,000 $ --
Vice President,
Operations 1998 $ -- $ -- $ -- -- -- $ --
1997 $ -- $ -- $ -- -- -- $ --
Henry W. Donaldson...... 1999 $ 300,000 $ 50,000 $ 181,982(3) -- -- $ --
Former President and
Chief Operating 1998 $ 298,374 $ 50,000 $ 4,953 -- 350,000 $ --
Officer 1997 $ 225,000 $ 50,000 $ 162 -- 80,000 $ --
Paul W. Emery, II....... 1999 $ 190,000 $ -- $ -- -- 50,000 $ --
Former Vice President, 1998 $ 186,647 $ 35,000 $ 990(4) 50,000 150,000 $ --
Finance and
Chief Financial Officer 1997 $ -- $ -- $ -- -- -- $ --
</TABLE>
--------
(1) Salary includes amounts deferred under DG Systems' 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 DG
Systems ($6,982).
(4) Includes taxable benefits from premiums for group life insurance paid by DG
Systems.
(5) Mr. Devine began employment with the company on July 21, 1999.
(6) Mr. Choucair began employment with the company on July 21, 1999.
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<PAGE>
Option Grants In Last Fiscal Year
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 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation
Underlying Granted to Price for Option Term(2)
Options Employees Per Expiration ---------------------
Name Granted(1) in 1999 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 DG Systems 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. DG Systems' 1992 Stock
Option Plan provides that upon a change in control, the unvested options
granted to each of DG Systems' 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 DG Systems
resulting in a 50% or greater change in the total voting power of DG
Systems immediately following such transaction, or (ii) certain changes in
the majority composition of DG Systems' 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 DG Systems' 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.
Aggregate Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
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.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year in-the-Money Options at
Shares End Fiscal Year End(1)
Acquired on Value ------------------------- -------------------------
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 DG Systems' common stock at year end,
$7.125 per share, less the exercise price payable for such shares.
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<PAGE>
Employment Contracts and Change in Control Arrangements
None of DG Systems' current executive officers have employment or severance
agreements with DG Systems, and their employment may be terminated at any time
at the discretion of the board of directors. Henry W. Donaldson, DG Systems'
former President and Chief Operating Officer, entered into an employment
agreement with DG Systems 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 DG Systems during 1998, and in April 2000,
received an additional incentive bonus of $50,000 with respect to the 1999
fiscal year. In connection with Mr. Donaldson's resignation, DG Systems paid
Mr. Donaldson his base compensation through March 31, 2000.
Beginning in 1994, Mr. Donaldson purchased restricted stock from DG Systems
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 by DG Systems in connection with his resignation.
On January 21, 1998, the board of directors awarded the right to purchase
50,000 shares of DG Systems' common stock to Paul W. Emery II, DG Systems'
former Vice President, Finance, for a per share purchase price equal to
$3.875, the closing price of DG Systems' 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. DG Systems had the right to repurchase a portion of the shares of DG
Systems' common stock upon the termination of Mr. Emery's employment with DG
Systems. On December 9, 1998, Mr. Emery entered into a Restricted Stock
Purchase Agreement with DG Systems 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 DG Systems, DG Systems
repurchased 22,917 shares of the 50,000 restricted shares awarded. In
connection with his separation from DG Systems, the promissory note was
amended to become due and payable on February 28, 2001.
Compensation Committee Report
The Compensation Committee of DG Systems' board of directors (the
"Compensation Committee" or the "Committee") reviews and approves DG Systems'
compensation policies. The following is the report of the Compensation
Committee describing the compensation policies applicable to the compensation
of DG Systems' 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 DG Systems'
key executive officers. However, the Committee made the final compensation
decisions concerning such officers.
General Compensation Philosophy. DG Systems' philosophy in setting its
compensation policies for executive officers is to maximize shareholder value
over time. Therefore, the primary goal of DG Systems' executive compensation
program is to closely align the interests of the executive officers with those
of DG Systems' shareholders. To achieve this goal, DG Systems attempts to (1)
offer compensation opportunities that attract and retain executives whose
abilities are critical to the long-term success of DG Systems, motivate
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<PAGE>
individuals to perform at their highest level and reward outstanding
achievement, (2) 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 (3) encourage executives
to manage from the perspective of owners with an equity stake in DG Systems.
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 DG Systems, prior experience, past performance for DG Systems, expected
contribution to DG Systems' future success and recommendations from
management. The Compensation Committee also takes into account the salaries
for similar positions at comparable companies in DG Systems' 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 DG
Systems. To carry out this philosophy, the board of directors reviews and
approves the financial goals for the fiscal year. The Compensation Committee
then evaluates the overall performance of DG Systems and approves performance
bonuses based on the extent to which the goals of the board of directors have
been achieved. DG Systems achieved record revenues in 1999 of $48.7 million,
and substantially increased its EBITDA (earnings before interest, taxes,
depreciation and amortization) to $1.4 million for the year, both of which
were important milestones for DG Systems.
Long-Term Incentive Compensation. The Compensation Committee views stock
option grants as an important component of its long-term, performance-based
compensation philosophy. DG Systems 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 DG Systems. 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 DG Systems. All options granted to
executive officers to date have been granted at the fair market value of DG
Systems' 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 DG
Systems' employ, and then only if the market price of DG Systems' 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 DG Systems' 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 DG Systems. 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 DG Systems
in connection with the commencement of his employment. The warrant was
intended to induce Mr. Ginsburg to join DG Systems as its new Chairman of the
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<PAGE>
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 DG Systems' 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 DG
Systems. 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
DG Systems 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 DG Systems' 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
qualify as performance-based compensation that will not be subject to the $1
million limitation. Since the cash compensation paid to DG Systems' 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 DG Systems' 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, DG
Systems' 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 DG Systems.
No executive officer of DG Systems 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 DG Systems' board of directors or
Compensation Committee, except for Matthew E. Devine who is a director and the
Chief Executive Officer of DG Systems and also a director and the Chief
Executive Officer of StarGuide.
Stock Performance Table
The graph set forth below compares the cumulative total shareholder return
on DG Systems' common stock between February 6, 1996 (the date DG Systems'
common stock commenced public trading) and December 31, 1999 with the
cumulative total return of (1) the Nasdaq Non-Financial Stocks Index and (2)
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 DG
Systems' 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. DG
Systems cautions that the stock price performance shown in the graph below is
not indicative of, nor intended to forecast, the potential future performance
of DG Systems' 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 DG Systems is not responsible for any errors or omissions
in such information.
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<PAGE>
CUMULATIVE SHAREHOLDER RETURN DATA
[CUMULATIVE SHAREHOLDER RETURN DATA GRAPH]
<TABLE>
<CAPTION>
CRSP Total Returns Index for: 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 Index... 100 117 137 201 397
Nasdaq Computer and Data............ 100 121 148 265 583
</TABLE>
Processing Services Stocks Index
DG Systems effected its initial public offering of common stock on February
6, 1996. For purposes of this presentation, DG Systems 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 DG Systems'
previous or future filings under the Securities Act of 1933 or the Securities
Exchange Act of 1934 that might incorporate this report or future filings made
by DG Systems 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 DG Systems under
those statutes.
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<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of July 31, 2000 (except where otherwise
noted), certain information with respect to shares beneficially owned by (1)
each person who is known by DG Systems to be the beneficial owner of more than
five percent of DG Systems' outstanding shares of common stock, (2) each of DG
Systems' directors and the executive officers named in the Summary
Compensation Table and, (3) 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, and
therefore, 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.
<TABLE>
<CAPTION>
Shares Beneficially
Owned as of July 31,
2000(1)(2)
---------------------
Number of Percentage
Beneficial Owner Shares of Class
---------------- ---------- ----------
<S> <C> <C>
Entities and individuals affiliated with London Merchant
Securities plc(3)...................................... 1,578,105 5.6%
Carlton House
33 Robert Adam Street
London WIM 5AH, England
Entities and individuals affiliated with Pequot Capital
Management, Inc.(4).................................... 4,987,911 17.7%
500 Nyala Farm Road
Westport, Connecticut 06880
Entities and individuals affiliated with Technology
Crossover Ventures, L.P.(5)............................ 2,930,699 10.4%
56 Main Street, Suite 210
Millburn, New Jersey 07041
Scott K. Ginsburg(6).................................... 4,246,552 15.1%
Moon Doggie Family Partnership
17340 Club Hill Drive
Dallas, Texas 75248
Matthew E. Devine....................................... 388,360 1.4%
Omar A. Choucair........................................ 72,917 *
Dan F. Dent............................................. -- --
Henry W. Donaldson(7)................................... 893,008 3.2%
Paul W. Emery, II....................................... 27,083 *
Lawrence D. Lenihan, Jr.(8)............................. 4,997,911 17.7%
Michael G. Linnert(9)................................... 2,934,032 10.4%
David Kantor............................................ -- --
All current directors and executive officers as a
group.................................................. 15,137,968 53.7%
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
(1) Except as indicated in the notes 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 DG
Systems' 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 5221 North O'Connor Boulevard,
Suite 950, Irving, Texas 75039.
(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 July 31, 2000.
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<PAGE>
(3) 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 are wholly owned
subsidiaries of London Merchant Securities plc.
(4) 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 DG Systems' 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.
(5) Includes 809,612 shares held in the name of Technology Crossover
Ventures, L.P., 63,719 shares held in the name of Technology Crossover
Ventures, C.V., 26,208 shares held in the name of TCV II, V.O.F.,
806,807 shares held in the name of Technology Crossover Ventures II,
L.P., 620,282 shares held in the name of TCV II (Q), L.P., 110,078 shares
held in the name of TCV II Strategic Partners, L.P. and 123,186 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.
(6) Based on a filing with the Securities and Exchange Commission, dated July
7, 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, DG Systems' 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 July 31, 2000.
(7) Includes options exercisable into 499,683 shares of common stock.
(8) 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 Note 4). Includes options
exercisable into 10,000 shares of common stock.
(9) 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 Note 5). Includes options
exercisable into 3,333 shares of common stock.
Certain Relationships And Related Transactions
On December 17, 1999, DG Systems issued 725,199 shares of common stock to
certain existing institutional and closely associated investors pursuant to
the terms of a common stock subscription agreement, dated December 17, 1999,
at a price per share of $5.171. Pursuant to the subscription agreement,
241,733 shares were issued to Scott K. Ginsburg, DG Systems' current Chairman
of the board, 96,693 shares were issued to Matthew E. Devine, DG Systems'
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 DG Systems from the issuance of these additional shares were
approximately $3.75 million.
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MEETING OF STARGUIDE SHAREHOLDERS
StarGuide will hold a special meeting of its shareholders on , 2000 at
a.m., local time, at the La Cima Club, 5215 North O'Connor Boulevard, Suite
2600, Irving, Texas 75039 in order to consider and approve the merger.
StarGuide will not be soliciting proxies. Scott K. Ginsburg, Chairman of the
Board of StarGuide, owns 49% of the outstanding shares of StarGuide common
stock, consisting of 8,200,000 shares of Class A common stock and 3,744,483
shares of Class B common stock, and serves as voting trustee with respect to
an additional 45% of StarGuide common stock, consisting of 5,000,000 shares of
Class A common stock, and 7,052,528 shares of Class B common stock, and
therefore possesses the power to vote the number of shares needed to approve
the merger. Mr. Ginsburg has executed a voting agreement with DG Systems,
pursuant to which he has agreed to vote in favor of the merger. See
"ADDITIONAL AGREEMENTS--Voting Agreements." Accordingly, at the special
meeting of StarGuide shareholders Mr. Ginsburg will approve the merger.
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THE COMPANIES
The discussion in this proxy statement/prospectus contains forward-looking
statements that involve risks and uncertainties. StarGuide's and DG Systems'
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "RISK
FACTORS."
DG SYSTEMS BUSINESS
DG Systems operates a nationwide, value-added digital network which links
hundreds of advertisers and advertising agencies with more than 7,500 radio
and 775 television stations across the United States and Canada. DG Systems'
fault-tolerant Network Operation Center located in San Francisco delivers
audio, video, image and data content that comprise transactions between the
advertising and broadcast industries.
As a result of its September 1998 acquisition of Digital Courier
International, Inc., ("DCI"), a provider of electronic distribution and
communications services for the radio broadcast industry, DG Systems is now
the most significant provider of audio spot advertising to radio stations,
enjoying a market share in excess of 50%. In late 1996, DG Systems entered the
market for the electronic distribution of digital video spots to television
stations, cable systems and networks. DG Systems' revenues derive mainly from
advertising agencies, advertisers, tape duplication vendors and dealers,
syndicated programmers and music companies that principally service these
markets. DG Systems believes that its digital network enables rapid, cost-
effective and reliable transmission of audio and video broadcast content, and
provides higher levels of quality, control and flexibility than physical
distribution methods currently available. In July 1997, DG Systems purchased
Starcom Mediatech, Inc. ("Mediatech"), a provider of broadcast video and audio
duplication, syndicated program distribution and corporate media duplication
services, with facilities in Chicago, Los Angeles and New York, augmenting its
November 1996 acquisition of PDR Productions, Inc. ("PDR"), a New York City-
based broadcast production services company. As a result of these
acquisitions, DG Systems also has become a leading provider of video
advertising distribution and is rapidly adding new customers to its digital
audio and video network. DG Systems offers a complete range of post production
services, including editing, duplication, color control, close captioning,
content review, quality assurance, electronic archiving and format
conversions, all of which allow one-stop shopping in the critical advertising
markets of New York City, Chicago, and Los Angeles.
Industry Background
While many radio and television broadcasters now embrace digital technology
for much of their production processes and in-station media management,
current methods for the distribution of audio and video advertising content
are based primarily on the manual duplication and physical delivery of analog
tapes. According to industry sources, there are approximately 10,000
commercial radio and 1,100 commercial television stations in the United
States. These stations generate revenue by selling airtime to advertisers.
Advertising is most frequently produced under the direction of advertising
agencies for large national or regional advertisers, or by station personnel
for advertisers that are local in nature. Advertising is characterized as
"network" or "spot," depending on how it is bought and distributed. Network
advertising typically is delivered to stations as part of a "network feed"
(bundled with network programming), while spot advertising is delivered to
stations independently of other programming content.
Spot advertising airtime typically is purchased by advertising agencies or
media buying firms on behalf of advertisers. Advertisers and their agencies
select individual stations or groups of stations to support marketing
objectives, which usually are based on the stations' geographic and other
demographic characteristics. The actual commercials or "spots" typically are
produced at a digital production studio and recorded on digital tape.
Variations of the spot intended for specific demographic groups also are
produced at this time. The spots undergo a review of quality and content
before being cleared for distribution to broadcast stations. Tapes containing
the spot and its variations are then duplicated on analog tape, packaged,
labeled and shipped to the radio and television stations and cable head-ends
specified by the advertiser or its agency.
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The predominant method for distributing spot advertisements to radio and
television stations traditionally has been physical delivery of analog audio
or videotapes. DG Systems estimates that approximately 30% of radio spots and
more than 90% of video spots are delivered by air express services. Many
companies, commonly known as "dub and ship houses," are in the business of
duplicating audio and video tapes, assembling them according to agency-
specified bills of material and packing them for air express delivery. DG
Systems estimates that it has transitioned approximately 60% of the market for
audio spot deliveries and approximately 10% of video spot deliveries, to
digital distribution. DG Systems estimates the market sizes for the audio
distribution market to be approximately $40 million and approximately $150
million for the video distribution market.
The Company
DG Systems is a leading provider of electronic and physical distribution and
ancillary post-production services for audio and video content to advertising
agencies, production studios and broadcast stations throughout the United
States. DG Systems, a California corporation, was incorporated in 1991. DG
Systems has developed a digital network currently serving over 7,500 radio and
775 television stations that is controlled through DG Systems' San Francisco
Network Operating Center, or "NOC". This network enables the rapid, cost-
effective and reliable electronic transmission of audio and video spots and
other content and provides a high level of quality, accountability and
flexibility to both advertisers and broadcasters. With DG Systems' network,
transmissions are automatically routed to stations through a computerized on-
line transaction and delivery system and arrive, in text format, at stations
in as little as one hour after an order is received. Typically, associated
traffic instructions are simultaneously transmitted by facsimile to minimize
station handling and scheduling errors. Shortly after a spot is delivered to a
station, DG Systems sends the customer a confirmation specifying the time of
delivery. Additionally, DG Systems' digital network delivers close to "master"
quality audio or video to broadcast stations, which is equal to or superior to
that currently delivered on analog tape.
DG Systems generates its revenues from advertising agencies as well as from
production studios and dub and ship houses that consolidate and forward the
deliveries to broadcast stations. DG Systems has historically operated and
currently operates without substantial backlog. DG Systems receives
distribution orders with specific bills of material, routing and timing
instructions provided by the customer. These orders are entered into DG
Systems' computer system either by the customer (through an internet-based
order-entry system) or by DG Systems, and are scheduled for electronic
delivery if a station is on DG Systems' network, or are scheduled for physical
delivery via DG Systems' various dub and ship facilities if a destination
station is not on the network.
Audio content is received electronically at DG Systems' NOC from Record Send
Terminals and, in the case of Digital Courier's network, Client Workstations,
that are owned by DG Systems and deployed primarily in production studios.
Audio content also can be received at DG Systems' San Francisco NOC on media
shipped via airfreight carriers where Record Send Terminals are not available.
In addition, audio can be received using DG Systems' "iAudio" internet audio
collection system. When audio spots are received, company personnel quality-
assure the audio content and then initiate the electronic transaction to
transmit various combinations of audio to designated radio stations. Audio
transmissions are delivered over standard telephone or ISDN lines to servers
that DG Systems has placed in each radio station. The audio spots are
thereafter available to the station on demand.
Video content is received electronically at DG Systems' San Francisco NOC
primarily from DG Systems' Video Record Transmission Systems that are owned by
DG Systems and deployed in production video studios. Video content also can be
received at DG Systems' San Francisco NOC on media shipped via airfreight
carriers or through high-speed communication lines from collection points in
locations where Video Record Transmission Systems are not available. When
video spots are received, company personnel quality-assure the spots and
release the video to the NOC, where it is combined with the customer's
electronic transaction to transmit the various combinations of video to
designated television stations. Video transmissions are sent via a high-speed
frame relay link to the digital satellite uplink facility over which they are
then delivered directly to servers that DG Systems has placed in television
stations and cable interconnects.
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Audio and video transmissions are received at designated radio and
television stations on DG Systems--owned servers, called Receive Playback
Terminals, Client Workstations and ADvantage Digital Video Playback Systems.
The servers enable stations to receive and play back material delivered
through DG Systems' digital distribution network. The units are owned by DG
Systems and typically are installed in the "master control" or production area
of the stations. Upon receipt, station personnel generally review the content
and transfer the spot to a standardized internal station format for subsequent
broadcast. Through its NOC, DG Systems monitors the spots stored in each
Receive Playback Terminal, Client Workstation and Digital Video Playback
System and ensures that space is always available for new transmissions. DG
Systems can quickly transmit audio or video at the request of a station or in
response to the request of a customer who wishes to alter an existing order,
enabling responsiveness not possible in a physical tape distribution system.
DG Systems currently offers four primary levels of digital audio
distribution services and three levels of video distribution services from its
NOC to broadcast advertisers distributing content to broadcast stations: DG
Priority, a service which guarantees arrival of the first audio spot on an
order within one hour (available for audio only); DG Express, which guarantees
arrival within four hours; DG Standard, which guarantees arrival by noon the
next day; and DG Economy, which guarantees arrival by noon on the second day.
DG Systems also offers a set of premium services enabling advertisers to
distribute audio or video spots provided after normal business hours and,
therefore, after overnight parcel delivery service is no longer available.
In addition to its standard services, DG Systems has developed unique
products to service four vertical markets with particular time-sensitive
delivery needs. "Sweeps" delivery is a specialized service for television
stations that wish to advertise on radio with either topical or cooperative
content to stimulate viewership during the periods of ratings measurements
conducted by the A.C. Nielsen Company. DG Systems also offers delivery of
advertising for daily newspapers seeking to expand their readership based on a
dissemination of breaking news during the morning rush hour. DG Systems
distributes first release music singles and uses unique software functionality
to insure that the singles are released throughout the country to all stations
simultaneously thereby eliminating concerns of favoritism or premature
release. Finally, DG Systems delivers political advertising during election
campaigns, providing a rapid response mechanism for candidates and issue
groups.
DG Systems also provides audio and video duplication services, syndicated
programming distribution services, and a host of other ancillary post
production services through its nationwide facilities in New York, Chicago,
Louisville and Los Angeles.
Products and Services
DG Systems' mission is to become the leading provider of electronic value-
added transaction services to the advertising and broadcast industries.
Audio Advertising Distribution. Prior to DG Systems' acquisitions of PDR and
Mediatech, substantially all of DG Systems' revenues were derived from the
delivery of radio advertising from advertising agencies, production studios
and dub-and-ship houses to radio stations in the United States. In 1998, DG
Systems acquired DCI, and has integrated DCI's network with DG Systems'
existing network to form a single, comprehensive network servicing over 7,500
stations throughout Canada and the United States. Audio services are expected
to continue to account for a significant share of DG Systems' revenues for
some time. See "RISK FACTORS--Risks Relating to DG Systems--DG Systems'
business is highly dependent on radio and television advertising; if demand
for, or margins from, our radio and television advertising delivery services
declines, our business will be adversely affected." DG Systems also derives
revenue from its offering of audio distribution services in the four vertical
markets: sweeps; local/regional newspapers; music releases; and political
advertising. DG Systems provides two-way audio transmission services to radio
stations within markets, regions and co-owned groups, facilitating the sharing
of programming and commercial content. DG Systems also derives limited revenue
through its studio services, which enable production studios to directly
exchange audio files with each other without the intervention of company
personnel.
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Postproduction Services. DG Systems' acquisitions of PDR and Mediatech have
enabled it to provide digital delivery to a larger base of customers and to
provide postproduction services in the three major advertising markets (New
York, Los Angeles and Chicago) for a "one-stop shopping solution." DG Systems
continues to focus on value-added postproduction services to complement DG
Systems' digital delivery product. Such services include leading edge digital
editing, digital closed captioning, Internet-based encoding, and CD-ROM
mastering and duplication.
Video Advertising Distribution. DG Systems believes that the delivery of
television advertising is characterized by many of the same challenges facing
radio advertisers. DG Systems introduced its video distribution services in
1996. To date, DG Systems has deployed a video distribution network consisting
of over 775 television stations and cable interconnects, which currently are
on-line and receive video content through DG Systems' network. DG Systems is
actively marketing and selling its video services to agencies, advertisers and
dealers. As many of DG Systems' radio advertising customers also are active
television advertisers, its current customers who already utilize DG Systems'
audio spot distribution services are candidates for or already are utilizing
its video services. See "RISK FACTORS--Risks Related to DG Systems--DG
Systems' business is highly dependent on electronic video advertising delivery
service deployment," and "-- If DG Systems is not able to develop new products
and services to respond to rapid technological changes, its business will be
adversely affected," and "-- The markets in which DG Systems operates are
highly competitive and DG Systems may be unable to compete successfully
against new entrants and established companies with greater resources."
Syndicated Program Distribution. DG Systems also generates revenue by
distributing syndicated programming. This service primarily consists of
integrating commercials into syndicated programs and either uplinking the
completed programs via satellites for distribution to stations nationwide and
in Canada or the physical duplication and shipping of shows to stations that
do not receive a satellite feed.
Corporate Duplication. DG Systems also generates revenues from the
duplication of corporate content. This service primarily consists of large
quantity duplication of training, corporate or product information tapes on
non-broadcast quality tape stock, such as VHS.
Music Distribution. DG Systems also derives revenues from its "first release
music deliveries," in which it offers music labels the capability to
electronically distribute first-release music singles simultaneously to
selected radio stations.
DG Systems' future growth depends on its successful and timely introduction
of new products and services, often in markets that do not currently exist or
are just emerging. DG Systems currently is undertaking efforts to develop new
products and services. However, DG Systems may not be able to complete such
development successfully, and, even if the development is completed, DG
Systems' introduction of these products and services may not realize market
acceptance or meet the technical or other requirements of potential customers.
See "RISK FACTORS--Risks Relating to DG Systems--DG Systems' business is
targeted at developing markets. If these markets do not continue to develop,
or do not accept DG Systems' products and services, our business could be
adversely affected."
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The DG Systems Network
[DG SYSTEMS NETWORK CHART]
DG Systems has developed a sophisticated, highly scaleable network
communication system to provide network transaction services to the advertising
and broadcast industries. Today this system supports two-way communication
between advertisers, agencies, production studios and stations via standard
telephone lines, ISDN lines, digital data satellite frame relay connections and
the Internet. DG Systems intends to continue employing state-of-the-art
communications capabilities, such as xDSL and cable modems, as they become
widely available and economically feasible.
DG Systems' network consists of the following:
(1) Record Send Terminals, Client Workstations (audio), and Video Record
Transmission Systems (video) owned by DG Systems and installed
primarily at production studios;
(2) NOC at DG Systems' headquarters used to assemble, process, route and
store digital content; and
(3) Receive Playback Terminals, Client Workstations (audio), and Digital
Video Playback Systems (video) owned by DG Systems and installed at
broadcast stations, cable interconnects and broadcast and cable
networks.
Record Send Terminal and Client Workstation. Both the Record Send Terminal
and Client Workstation are PC-based audio encoder and communication servers
with a full screen monitor and keyboard. The Record Send Terminal accepts audio
in either analog or digital format and encodes the audio using an efficient
algorithm for transmissions to DG Systems' NOC in San Francisco.
Video Record Transmission System. The Video Record Transmission System is a
video encoder and communications server with a full screen monitor and
keyboard. The Video Record Transmission System accepts video in either analog
or digital format and encodes the video using a standard MPEG-2 compression
algorithm for transmissions to DG Systems' NOC in San Francisco.
Network Operating Centers. DG Systems has developed a fault-tolerant
client/server on-line transaction system based on relational databases and UNIX
servers from Sun Microsystems. DG Systems has developed software applications
incorporating critical operational capabilities such as transaction management,
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communication facility monitoring, system security, intelligent network
routing and customer service databases. The major system components include
(1) a transaction scheduling, monitoring and management system, (2) a media
collection, processing and delivery system which is designed to handle audio,
video, image and data organizing the delivery content by destination address,
and routing those deliveries by the most cost-effective route, and (3) a high-
capacity media storage and archive system that indexes and archives every
media file delivered by DG Systems.
ADvantage Receive Playback Terminal. The Receive Playback Terminal is a
rack-mountable, PC-based communication server and media decoder that enables
radio stations to receive and play back audio content delivered through DG
Systems' digital distribution network. The Receive Playback Terminal
communicates with DG Systems' network to exchange media and transactional
information, and allows users to play back broadcast quality audio on demand.
Receive Playback Terminal software consists of extensive remote capabilities
such as system diagnostics, storage management and remote software upgrade as
well as enhanced security features such as user authentication, network access
security protocol and media content encryption to prevent unauthorized access.
ADvantage Digital Video Playback System. The Digital Video Playback System
is a rack-mountable, PC-based communication server and video decoder that
enables television stations and cable systems to receive and play back
advertisements delivered through DG Systems' digital distribution network. The
Digital Video Playback System communicates with DG Systems' network to
exchange media and transactional information, and allows users to play
broadcast quality video on demand. The Digital Video Playback System includes
a fully-integrated monitor and keyboard and has the disk capacity to store up
to 250 30-second spots. Digital Video Playback System software consists of
extensive remote capabilities such as system diagnostics, storage management
and remote software upgrades as well as enhanced security features such as
user authentication, network access security protocol and media content
encryption to prevent unauthorized access.
Hughes DirecPC Satellite Interface. DG Systems has a joint development and
deployment agreement with Hughes Network Systems for satellite delivery to its
network of stations. DG Systems has developed an electronic interface between
its NOC in San Francisco and the Hughes satellite uplink facility. DG Systems
also has integrated the Hughes DirecPC satellite technology into its Digital
Video Playback Systems to permit the receipt of media content from satellite
as well as from terrestrial connections.
Client Workstation. The Client Workstation is a rack-mountable or desktop,
PC-based communication server and media encoder/decoder that enables radio
stations to receive, play back, record and send audio content delivered
through DG Systems' digital distribution network. The Client Workstation
communicates with DG Systems' network to exchange media and transactional
information, and allows users to record, store and play back broadcast quality
audio on demand. Client Workstation software consists of extensive remote
capabilities such as system diagnostics, storage management and remote
software upgrade as well as enhanced security features such as user
authentication and a network access security protocol to prevent unauthorized
usage of the network.
DG Systems' extensive network of digital audio Receive Playback Terminals
and Digital Video Playback Systems strategically placed across the country in
broadcast stations, its Record Send Terminals, Client Workstations and Video
Record Transmission Systems, coupled with unique encoding, compression and
complex communications software, connected via its NOC described above, and an
established customer base, create important barriers to entry for potential
competitors. The transmission of content is controlled by a very comprehensive
transaction scheduling, routing, monitoring and delivery management system
that DG Systems believes would be very difficult to replicate. Additionally,
DG Systems' audio and video capabilities now are complemented with facilities
in New York City, Chicago, Louisville, and Los Angeles to handle customers'
other production services needs. DG Systems believes that no single competitor
today offers DG Systems' audio, video, and production services capabilities
that are deliverable locally and nationally via several strategic locations.
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Markets and Customers
A large portion of DG Systems' current revenue is derived from the delivery
of spot radio and television advertising to broadcast stations, cable systems
and networks. DG Systems derives revenue from advertising agencies directly
and from its marketing partners, which are typically dub and ship houses that
have signed agreements with DG Systems to consolidate and forward the
deliveries of their advertising agency customers to broadcast stations, cable
systems and networks via DG Systems' electronic delivery service in exchange
for price discounts from DG Systems. The advertisements distributed by DG
Systems are representative of the five leading national advertising categories
of automotive, retail, business and consumer services, food and related
products including soft drinks, and entertainment. The volume of advertising
from these segments is subject to substantial seasonal and cyclical
variations. See "Risk Factors--Risks Relating to DG Systems--DG Systems' sales
cycles reflect seasonal buying patterns that can adversely affect operating
results and lead to potential fluctuations in quarterly performance." Through
its acquisition of the assets of DCI, DG Systems has also acquired an
additional revenue stream from radio stations by providing distribution
between radio stations and radio groups.
In addition to its core distribution services, DG Systems has identified
vertical-market applications for services where same day delivery is used to
promote time-sensitive content. These applications include:
Sweeps Promotions. The A.C. Nielsen ratings periods take place during the
broadcast months of February, May, September, and November. DG Systems'
services allow local television stations, their affiliated networks and
syndicators, whose own advertising rates are based on their Nielsen ratings,
to promote viewership of their programs during ratings periods.
Station to Station Distribution. Many radio stations produce and distribute
commercials and short-form programming to other stations for airplay on the
same day, and DG Systems' network has proven efficient in delivering this
content, replacing ground deliveries and couriers. In addition, consolidation
in radio ownership has resulted in many of the new radio mega-groups
developing facilities for central audio production. DG Systems' delivery
system is used to distribute this production to the group's co-owned stations.
Political Campaigns. Radio and television can provide a rapid response
mechanism for candidates and issue groups. DG Systems offers a same-day
service for the facilitation of such advertising during political campaigns.
In 1998, an election year, DG Systems delivered 25,000 campaign
advertisements, representing over 300 candidates and propositions.
DG Systems also offers the following services:
Postproduction Services. Advertising agencies, advertisers, corporations,
and public relations firms often require additional services to be performed
before a produced element is distributed for broadcast purposes. In addition
to DG Systems' traditional postproduction services--closed captioning,
commercial tagging, international standards conversions, and duplication--DG
Systems has developed and introduced digital solutions in the postproduction
environment. The new digital services enforce DG Systems' focus on a fully
digital production and distribution environment.
Syndication Programming Distribution. Syndicators distribute long form video
programming inclusive of advertising to local television stations and cable
operators. DG Systems offers numerous postproduction services to prepare this
content for broadcast and distributes it across the country and around the
world. Distribution services include both satellite uplink and physical
duplication and shipping to those stations, which do not or cannot receive the
content via satellite.
Corporate Duplication. Corporations and other entities develop training,
management communications and other general information programs for internal
and external distribution for various purposes. DG Systems provides high
volume duplication of such content on non-broadcast quality tape stock,
typically VHS.
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Sales, Marketing and Customer Service
Brand Strategy. DG Systems' brand strategy is to position itself as the
standard transaction method for the radio, television, cable, and network
broadcast industries. DG Systems focuses its marketing messages and programs
at multiple segments within the advertising and broadcast industries. Each of
the segments interacts with DG Systems for a different reason. Agencies
purchase services from DG Systems on behalf of their advertisers. Production
studios facilitate the transmission of audio and video to DG Systems' NOC.
Production studios and dub and ship houses resell delivery services to
agencies. Stations join the network to receive the content from their
customers: the agencies and advertisers. A key strategy to providing a
consistent brand theme at all levels is developing "DG Systems" as a brand
identity across these various product and service offerings.
Internet/E-Commerce Strategy. DG Systems introduced its first Internet-based
services called DG On-line in 1998 to facilitate the electronic remote entry
of work orders and to provide on-line tracking of order status by its
customers. In 1999, DG Systems estimates that 30% of its orders were entered
electronically via the Internet, versus approximately 11% during 1998. In
addition, DG Systems also offers its "iAudio" Internet audio collection system
service which allows audio content to be received from clients via the
Internet.
Sales. DG Systems employs a direct sales force that calls on various
departments at advertising agencies to communicate the capabilities and
comparative advantages of DG Systems' electronic distribution system and
related products and services. In addition, DG Systems' sales force calls on
corporate advertisers who are in a position to either direct or influence
agencies in directing deliveries to DG Systems. A separate staff sells to and
services audio and video dealers, who resell DG Systems' distribution
services. An insider sales staff also represents DG Systems' services to radio
stations. DG Systems currently has field sales offices in New York, Los
Angeles and Chicago, as well as sales personnel in its San Francisco
headquarters. DG Systems' sales force includes field sales, inside sales, and
telemarketing.
Marketing. DG Systems' marketing programs are directed toward demand
stimulation with an emphasis on popularizing the benefits of digital delivery,
including fast turnaround (same day services), increased flexibility, higher
quality, problem recovery, and greater reliability and accountability. These
marketing programs include direct mail and telemarketing campaigns,
newsletters, collateral material (including brochures, data sheets, etc.),
application stories, and corporate briefings in major United States cities. DG
Systems also engages in public relations activities including trade show
participation, the stimulation of articles in the trade and business press,
press tours and advertisements in advertising and broadcast oriented trade
publications.
DG Systems also markets to broadcast stations to arrange for the placement
of its Receive Playback Terminals and Digital Video Playback Systems for the
receipt only of audio and video advertisements, or CW's, which provide the
ability to both receive and to originate distribution of audio to other radio
stations. There is currently no charge for a station to receive an
advertisement. For radio stations or groups that subscribe to network
distribution services utilizing the Client Workstation, the station signs a
month-to-month, one-year or two-year term of service.
DG Systems believes that in combination with its acquisition of the assets
of DCI, its combined network provides digital distribution coverage for more
than 90% of commercial radio stations and distribution traffic in the United
States and Canada. DG Systems is focusing on the most significant 775
television stations as rated by A.C. Nielsen, along with the major cable
interconnects and cable and broadcast networks.
Customer Service. DG Systems' approach to customer service is based on a
distributed model designed to provide focused support from key market centered
offices, located in Los Angeles, San Francisco, Chicago and New York. Clients
work with specific, assigned account coordinators to place production service
and distribution orders. National distribution orders are electronically
routed to the San Francisco NOC for electronic distribution or, for offline
destinations, to DG Systems' national duplication center in Louisville,
Kentucky. DG Systems' distributed service approach provides direct support in
key market cities enabling DG Systems to develop closer relationships with
clients as well as the ability to support client needs for local production
services. DG Systems
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also maintains a customer service team dedicated to supporting the needs of
radio, television, and network stations. This support is available 7 days a
week, 24 hours a day, to respond to station requests for information, traffic
instructions or additional media. Providing direct support alleviates the need
for client traffic departments to deal with individual stations or the
challenges of staffing for off-hours support. DG Systems' customer service
operation centers are linked to DG Systems' order management and media storage
systems, and national distribution network. These resources enable DG Systems
to manage the distribution of client orders to the fulfillment location best
suited to meet critical customer requirements as well as providing order
status and fulfillment confirmation. This distributed model also provides DG
Systems with significant redundancy and re-route capability, enabling DG
Systems to meet customer needs when weather or other conditions prevent
deliveries using traditional courier services.
Work orders entered by customers into Client Workstations are shipped
automatically through the NOC to their destinations with minimal human
intervention. No monitoring is done of the spots, unless DG Systems is asked
to review a spot by a client. These capabilities enable DG Systems' customers
to move to an e-commerce business model as the service is developed more
fully.
Competition
The market for the distribution of advertising and other content to radio
and television stations and cable systems is highly competitive. DG Systems
currently competes in the market for the distribution of audio and video
advertising spots to broadcast stations, cable systems and networks. The
principal competitive factors affecting this market are ease of use, price,
timeliness and accuracy of delivery.
DG Systems competes with a variety of dub and ship houses and production
studios that have traditionally distributed taped advertising spots via
physical delivery. As local distributors, these entities have long-standing
ties with advertising agencies that are often difficult for DG Systems to
replace. In addition, these dub and ship houses and production studios often
provide an array of ancillary video services, including archival storage and
retrieval, closed captioning and format conversions, enabling them to deliver
to their advertiser and agency customers a full range of customizable, media
postproduction, preparation, distribution and trafficking services. DG
Systems' acquisitions of Mediatech and PDR enable DG Systems to provide
similar services in the three largest domestic advertising markets: New York,
Los Angeles and Chicago. DG Systems plans to continue pursuing potential dub
and ship house partners where such partnerships make strategic sense.
With the acquisition of DCI, DG Systems has the only widely deployed
electronic system for the delivery of audio advertisements; consequently, it
competes largely with physical tape duplication and shipping for audio
advertising distribution.
In the video marketplace, DG Systems also competes with dub and ship houses
across the country but additionally with a satellite-based real-time video
distribution network operated by Vivyx, an operating division of the Williams
Communications Group. This network differs from that of DG Systems in several
ways, including limited error checking, lack of digital video as the standard
output to the station and lack of a station server to support presentation of
video-on-demand to the station. DG Systems has been able to successfully
convince a number of customers of the relative benefits of its system. DG
Systems also anticipates that certain common and/or value-added
telecommunications carriers may develop and deploy high bandwidth network
services targeted at the advertising and broadcast industries, although no
such carriers have yet entered the market for spot distribution.
To the extent that DG Systems is successful in entering new markets, such as
delivery of other content to radio and television stations or delivery of data
concerning the actual airtime and audience ratings of commercials, it expects
to face competition from companies in related communications markets and/or
package delivery markets which offer products and services with functionality
similar to that offered by DG Systems' products and services.
Telecommunications providers such as AT&T, MCI, and Regional Bell Operating
Companies could enter the market as competitors with significantly lower
telecommunications transportation
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costs. DG Systems also could face competition from entities with package
delivery expertise such as Federal Express, United Parcel Service, DHL or
Airborne if any such companies enter the electronic data delivery market.
Radio Networks such as ABC or Westwood One also could become competitors by
selling and transmitting advertisements separately from their network content
programming.
Many of DG Systems' current and potential competitors in the markets for
audio and video distribution have substantially greater financial, technical,
marketing and other resources than DG Systems. DG Systems expects that an
increasingly competitive environment may result in price reductions that could
result in reduced unit profit margins and loss of market share, all of which
would have a material adverse effect on DG Systems' business, results of
operations and financial condition. Moreover, the markets for the distribution
of audio and video content have become increasingly concentrated in recent
years as a result of acquisitions, which are likely to permit many of DG
Systems' competitors to devote significantly greater resources to the
development and marketing of new services. DG Systems may not be able to
compete successfully with new or existing competitors. Additionally,
competitive pressures faced by DG Systems may materially and adversely affect
its business, operating results and financial condition. See "RISK FACTORS--
Risks Relating to DG Systems--The markets in which DG Systems operates are
highly competitive and DG Systems may be unable to compete successfully
against new entrants and established companies with greater resources."
Intellectual Property and Proprietary Rights
DG Systems primarily relies upon a combination of copyright, trademark and
trade secret laws and license agreements to establish and protect proprietary
rights in its technologies. The source code for DG Systems' software is
protected both as a trade secret and as an unpublished copyrighted work.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use DG Systems' hardware, software or technology without
authorization or to develop similar technology independently. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries.
Because DG Systems' business is characterized by rapid technological change,
DG Systems believes that factors such as the technological and creative skills
of its personnel, new computer hardware, software and telecommunications
developments, frequent hardware and software enhancements, name recognition,
and reliable customer service and support are more important to establishing
and maintaining a leadership position than the various legal protections of
its technology.
DG Systems believes that its software, trademarks and other proprietary
rights do not infringe the proprietary rights of third parties. However, third
parties might assert such infringement by DG Systems with respect to current
or future software, hardware or services. Any such claims, with or without
merit, could be time-consuming, result in costly litigation, cause software
release delays or might require DG Systems to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to DG Systems.
Employees
As of June 30, 2000, DG Systems had a total of 328 employees, including 21
in research and development, 34 in sales and marketing, 242 in operations and
manufacturing, and 31 in finance and administration. Of these employees, 318
were located in the United States and 10 were located in Canada. None of DG
Systems' employees are represented by a collective bargaining agreement, and
DG Systems has not experienced a work stoppage. DG Systems considers its
relations with its employees to be good.
DG Systems' business and prospects depend in significant part upon the
continued service of its key management, sales and marketing and
administrative personnel. DG Systems does not generally have employment
agreements with its key personnel. The loss of key management or technical
personnel could materially adversely affect DG Systems' business, operating
results and financial condition. DG Systems believes that its prospects depend
in large part upon its ability to attract and retain highly skilled
managerial, sales and
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marketing and administrative personnel. Competition for such personnel is
intense, and DG Systems may not be successful in attracting and retaining such
personnel. Failure to attract and retain key personnel could have a material
adverse effect on DG Systems' business, operating results and financial
condition. See "RISK FACTORS--Risks Relating to DG Systems--DG Systems depends
on its key personnel to manage its business effectively, and if DG Systems is
unable to retain its key employees or hire additional qualified personnel, DG
Systems' ability to compete could be harmed."
Properties
Principal executive offices are at 5221 North O'Connor Boulevard in Irving,
Texas. The Irving offices include 10,000 square feet of leased space, for
which the lease expires in August 2001. DG Systems also has administrative
offices and its NOC at leased office space located at 875 Battery Street in
San Francisco, California. DG Systems' lease at this site is for 19,000 square
feet and expires in June 2001. To sustain uninterrupted network integrity, DG
Systems has an agreement for non-interruptible access to emergency power and
DG Systems has arranged for alternative fiber optic routes to maintain its
fiber connection between its computers and its long distance carrier. However,
a catastrophic earthquake or other natural disaster could interrupt DG
Systems' operations. DG Systems maintains an additional lease in San
Francisco, set to expire in 2001, for a 5,000 square foot facility, which is
used for assembly of its field equipment and for offsite storage. In addition,
DG Systems leases approximately 3,000 square feet in Louisville, Kentucky for
its dub and ship facility which expires in 2002; approximately 22,000 square
feet in New York City which is occupied by DG East (formerly PDR) and expires
in 2006; approximately 13,000 square feet in Los Angeles occupied by DG West
(formerly Mediatech) which expires in 2006; 25,000 square feet in Chicago,
which is occupied by DG Central (formerly Mediatech) on a month-to-month
rental agreement (pending finalization of a long-term lease) which expires on
December 31, 2000; and 9,000 square feet occupied by DG North (formerly DCI)
in Burnaby, British Columbia (Vancouver, Canada) which expires on March 31,
2003. DG Systems believes that these facilities and offices are adequate to
meet its requirements for the foreseeable future.
Legal Proceedings
DG Systems is subject, from time to time, to various legal proceedings and
claims, either asserted or unasserted, which arise in the ordinary course of
business. While the outcome of these claims cannot be predicted with
certainty, management does not believe that the outcome of any of these legal
matters asserted to date will have a material effect on DG Systems'
consolidated financial condition or results of operations.
DG Systems' Management's Discussion and Analysis of Financial Condition and
Results of Operations
Revenue Overview
DG Systems was incorporated in 1991. Through 1993, DG Systems was a
development-stage company, principally engaged in developing its network,
marketing its services to radio stations and advertising agencies, and
producing and deploying terminals for use at advertising agencies, production
studios and radio stations. In 1994, DG Systems first generated significant
operating revenues from the delivery of audio commercials and the related text
traffic instructions to radio stations through a nationwide network
established by DG Systems. DG Systems has invested heavily in the development
of its digital audio network, which was nearly complete by the end of 1996. It
was at that time that DG Systems began to promote its digital video technology
service revenues from which have grown every year since that time. As DG
Systems' audio and video network coverage has expanded to include an
increasing number of radio and television stations, the number of deliveries
ordered by customers has increased. At the same time, the number of deliveries
performed via electronic delivery has increased relative to the number
performed by physical delivery through DG Systems' dub and ship facility in
Louisville, Kentucky.
DG Systems defines a delivery as the transmission, electronic or physical,
of a piece or pieces of audio or video content, generally a commercial
("spot") or a set of commercials ("tied spots") to a destination, generally a
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radio or television station, based on a single order from a customer. Each
order usually calls for the delivery of the same spot or spots to multiple
destinations, resulting in multiple deliveries. The revenue earned per
delivery is dependent upon the type of service ordered, generally defined by
the time interval between submission and delivery (Priority, Express, Standard
or Economy), the channel from which the order is received (directly from an
advertiser or advertising agency or through a dub and ship house), and the
quantity of audio or video being delivered (a single spot or multiple tied
spots). DG Systems derives revenue from advertising agencies, as well as
production studios and dub and ship houses that consolidate and forward
deliveries for their agency customers. Because the revenue earned for the
delivery of the first spot is significantly greater than the revenue earned
for a tied spot and because DG Systems' per spot electronic transmission cost
is relatively constant regardless of volume, electronic deliveries that
comprise a single spot are generally more profitable than deliveries, which
include tied spots. DG Systems recognizes revenue for each order on the date
the content is received by the customer.
Results of Operations
The following table sets forth certain financial data for the years ended
December 31, 1999, 1998, and 1997, and the six months ended June 30, 2000 and
July 3, 1999. Operating results for any period are not necessarily indicative
of results for any future periods. Amounts (except per share data) are shown
in thousands.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
---------------- ---------------------------
6/30/00 7/3/99 1999 1998 1997
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues....................... $26,250 $23,580 $48,724 $ 41,270 $ 29,175
Costs and expenses:
Delivery and material costs.. 7,213 9,308 17,857 14,630 11,334
Customer operations.......... 8,237 7,528 15,138 14,780 11,388
Sales and marketing.......... 2,273 2,651 4,818 4,970 4,417
Research and development..... 1,634 1,292 2,577 2,780 2,473
General and administrative... 4,055 2,609 6,552 4,314 3,169
Write down of goodwill and
fixed assets(1)............. -- -- -- 17,006 --
Non-recurring charges........ -- -- 370 -- --
Depreciation and
amortization................ 3,199 4,925 8,591 10,266 9,306
------- ------- ------- -------- --------
Total expenses............. 26,611 28,313 55,903 68,746 42,087
------- ------- ------- -------- --------
Loss from operations........... (361) (4,733) (7,179) (27,476) (12,912)
Other income (expense):
Interest income and other,
net......................... 96 153 319 253 744
Interest expense............. (686) (1,112) (1,903) (3,014) (2,607)
------- ------- ------- -------- --------
Net loss....................... $ (951) $(5,692) $(8,763) $(30,237) $(14,775)
======= ======= ======= ======== ========
Basic and diluted net loss per
common share(2)............... $ (0.03) $ (0.21) $ (0.33) $ (1.97) $ (2.52)
======= ======= ======= ======== ========
Weighted average number of
common shares outstanding..... 27,812 26,490 26,653 16,272 11,893
======= ======= ======= ======== ========
</TABLE>
--------
(1) See Note 3 of "Notes to Consolidated Financial Statements" for DG Systems.
(2) See Note 11 of "Notes to Consolidated Financial Statements" for DG
Systems.
Six Months Ended June 30, 2000 Compared to the Six Months Ended July 3, 1999.
Revenues
Revenues were $26,250,000 for the six months ended June 30, 2000, 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 DG Systems' video delivery and postproduction services and the expanded
network of DG Systems equipment located in television stations.
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Delivery and Material Costs
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 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 the
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 NOC into the San Francisco NOC.
Telecommunication costs were $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 and 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 DG Systems.
Customer Operations
Customer operations expenses were $8,237,000 and $7,528,000 for the six
months ended June 30, 2000 and July 3, 1999, respectively. These increases are
primarily due to additional personnel necessary to respond to the greater
volume of orders and deliveries.
Customer operations expenses as a percentage of revenues 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.
Sales and Marketing
Sales and marketing expenses were $2,273,000 for the six months ended June
30, 2000, a 14% decrease from $2,651,000 for the six months ended July 3,
1999. The decrease in sales and marketing expense in the six months ended June
30, 2000 is a result of improved efficiency of DG Systems' sales and marketing
efforts, as well as the consolidation of the company's sales and marketing
efforts among all its locations. Sales and marketing costs as a percentage of
revenues decreased to 9% from 11% for the six months ended June 30, 2000 and
July 3, 1999, respectively, as a result of these improved efficiencies and
reorganization efforts.
DG Systems expects to continue to expand sales and marketing programs design
to introduce DG Systems' services to the marketplace and to attract new
customers for its services. DG Systems 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 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.
DG Systems 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.
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General and Administrative
General and administrative expenses increased 55% to $4,055,000 for the six
months ended June 30, 2000, from $2,609,000 for the six months ended July 3,
1999. The increase is primarily due to the increased use of temporary labor
and professional fees associated with filling open positions and the cost of
integrating DG Systems financial systems. In addition, the company increased
its allowance for doubtful accounts receivable. General and administrative
expenses have increased to 15% of revenues for the six months ended June 30,
2000 from 11% for the six months ended July 3, 1999.
Depreciation and Amortization
Depreciation and amortization expenses decreased 35% to $3,199,000 in the
six months ended June 30, 2000 from $4,925,00 in the six months ended July 3,
1999. The decrease is due to a higher percentage of fixed assets reaching or
having reached the end of their depreciable lives.
DG Systems recorded goodwill amortization expense of $361,000 for the six
months ended June 30, 2000, and $387,000 for the six months ended July 3,
1999.
Interest Income and Interest Expense
Interest income 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 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 DG Systems' outstanding debt. Debt
outstanding decreased to $8.2 million at June 30, 2000 from $14.1 million at
July 3, 1999. DG Systems expects that interest expense will fluctuate in the
future based on the levels of borrowing.
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.
DG Systems 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 DG Systems' 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.
DG Systems expects to continue to invest in the expansion of its network. In
particular, DG Systems 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 ("DVPS's") to be built
and installed in production studios and television stations.
At June 30, 2000, DG Systems' current sources of liquidity included cash and
cash equivalents of $3.2 million. Based on management's current plans and
forecasts, DG Systems believes that its existing sources of liquidity will
satisfy DG Systems' projected working capital, capital lease and revolving
loan commitments, and other cash requirements through DG Systems' foreseeable
future.
On April 6, 2000, DG Systems 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 DG Systems 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
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additional $2.3 million was available for borrowing. On April 7, 2000, DG
Systems entered into a long-term debt agreement to refinance $3 million in
outstanding loans and capital leases. The new agreement expires in 2002.
Results of Operations for the Years Ended December 31, 1999, 1998 and 1997
Revenues
Revenues increased from $29,175,000 to $41,270,000 to $48,724,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
Revenues increased in 1998 primarily due to the acquisitions of Mediatech in
1997 and DCI in 1998. In addition, the increase is due to certain other
factors, including increased volume resulting from greater acceptance of the
services offered by DG Systems and increased availability of an expanded
network of DG Systems' equipment located in radio and television stations, as
well as general price increases. The increase from 1998 to 1999 is due in part
to including the results of operations of DCI for an entire year, as well as
continued volume and price increases.
Delivery and Material Costs
Delivery and material costs were $11,334,000, $14,630,000 and $17,857,000 in
1997, 1998 and 1999, respectively. The increase in costs in each period versus
the same period of the prior year is primarily due to the increased delivery
volume, as well as the acquisitions of DCI and Mediatech. These costs include
fees paid to other service providers for charges incurred by DG Systems for
the receipt, transmission and delivery of information via DG Systems' NOC,
costs for video and audio tapes, packaging and shipping costs required when
physically duplicating and distributing a video or audio spot, and direct
material and fees paid to other service providers in connection with post-
production services and other services offered by DG Systems.
Delivery and material costs as a percentage of revenues decreased from 39%
in 1997 to 35% in 1998 and increased to 37% in 1999. The decrease from 1997 to
1998 is due principally to the improvements in electronic costs of delivery
for audio and video distribution as volumes have increased. In 1999, the
increase in delivery and materials costs as a percentage of revenues over 1998
is due primarily to rising costs.
DG Systems 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 price and scale economies as video
deliveries increase in volume.
Customer Operations
Customer operations expenses were $11,388,000, $14,780,000 and $15,138,000
in 1997, 1998 and 1999, respectively. The increase in 1998 versus 1997 is due
primarily to increased costs incurred to support the greater volume of
deliveries processed through DG Systems' San Francisco NOC as well as the
consolidation of the costs of the former Mediatech and DCI operations. The
increase in 1999 versus 1998 is the result of including a full year of costs
in 1999 of the former DCI operations and the addition of the personnel
necessary to respond to the greater volume of orders and deliveries.
Customer operations expenses as a percentage of revenues have decreased from
39% to 36% to 31% in 1997, 1998 and 1999, respectively. The decreases are
primarily due to improvements in processing orders through DG Systems' NOC,
which serves as the primary support for the digital network. DG Systems
continually attempts to improve process flows in an effort to gain scale
efficiencies.
DG Systems expects that customer operations expenses will increase in
absolute dollars and may fluctuate as a percentage of revenues in future
periods. Moreover, DG Systems believes that to compete effectively and
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manage future growth, DG Systems will be required to continue to implement
changes that improve and increase the efficiency of its customer operations.
Sales and Marketing
Sales and marketing expenses were $4,417,000, $4,970,000 and $4,818,000 in
1997, 1998 and 1999, respectively. The increase in 1998 versus 1997 is due
primarily to growth in marketing program costs to increase customer awareness
of DG Systems' services. In addition, sales and marketing expenses increased
due to the acquisition of DCI. The decrease in 1999 versus 1998 is due
primarily to the consolidation of DG Systems' sales and marketing efforts
among all of its locations. Sales and marketing costs as a percentage of
revenue has decreased from 15% to 12% to 10% of revenues for 1997, 1998 and
1999, respectively, due to greater economies of scale.
DG Systems expects to continue to expand sales and marketing programs
designed to introduce DG Systems' existing and future services to the
marketplace and to attract new customers for its services. DG Systems expects
that sales and marketing expenses will increase in absolute dollars in future
periods and may fluctuate as a percentage of revenue in future periods.
Research and Development
Research and development expenses were $2,473,000, $2,780,000 and $2,577,000
in 1997, 1998 and 1999, respectively. The increase in 1998 versus 1997 is
primarily due to the hiring of additional engineers to develop and enhance DG
Systems' digital services. Research and development expenses in 1998 also
increased due to the additional research and development expenses incurred as
a result of its acquisition of DCI. The decrease in expenses in 1999 versus
1998 is due primarily to the capitalization of certain salaries and benefits
related to internally generated software and the consolidation of DG Systems'
research and development efforts. As a percent of revenues, research and
development expenses have decreased from 8% in 1997 to 7% in 1998 to 5% in
1999.
DG Systems expects that increased research and development expenses will be
necessary to remain competitive and that its future success will depend in
part upon the technological quality of its products and processes relative to
those of its competitors and its ability both to develop new and enhanced
products and services. DG Systems' research and development expenses may
increase substantially in absolute dollars and may fluctuate as a percentage
of revenues in future periods.
General and Administrative
General and administrative expenses consist primarily of personnel,
consulting fees, and related overhead costs for finance and general management
of DG Systems. General and administrative expenses were $3,169,000, $4,314,000
and $6,552,000 in 1997, 1998 and 1999, respectively. These increases were
primarily due to the costs incurred to consolidate and upgrade DG Systems'
order entry, billing and financial reporting systems and the increase in staff
as a result of the acquisitions of Mediatech and DCI. As a percent of
revenues, general and administrative expenses were 11%, 10% and 13% in 1997,
1998, and 1999, respectively. DG Systems 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 expense was $9,306,000 and $10,266,000 and
$8,591,000 in 1997, 1998 and 1999, respectively. The increase in expenses in
1998 versus 1997 was due to the continued expansion of DG Systems' network. DG
Systems acquired the bulk of its assets prior to December 31, 1996; therefore,
beginning in fiscal year 1998, there have been a higher percentage of fixed
assets, which are reaching or have reached the end of their depreciable lives.
The decline of depreciation expense in 1999 versus 1998 reflects this fact. DG
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Systems' total investment in network equipment has increased from $30.4
million to $33.2 million to $35.3 million at the end of 1997, 1998 and 1999,
respectively.
Included in depreciation and amortization is amortization expense of
$787,000, $1,163,000 and $486,000 in 1997, 1998, and 1999, respectively,
related to the goodwill and other intangible assets recorded in connection
with the acquisitions of PDR, Mediatech, and DCI. As discussed in the Notes to
the Condensed Consolidated Financial Statements, in September 1998, DG Systems
wrote off the remaining goodwill of its Mediatech subsidiary, approximately
$16.7 million, and wrote down Mediatech's fixed assets by an additional
$340,000 because it was determined that the carrying values of these assets
may not be recoverable. Because of a change in Mediatech's business, it was
determined that the value of the investment had permanently declined.
DG Systems expects to continue to invest in the expansion of its network. In
particular, DG Systems is in the process of expanding its infrastructure
within the television broadcast industry that will require additional VRTSs
and DVPS's to be built and installed in production studios and television
stations. DG Systems expects depreciation and amortization to increase in
absolute dollars in proportion to this growth. However, whether DG Systems
will make such investments is uncertain, and, even if DG Systems makes such
investments, the investments might not result in future revenue growth.
Interest Income and Interest Expense
DG Systems has derived interest income from the short-term investment of the
proceeds received in various stock offerings, including $23.5 million of net
proceeds from the private placements of common stock in August and December
1998 and $16.4 million of net proceeds from the Series A convertible preferred
stock offering in July 1997. Fluctuations in interest income are due to
differences in the amounts raised and the timing of each offering as well as
the differences in the levels of cash used to fund company operations and
strategic acquisitions and interest rates. DG Systems expects that interest
income will decrease in the future in proportion to the levels of cash used to
fund operations and acquisition activity.
Interest expense incurred by DG Systems was $2,607,000, $3,014,000 and
$1,903,000 in 1997, 1998 and 1999, respectively. This expense relates
primarily to lease agreements used to fund the acquisition of components and
equipment needed to develop the network and to provide DG Systems personnel
with the capital resources necessary to support DG Systems' business growth.
Total long-term debt outstanding was $19,407,000, $17,533,000 and $10,202,000
at December 31, 1997, 1998 and 1999, respectively. DG Systems expects that
interest expense will fluctuate in the future based on the levels of
borrowing.
Liquidity and Capital Resources
DG Systems used cash in operating activities of $6.3 million and $4.8
million in 1997 and 1998, respectively, and generated cash from operating
activities of $0.2 million in 1999. Cash flows from operating activities
improved during 1999 as compared to 1998 primarily because revenue increased
by 18% and operating expenses increased by only 8%. Cash flows from operating
activities improved during 1998 as compared to 1997 primarily due to a 42%
increase in revenue in 1998 as compared to 1997, while operating expense (net
of the impairment of goodwill and operating assets of its subsidiary),
increased by only 23% during 1998 over 1997. Additionally, DG Systems'
accounts receivable balance, net of reserves, increased 24% from 1997;
however, revenues increased 42% in 1998 over 1997, reflecting an improvement
in cash collections in 1998 over the prior year. DG Systems' earnings before
interest, taxes, depreciation and amortization has improved from a loss of
$3.6 million in 1997, to a loss of $204,000 in 1998, to a positive amount of
$1.4 million in 1999.
DG Systems used $5.1 million, $2.2 million and $2.7 million of cash in 1997,
1998 and 1999, respectively, to purchase property and equipment. In addition,
$0.4 million, $1.7 million and $2.0 million of property and equipment has been
acquired through term lease or credit agreements in 1997, 1998 and 1999,
respectively. The capital additions for each of the three years were a result
of DG Systems' continued expansion of its network. In particular, capital
additions in 1997 and 1998 were primarily in support its video delivery
service plan.
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DG Systems completed its initial public offering in February 1996. The net
proceeds to DG Systems in 1996 after underwriting discounts and offering
expenses were $29.5 million. DG Systems raised $16.4 million, net of offering
expenses, through its Series Aconvertible preferred stock offering in 1997.
The proceeds from these two offerings have been used in the acquisitions of
PDR in November 1996 and Mediatech in July 1997, as well as to fund the
acquisition of property and equipment, the payment of lease obligations and to
fund the continuing operations of DG Systems. Approximately $20.5 million has
been invested in the purchases of PDR and Mediatech and an additional $2.5
million was used to repay the promissory note payable in November 1997 as a
result of the PDR acquisition. In connection with the July 1997 acquisition of
Mediatech, DG Systems also issued 324,355 shares of DG Systems' common stock,
$3.8 million of promissory notes, and assumed $5.4 million of term and line of
credit debt payable by Mediatech. In August 1998, DG Systems raised
approximately $12.7 million from a private placement of 4.6 million shares of
common stock and in December 1998 raised approximately $11.0 million from a
private placement of 3.8 million shares of common stock. The proceeds from
these two offerings were used to fund the purchase of DCI in September 1998,
as well as to fund the purchase of property and equipment, payment of lease
obligations and to fund the continuing operations of DG Systems. In December
1999, DG Systems raised an additional $3.8 million from a private placement of
725,199 shares of common stock.
DG Systems, through its Mediatech subsidiary, made net payments on the
Mediatech line of credit of $1,402,000 in 1998. There was no balance
outstanding under this agreement at December 31, 1999, and the outstanding
balance was $1,433,000 at December 31, 1998, which was approximately equal to
the maximum amount available under the agreement at that time. The company
repaid the outstanding balance of $476,603 on January 17, 2000.
Principal payments on long-term debt were $8.0 million, $7.1 million and
$9.3 million in 1997, 1998 and 1999, respectively, reflecting the increases in
regularly scheduled payments of the increased capital lease liability incurred
to finance equipment and property acquisitions. Principal payments in 1997
also included the following scheduled payments: repayment of a $2.5 million
promissory note issued in connection with the PDR acquisition, $500,000 of
payments on the promissory notes issued in connection with the Mediatech
acquisition and $346,000 of payments on other long-term debt of Mediatech
assumed by DG Systems in conjunction with the Mediatech acquisition.
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STARGUIDE BUSINESS
Overview
StarGuide is a leading designer and provider of high-speed digital
information transmission and distribution systems. StarGuide's patented
technology--digital distribution, compression, and transmission systems
combined with satellite and Internet technologies--allow StarGuide to achieve
high-quality, economical, flexible, and high-throughput information flow
without the need for point-to-point connections, regardless of digital
formatting or compression protocols. Integrated into many of StarGuide's
systems are StarGuide's proprietary digital audio compression and
decompression, or "codec," techniques and products.
StarGuide's satellite transmission systems combine varying types of
information into one single transmission, maximizing the amount of information
transmitted through the satellite in a significantly more cost-effective and
reliable manner than other distribution systems available on the market. The
systems are also readily upgradeable, secure, and able to direct
transmissions, or components of transmissions, to multiple points
simultaneously. StarGuide's transmission systems are capable of receiving any
type of digitized media including audio, simultaneous audio, video, text and
data from a variety of sources including satellite, high-bandwidth connections
such as ISDN or T1 lines, and other wired and wireless systems.
StarGuide has developed a patented store-and-forward system called
Transportal 2000(TM), a cost-effective, reliable, high-speed electronic media
delivery system that serves the broadcast industry with Internet connectivity,
compatible StarGuide satellite transmission and terrestrial overlays,
automatic fall-back dub and ship service, and automated confirmation of
delivery. This proprietary and uniquely flexible, powerful, and economical
automated media distribution system is being deployed across the radio
broadcasting industry. StarGuide will seek to expand its presence in the
broadcasting industry and will target new market opportunities for high-
quality, high-throughput digital information systems.
Building on its experience and technology in digital content distribution,
StarGuide also seeks to become the leading provider of Internet-related video
and audio content delivery through the commercial application of its patented
CoolCast(TM) technology. Using this technology, millions of viewers and
listeners can simultaneously access high-quality content through personal
computers. Streaming video and audio content, delivered via satellite to
Internet points of presence, can be accessed by subscribers through broadband
connections capable of supporting CoolCast(TM) technology. Subscribers can
thus enjoy this streaming content in conjunction with CoolCast(TM)-enabled
web-sites, without the degradation of signal quality typically caused by the
congestion of the Internet backbone. StarGuide believes that its CoolCast(TM)
service represents the best means to meet the growing demand for broadband
video and audio delivery to Internet users.
StarGuide Digital Information Distribution
Background
Increasing demand for reliable and rapid means of information transfer in
the broadcast, scientific, education, entertainment, home-computing, and
telecommunications industries has driven a number of technical innovations in
recent years. In particular, digital distribution technologies are
increasingly used for distributing information in forms such as audio, video,
text, and data. Digitized information can be stored, manipulated, transmitted,
and reproduced more easily, more rapidly, with less degradation, and in
greater volumes than traditional analog or hard copy information.
Prominent among digital distribution system developments in recent years has
been the growth of the Internet. The Internet, however, suffers from
significant bandwidth, security, reliability, and other constraints.
To meet their growing need for solutions that offer reliable, high-quality
digital information distribution, some companies have deployed their own
terrestrial-based local and wide area computer networks. These systems are
typically very costly to deploy, use, and maintain. Additionally, upgrading
these systems to keep abreast of technical innovations can be particularly
difficult and costly.
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Other digital communication and transmission technologies, such as private-
network satellite systems, can offer more cost-effective and reliable
solutions for the digital-transmission requirements of data-intensive
businesses, including radio and television broadcasting. Satellite
distribution can be particularly effective at meeting the needs of point-to-
multipoint transmission, or "multicasting," and other broadcasting
applications.
StarGuide has developed proprietary software and hardware systems that can
address the need for data distribution services that are both economically and
technologically suitable to various commercial applications. Many of these
systems are currently deployed and in service, and StarGuide continues to
upgrade its technology, and to deploy additional units in the marketplace.
StarGuide Digital Media Transmission Solutions
StarGuide has developed proprietary, integrated hardware and software
transmission systems that provide high-quality, reliable, cost-effective,
variable-speed distribution of digitized media. StarGuide's systems are
flexible; they can be used to distribute digitized audio, video, text and
data, no matter how such information is stored, compressed, or formatted. In
addition, StarGuide's systems may be used with other wired or wireless
transmission systems, including satellite systems. StarGuide has focused
initially on providing these solutions for the media and broadcast industries.
StarGuide's transmission systems are also "scalable," to accommodate data
streams of varying sizes and transmission speed requirements. As a result, a
StarGuide transmission system allows the broadcaster to vary, and minimize or
maximize as desired, the amount of bandwidth utilized by the system for each
transmission in real time, thus providing "bandwidth-on-demand" and savings in
bandwidth-related costs.
In the United States radio industry, StarGuide has deployed its digital
transmission systems to radio stations owned by or affiliated with Jacor, ABC
Radio, Clear Channel, Infinity, Westwood One, CBS, Bloomberg, Jones Broadcast
Programming, One-On-One Sports, and Voice of America. Abroad, StarGuide has
deployed its digital transmission systems for Osaka-Yusen (Japan), the
Shenzhen Stock Exchange (China), and other entities in Australia, New Zealand,
and South America.
StarGuide has also built a line of high-quality audio compression and
decompression products for use in the media, recording, telecommunications,
and broadcasting industries. StarGuide has sold its audio
compression/decompression products to leading companies and institutions in
the United States and abroad. StarGuide has also deployed these products in
conjunction with its deployment of satellite transmission systems in the
United States radio industry.
The core of the StarGuide transmission system is StarGuide's patented MX3
Multiplexer and the StarGuide Receiver. The MX3 Multiplexer can accept up to
120 simultaneous digital, audio, video, or data services in any digital
format. The StarGuide Multiplexer then breaks up these differing digital
service streams and re-orders and consolidates the various data streams into a
single data stream. The system can then cost-effectively transmit this data
stream in a single transmission signal, via satellites or other wired or
wireless communications vehicles. The MX3 Multiplexer does so in a highly
efficient manner, resulting in less consumption of costly bandwidth capacity
on the satellites than other transmission systems on the market, such as DVB
systems.
Upon receipt of a transmission, the patented StarGuide Receiver re-assembles
and transmits data packets into their respective types of digital information
streams (audio, video, text, or data). StarGuide's receivers are flexible and
adaptable, employing low cost insertion cards that are installed in any of a
number of slots in the receivers, thus adapting the capabilities of the
receivers to varying needs of broadcasters who use them.
Current StarGuide receiver insertion cards include:
. eDAS (Ethernet Enabled Digital Audio Storage) Card: a unique, patented
store-and-forward card that allows a "live" broadcast through the
StarGuide Receiver to be automatically mixed with pre-
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transmitted audio or video clips or advertising spots, thus allowing
broadcasters to realize or regionalize national programs or
advertisements distributed through the StarGuide transmission system;
. 10/100 Based-T Ethernet Interface Card: a unique, patented card that
allows StarGuide Receivers to receive and route digital content,
particularly Internet Protocol content, directly onto a 10 or 100 Based-
T local or wide area computer network;
. Musicam(R) MPEG Layer II Digital Audio Decoder Card: a proprietary audio
decoder card that provides CD quality audio and additional network
control capabilities for broadcasters who use the StarGuide transmission
systems to transmit radio broadcasts or other audio content;
. Relay Expansion Card: a system card that allows a broadcaster to
remotely control a network through the StarGuide Receiver; and
. MPEG2 Digital Video Decoder Card: a video decoder card that provides VCR
quality video and additional network control capabilities for
broadcasters who use the StarGuide transmission systems to transmit
video broadcasts or other video content.
StarGuide's transmission systems are controlled by StarGuide's Windows-based,
propriety Network Management Control System, or NMCS, which allows a system
operator to maintain and control the entire transmission system locally or
remotely. The StarGuide NMCS allows the system operator to control both the use
of satellite bandwidth by the system and the accessing of transmitted data by
the individual StarGuide Receivers in the field.
StarGuide also has developed a StarGuide DVB Multiplexer and mating StarGuide
DVB Receiver. StarGuide developed its StarGuide DVB transmission system for
applications requiring transmission in compliance with the DVB standard.
StarGuide's DVB system is being deployed throughout Japan by Osaka-Yusen.
StarGuide Digital Media Distribution System Solutions
StarGuide has developed a comprehensive automated digital content store-and-
forward delivery system called the Transportal 2000(TM). Shown in Figure 1
below, StarGuide's patented Transportal 2000(TM) system combines the best
features of satellite delivery with Internet-based, point-to-point terrestrial
connections, along with traditional manual dub-and-ship service, to provide a
reliable, flexible, and economical digital content delivery system. The
Transportal 2000(TM) system includes automated digital content packaging along
with package-tracking and confirmation of delivery reporting, which can be
accessed by the user locally or remotely via the Internet.
The Transportal 2000(TM) System can be used with or without simultaneous
delivery through real time satellite broadcasts. The Transportal 2000(TM)
System also may be utilized with StarGuide's eDAS technology, to distribute and
automatically insert locally or regionally-tailored content, such as
regionalized spot advertisements, into national broadcasts being transmitted
through the system.
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[STARGUIDE TRANSPORTAL 2000 DISTRIBUTION SYSTEM CHART]
Figure 1. StarGuide Transportal 2000(TM) Digital Media Distribution System
The StarGuide Transportal 2000(TM) system is presently being deployed
nationwide by Clear Channel and ABC Radio under long term contracts with
StarGuide. Under its contracts with Clear Channel and ABC Radio, StarGuide has
the rights to distribute content, such as advertisements, to the Clear Channel
and ABC Radio affiliates using these systems.
StarGuide Strategy
StarGuide's objective is to become the leading provider of high-quality,
integrated systems for the cost-effective, reliable, high-speed transmission
and distribution of digitized audio, video, text, data, and multimedia content.
In addition, StarGuide plans to deploy its CoolCast(TM) system for distributing
Internet-related video and audio content, establishing partnerships with
companies that need the capability to deliver streaming media content and with
Internet service providers who can deliver subscribers who will access that
content. Key elements of StarGuide's strategy include:
Develop and Deploy CoolCast.(TM) StarGuide has successfully demonstrated its
CoolCast(TM) technology for delivering Internet-related content, and is working
to establish long-term relationships with content providers and local access
providers in order to begin providing the CoolCast(TM) service on a commercial
basis. StarGuide plans to enter into agreements with broadband access providers
in each major market, in order to grow the CoolCast(TM)
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subscriber base and make CoolCast(TM) the leading system for delivery of
streaming content that can be accessed from personal computers.
Expand Presence in Broadcast Industry. StarGuide maintains established
relationships with producers and broadcasters such as Infinity, Westwood One,
Clear Channel, ABC Radio, Jacor, CBS, Bloomberg, Jones Broadcast Programming,
One-On-One Sports, and Voice of America. In connection with these
relationships, StarGuide has sold or has contracts to sell over 6,000 of its
StarGuide II Receiver systems, and has contracts to sell roughly 6,000 of its
StarGuide III Receiver systems. In addition, StarGuide's audio codecs are
recognized and used throughout the radio production and broadcast industries.
StarGuide seeks to expand its presence in the broadcast industry by providing
its Transportal 2000(TM) integrated digital transmission and distribution
systems, upgrades and enhancements of such systems, and customized software
solutions to radio stations and other communication segments such as
television networks. StarGuide also intends to utilize its existing
relationships as reference points and to leverage such relationships to
develop potential new customers in the broadcast industry.
Target New Market Opportunities. StarGuide continually seeks to identify
additional markets and industries with the greatest need for flexible, cost-
effective, high-throughput multimedia transmission and distribution systems
and services. To penetrate such markets and industries, StarGuide conducts
substantial research and market analysis to identify potential new customers
in new markets and industries which represent a strategic benefit to
StarGuide.
Maintain Technological Leadership. StarGuide seeks to provide the highest
level of quality, functionality, and compatibility in its digital compression,
transmission, and distribution systems and products. StarGuide intends to
continue to develop its core compression, transmission, and distribution
technologies and introduce new, flexible, high-speed transmission systems and
integrated distribution software, audio, text, and data services. StarGuide
intends to expand its research and development efforts to develop these types
of new products and services and to reduce the costs of existing products and
services.
Expand Service Offerings. StarGuide has developed proprietary distribution
services for the distribution of multimedia content. StarGuide plans to
enhance these services and provide an increasing array of integrated
information and distribution service systems which utilize StarGuide's
proprietary transmission receiver and digital compression transmission and
distribution technologies.
CoolCast(TM)
Background
The appeal of broadband access to the Internet is that households with
access to asymmetric digital subscriber lines ("ADSL") can remain connected to
the Internet 24 hours a day, without tying up the telephone line, and the
connection is fast: five to 50 times faster than dial-up speeds commonly found
with traditional modem connections. According to the Yankee Group, 19 million
homes can currently connect to the Internet with ADSL's higher speeds. This
number should reach 39 million within a year.
For the user, upgrading to high-speed access translates into an almost
instantaneous improvement in the Internet experience. At ADSL speeds, for
example, consumers can often view web pages almost as fast as they can turn
the pages of a book. More importantly, households with high-speed access and
the patented CoolCast(TM) service can receive digital quality video and audio
on their home computers.
CoolCast(TM) is designed to serve as the Internet user's video portal, and
the video programmer's delivery medium. Aggregating branded entertainment
video and text-based content, CoolCast(TM) provides an interactive experience
to the Internet-based consumer. Through data-embedded messages within its
streaming media content, CoolCast(TM) can also enable providers to stimulate
greater levels of user interactivity with web site content. In marketing, this
combination of video and the associated web page is designed to be a point-of-
sale vehicle for a wide variety of products.
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CoolCast(TM) delivers both pre-recorded and live video broadcasts. It will
afford consumers the ability to enjoy a wide variety of high-quality video and
audio, while simultaneously conducting other tasks, such as word processing,
using e-mail, or, perhaps most significantly, interacting with the related
content found on content-provider and CoolCast(TM) web pages. Such web-
page/streaming-media interaction can take many forms, from simply reviewing
multiple pages designed to enhance the video experience (and vice versa), to
electronic commerce.
CoolCast(TM) Service
CoolCast(TM)'s delivery of quality video and audio was designed to require
nothing more from the consumer than connection to the Internet via a broadband
modem. The user can then request and view web pages normally, using any
standard web browser, and the CoolCast(TM)-programmed streaming video will
appear without further downloads or waiting. CoolCast(TM) video and audio
channels are delivered at broadband data-rates, providing high frame-rates for
video at both one-quarter and full-screen sizes, along with full bandwidth
stereo audio. In addition to viewing video in the space provided on the
associated web page, the user can "tear-off" the video, keeping it on the
screen while moving to other web pages or performing other tasks such as word
processing, games, or e-mail.
CoolCast(TM) System
Like other information, digitized streaming video and audio content is
transmitted over the Internet "backbone" in data "packets," which may be
routed in various directions through transmission facilities that are shared
by millions of users, causing some packets to be received out of sequence or
not at all. This contributes to poor quality of Internet-borne streaming
content. CoolCast(TM), on the other hand, delivers video and audio streams
over an independent network, which bypasses the Internet backbone. Thus,
streaming content is sent directly to Internet service providers via high-
speed satellite links. Text and graphic information of an associated web page
travels over the Internet as usual and is combined with video at a local
Internet service provider's distribution facility. The combined interactive
web page and video is then delivered by the Internet service provider to
consumers who have broadband connections to their Internet service providers.
The technology is transparent to the consumer, who sees only video as part of
a web page.
The proprietary CoolCast(TM) architecture has the unique advantage of
scaling easily in terms of number of media streams, number of viewers per
stream, and bandwidth (quality) chosen for each stream. CoolCast(TM)
technology can be used to provide hundreds of streams and to "broadcast" to
millions of simultaneous viewers per stream.
CoolCast(TM) content providers simulcast content at multiple data rates to
reach customers with the highest video quality consistent with the user's
Internet connection. Currently, CoolCast(TM) can deliver up to eight different
video rates for each content channel. Thus, content providers can vary data
rates to match those used for different broadband service offerings.
The CoolCast(TM) service provides multiple channels of audio and video at no
cost to the customer. Initially, StarGuide expects to derive income through
the CoolCast(TM) service by sharing of traditional advertising revenue with
content providers and electronic commerce fees. In the future, StarGuide will
seek to generate revenue from the sale of pay-per-view and premium
programming, and in providing CoolCast(TM) services for specialized uses such
as education, government information services, and others. In addition,
StarGuide manufactures and markets the equipment suite used by local access
providers to receive, decode, and distribute CoolCast(TM)-distributed audio
and video content to their local broadband subscribers. StarGuide also
provides certain maintenance and customer support services for these systems.
System Deployment
CoolCast(TM) was first installed in the IPTV (now owned by Cisco(TM)) labs
in June 1998. CoolCast(TM) was also installed in Cisco(TM)'s ADSL test labs on
March 1, 1999. Cisco(TM)'s ADSL test group has validated the efficacy of
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the CoolCast(TM) system. CoolCast(TM) is operational in Cincinnati, as part of
the ZoomTown.com broadband service offering, where CoolCast(TM) provides seven
video channels and twenty commercial-free audio channels.
StarGuide has been in active discussions with content providers that have
shown interest in employing CoolCast(TM) to meet their needs for delivery of
streaming video and audio to the growing population of regular Internet users.
Typically, early in the discussion with a content provider, the provider and
StarGuide have entered into a limited license agreement, for purposes of test
and demonstration of the CoolCast(TM) system, while the companies work
together on a long-term agreement. Currently, StarGuide has such limited
license agreements with Family Net, Court TV, The Game Show Network, E4L,
Inc., Music Choice, and DMX. StarGuide also has a content agreement with
Bloomberg. StarGuide intends to enter into long-term contracts to provide the
CoolCast(TM) service to these and other content providers, although whether or
when such contracts will be executed is uncertain.
StarGuide has also been working with companies that provide broadband
connection to the Internet, which seek to offer CoolCast(TM)-delivered video
and audio content to their subscribers. This process first involves
negotiation of a memorandum of understanding between StarGuide and the access
provider. The memorandum of understanding provides for a period of technical
and market trials of the CoolCast(TM) service over the access provider's
facilities (using licensed content), during which the parties negotiate a long
term CoolCast(TM) distribution agreement. StarGuide currently has memoranda of
understanding in effect, and is conducting trials, with various regional Bell
operating companies and competitive local exchange carriers, including New
Edge Networks, Verizon, NorthPoint, a competitive provider of ADSL services,
and BRE, a leading provider of telecommunications services to multi-dwelling
residential units. Currently, StarGuide has a long-term distribution agreement
with ZoomTown.com, a subsidiary of Cincinnati Bell. StarGuide intends to enter
into long-term agreements with companies providing broadband access to
subscribers in all major markets, although whether or when such contracts will
be completed is uncertain.
Viewer Statistics Reporting
CoolCast(TM) can be used to track the viewing audience by channel, bit rate,
age, sex, and zip code. This information will be provided to the content
providers for their use. This information is also provided to CoolCast(TM)'s
distribution partners for their broadband network capacity planning.
CoolCast(TM) Technology Overview
Video content can be delivered to Internet users a variety of ways.
Acceptance of these methods has been limited, due to poor picture quality, low
frame rate, and small picture size. These deficiencies are exacerbated by the
Internet's limitations in providing reliable transport and ubiquitous
multicast deployment. CoolCast(TM) is an efficient platform for broadcasting
digital video to Internet users. It uses a dedicated, reliable, and scalable
patent-pending architecture.
Patented CoolCast(TM) technology provides a uniquely independent video
network that bypasses the congested Internet, provides dedicated capacity for
video streams, and delivers video directly to Internet service providers and
subsequently to end users, using a one-to-many multicast model. CoolCast(TM)
delivers both live and pre-recorded video from national and local content
providers to on-line consumers.
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The Internet Today
The United States Internet is a nationwide network consisting of long
distance fiber backbone, interconnecting routers and switches, and copper
connections within cities that reach the local users. Various companies who
lease out their connectivity to generate revenue own the connections that make
up the Internet network. All Internet users share this limited infrastructure,
much like a "party line." The rapid growth in the number of Internet users has
resulted in strain on the Internet backbone. Today's Internet is represented
in Figure 2.
[TODAY'S INTERNET FLOW CHART]
Figure 2. Today's Internet
The current point-to point Internet architecture is also limited in its
ability to scale, because a separate video stream must be transmitted to each
recipient. In video delivery systems based on the point-to-point model, each
server can only distribute to a maximum of a few thousand clients. This is
easily seen by assuming that each client is connected to the video server via
a TCP/IP connection that needs minimally 28.8 kbs. If there are 5,000 such
connections, then the server and the long distance backbone must deliver
approximately 144 Mbs (28.8 kbs times 5000). This is extremely difficult for
current server technology to supply and completely saturates an OC3 fiber
optic backbone. Such point-to-point technology has no possibility of scaling
to millions or tens of millions of consumers.
Attempts are currently underway to provide solutions that enable more
efficient data broadcasting ("IP multicasting") and guaranteed bandwidth for
use in connection with the Internet. However, to achieve these objectives, an
upgrade of the entire Internet router infrastructure would be required. Even
if the Internet is upgraded, it will still have the shared character of a
party line and will be subject to unpredictable loading and congestion.
CoolCast(TM) Network Technology
The CoolCast(TM) Network is a one-way multicast distribution network
overlaying the existing Internet network. The CoolCast(TM) Network consists of
the CoolCast(TM) Network Media Center and Internet service provider
affiliates. The network/affiliate analogy is similar to the television or
radio industry. The CoolCast(TM) Network Media Center gathers and prepares the
content for broadcast. The video is broadcast over satellite and received by
CoolCast(TM) equipment operated by Internet service provider, or ISP,
affiliates. At the ISP affiliate's local facility, the video and web pages are
combined, and then routed to the Internet user over existing last mile
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connection (copper, wireless, or cable), where it is viewed using CoolCast(TM)
software (See Figure 3. The CoolCast(TM) Network). The CoolCast(TM) network
allocates the satellite capacity used for transmission, avoiding any bandwidth
over-subscription that would result in video distortion. Thus, CoolCast(TM)
can guarantee reliable video service to the ISP affiliate and to its
subscribers. This broadcast architecture--one-transmission to many
recipients--enables the CoolCast(TM) service to scale to an unlimited number
of users within the satellite footprint. Unlike the Internet, additional users
do not require additional transmission bandwidth.
The equipment used by ISP affiliates consists of a proprietary CoolCast(TM)
satellite receiver and related network interconnection hardware. All
CoolCast(TM) hardware is designed to interoperate with the local-area network
infrastructure found in typical ISP affiliate facilities. The reliance on
standards-based network technology ensures that CoolCast(TM) will take
advantage of any technical advances and cost reductions in components
available to ISP affiliates.
[THE COOLCAST NETWORK FLOW CHART]
Figure 3. The CoolCast Network
Last Mile Technology
CoolCast(TM) relies on existing local, or "last-mile," connections to
Internet users. CoolCast(TM) leverages the continued technological innovation
in last mile access speeds. Last mile access speeds have progressed from
300 bps 20 years ago to the current 56 kbs supplied by the prevailing modem
technology. Intense development activity is creating an array of even higher
speed digital subscriber line, or DSL, technologies. Two such popular
technologies are ADSL and ADSL-Lite.
ADSL typically provides from 1 to 8 Mbs over standard copper telephone
lines. Low cost integrated circuits have been developed and will appear in low
cost consumer modems. Within the last two years, over 60 new ADSL
manufacturers have begun to provide customer premises and central office
equipment for this new market, which has lowered the cost of such equipment.
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ADSL-Lite technology, championed by Intel, Microsoft, and Compaq, provides
up to 1.5 Mbs over copper telephone wires. The International
Telecommunications Union's international standards body has ratified this low
cost version of ADSL and modem manufacturers are now producing low cost ADSL-
Lite modems. Compaq and Dell have already announced computers with ADSL-Lite
modems installed.
ADSL-Lite enables the consumer to connect telephones and computers on copper
phone lines within a house in the same way that phones and computers are
connected today. Some of the ADSL-Lite modems will revert to today's standard
V.90 (56k) modem method if they do not detect the ADSL-Lite signal. This
enables computers shipped with the new ADSL-Lite modems to always work on any
phone line.
Other broadband last-mile technologies also are being developed. Cable
companies have recently begun to upgrade their infrastructure for use with
two-way cable modems, yielding last mile bandwidth in the megabit range.
Wireless is yet another last mile technology that will provide additional
bandwidth from the ISP to the consumer. Although this industry is in its
infancy, it should develop rapidly over the next 5 years.
The increase in local connectivity will place even higher demands on the
Internet backbone, resulting in greater Internet congestion and distorted
video for companies using the Internet backbone to deliver video. This same
increase in local connectivity will enable CoolCast(TM) to improve the quality
of its content delivery while maintaining reliability.
Musicam Express
Musicam Express is a limited liability company formed in February 1996 to
implement a joint venture among Infinity, Westwood One, and StarGuide to
provide program delivery and distribution services using StarGuide technology.
Musicam Express employs the StarGuide proprietary store-and-forward system
that allows producers to regionalize, localize, and distribute advertising and
programming content. StarGuide currently owns 50% of the Musicam Express
membership interests. StarGuide announced in April 2000 that it would acquire
the remaining 50% membership interests of Infinity and Westwood One in Musicam
Express, in exchange for assumption by StarGuide of certain liabilities of
Musicam Express and for 400,000 shares of StarGuide's common stock. Pending
the completion of the announced transaction with Infinity and Westwood One,
StarGuide will own 100% of the Musicam Express membership interests.
Sales and Marketing
StarGuide presently markets and sells its transmission and distribution
systems and audio compression products directly to corporate and commercial
end-users, distributors, and to radio stations and networks. StarGuide
currently employs three salespersons who promote and sell the StarGuide
integrated transmission and distribution systems and promote the digital
distribution services provided to the radio broadcast industry. StarGuide also
employs seven salespersons who market and sell StarGuide's audio compression
products. StarGuide currently maintains relationships with distributors
marketing and selling StarGuide's audio compression products in Europe, Asia,
South America, and Australia. StarGuide is presently expanding these
relationships to include the distribution of StarGuide transmission and
information management systems. StarGuide supplies its completely integrated
Transportal 2000(TM) digital distribution system to the United States radio
broadcast industry through Musicam Express.
StarGuide currently engages in several promotional and other activities to
generate interest in its systems and to consummate sales. For example,
StarGuide participates actively in trade shows, and participated in the
following shows in 1999: National Association of Broadcasters ("NAB") and the
NAB Radio Show, Audio Engineering Society, CommunicAsia (in Singapore), as
well several regional exhibitions around the country. StarGuide seeks to
maximize its visibility at trade shows by hosting a customer booth and
providing complimentary product literature describing StarGuide's systems.
StarGuide also conducts several on-site demonstrations with technical and
other senior level personnel and regularly contacts potential customers who
have indicated an interest in utilizing StarGuide's systems or products.
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To support CoolCast(TM) marketing and deployment efforts, StarGuide employs
four marketing and technical personnel who regularly meet with content
provider and ISP representatives to introduce and demonstrate CoolCast(TM) and
negotiate CoolCast(TM)-related agreements. Company technical support personnel
also work with StarGuide"s content and distribution partners in installation
and operation of CoolCast(TM) components.
An important element of StarGuide's sales and marketing strategy is to
support its sales efforts with comprehensive technical support. Technical
personnel often accompany sales personnel when meeting with prospective
customers and aid in the implementation of StarGuide's products. Customer
feedback received through the sales process is incorporated into the product
development process and allows StarGuide to constantly upgrade its service and
support capabilities.
Competition
StarGuide is aware of other companies that are focusing or may in the future
focus significant resources on developing and marketing products and services
that will compete with StarGuide. StarGuide believes that its ability to
compete successfully depends on a number of factors, both within and outside
of its control, including: (1) the price, quality and performance of
StarGuide's and its competitors' products; (2) the timing and success of new
product introductions by StarGuide and its competitors; (3) the emergence of
new technologies; (4) the number and nature of StarGuide's competitors in a
given market; (5) the assertion of intellectual property rights; and (6)
general market and economic conditions.
StarGuide expects competition to continue to intensify as existing and new
competitors begin to offer products, services, or systems that compete with
StarGuide's products. StarGuide's current or future competitors, many of whom,
individually or together with their corporate parents, have substantially
greater financial resources, research, and development resources,
distribution, marketing, and other capabilities than StarGuide, may apply
these resources and capabilities to compete successfully against StarGuide. A
number of the markets in which StarGuide sells its products are also served by
technologies that currently are more widely accepted than StarGuide's.
Although StarGuide believes that its products and services are less expensive
to use and significantly more functional than competing products and services
that rely on other technologies, it is uncertain whether StarGuide's potential
customers will be willing to make the initial capital investment that may be
necessary to convert to StarGuide's products and services. The success of
StarGuide's systems against these competing technologies depends in part upon
whether StarGuide's systems can offer significant improvements in productivity
and sound quality in a cost-effective manner. It is uncertain whether
StarGuide's competitors will be able to develop systems compatible with, or
that are alternatives to, StarGuide's proprietary technology or systems. It is
also not certain that StarGuide will be able to compete successfully against
current or future competitors or that competitive pressures faced by StarGuide
will not materially adversely affect its business, operating results, and
financial condition.
Research and Development
StarGuide's research and development strategy is to enhance its existing
products, develop new products based on its existing products, and leverage
its technological base for performance enhancement and cost reduction. By
working closely with key customers StarGuide seeks to develop and maintain a
competitive advantage and continue to support current and emerging industry
standards. StarGuide intends to expand its industry focus to develop more
versatile digital transmission equipment and distribution software
applications for the television, Internet, retail, distance learning, finance,
and telecommunications markets. The development of new, technologically
advanced products and product enhancements is a complex process requiring
accurate anticipation of technological and market trends. StarGuide cannot be
certain that such new products or enhancements will be successfully developed
or, if developed, that any such new products or product enhancements will be
developed in time to capture market opportunities or achieve a significant or
sustainable level of market acceptance in new or existing markets. During
fiscal 1998 and 1999, StarGuide's research and development expense was $2.6
million and $3.4 million, respectively. In 2000, StarGuide has budgeted
$2.5 million for research and development expense.
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Proprietary Rights
StarGuide has pursued a policy of actively identifying and protecting its
intellectual property rights. StarGuide currently has nine patents issued and
three others allowed and awaiting issuance. StarGuide has more than thirty-six
other patent applications pending domestically and abroad. StarGuide also has
four trademark registrations and six copyright registrations. StarGuide is in
the process of filing additional patent applications and applications for
copyright registrations.
StarGuide licenses certain aspects of its technology to and from third
parties. For example, StarGuide has licensed a number of companies for use of
its digital audio compression technology. Present licensees of this technology
include Comstream, General Instruments, Lucent, and Wegener Communications.
StarGuide has also granted a limited license with respect to its CoolCast
technology to ZoomTown.com in connection with its contract to deploy CoolCast
within the ZoomTown.com network. However, StarGuide generally refrains from
licensing its technology when such licensing is deemed by management to be
inappropriate in view of competitive alternatives (if any), the profitability
of licensing, and the promotion of StarGuide technology.
The success of StarGuide's business depends in part upon its ability to
protect trade secrets, obtain or license patents, and operate its business
without infringing on the rights of others. Although StarGuide believes that
its patents, trademarks, and copyrights have value, StarGuide's patents,
trademark and copyright registrations, or any additional patents, trademarks,
and copyrights obtained in the future, may not provide meaningful protection
from competition. StarGuide believes its success will depend primarily upon
the experience, creative skills, technical expertise, and marketing and sales
abilities of its personnel. The value of StarGuide's products depends
substantially on StarGuide's technical innovation in fields in which there are
currently many patent filings. StarGuide believes that as new patents are
issued or infringement of others' patents are brought to StarGuide's attention
by the holders of such patents, it may be necessary for StarGuide to withdraw
products from the market, negotiate a license from such patent holders,
redesign its products or pay damages assessed as a result of litigation.
Although StarGuide believes that its products and other proprietary rights do
not infringe upon the proprietary rights of third parties, third parties may
assert infringement claims against StarGuide, and whether StarGuide would
prevail in defending such claims is uncertain.
Employees
As of June 30, 2000, StarGuide employed 97 people on a full-time basis and 2
people on a part-time basis. Of the full-time employees, 12 were in sales and
marketing, 34 in operations, 21 in product development, and 30 in finance and
administrative functions. None of StarGuide's employees are represented by a
labor union, and management believes its employee relations are good.
Properties
StarGuide has executive offices in Reno, Nevada, under a lease that expires
on September 30, 2000 and will be month-to-month thereafter. In addition,
StarGuide leases a technical center in Reno, Nevada and office space in
Holmdel, New Jersey, San Diego, California, and Louisville, Kentucky. The
terms of these leases expire at various dates between October 31, 2000 and
August 31, 2004.
Legal Proceedings
StarGuide is from time to time involved in lawsuits incidental to its
business. StarGuide currently is involved in several pending or potential
claims, either as defendant or plaintiff, which, individually or in the
aggregate, are not material to StarGuide's business or financial condition.
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StarGuide's Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
StarGuide is a leading designer of high speed digital transmission and
distribution systems. Digital distribution and transmission provide a wide
number of inherent advantages over analog and manual methods, particularly
when combined with satellite technologies to achieve high-quality, and high-
throughput information flow without the need for point-to-point connections.
To capitalize on these advantages, StarGuide has developed proprietary,
integrated hardware and software systems that are used to provide high
quality, reliable, high-speed, cost-effective, and high-volume distribution of
any type of digital information, regardless of formatting or compression
protocols. StarGuide is deploying its systems across the radio broadcasting
industry and has developed a proprietary, highly integrated, and powerful
digital information production, organization, transmission, distribution, and
playback system for use by the radio industry. StarGuide will continue to
expand its presence in the broadcasting industry and will target new market
opportunities for high-quality, high-throughput digital information systems.
StarGuide's objective is to become the leading provider of high-quality,
integrated systems for the cost-effective, reliable, high-speed transmission
and distribution of digitized audio, video, text, data, and multimedia
content. StarGuide's success will depend to a substantial degree upon its
ability to develop and introduce in a timely manner new products and product
enhancements for new and existing markets that incorporate technological
changes and innovations, meet changing customer or regulatory requirements, or
meet emerging industry standards. StarGuide expects to make significant
investments in research and development and acquire complementary businesses
and product lines in an effort to continue to: (1) enhance existing products,
(2) develop new products which incorporate new and existing technologies, and
(3) achieve market acceptance for such products.
Results of Operations
The following tables set forth certain financial data for the six months
ended June 30, 2000 and 1999, and the years ended December 31, 1999, 1998, and
1997. Operating results for any period are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- --------------------------
2000 1999 1999 1998 1997
-------- ------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenues.................. $ 6,600 $ 5,326 $ 13,068 $11,819 $23,977
Costs and expenses:
Cost of revenues.............. 4,365 3,229 8,128 8,137 14,676
Sales and marketing........... 1,172 1,967 3,209 2,965 2,823
Research and development...... 1,480 1,197 3,383 2,547 2,770
General and administrative.... 2,009 1,296 3,087 2,878 3,101
Noncash stock compensation
charges...................... 18,375 -- -- -- --
Depreciation and
amortization................. 433 484 973 1,267 1,014
-------- ------- -------- ------- -------
Total costs and expenses.... 27,834 8,173 18,780 17,794 24,384
-------- ------- -------- ------- -------
Operating loss.................. (21,234) (2,847) (5,712) (5,975) (407)
Other income (expense):
Equity in losses of joint
venture...................... (829) (673) (3,031) (2,282) (3,276)
Interest and other income..... 195 34 289 35 40
Interest expense.............. (17) (293) (547) (628) (815)
-------- ------- -------- ------- -------
Net loss........................ $(21,885) $(3,779) $ (9,001) $(8,850) $(4,458)
======== ======= ======== ======= =======
</TABLE>
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Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Consolidated revenues for the six months ended June 30, 2000 and 1999 were
$6,600,000 and $5,326,000, respectively. The increase in revenue includes
$1,329,000 related to deliveries under new development, supply, and service
agreements with two large broadcasters and $175,000 of increased CoolCast(TM)
revenues.
Cost of revenues for the six months ended June 30, 2000 were $4,365,000
compared to $3,229,000 for the corresponding six months in 1999, yielding
gross profit margins of 33.9% for 2000 and 39.4% for 1999. Gross profit was
adversely affected in 2000 by certain fixed costs related to expanding
CoolCast(TM) operations and fulfilling the development, supply, and service
agreements.
Sales and marketing expense for the first six months of 2000 were $1,172,000
or 17.8% of revenues compared to $1,967,000 or 36.9% of revenues for the same
six months in 1999. The decline is primarily due to reduced professional
consulting fees in 2000 compared to 1999 as a result of performing more of the
CoolCast(TM) marketing function in-house in 2000 versus 1999. Sales and
marketing expense decreased by approximately $230,000 as a result of not
extending the Vice President--Sales employment contract and related
international sales distributor agreements in April 1999.
Research and development expense was $1,480,000 and $1,197,000 for the first
six months of 2000 and 1999, respectively. This increase was primarily
attributable to headcount and related expense increases for intensified
CoolCast(TM) development of e-commerce, web and internet applications. These
increases were partially offset by decreases in other research and development
costs which were $165,000 less in the first six months of 2000 versus 1999 due
to the completion of new product development during 1999.
General and administrative costs were $2,009,000 for the first six months of
2000, as compared to $1,296,000 for the first six months of 1999. The overall
increase is a result of additional administrative and financial personnel and
associated operating expenses beginning in mid 1999. The additional personnel
were added to prepare for CoolCast(TM) growth and to develop and execute
strategic corporate, financial, and operational plans. Legal and patent fees
also increased $148,000 due to the increased volume of contractual and
intellectual property activity during the first six months of 2000 compared to
1999.
Noncash stock compensation expense of $18,375,000 was recorded in the first
quarter of 2000 related to the issuance of warrants to StarGuide's Chairman
and stock purchase rights to a third party to purchase up to 2,250,000 and
200,000 shares of Class B common stock, respectively, at grant prices of less
than the fair value of the stock. The board of directors formally approved
issuance of these warrants and stock purchase rights in the first quarter of
2000.
Depreciation and amortization expense was $433,000 for the first six months
of 2000, compared to $484,000 for the first six months of 1999. The decrease
is primarily due to some assets becoming fully depreciated.
Interest and other income increased $161,000 from $34,000 for the six months
ended June 30, 1999 to $195,000 for the six months ended June 30, 2000. This
increase was due to higher cash and cash equivalent balances available for
investment in 2000 due to private equity raised in March 2000.
Interest expense was $17,000 for the six months ended June 30, 2000 compared
to $293,000 for the six months ended June 30, 1999. The decrease in interest
expense is the result of retirement of debt.
The loss from joint venture increased $156,000 from $673,000 for the six
months ended June 30, 1999 to $829,000 for the first six months of 2000. This
increase was principally due to further impairment of Musicam Express fixed
assets during 2000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Consolidated revenues for the years ended December 31, 1999 and 1998, were
$13,068,000 and $11,819,000, respectively. Increases were primarily due to the
completion of two development and product sales agreements with a large
distributor plus $590,000 of CoolCast(TM) revenue during 1999.
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Cost of revenues for the years ended December 31, 1999 and 1998 were
$8,128,000 and $8,137,000, respectively, yielding gross profit margins of
37.8% for 1999 and 31.1% for 1998.
Sales and marketing expense was $3,209,000 and $2,965,000 for the years
ended December 31, 1999 and 1998, respectively. CoolCast(TM) marketing
expenses were $824,000 more in 1999 than in 1998 primarily due to increased
travel expense and professional consulting fees related to the effort to
contract field trials, sign up content providers, and market the CoolCast(TM)
business model to potential customers. Other marketing expenses decreased due
to not extending the Vice President--Sales employment contract and related
international sales distributors agreements in 1999 and other expense
reduction efforts.
Research and development expense for the year ended December 31, 1999 were
$3,383,000 compared to $2,547,000 for the year ended December 31, 1998.
Research and development expense increased $347,000 due to headcount increases
required to support development and product sales agreements and CoolCast(TM)
development. CoolCast(TM) development professional fees also increased
$387,000, mostly due to space segment lease costs included in 1999 used to
further develop the CoolCast(TM) technology.
General and administrative expense for the year ended December 31, 1999 was
$3,087,000 or 23.6% of revenues compared to $2,878,000 or 24.4% of revenues
for the year ended December 31, 1998. The increase in expense is due primarily
to CoolCast(TM) legal fees of $153,000 in 1999 compared to zero in 1998. These
fees were directly related to work on contractual, corporate and patent
matters for CoolCast(TM).
Interest expense for the years ended December 31, 1999 and 1998 was $547,000
and $628,000, respectively. The decrease in interest expense is a result of
debt reduction through note payments.
Equity in losses from joint venture increased from $2,282,000 in 1998 to
$3,031,000 in 1999. This increase was primarily the result of the impairment
of equipment by Musicam Express in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated revenues for the years ended December 31, 1998 and 1997 were
$11,819,000 and $23,977,000, respectively. A significant portion of the
decrease was attributable to the loss of a large broadcasting client in late
1997 due to their reforecast of their affiliates' equipment needs. In
addition, sales of store and forward products to Musicam Express decreased by
$3,628,000 from 1997 to 1998 as a result of Musicam Express' conversion to a
less hardware intensive operation. Also, product shipments were significantly
reduced in the fourth quarter of 1998 due to availability of approved contract
manufacturers. New contract manufacturers were subsequently identified and
retained by StarGuide.
Cost of revenues for the years ended December 31, 1998 and 1997 were
$8,137,000 and $14,676,000, respectively, yielding gross profit margins of
31.1% for 1998 and 38.8% for 1997. The significant decrease in gross profit
margin was the result of the increased proportion of fixed expenses included
in cost of revenues.
Sales and marketing expense was $2,965,000 and $2,823,000, for the years
ended December 31, 1998 and 1997, respectively. The $142,000 increase was
primarily due to the addition of a Vice President of Sales and international
sales distributors during 1998.
Research and development expense for the year ended December 31, 1998 was
$2,547,000, compared to $2,770,000 for the year ended December 31, 1997. The
decrease was due to eliminating certain research and development activities.
General and administrative expense for the year ended December 31, 1998 was
$2,878,000 compared to $3,101,000 for the year ended December 31, 1997. The
decrease in overall general and administrative expense was due to a management
focus on cost reductions in 1998 as a result of decreased revenue.
Interest expense for the years ended December 31, 1998 and 1997 was $628,000
and $815,000, respectively. A related party note was settled during 1998,
which accounts for the significant portion of the decrease.
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Equity in losses from joint venture decreased $994,000 from 1997 to 1998.
This decrease was primarily the result of efforts to dramatically reduce
headcount and costs associated with the unprofitable operations of Musicam
Express during 1998.
Liquidity and Capital Resources
StarGuide used cash in operating activities of $1.6 million in both 1997 and
1998 and generated cash from operating activities of $3.3 million in 1999.
Cash flows from operating activities improved during 1999 as compared to 1998
primarily because significant development, supply, and service agreements were
executed and delivered in 1999 resulting in cash payments during 1999. Cash
used in operating activities for the six months ended June 30, 2000 was $1.8
million, primarily the result of settling trade payables with proceeds from
the sale of common stock in March 2000.
StarGuide used $2.5 million, $1.4 million and $2.1 million of cash in 1997,
1998 and 1999, respectively, to purchase property and equipment and invest in
the Musicam Express joint venture. The lower amounts of cash used for
investing in 1998 from 1997 was due to decreased spending on property and
equipment, intellectual property, and the Musicam Express joint venture.
Expenditures on these categories were partially reinstated during 1999 due to
business expansion.
In 1997, StarGuide issued a $5.0 million convertible note payable to Fuchsia
Enterprises. Proceeds were used to finance operations. The note was
subsequently retired in 2000.
In December 1998, StarGuide received $8.0 million from the sale of 3,200,000
shares of Class A common stock to Scott K. Ginsburg, StarGuide's new Chairman
of the board and Chief Executive Officer. In combination with the sale, Mr.
Ginsburg was issued a warrant to purchase 500,000 shares of Class B common
stock at $5.00 per share. Mr. Ginsburg subsequently assigned the warrant to
United States Media Corporation. The warrant expires in December 2003.
In March 2000, StarGuide received $12.2 million from the issuance of
1,217,250 shares of Class B common stock sold to investors in a private
offering. Approximately $5.7 million of the proceeds were used to pay off
existing indebtedness. StarGuide intends to use the remainder of the proceeds
to finance the further development of its technologies, including
CoolCast(TM).
In March 2000, StarGuide awarded the right to purchase 200,000 shares of
Class B common stock to a third party for $2.50 per share.
In February 2000, StarGuide's board of directors approved the issuance to
its Chairman of warrants to purchase up to 2,250,000 shares of Class B common
stock at $2.50 per share.
In April 2000, StarGuide executed an agreement with Infinity and Westwood
One regarding the acquisition by StarGuide of all of Infinity's and Westwood
One's membership interests in Musicam Express. Under the terms of the
agreement, StarGuide will issue 400,000 shares of Class B common stock and
assume Infinity's and Westwood One's guarantees of $4.8 million of Musicam
Express bank debt. In addition, the company will assume an additional $1.5
million of net liabilities of Musicam Express. The transaction is expected to
close in the fourth quarter of 2000.
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DESCRIPTION OF DG SYSTEMS CAPITAL STOCK
The following is a summary of the current material terms of DG Systems
capital stock. The DG Systems shareholders are being asked to approve the
reincorporation of DG Systems as a Delaware corporation, or if the
reincorporation is not approved, to approve an increase in the total number of
authorized shares to 200,000,000. Therefore, you should also carefully review
the section entitled "THE DG SYSTEMS ANNUAL MEETING--Proposal to Approve
Reincorporation of DG Systems" for a description of the proposed
reincorporation or the section entitled "THE DG SYSTEMS ANNUAL MEETING--
Proposal to Amend Articles of Incorporation" for the proposed increase in
authorized shares. Because it is only a summary, it does not contain all
information that may be important to you. Therefore, you should read carefully
the more detailed provisions of DG Systems articles of incorporation (as
amended) and by-laws. For information on how to obtain copies of DG Systems
articles of incorporation and by-laws, see "Where You Can Find More
Information."
General
As of the date of this proxy statement/prospectus, DG Systems authorized
capital stock consists of 100,000,000 shares of DG Systems common stock,
without par value, and 15,000,000 shares of preferred stock, without par
value. No other classes of stock are authorized or expected to be authorized
under DG Systems articles of incorporation. The issued and outstanding shares
of DG Systems common stock and DG Systems preferred stock are duly authorized,
validly issued, fully paid and nonassessable.
Common Stock
Each holder of DG Systems common stock is entitled to one vote for each
share of DG Systems common stock held of record by such holder. Except for
voting rights established by the DG Systems board for DG Systems preferred
stock, holders of DG Systems common stock, voting as a single class, are
entitled to elect all of the directors of DG Systems. Matters submitted to
shareholder approval generally require a majority vote. Holders of DG Systems
common stock are entitled to receive ratably such dividends as may be allowed
under the various financing agreements of DG Systems and as declared by DG
Systems' board out of funds legally available therefor after the payment of
dividends to holders of DG Systems Series A preferred stock. Upon DG Systems'
liquidation, dissolution or winding up, holders of DG Systems common stock
would be entitled to share ratably in DG Systems' net assets after the payment
of liquidating distributions to holders of DG Systems preferred stock. Holders
of DG Systems common stock have no preemptive, redemption, conversion or other
subscription rights.
The registrar and transfer agent for DG Systems common stock is ChaseMellon
Shareholders Services, LLC.
Preferred Stock
DG Systems board has the power, without further vote of shareholders, to
authorize the issuance of up to 15,000,000 shares of DG Systems preferred
stock and to fix and determine the terms, limitations and relative rights and
preferences of any shares of DG Systems preferred stock. This power includes
the authority to establish voting, dividend, redemption, conversion,
liquidation and other rights of any such shares. The DG Systems preferred
stock may be divided into such number of series as the DG Systems board
determines. The DG Systems board has designated 5,000,000 shares of the
authorized preferred stock as Series A preferred stock. Upon the occurrence of
certain events, the DG Systems Series A preferred stock is convertible into DG
Systems common stock. Holders of Series A preferred stock are entitled to vote
upon all matters upon which the holders of DG Systems common stock have the
right to vote, together with the DG Systems common stock voting as a single
class. Each holder of DG Systems Series A preferred stock is entitled to vote
the number of votes equal to the number of shares of DG Systems common stock
into which such shares of DG Systems Series A preferred stock could be
converted on the occurrence of certain events. The holders of DG Systems
Series A preferred stock are entitled by right, voting separately as a single
class, to elect one director of DG Systems. In addition,
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the affirmative vote or consent of the holders of at least a majority of the
outstanding DG Systems Series A preferred stock is required to:
. amend DG Systems' articles of incorporation or the rights and privileges
of the DG Systems Series A preferred stock that would adversely affect
the rights of holders of DG Systems Series A preferred stock;
. increase the authorized numbers of shares of DG Systems Series A
preferred stock or issue additional shares of DG Systems Series A
preferred stock;
. create or designate, or authorize the issuance of any new class or
series of stock having preference over or having similar rights to the
DG Systems Series A preferred stock; or
. change the authorized number of directors of DG Systems.
There are no shares of DG Systems preferred stock currently outstanding.
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DESCRIPTION OF DG SYSTEMS WARRANTS
From 1993 through 1998, DG Systems issued warrants to purchase shares of DG
Systems common stock. The outstanding warrants as of July 31, 2000, some of
which will become exercisable upon certain events, are as follows:
<TABLE>
<CAPTION>
Issue Expiration Exercise
Name Date Date Warrants Price
---- ----- ---------- --------- --------
<S> <C> <C> <C> <C>
Scott K. Ginsburg........................... 12/98 12/01 1,460,067 $3.25
Scott K. Ginsburg........................... 12/98 12/03 1,548,460 $3.25
Pequot Capital Management................... 12/98 12/01 207,692 $3.25
Technology Crossover Partners............... 12/98 12/01 115,385 $3.25
Integral Capital Partners................... 12/98 12/01 69,232 $3.25
London Merchant Services.................... 12/98 12/01 69,231 $3.25
Comdisco.................................... 93-96 02/01 45,000 $6.00
Comdisco.................................... 93-96 12/01 67,500 $8.00
Venture Lending & Leasing................... 12/96 12/06 9,351 $8.02
Venture Lending & Leasing................... 12/97 12/03 186,652 $4.42
Venture Lending & Leasing................... 01/97 01/03 112,500 $8.00
---------
Total..................................... 3,891,070
=========
</TABLE>
DESCRIPTION OF STARGUIDE WARRANTS
On December 8, 1998, as an inducement to Mr. Ginsburg to invest in
StarGuide, StarGuide issued Mr. Ginsburg a warrant to purchase 500,000 shares
of Class B common stock of StarGuide, at a price of $5.00 per share. Mr.
Ginsburg assigned the warrant to United States Media Corporation, referred to
as USMC, as partial consideration for shares of Class A and Class B common
stock then held by USMC. USMC is currently the holder of the warrant, which
expires on December 8, 2003.
On February 28, 2000, the board of directors of StarGuide approved the
issuance to Mr. Ginsburg of warrants to purchase up to 2,250,000 shares of
StarGuide's Class B common stock at a purchase price of $2.50 per share for a
period of five years expiring in February 2005.
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COMPARISON OF SHAREHOLDER RIGHTS
The rights of StarGuide shareholders are currently governed by the General
Corporation Law of the State of Nevada, which is referred to as the Nevada
Revised Statutes, or NRS, StarGuide's articles of incorporation, and
StarGuide's by-laws. The rights of DG Systems shareholders are governed by the
California General Corporation Law, which is referred to as California Law, DG
Systems' articles of incorporation, and DG Systems' by-laws. When the merger
is completed, StarGuide shareholders will become shareholders of DG Systems.
As a result, the rights and obligations of the former StarGuide shareholders
will be governed by California Law, DG Systems' articles of incorporation, and
DG Systems' by-laws. It is important to note, however, that one of the
proposals before the DG Systems shareholders in this proxy
statement/prospectus is a proposal to change DG Systems' state of
incorporation from California to Delaware. If this proposal is approved by the
shareholders, upon completion of the merger, both StarGuide and DG Systems
shareholders will hold common stock of DG Systems subject to DG Systems'
Delaware certificate of incorporation and by-laws, all of which will be
governed by the Delaware General Corporation Law, or the DGCL. See "THE DG
SYSTEMS ANNUAL MEETING--Proposal to Amend Articles of Incorporation" for a
description of the proposed amendment to DG Systems' articles of
incorporation, and "THE DG SYSTEMS ANNUAL MEETING--Proposal to Approve
Reincorporation of DG Systems" for a description of the proposed
reincorporation.
There are some differences between the NRS, StarGuide's articles of
incorporation, StarGuide's by-laws, California Law, DG Systems' articles of
incorporation, DG Systems' by-laws, the DGCL and DG Systems' Delaware
certificate of incorporation, as proposed to be adopted pursuant to the
reincorporation. We have summarized some of these differences below. However,
this is only a summary of some provisions and does not purport to be a
complete description of the similarities and differences. In addition, the
following summary is qualified in its entirety by reference to the NRS,
StarGuide's articles of incorporation and StarGuide's by-laws, by reference to
California Law, DG Systems' articles of incorporation and DG Systems' by-laws,
the DGCL and to DG Systems' Delaware certificate of incorporation, as proposed
to be adopted pursuant to the reincorporation. We further invite you to read
the provisions of the NRS, California Law and the DGCL as well as the articles
of incorporation and by-laws of StarGuide, the articles of incorporation and
by-laws of DG Systems and DG Systems' Delaware certificate of incorporation,
as proposed to be adopted pursuant to the reincorporation. See "DESCRIPTION OF
DG SYSTEMS CAPITAL STOCK" for a summary of a number of other rights relating
to DG Systems common stock.
Capitalization
StarGuide. The total number of authorized shares of capital stock of
StarGuide consists of 120,000,000 shares of common stock, par value $0.001 per
share, of which 60,000,000 have been designated shares of StarGuide Class A
common stock and 60,000,000 have been designated shares of StarGuide Class B
common stock.
DG Systems. The total number of authorized shares of capital stock of DG
Systems consists of 100,000,000 shares of common stock, no par value, and
15,000,000 shares of convertible preferred stock, no par value.
Delaware. If DG Systems becomes a Delaware corporation after the merger and
DG Systems' articles of incorporation are amended as proposed in this proxy
statement/prospectus, the total number of authorized shares of capital stock
of DG Systems will consist of 200,000,000 shares of common stock, no par
value, and 15,000,000 shares of convertible preferred stock, no par value.
Voting Rights
StarGuide. Section 78.350 of the NRS allows the shareholders of a
corporation to cast more or less than one vote per share for any class or
series of shares if provided for in the articles of incorporation. StarGuide's
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articles of incorporation provide that Class A common stock is entitled to
twenty votes per share and Class B common stock is entitled to one vote per
share at all meetings of shareholders.
DG Systems. Similarly, Sections 700 and 708 of California Law permit a
corporation to create series of shares that are entitled to cast more or less
than one vote per share. DG Systems' by-laws provide that the holders of its
common stock are entitled to one vote per share at all meetings of
shareholders.
Delaware. Section 212 of the DGCL, unless otherwise provided in the articles
of incorporation or by-laws, allows for one vote per share of capital stock at
all meetings of shareholders.
Amendment to Articles of Incorporation and By-laws
StarGuide. Sections 78.385 and 78.390 of the NRS permit a corporation to
amend its articles of incorporation as long as the amendment contains only
provisions that would be lawful in the original articles of incorporation
filed at the time of amendment. To amend the articles of incorporation, the
board must adopt a resolution presenting the proposed amendment. In addition,
a majority of the shares entitled to vote, as well as a majority of shares by
class of each class entitled to vote, must approve the amendment. When the
substantial rights of a class of shares will be affected by an amendment, the
holders of those shares may vote as a class regardless of any limitations or
restrictions on the voting power of those shares. When only one or more series
in a class of shares, and not the entire class, will be adversely affected by
an amendment, only the affected series may vote as a class. Any provision in
the articles of incorporation which requires a greater vote than required by
law cannot be amended or repealed except by the greater vote. Section 78.120
of the NRS provides that, subject to the by-laws, the directors may make the
by-laws of the corporation. StarGuide's by-laws allow the board of directors,
to the extent permitted in the articles of incorporation, or the shareholders
to amend or repeal the by-laws.
DG Systems. Section 902 of California Law provides that, unless otherwise
stated in a corporation's articles of incorporation, an amendment to the
articles of incorporation requires the approval of the corporation's board of
directors and the affirmative vote of a majority of the outstanding shares
entitled to vote on those shares. Amendments to allow for stock splits, unless
the corporation has more than one class of shares outstanding, (including a
proportionate increase in the authorized number of shares) does not require
shareholder approval. Unless otherwise provided in the articles of
incorporation, any provision in the articles of incorporation which requires a
greater vote than required by law cannot be amended or repealed except by the
greater vote. Section 903 of California Law provides that when the rights of a
class of shares will be affected by an amendment, the holders of those shares
may vote as a class even if the shares are non-voting shares. In addition,
when only one or more series in a class of shares, and not the entire class,
will be adversely affected by an amendment, only the affected shares may vote
as a class. Section 211 of California Law provides that, unless the board of
directors is prohibited by the articles of incorporation, the by-laws, or
Section 212, the board or a majority of the outstanding shares entitled to
vote may amend the by-laws. DG Systems' by-laws allow the shareholders, by the
vote or written consent of a majority of the outstanding shares entitled to
vote, or the board of directors to amend or repeal the by-laws.
Delaware. Section 242 of the DGCL permits a corporation to amend its
articles of incorporation as long as the amendment contains only provisions
that would be lawful in the original articles of incorporation filed at the
time of amendment. To amend the articles of incorporation, the board must
adopt a resolution presenting the proposed amendment. In addition, a majority
of the shares entitled to vote, as well as a majority of shares by class of
each class entitled to vote, must approve the amendment. When the substantial
rights of a class of shares will be affected by an amendment, the holders of
those shares may vote as a class regardless of any limitations or restrictions
on the voting power of those shares. When only one or more series in a class
of shares, and not the entire class, will be adversely affected by an
amendment, only the affected series may vote as a class. Any provision in the
articles of incorporation which requires a greater vote than required by law
cannot be amended or repealed except by the greater vote. In addition, Section
242 of the DGCL provides that in its resolution proposing an amendment the
board may insert a provision allowing the board to abandon the amendment,
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without concurrence by shareholders, after the amendment has received
shareholder approval but before its filing with the Secretary of State. Under
Section 109 of the DGCL, the power to amend the by-laws rests with the
shareholders entitled to vote, although the articles of incorporation may give
the board or directors power to amend the by-laws. The fact that the articles
of incorporation confers such power upon the board neither limits nor divests
the shareholders of the power to amend the by-laws.
Board of Directors; Quorum; Cumulative Voting
StarGuide. Section 78.115 of the NRS provides that a corporation must have
at least one director. In addition, a corporation may provide in its articles
of incorporation or its by-laws for a fixed or a variable number of directors
within a fixed maximum and minimum number. A corporation may also provide in
its articles of incorporation or its by-laws for the manner in which the
number of directors may be increased or decreased. StarGuide's articles of
incorporation and by-laws provide that the board of directors will consist of
one or more members as determined by resolution of the shareholders and that
the board of directors will hold office until their respective successors are
elected and qualified. Any decrease in the authorized number of directors will
not become effective until the expiration of the term of the directors then in
office.
Section 78.330 of the NRS provides that the articles of incorporation or the
by-laws may provide for a classified board of directors, but at least one-
fourth of the directors must be elected annually.
Section 78.315 of the NRS provides that a majority of the board of directors
then in office is necessary to constitute a quorum, unless otherwise provided
in the articles of incorporation or the by-laws. The StarGuide by-laws provide
that a majority of the directors constitutes a quorum.
Section 78.360 of the NRS allows a corporation to provide for cumulative
voting in the articles of incorporation. The StarGuide articles of
incorporation do not provide for cumulative voting.
DG Systems. Section 212 of California Law allows a corporation's articles of
incorporation or by-laws to determine the number of directors as long as there
will be at least three directors, with certain exceptions. In addition, a
corporation's articles of incorporation or by-laws may provide that the number
of directors may not be less than a stated minimum or more than a stated
maximum with the exact number of directors to be fixed by approval of the
board or the shareholders. The minimum number of directors also may not be
less than three, with certain exceptions. Approval by a majority of the
outstanding shares is needed to change the number of directors and the manner
in which the number of directors may be increased or decreased. DG Systems'
by-laws provide that the board will consist of a minimum of five and a maximum
of nine members. The exact number of directors is currently set at six members
until changed by an amendment to the by-laws approved by the board or by the
shareholders. The indefinite number of directors may be changed, or a definite
number may be fixed without provision for an indefinite number, by an
amendment of the DG Systems articles of incorporation or by-laws adopted by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote. However, an amendment reducing the fixed number or the
minimum number of directors to a number less than five cannot be adopted if
the votes cast against its adoption at a shareholders meeting (or the shares
not consenting in the case of shareholder action by written consent) are equal
to more than 16 2/3% of the shares entitled to vote. DG Systems may not amend
its by-laws to change the stated maximum number of authorized directors to a
number greater than two times the stated minimum number minus one. In
addition, the affirmative vote of a majority of any outstanding DG Systems
Series A preferred stock is required to change the authorized number of
directors. Each director will serve until the subsequent annual meeting and
until his successor is elected and qualified, or until his death, resignation
or removal. Any decrease in the authorized number of directors will not become
effective until the expiration of the term of the directors then in office.
Section 301 of California Law allows qualifying corporations to have a
classified board of directors.
Section 307 of California Law, provides that a majority of the authorized
directors constitutes a quorum unless a different number is required by the
articles of incorporation or the by-laws and provided that the number
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not be less than one-third of the authorized number of directors or less than
two, whichever is larger, unless the number of authorized directors is one, in
which case one constitutes a quorum. DG Systems' by-laws provide that a
majority of the authorized number of directors constitutes a quorum.
Section 301.5 of California Law allows a corporation in its articles of
incorporation or its by-laws to eliminate cumulative voting. DG Systems'
articles of incorporation provide that votes may not be cumulated in the
election of directors.
Delaware. Section 141 of the DGCL permits a corporation's articles of
incorporation or by-laws to contain provisions governing the number and terms
of directors. However, if the articles of incorporation contains provisions
fixing the number of directors, the number may not be changed without amending
the articles of incorporation, and the board must consist of one or more
members. Section 141 of the DGCL also permits a corporation's articles of
incorporation or a by-law adopted by the shareholders to provide that
directors be classified, with the term of office of one class of directors to
expire each year. In addition, Section 141 allows the articles of
incorporation to confer upon holders of any class or series of stock the right
to elect one or more directors to serve for the terms and have the voting
powers contained in the articles of incorporation. The terms of office and
voting powers of directors so elected may be greater or less than those of any
other director or class of directors.
Section 141 of the DGCL provides that a majority of the total number of
directors shall constitute a quorum unless the article of incorporation or the
by-laws require a greater number. Unless the articles of incorporation provide
otherwise, the by-laws may provide that a number less than a majority shall
constitute a quorum which in no case shall be less than one-third of the total
number of directors, except when there is only one director, then one director
shall constitute a quorum.
Section 214 of the DGCL allows a corporation to provide for cumulative
voting in its articles of incorporation or by-laws.
Removal of Directors
StarGuide. Section 78.335 of the NRS permits directors to be removed from
office by a two-thirds shareholder vote, or by the vote of a larger percentage
of shares if provided in the articles of incorporation. However, if the
corporation's articles provide for cumulative voting to elect directors, those
directors may not be removed other than by a vote of a sufficient number of
shares that would have prevented their election at the time of removal.
DG Systems. Section 303 of California Law, and DG Systems' by-laws provide
that any or all of the directors may be removed without cause if the removal
is approved by a majority of the shares entitled to vote. However, under
California Law, unless the entire board of directors is removed, no single
director may be removed unless the votes cast against the removal of the
single director would be sufficient to elect that director if voted
cumulatively at an election with the same total number of votes cast and
number of directors authorized at the time of the single director's most
recent election.
Section 304 of California Law permits shareholders holding at least 10% of
the outstanding shares in any class to sue in superior county court to remove
any director from office for fraud or dishonest acts or gross abuse of
authority or discretion. Section 302 of California Law permits the board of
directors to declare vacant the office of a director who has been declared of
unsound mind by any order of court or convicted of a felony.
Delaware. Section 141 of the DGCL provides that a corporation's directors
may be removed with or without cause by the holders of a majority in voting
power of the shares then entitled to vote at an election of directors, except
that:
. members of a classified board may be removed only for cause, unless the
articles of incorporation provides otherwise; and
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. if there is cumulative voting, if less than the entire board of
directors is to be removed, no director may be removed without cause if
the votes cast against the director's removal would be sufficient to
elect the director then cumulatively voted at an election of the entire
board of directors or of the class of directors of which the director is
a part.
Newly Created Directorships and Vacancies
StarGuide. Section 78.335 of the NRS provides that, unless the articles of
incorporation provide otherwise, all vacancies may be filled by a majority of
the remaining directors, even if less than a quorum. In addition, if a
director gives notice of his or her resignation to the board of directors, to
become effective at a future date, the board may fill the vacancy to take
effect when the resignation becomes effective. The appointed director will
hold office during the remainder of the term of office of the resigning
director. StarGuide's by-laws provide that whenever the number of directors is
increased by resolution of the shareholders, a majority of the directors then
in office have the power to elect the new directors for the balance of the
term and until their successors are elected and qualified by a resolution of
the shareholders.
DG Systems. Section 305 of California Law provides that any vacancy on the
board of directors other than one created by removal of a director may be
filled by the board of directors, unless otherwise provided in the articles of
incorporation or by-laws. If the number of directors is less than a quorum, a
vacancy may be filled by the unanimous written consent of the directors, by
the affirmative vote of a majority of the directors or by a sole remaining
director. A vacancy created by removal of a director can only be filled by the
shareholders unless the board is authorized by the articles of incorporation
or by-laws to fill the vacancy. DG System's by-laws permit vacancies in the
board to be filled by a majority of the remaining directors or by the
shareholders. However, any vacancy in the board created by the removal of a
director by the shareholders may be filled only by election by the
shareholders.
Delaware. Under Section 142 of the DGCL, unless otherwise provided in the
articles of incorporation or by-laws, vacancies on a corporation's board of
directors and newly created directorships resulting from an increase in the
authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by the sole remaining
director. However, in the case of a classified board of directors, vacancies
and newly created directorships may be filled by a majority of the directors
elected by the class or by the sole remaining director so elected. Directors
elected to fill vacancies or newly created directorships on a classified board
of directors hold office until the next election of the class for which the
directors have been chosen, and until their successors have been duly elected
and qualified. In addition, if, at the time any vacancy or newly created
directorship is filled, the directors in office constitute less than a
majority of the whole board of directors (as constituted immediately prior to
any increase), the Delaware Court of Chancery may, upon application of any
shareholder or shareholders holding at least 10% of the total number of
outstanding shares entitled to vote for the directors, summarily order an
election to fill any such vacancy or newly created directorship, or replace
the directors chosen by the directors then in office.
Special Meetings of Shareholders
StarGuide. Section 78.310 of the NRS provides that meetings may be held in
the manner provided by the by-laws of the corporation. StarGuide's by-laws
provide that any special meetings of the shareholders for any purposes listed
in the notice of meeting may be called by the board of directors, the chairman
of the board, or by the holders of not less than one-fifth of all the
outstanding shares who are entitled to vote on the matter for which the
meeting is being called.
DG Systems. Section 600 of California Law permits a special meeting of the
shareholders to be called by the board of directors, the chairman of the
board, the president, the holders of shares entitled to cast at least 10% of
the votes at the meeting, or any additional persons who are listed in the
corporation's articles of incorporation or by-laws. DG Systems' by-laws
provide that special meetings of the shareholders for any purposes listed in
the notice of the meeting may be called by the board of directors, the
chairman of the board, the president of the company, or by one or more
shareholders holding shares in the aggregate entitled to cast not less than
ten percent of the votes at the meeting.
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Delaware. Section 211 of the DGCL provides that special meetings of
shareholders may be called by the board of directors and by such other person
or persons as may be authorized to do so by the corporation's articles of
incorporation or by-laws.
Shareholder Action by Written Consent
StarGuide. Section 78.320 of the NRS allows, unless otherwise provided in a
corporation's articles of incorporation or by-laws, any action required or
permitted to be taken at a meeting of shareholders to be taken without a
meeting if a written consent is signed by shareholders holding at least a
majority of the voting power, except that if a different proportion of voting
power is required for the action at a meeting, then that proportion of written
consents is required. StarGuide's by-laws provide that any action required or
permitted to be taken by StarGuide shareholders at any annual or special
meeting of shareholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing describing the action taken is
signed by the holders of outstanding stock having at least the minimum number
of votes that would be necessary to authorize the taking of the action at a
meeting at which all shares entitled to vote were present and voted. Those
StarGuide shareholders who have not consented in writing must receive prompt
notice of the taking of an action without a meeting by less than unanimous
written consent.
DG Systems. Section 603 of California Law permits, unless otherwise provided
in the articles of incorporation, any action required to be taken or which may
be taken at an annual or special meeting to be taken without a meeting and
without prior notice if a written consent is signed by the holders of
outstanding stock having at least the minimum number of votes required to
authorize the action. If consent is sought from less than all shareholders
entitled to vote, the corporation must give notice. DG Systems' articles of
incorporation provide that as long as DG Systems has any class of its capital
stock registered under the Securities Exchange Act of 1934, as amended, any
action required to be taken or which may be taken at any annual or special
meeting of shareholders may not be taken without a meeting, and the
shareholders have no power to consent in writing, without a meeting.
Delaware. Under Section 228 of the DGCL, unless otherwise provided in a
corporation's articles of incorporation, any action required to be taken at an
annual or special meeting of the shareholders may be taken by the written
consent of shareholders in lieu of a meeting. The written consent must set
forth the action taken and be signed by the holders of outstanding stock
representing the number of shares necessary to take such action at a meeting
at which all shares entitled to vote were present and voted.
Vote Required for Merger
StarGuide. Section 92A.120 of the NRS requires a majority vote of the shares
entitled to vote to approve a merger between two corporations. However, the
articles of incorporation, board of directors, or applicable law may provide
for a greater vote or a vote by classes of shareholders. If shareholders of a
class of shares are entitled to vote as a class, then the merger must be
approved by a majority of all votes entitled to be cast by each class as well
as a majority of all votes entitled to be voted. Section 92A.120 of the NRS
requires separate voting by a class of shareholders:
. on a plan of merger if the plan contains a provision that, if contained
in a proposed amendment to the articles of incorporation, would permit
certain shareholders to vote as a class on the proposed amendment; and
. on a plan of exchange by each class or series of shares included in the
exchange, with each class or series comprising a separate voting class.
Section 92A.130 of the NRS provides that the vote of the shareholders of the
surviving corporation on a plan of merger is not required if:
. the articles of incorporation of the surviving corporation will remain
unchanged;
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. each shareholder of the surviving corporation will hold the same number
of shares with identical rights as those shares held immediately before
the merger; and
. the number of voting shares outstanding immediately after the merger,
plus the number of shares issued as a result of the merger will not
exceed the total number of voting shares of the surviving corporation
outstanding immediately before the merger by more than twenty percent.
DG Systems. Section 1201 of California Law requires a majority of the
outstanding shares entitled to vote to approve a merger, except that no
shareholder vote is required of a corporation that will be the surviving
corporation in the merger as long as the shareholders of the corporation own,
immediately after the merger, more than five-sixths of the voting power of the
surviving corporation.
Section 1201 of California Law provides that if a corporation has two
classes of common shares that differ only as to voting rights, the shares will
vote as a single class. Similar voting requirements apply for share exchanges
under Section 1201.5 of California Law.
Section 1201 further requires the affirmative vote of a majority of the
outstanding shares entitled to vote on the merger if:
. the surviving corporation's articles of incorporation will be amended
and would otherwise require shareholder approval; or
. shareholders of the surviving corporation will receive shares of a non-
California corporation or shares of the surviving corporation having
different rights, preferences, privileges or restrictions than the
shares surrendered.
Delaware. Section 251 of the DGCL requires a majority vote of the
outstanding shares of the corporation entitled to vote to effectuate a merger.
In addition, the vote of shareholders of the surviving corporation on a plan
of merger is not required under certain circumstances.
Takeovers: Statutory Protection
StarGuide. Section 78.378 of the NRS provides that the directors of a
corporation may adopt or execute plans, arrangements or instruments that deny
rights, privileges, power or authority to a holder of a specified number of
shares or percentage of share ownership or voting power to protect the
interests of the corporation and its shareholders. Section 78.3792 of the NRS
provides that, under certain circumstances and if provided for in the articles
of incorporation or the by-laws in effect on the tenth day following the
acquisition of at least 20% of the voting power, the corporation may call for
redemption of all the shares that were acquired during the ninety day period
immediately before the date when the acquiring person became an owner of 20%
of the shares. A corporation's call for redemption must be made within 30 days
after the occurrence of certain specified events, and the shares must be
redeemed within 60 days after the call.
Section 78.438 of the NRS prohibits, with certain exceptions, a corporation
from engaging in any combination with any interested shareholder for three
years after the date the interested shareholder acquired the shares unless the
combination or the purchase of shares is approved by the board of directors
before the date when the interested shareholder acquired the shares. Sections
78.439 through 78.444 of the NRS contain provisions restricting the ability of
a corporation to enter into business combinations with an interested
shareholder after the expiration of three years after the date the interested
shareholder acquired the shares. Section 78.423 of the NRS defines an
interested shareholder, generally, as a person who owns 10% or more of the
outstanding shares of the corporation's voting stock.
DG Systems. Section 1101 of California Law generally requires that, with
certain exceptions including a merger of a corporation with its subsidiaries
of which the corporation owns at least 90% of the outstanding shares of each
class, the holders of non-redeemable common stock or non-redeemable equity
securities receive non-redeemable common stock in a merger of the corporation
where one of the merging corporations or its parent
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owns more than 50% of the voting power of the other merging corporation,
unless all of the holders of the class consent to the merger. This provision
may have the effect of making a "cash-out" merger by a majority shareholder
owning less than 90% of the outstanding shares of each class more difficult to
accomplish.
Section 1203 of California Law also provides that, except in some
circumstances, when a tender offer or a proposal for a reorganization or a
sale of assets that would require shareholder approval is made by an
interested party, an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to
shareholders, unless the target corporation does not have shares held of
record by at least 100 persons or unless the transaction has been qualified
under California state securities laws. In addition, if a tender of shares or
vote is sought concerning an interested party's proposal and a later proposal
that would require shareholder approval is made by another party at least 10
days prior to the date of acceptance of the interested party proposal, then
shareholders must be informed of the later offer and be given a reasonable
opportunity to withdraw any vote, consent, or proxy, or to withdraw any
tendered shares. Section 1203 of California Law defines an interested party,
generally, as a person who:
. controls more than 50% of the votes of the target corporation;
. is an officer or director of the corporation or is controlled by an
officer or director of the corporation; or
. is an entity in which a material financial interest is held by a
director or executive officer of the corporation.
Delaware. Section 203 of the DGCL contains provisions restricting the
ability of a corporation to engage in business combinations with an interested
shareholder. Under the DGCL, except under certain circumstances, a corporation
is not permitted to engage in a business combination with any interested
shareholder for a three year period following the date such shareholder became
an interested shareholder. The DGCL defines interested shareholder generally
as a person who owns 15% or more of the outstanding shares of such
corporation's voting stock.
Dissenters' Appraisal Rights
StarGuide. Sections 92A.380 and 92A.390 of the NRS provide that shareholders
have the right, in some circumstances, to dissent from certain corporate
reorganizations and to instead demand payment of the fair value of their
shares. Unless a corporation's articles of incorporation provide otherwise,
dissenters do not have rights of appraisal for a merger or consolidation by a
corporation, the shares of which are either:
. listed on a national securities exchange, designated as a national
market system security on an inter-dealer quotation system by the
National Association of Securities Dealers, Inc.; or
. held by more than 2,000 shareholders, if the shareholders receive cash,
shares in the surviving corporation, shares of another corporation that
are publicly listed or held by more than 2,000 shareholders, cash in
lieu of fractional shares, or any combination of the above.
Also, shareholders of a corporation surviving a merger do not have appraisal
rights if the shareholders of the surviving corporation are not required to
vote to approve the merger.
DG Systems. Section 1300 of California Law provides that if the approval of
the outstanding shares of a corporation is required for a reorganization under
specific provisions of California Law, each shareholder of the corporation
entitled to vote on the transaction may require the corporation to purchase
for cash, at the fair market value, any "dissenting shares" owned by the
shareholder. Shares listed on any national securities exchange or listed on
the Nasdaq National Market System generally do not have these appraisal rights
unless the holders of at least 5% of the class of outstanding shares demand
the right, or the corporation or any law restricts the transfer of the shares.
The fair market value will be determined as of the day before the first
announcement of the terms of the proposed reorganization, excluding any
appreciation or depreciation as a result of the proposed action.
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Delaware. Under Section 262 of the DGCL, except as provided elsewhere in the
DGCL, shareholders of a constituent corporation in a merger or consolidation
have the right to demand and receive payment of the fair value of their stock
in a merger or consolidation. Unless a corporation's articles of incorporation
provide otherwise, dissenters do not have rights of appraisal for a merger or
consolidation by a corporation under Delaware law for the same reasons as set
forth for StarGuide above.
Limitations on Directors' Liability
StarGuide. Section 78.037 of the NRS allows a corporation, through its
articles of incorporation, to limit or eliminate the personal liability of
directors and officers to the corporation and its shareholders for damages for
breach of fiduciary duty. However, this provision excludes any limitation on
liability for:
. acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law; or
. the payment of distributions in violation of Section 78.300 of the NRS.
In addition, Section 78.138 of the NRS allows directors and officers of a
corporation to consider a variety of non-shareholder interests in carrying out
their duties to the corporation. StarGuide's articles of incorporation and by-
laws provide that directors and officers are not personally liable to the
corporation or its shareholders for damages for breach of fiduciary duty. This
provision, however, does not eliminate or limit the liability of a director
for acts or omissions not in good faith or which involve intentional
misconduct, fraud, or a knowing violation of law, the payment of dividends in
violation of NRS 78.300 or for any receipt of an improper personal benefit.
DG Systems. Section 309 of California Law provides that a director is not
liable to a corporation or its shareholders if the director acted in good
faith, in a manner that the director believed to be in the best interests of
the corporation and its shareholders, and with a proper duty of care in
carrying out his or her duties as a director. In the carrying out of any duty
or power, the director is entitled to rely on information, opinions, reports
or statements prepared or presented by officers or employees of the
corporation, professional or expert advisors or a board committee on which the
director does not serve.
Sections 204 and 309 of California Law provide that a corporation's articles
of incorporation may eliminate or limit the liability of a director for
monetary damages in an action brought by or in the right of the corporation
for breach of a director's duties to the corporation and its shareholders. The
articles may not eliminate director liability for:
. intentional misconduct or knowing and culpable violation of law;
. acts or omissions that a director believes are contrary to the best
interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director;
. the receipt of an improper personal benefit;
. acts or omissions that show reckless disregard for the director's duty
to the corporation or its shareholders where the director in the
ordinary course of performing a director's duties is or should be aware
of a risk of serious injury to the corporation or its shareholders;
. acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abandonment of the director's duty to the corporation
and its shareholders;
. transactions between the corporation and a director in which a director
has a material financial interest; and
. some types of improper distributions.
Section 204 of California Law provides that a director's liability cannot be
eliminated or limited by any provision in the articles of incorporation for
any act or omission occurring prior to the date when the provision became
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<PAGE>
effective, or eliminate or limit the liability of an officer for any act or
omission as an officer, even if that officer is also a director, and even if
his or her actions, if negligent or improper, have been ratified by the board
of directors.
DG Systems' articles of incorporation eliminate the liability of directors
for monetary damages to the fullest extent permissible under law.
Delaware. Section 102 of the DGCL allows a corporation, through its articles
of incorporation, to limit or eliminate the personal liability of directors to
the corporation and its stockholders for monetary damages for breach of
fiduciary duty. However, this provision excludes any limitation on liability
for:
. any breach of the director's duty of loyalty to the corporation or its
shareholders;
. (ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. (iii) willful or negligent violation of the laws governing the payment
of dividends or the purchase or redemption of stock; or
. (iv) any transaction from which the director derives an improper
personal benefit.
Indemnification
StarGuide. Section 78.7502 of the NRS, permits a corporation to indemnify
any agent of the corporation who was or is a party or is threatened to be made
a party to any proceeding (other than an action by or in the right of the
corporation), against expenses, judgments, fines, settlements, and other
amounts incurred in connection with the proceeding. StarGuide's by-laws permit
the foregoing indemnification. This indemnification is allowed only if the
person acted in good faith and in a manner the person believed to be in the
best interests of the corporation. The decision of whether indemnification
will be provided must be made by the shareholders, by the board by a majority
vote of a quorum consisting of directors who are not parties to the
proceeding, or by independent legal counsel in a written opinion if ordered by
a majority vote of a quorum of disinterested directors or if a quorum of
disinterested directors cannot be obtained.
Section 78.7502 of the NRS provides that a corporation must indemnify
directors, officers, employees and agents against expenses actually and
reasonably incurred to the extent the person was successful on the merits in
defending the proceeding. Section 75.751 of the NRS permits a corporation to
pay expenses in advance of the final disposition of the action, suit, or
proceeding if the corporation receives an undertaking by or on behalf of the
director, officer, employee or agent to repay the amount if it is ultimately
determined that such individual is not entitled to be indemnified. In
addition, Section 78.7502 of the NRS permits indemnification against expenses
actually and reasonably incurred in connection with the defense or settlement
of the action by or in the right of the corporation to obtain a judgment in
its favor.
A corporation may not provide indemnification for any:
. claim, issue or matter for which the person has been found liable to the
corporation; or
. amounts paid in settlement to the corporation, unless the court
determines that the person is fairly and reasonably entitled to
indemnity for the expenses.
Section 78.751 of the NRS provides that indemnification, unless ordered by a
court, may not be made to or on behalf of any director, officer, employee or
agent if a court establishes that the person's acts or omissions involved
intentional misconduct, fraud or a knowing violation of the law and was
material to the proceeding. In the case of a criminal proceeding, the person
must have had no reasonable cause to believe his or her conduct was unlawful.
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<PAGE>
Section 78.752 of the NRS permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation for any liability and expenses whether or not the
corporation has the authority to indemnify the person for the liability and
expenses.
DG Systems. Section 317 of California Law allows a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
obtain a judgment in its favor) because the person is or was an agent of the
corporation, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with the proceeding. A
corporation must indemnify an agent against expenses actually and reasonably
incurred to the extent the agent was successful on the merits in defending the
proceeding. A corporation may also indemnify the person against expenses
actually and reasonably incurred by that person in connection with the defense
or settlement of the action by or in the right of the corporation to obtain a
judgment in its favor. This indemnification is allowed only if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders. A corporation may advance
expenses incurred in defending any proceeding prior to the final disposition
of the proceeding if the corporation receives an undertaking by or on behalf
of the agent to repay that amount if it is ultimately determined that the
agent is not entitled to be indemnified.
The decision of whether indemnification will be provided will be made by:
. a majority vote of a quorum consisting of directors who are not parties
to the proceeding;
. if a quorum is not obtainable, by independent legal counsel in a written
opinion;
. approval of a majority of the shareholders, excluding the shares of the
person to be indemnified; or
. the court in which the proceeding is or was pending.
Under California law, however, a corporation may not provide indemnification
for:
. any claim, issue or matter for which the person has been found liable to
the corporation in the performance of that person's duty to the
corporation and its shareholders, unless the court determines that the
person is fairly and reasonably entitled to indemnification; or
. any amounts paid in settling or expense incurred in defending a pending
action that was concluded without court approval.
In addition, indemnification is not allowed if it would be inconsistent
with:
. a resolution of the shareholders;
. the company's articles of incorporation or by-laws;
. an agreement in effect at the time of the cause of action; or
. any condition expressly imposed by a court in approving a settlement. In
the case of a criminal proceeding, the person must have had no
reasonable cause to believe his or her conduct was unlawful.
Under California Law, a corporation may obtain and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation for any liability asserted against him or her, whether or not
the corporation has the power to indemnify him or her against liability under
California Law.
DG Systems' articles of incorporation permit the corporation through its by-
laws, agreements with agents, vote of shareholders or disinterested directors,
or otherwise to provide for indemnification in excess of the indemnification
provided by law. They also provide that the indemnification provisions in the
by-laws are not exclusive of any other rights to which a person seeking
indemnification may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise.
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Delaware. Section 145 of the DGCL generally permits a corporation to
indemnify its directors and officers against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
a third-party action, other than a derivative action, and against expenses
actually and reasonably incurred in the defense or settlement of a derivative
action, provided that there is a determination that the individual acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation. The determination must be made, in the case
of an individual who is a director or officer at the time of determination,
by:
. a majority of the directors who are not parties to the action, suit or
proceeding, even though less than a quorum;
. a committee of these directors designated by a majority vote of these
directors, even though less than a quorum;
. independent legal counsel, regardless of whether a quorum of these
directors exists; or (iv) a majority vote of the shareholders, at a
meeting at which a quorum is present.
Without court approval, however, an individual may not be indemnified in any
claim, issue or matter in a derivative action as to which the individual is
adjudged liable to the corporation. Section 145 of the DGCL requires
indemnification of directors and officers for expenses relating to a
successful defense on the merits or otherwise of a derivative or third-party
action. However, a corporation may advance expenses incurred in the defense of
any proceeding to directors and officers contingent upon an undertaking by or
on behalf of the individuals to repay any advances if it is determined
ultimately that the individuals are not entitled to be indemnified. Under
Section 145 of the DGCL, the rights to indemnification and advancement of
expenses provided in the law are non-exclusive, in that, subject to public
policy issues, indemnification and advancement of expenses beyond that
provided by statute may be provided by by-law, agreement, vote of
shareholders, disinterested directors or otherwise.
Section 145 of the DGCL provides that a corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, or other entity against any liability asserted against
and incurred by such person in such capacity or status, whether or not the
corporation would have the power to indemnify the individual under Delaware
law.
Distributions and Dividends; Liquidation
StarGuide. Section 78.288 of the NRS allows a board of directors to make
distributions to shareholders, unless otherwise provided in the articles of
incorporation. However, the board may not make a distribution if it would
cause the corporation to be unable to pay its debts as they become due or
except as otherwise specifically allowed by the articles of incorporation, the
corporation's assets to be less than the sum of its liabilities plus the
amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights of shareholders
whose rights are superior to those receiving the distribution. StarGuide's by-
laws permit the board to declare and the corporation to pay dividends on its
outstanding stock from assets that are legally available for this purpose.
In the event of the liquidation or dissolution of StarGuide, its articles of
incorporation and by-laws permit holders of StarGuide Class A and Class B
common stock to receive all assets available for distribution to shareholders.
DG Systems. Section 500 of California Law generally provides that a
corporation may not make any distribution (including dividends, whether in
cash or other property, and repurchases of its shares) unless the
corporation's retained earnings immediately prior to the proposed distribution
equal or exceed the amount of the proposed distribution. Alternatively, a
corporation may make a distribution if immediately after making the
distribution, the corporation's assets (exclusive of goodwill, capitalized
research and development expenses and
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<PAGE>
deferred charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the
corporation's current assets would be at least equal to its current
liabilities (or 1 1/4 times its current liabilities if the average pre-tax and
pre-interest expense earnings for the preceding two fiscal years were less
than the average interest expense for those years). However, Section 501 of
California Law prohibits a corporation from making a distribution if it is, or
as a result of the distribution would be, unlikely to be able to meet its
liabilities as they come due. DG Systems' articles of incorporation permit the
board of directors to declare and pay dividends from funds lawfully available
for this purpose, subject to any preferential rights of any then outstanding
shares of preferred stock.
In the event of liquidation or dissolution of DG Systems, holders of common
stock are entitled to receive all assets available for distribution to
shareholders, subject to any preferential rights of any then outstanding
shares of preferred stock.
Delaware. Section 170 of the DGCL allows the board of directors of a
corporation to authorize a corporation to declare and pay dividends and other
distributions to its shareholders, subject to any restrictions contained in
the articles of incorporation, either out of surplus, or, if there is no
surplus, out of net profits for the current or preceding fiscal year in which
the dividend is declared. However, a distribution out of net profits is not
permitted if a corporation's capital is less than the amount of capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, until the deficiency has been
repaired.
Redeemable Shares
StarGuide. Section 78.196 of the NRS provides that the articles of
incorporation or a resolution of the board of directors may authorize one or
more classes or series of stock that are redeemable or convertible at the
option of the corporation, the shareholders or another person or upon the
occurrence of a designated event.
DG Systems. Section 402 of California Law permits a corporation to provide
in its articles of incorporation for one or more classes or series of stock
that are redeemable, with certain exceptions, at the option of the
corporation, or to the extent and upon the occurrence of one or more specified
events.
Section 403 of California Law allows a corporation to provide in its
articles of incorporation for the issuance of stock convertible into shares of
any class or series:
. at the option of the holder,
. at the time of majority vote of the class or series to be converted,
. upon the occurrence of one or more specified events, or
. at the option of the corporation under certain circumstances.
See "DESCRIPTION OF DG SYSTEMS CAPITAL STOCK" for a discussion of DG Systems
Series A convertible preferred stock.
Delaware. Section 151 of the DGCL provides that the articles of
incorporation or a resolution of the board of directors may make any class of
stock subject to redemption at the option of the corporation or the
shareholders or upon the happening of a specified event, as long as at the
time of redemption one class of voting stock is not subject to redemption.
Preemptive Rights
StarGuide. Under Section 78.267 of the NRS provides, except as provided in a
corporation's articles of incorporation, a shareholder does not have
preemptive rights to acquire a corporation's unissued shares. StarGuide's
articles of incorporation do not provide preemptive rights enabling a holder
to subscribe for or receive shares of any class of StarGuide stock or any
other securities convertible into shares of any class of StarGuide stock.
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<PAGE>
DG Systems. Section 406 of California Law permits, unless the articles of
incorporation provide otherwise, the board of directors to issue shares
without first offering the shares to shareholders of any class. DG Systems'
articles of incorporation do not provide preemptive rights enabling a holder
to subscribe for or receive shares of any class of DG Systems stock or any
other securities convertible into shares of any class of DG Systems stock.
Delaware. Under Section 102 of the DGCL, a shareholder does not possess
preemptive rights unless preemptive rights are specifically granted in a
corporation's articles of incorporation.
LEGAL MATTERS
Gardere & Wynne, L.L.P., Dallas, Texas, counsel to DG Systems will pass upon
the validity of the issuance of the DG Systems common stock for DG Systems.
Latham & Watkins, Washington, DC, counsel to StarGuide, and Dewey Ballantine
LLP, Los Angeles, California, counsel to DG Systems' special committee, will
be delivering opinions concerning federal income tax consequences of the
merger. See "THE MERGER--Material United States Federal Income Tax
Consequences of the Merger."
EXPERTS
The consolidated financial statements of DG Systems as of December 31, 1999
and for the year then ended have been included and incorporated by reference
herein in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere and incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing. The
consolidated financial statements of DG Systems as of December 31, 1998 and
for the years ended December 31, 1998 and 1997 included herein have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports. The
consolidated financial statements of StarGuide as of December 31, 1999 and
1998, and for each of the years in the three-year period ended December 31,
1999, have been included herein in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Musicam Express as of December 31, 1999 and 1998
and for the years then ended have been included herein in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG LLP covering the Musicam Express 1999
financial statements refers to a change in accounting for the costs of start-
up activities.
DG SYSTEMS SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 2001 annual
meeting of shareholders of DG Systems must be received by DG Systems at its
offices at 5221 North O'Connor Boulevard, Suite 950, Irving, Texas, 75039, not
later than [ ], 2001 and satisfy the conditions established by the
Securities and Exchange Commission for holder proposals to be included in DG
Systems' proxy statement for that meeting. If a shareholder intends to submit
a proposal from the floor of DG Systems' 2001 annual meeting, which is not
eligible for inclusion in the proxy statement and form of proxy relating to
that meeting, the shareholder must provide written notice to DG Systems no
later than [ ], 2001. If such a shareholder fails to comply with the
foregoing notice provision, the proxy holders will be allowed to use their
discretionary voting authority when the proposal is raised at the 2001 annual
meeting.
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WHERE YOU CAN FIND MORE INFORMATION
DG Systems files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission, or the SEC. You
may read and copy any reports, statements or other information DG Systems
files at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. DG Systems' SEC filings are also
available to the public from commercial document retrieval services and on the
web site maintained by the SEC at http://www.sec.gov.
As of the date of this proxy statement/prospectus, DG Systems has filed a
registration statement on Form S-4 to register with the SEC the DG Systems
common stock that DG Systems will issue to StarGuide shareholders in the
merger. This proxy statement/prospectus is a part of that registration
statement and constitutes a prospectus of DG Systems, as well as a proxy
statement of StarGuide for its special meeting.
As allowed by SEC rules, this proxy statement/prospectus does not contain
all the information you can find in the registration statement or the exhibits
to the registration statement.
The SEC allows DG Systems to "incorporate by reference" information into
this proxy statement/prospectus, which means that DG Systems can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed
to be part of this proxy statement/prospectus, except for any information
superseded by information contained directly in this proxy
statement/prospectus. This proxy statement/prospectus incorporates by
reference the documents set forth below that DG Systems has previously filed
with the SEC. These documents contain important information about DG Systems
and its financial condition.
<TABLE>
<CAPTION>
DG Systems SEC Filings:
-----------------------
<S> <C>
(a) Our Annual Report on Form 10-K for the fiscal year ended December
31, 1999, as filed on March 28, 2000, and our amended Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1999, as filed on May 1, 2000.
(b) Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2000, as filed on May 15, 2000.
(c) Our Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, as filed on August 14, 2000.
(d) Our Current Report on Form 8-K, as filed on July 14, 2000.
</TABLE>
DG Systems can also incorporate by reference into this proxy
statement/prospectus additional documents that DG Systems may file with the
SEC from the date of this proxy statement/prospectus to the date of the
special meeting of DG Systems shareholders. These include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, as well as proxy statements.
If you are a shareholder, DG Systems may have sent you some of the documents
incorporated by reference, but you can obtain any of them through DG Systems,
the SEC or the SEC's web site as described above. Documents incorporated by
reference are available from DG Systems without charge, excluding all exhibits
unless DG Systems has specifically incorporated by reference an exhibit in
this proxy statement/prospectus. If you would like to request documents from
DG Systems, please do so by [ ], 2000 to receive them before the DG Systems
special meeting. Shareholders may obtain documents incorporated by reference
in this proxy statement/prospectus by requesting them in writing or by
telephone from DG Systems at the following address:
Digital Generation Systems, Inc.
5221 North O'Connor Boulevard
Suite 950
Irving, Texas 75039
Attention: Investor Relations
(972) 402-4800
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You should rely on the information contained or incorporated by reference in
this proxy statement/prospectus in considering the merits of the merger.
Neither DG Systems nor StarGuide has authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. Please note that DG Systems has supplied all information
contained or incorporated by reference in this proxy statement/prospectus
relating to DG Systems, and StarGuide has supplied all information relating to
StarGuide. Neither DG Systems nor StarGuide warrants the accuracy of any
information relating to the other party.
This proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities in any jurisdiction to or from
any person to whom it is not lawful to make such an offer.
This proxy statement/prospectus is dated [ ], 2000. You should not
assume that the information contained in this proxy statement/prospectus is
accurate as of any date other than that date, and neither the mailing of this
proxy statement/prospectus to you nor the issuance of DG Systems common stock
in the merger shall create any implication to the contrary.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Digital Generation Systems, Inc.
Independent Auditors' Report............................................. F-2
Report of Independent Public Accountants................................. F-3
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 and
1998.................................................................... F-4
Consolidated Statements of Operations for the Six Months Ended June 30,
2000 and July 3, 1999 and the Three Years Ended December 31, 1999....... F-5
Consolidated Statements of Shareholders' Equity for the Six Months Ended
June 30, 2000 and the Three Years Ended December 31, 1999............... F-6
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2000 and July 3, 1999 and the Three Years Ended December 31, 1999....... F-7
Notes to Consolidated Financial Statements............................... F-8
StarGuide Digital Networks, Inc.
Independent Auditors' Report............................................. F-20
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 and
1998.................................................................... F-21
Consolidated Statements of Operations for the Six Months Ended June 30,
2000 and 1999 and the Three Years Ended December 31, 1999............... F-22
Consolidated Statements of Shareholders' Deficit for the Six Months Ended
June 30, 2000 and the Three Years Ended December 31, 1999............... F-23
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2000 and 1999 and the Three Years Ended December 31, 1999............... F-24
Notes to Consolidated Financial Statements............................... F-25
Musicam Express, L.L.C.
Independent Auditors' Report............................................. F-36
Balance Sheets as of June 30, 2000 and December 31, 1999 and 1998........ F-37
Statements of Operations for the Six Months Ended June 30, 2000 and 1999
and the Years Ended December 31, 1999 and 1998.......................... F-38
Statement of Members' Deficit for the Six Months Ended June 30, 2000 and
the Years Ended December 31, 1999 and 1998.............................. F-39
Statement of Cash Flows for the Six Months Ended June 30, 2000 and 1999
and the Years Ended December 31, 1999 and 1998.......................... F-40
Notes to Financial Statements............................................ F-41
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Digital Generation Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Digital
Generation Systems, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of Digital Generation Systems' management. Our responsibility
is to express an opinion on these consolidated financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Generation Systems, Inc. and subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 25, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Generation Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Digital
Generation Systems, Inc. (a California corporation) and subsidiaries as of
December 31, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of Digital Generation
Systems' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Generation
Systems, Inc. and subsidiaries as of December 31, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997,
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
San Francisco, California
January 26, 1999
F-3
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
June 30, ------------------
2000 1999 1998
----------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 3,204 $ 5,420 $ 13,025
Accounts receivable, less allowance for
doubtful accounts of $2,431 in 2000, $1,659
in 1999 and $1,895 in 1998.................. 12,277 12,799 9,995
Prepaid expenses and other................... 1,489 1,717 933
-------- -------- --------
Total current assets......................... 16,970 19,936 23,953
-------- -------- --------
Property and equipment, at cost:
Network equipment............................ 36,853 35,304 33,211
Office furniture and equipment............... 6,247 5,833 3,730
Leasehold improvements....................... 844 793 542
-------- -------- --------
43,944 41,930 37,483
Less-Accumulated depreciation and
amortization................................ (36,590) (33,772) (25,738)
-------- -------- --------
Property and equipment, net................ 7,354 8,158 11,745
-------- -------- --------
Goodwill and other assets, net................. 12,864 13,672 14,094
-------- -------- --------
$ 37,188 $ 41,766 $ 49,792
======== ======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable............................. $ 4,259 $ 7,781 $ 3,035
Accrued liabilities.......................... 2,890 3,230 4,081
Line of credit............................... -- -- 1,433
Current portion of long-term debt............ 2,920 7,689 8,226
-------- -------- --------
Total current liabilities.................... 10,069 18,700 16,775
-------- -------- --------
Long-term debt, net of current portion......... 5,313 2,513 9,307
-------- -------- --------
Commitments and contingencies (note 5).........
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 at June 30, 2000 and
December 31, 1999; 40,000,000 shares at
December 31, 1998; Outstanding-28,172,828
shares in 2000, 27,530,170 shares in 1999
and 26,239,520 shares in 1998............... 121,711 119,519 114,131
Treasury stock, at cost...................... (101) -- --
Receivable from issuance of common stock..... (93) (194) (369)
Accumulated other comprehensive income....... 65 52 9
Accumulated deficit.......................... (99,776) (98,824) (90,061)
-------- -------- --------
Total shareholders' equity................. 21,806 20,553 23,710
-------- -------- --------
$ 37,188 $ 41,766 $ 49,792
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
---------------- ---------------------------
6/30/00 7/3/99 1999 1998 1997
------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues....................... $26,250 $23,580 $48,724 $ 41,270 $ 29,175
------- ------- ------- -------- --------
Costs and expenses:
Delivery and material costs.. 7,213 9,308 17,857 14,630 11,334
Customer operations.......... 8,237 7,528 15,138 14,780 11,388
Sales and marketing.......... 2,273 2,651 4,818 4,970 4,417
Research and development..... 1,634 1,292 2,577 2,780 2,473
General and administrative... 4,055 2,609 6,552 4,314 3,169
Write down of goodwill and
fixed assets (note 3)....... -- -- -- 17,006 --
Non-recurring charges........ -- -- 370 -- --
Depreciation and
amortization................ 3,199 4,925 8,591 10,266 9,306
------- ------- ------- -------- --------
Total expenses............. 26,611 28,313 55,903 68,746 42,087
------- ------- ------- -------- --------
Loss from operations........... (361) (4,733) (7,179) (27,476) (12,912)
Other income (expense):
Interest income and other,
net......................... 96 153 319 253 744
Interest expense............. (686) (1,112) (1,903) (3,014) (2,607)
------- ------- ------- -------- --------
Net loss....................... $ (951) $(5,692) $(8,763) $(30,237) $(14,775)
======= ======= ======= ======== ========
Basic and diluted net loss per
common share (note 11)........ $ (0.03) $ (0.21) $ (0.33) $ (1.97) $ (2.52)
======= ======= ======= ======== ========
Weighted average common
shares........................ 27,812 26,490 26,653 16,272 11,893
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible Receivable Accumulated Total
Preferred stock Common stock Treasury From Other Shareholders'
-------------------- ------------------- Stock Issuance of Comprehensive Accumulated Equity
Shares Amount Shares Amount at cost Common stock Income Deficit (Deficit)
---------- -------- ---------- -------- -------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. -- $ -- 11,653,625 $ 55,138 $ -- $(175) $-- $(28,124) $(28,124)
Issuance of
Series A
preferred stock,
net of issuance
costs of $1,100.. 4,950,495 16,400 -- -- -- -- -- -- 16,400
Preferred stock
deemed dividend.. -- 15,161 -- -- -- -- -- (15,161) --
Issuance of
common stock in
connection with
acquisition of
Mediatech........ -- -- 324,355 1,906 -- -- -- -- 1,906
Exercise of stock
options.......... -- -- 144,699 79 -- -- -- -- 79
Net loss......... -- -- -- -- -- -- -- (14,775) (14,775)
---------- -------- ---------- -------- ----- ----- ---- -------- --------
Balance at
December 31,
1997............. 4,950,495 31,561 12,122,679 57,123 -- (175) -- (58,060) 30,449
Conversion of
Series A
preferred stock
to common stock,
net of issuance
costs of $486.... (4,950,495) (31,561) 4,950,495 31,075 -- -- -- -- (486)
Preferred stock
deemed dividend
resulting from
conversion of
Series A
preferred stock.. -- -- 495,035 1,764 -- -- -- (1,764) --
Issuance of
common stock in
private
placements, net
of issuance costs
of $370.......... -- -- 8,432,499 23,480 -- -- -- -- 23,480
Warrants issued
in relation to
common stock
private
placement........ -- -- -- 12 -- -- -- -- 12
Issuance of
restricted stock
for promissory
note............. -- -- 50,000 194 -- (194) -- -- --
Exercise of stock
options.......... -- -- 164,701 371 -- -- -- -- 371
Stock issued for
services......... -- -- 10,000 80 -- -- -- -- 80
Purchase of
shares through
ESPP............. -- -- 14,111 32 -- -- -- -- 32
Foreign currency
translation
adjustment....... -- -- -- -- -- -- 9 -- 9
Net loss......... -- -- -- -- -- -- -- (30,237) (30,237)
---------- -------- ---------- -------- ----- ----- ---- -------- --------
Balance at
December 31,
1998............. -- -- 26,239,520 114,131 -- (369) 9 (90,061) 23,710
Issuance of
common stock in
private
placement........ -- -- 725,199 3,750 -- -- -- -- 3,750
Exercise of
Warrants......... -- -- 11,967 -- -- -- -- -- --
Forgiveness of
promissory note.. -- -- -- -- -- 175 -- -- 175
Exercise of stock
options.......... -- -- 507,686 1,518 -- -- -- -- 1,518
Purchase of
shares through
ESPP............. -- -- 45,798 120 -- -- -- -- 120
Foreign currency
translation
adjustment....... -- -- -- -- -- -- 43 -- 43
Net loss......... -- -- -- -- -- -- -- (8,763) (8,763)
---------- -------- ---------- -------- ----- ----- ---- -------- --------
Balance at
December 31,
1999............. -- -- 27,530,170 $119,519 -- (194) 52 (98,824) 20,553
Exercise of
stock options
(unaudited)..... -- -- 642,658 2,192 -- -- -- -- 2,192
Purchase of
treasury stock
(unaudited)..... -- -- -- -- (101) 101 -- -- --
Foreign currency
translation
adjustment
(unaudited)..... -- -- -- -- -- -- 13 -- 13
Net loss
(unaudited)..... -- -- -- -- -- -- -- (951) (951)
---------- -------- ---------- -------- ----- ----- ---- -------- --------
Balance at June
30, 2000
(unaudited)...... -- $ -- 28,172,828 $121,711 $(101) $ (93) $ 65 $(99,776) $ 21,806
========== ======== ========== ======== ===== ===== ==== ======== ========
<CAPTION>
Comprehensive
Loss
-------------
<S> <C>
Balance at
December 31,
1996............. $ --
Issuance of
Series A
preferred stock,
net of issuance
costs of $1,100.. --
Preferred stock
deemed dividend.. --
Issuance of
common stock in
connection with
acquisition of
Mediatech........ --
Exercise of stock
options.......... --
Net loss......... (14,775)
-------------
Balance at
December 31,
1997............. $ (14,775)
=============
Conversion of
Series A
preferred stock
to common stock,
net of issuance
costs of $486.... --
Preferred stock
deemed dividend
resulting from
conversion of
Series A
preferred stock.. --
Issuance of
common stock in
private
placements, net
of issuance costs
of $370.......... --
Warrants issued
in relation to
common stock
private
placement........ --
Issuance of
restricted stock
for promissory
note............. --
Exercise of stock
options.......... --
Stock issued for
services......... --
Purchase of
shares through
ESPP............. --
Foreign currency
translation
adjustment....... 9
Net loss......... (30,237)
-------------
Balance at
December 31,
1998............. $ (30,228)
=============
Issuance of
common stock in
private
placement........ --
Exercise of
Warrants......... --
Forgiveness of
promissory note.. --
Exercise of stock
options.......... --
Purchase of
shares through
ESPP............. --
Foreign currency
translation
adjustment....... 43
Net loss......... (8,763)
-------------
Balance at
December 31,
1999............. $ (8,720)
=============
Exercise of
stock options
(unaudited)..... --
Purchase of
treasury stock
(unaudited)..... --
Foreign currency
translation
adjustment
(unaudited)..... 13
Net loss
(unaudited)..... (951)
-------------
Balance at June
30, 2000
(unaudited)...... $ (938)
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,
----------------- ---------------------------
6/30/00 7/3/99 1999 1998 1997
-------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $ (951) $(5,692) $(8,763) $(30,237) $(14,775)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization.............. 2,824 4,492 8,106 9,103 8,519
Amortization of goodwill
and intangibles........... 361 387 486 1,163 787
Writedown of goodwill and
fixed assets.............. -- -- -- 17,006 --
Common stock issued for
services.................. -- -- -- 80 --
Provision for doubtful
accounts.................. 789 170 538 1,142 246
Changes in operating assets
and liabilities--
Accounts receivable...... (267) (244) (3,512) (1,953) (122)
Prepaid expenses and
other assets............ 675 (306) (659) (213) (212)
Accounts payable and
accrued liabilities..... (3,862) 790 3,957 (882) (751)
-------- ------- ------- -------- --------
Net cash provided by
(used in) operating
activities.............. (431) (403) 153 (4,791) (6,308)
-------- ------- ------- -------- --------
Cash flows from investing
activities:
Purchases of short-term
investments................. -- -- -- (2,013) (8,810)
Maturities of short-term
investments................. -- -- -- 3,000 18,738
Acquisition of Mediatech, net
of cash acquired............ -- -- -- -- (13,921)
Proceeds from sale of
property, plant and
equipment................... -- -- 75 -- --
Acquisition of DCI........... -- -- -- (9,131) --
Purchase of property and
equipment................... (1,147) (2,589) (2,653) (2,162) (5,131)
-------- ------- ------- -------- --------
Net cash used in
investing activities.... (1,147) (2,589) (2,578) (10,306) (9,124)
-------- ------- ------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
common stock, net........... 2,192 1,244 5,563 23,975 79
Proceeds from issuance of
convertible preferred
stock....................... -- -- -- -- 16,400
Costs of converting preferred
stock to common stock....... -- -- -- (486) --
Proceeds from line of
credit...................... 17,018 1,148 1,148 13,365 7,686
Payments on line of credit... (14,790) (1,406) (2,581) (14,767) (8,027)
Proceeds from short-term
loans....................... -- -- -- -- 6,000
Repayment of short-term
loans....................... -- -- -- -- (6,000)
Proceeds from issuance of
long-term debt.............. 3,000 -- -- 5,233 5,419
Payments on long-term debt... (8,070) (4,602) (9,308) (7,106) (7,974)
-------- ------- ------- -------- --------
Net cash (used in)
provided by financing
activities.............. (650) (3,616) (5,178) 20,214 13,583
-------- ------- ------- -------- --------
Effect of exchange rate changes
on cash....................... 12 (30) 2 (75) --
-------- ------- ------- -------- --------
Net increase (decrease) in cash
and cash equivalents.......... (2,216) (6,638) (7,605) 5,192 (1,849)
Cash and cash equivalents at
beginning of period........... 5,420 13,025 13,025 7,833 9,682
-------- ------- ------- -------- --------
Cash and cash equivalents at
end of period................. $ 3,204 $ 6,387 $ 5,420 $ 13,025 $ 7,833
======== ======= ======= ======== ========
Supplemental cash flow
information:
Interest paid................ $ 686 $ 1,391 $ 2,199 $ 2,777 $ 2,502
======== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
1. DG Systems:
Digital Generation Systems, Inc. ("DG Systems") was incorporated in 1991. DG
Systems operates 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. DG Systems is primarily a provider
of electronic and physical distribution of audio and video spot advertising to
radio and television stations and primarily generates its revenues from
advertising agencies and production studios.
DG Systems is subject to certain risks that include, but are not limited to:
the continued development of technology to enhance the delivery and variety of
services in the most cost-effective manner, including the successful
integration of the operations of its recently acquired subsidiaries; the
ability to compete successfully against current and future competitors; and
dependence on key personnel and the need for additional financing to fund
operations and its capital expenditure requirements. DG Systems obtains
certain components used in the assembly of the units which are placed at radio
and television stations and production studios from a few single or limited
source suppliers and obtains its primary long distance telephone access
through an exclusive contract with a telephone service provider which expires
in 2001. Any material interruption in these services could have a material
adverse effect on DG Systems' business. Although DG Systems believes that
alternate vendors can be obtained, the transition to alternative vendors could
have a material adverse impact on its costs and shipping schedules.
2. Summary of Significant Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of DG Systems and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting
from this process are included in other comprehensive income. Revenue, costs,
and expenses are translated at average rates of exchange prevailing during the
year. Gains (losses) on foreign currency transactions of ($28,000) and $10,000
for the years ended December 31, 1999 and 1998 (none in 1997), respectively,
are included in interest income and other, net in the consolidated statements
of operations.
Research and Development
Research and development costs are charged to expense as incurred.
F-8
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net identifiable assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, generally 20 years. DG Systems
assesses the recoverability of this intangible asset by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting DG Systems' average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Cash and Cash Equivalents
Cash and cash equivalents consist of liquid investments with original
maturities of three months or less. As of December 31, 1999 and December 31,
1998, cash equivalents consist principally of United States Treasury Bills.
Property and Equipment
Network equipment includes the network operating center, record send
terminals, receive playback terminals, video record transmission systems,
digital video playback systems and the related terminal and system components
as well as audio and video taping and dubbing equipment. DG Systems records
its property and equipment at cost and depreciates it on a straight-line basis
over its estimated useful life, generally three years. Equipment held under
capital leases and leasehold improvements are amortized straight-line over the
shorter of the lease term or estimated useful life of the asset.
Revenue Recognition
Revenues for distribution services which are digitally transmitted are
recognized for each transaction on the date audio, video or related
information is successfully transmitted from DG Systems' operating facilities
to the destination ordered. Revenues for distribution services of analog audio
or videotapes are recognized as the tapes are shipped.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-9
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
Stock Option Plans
DG Systems applies the intrinsic value-based method of accounting prescribed
by Accounting Principles board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, DG Systems has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
Concentration of Credit Risk
Financial instruments that potentially subject DG Systems to a concentration
of credit risk consist principally of cash and cash equivalents and accounts
receivable.
DG Systems believes that a concentration of credit risk with respect to
accounts receivable is limited because its customers are geographically
dispersed and the end users (the customer's clients) are diversified across
industries.
DG Systems' receivables are principally from advertising agencies, dub and
ship houses, and syndicated programmers. Revenues are not contingent on
customer sales or collections. However, the timing of collections from
customers is affected by the billing cycle in which the customer bills its
end-users (the customer's clients). DG Systems provides reserves for credit
losses.
Supplemental Cash Flow Information
Non-cash investing and financing activities for 1999, 1998 and 1997
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
Six Months Ended 31,
------------------ -----------------------
6/30/00 7/3/99 1999 1998 1997
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Property and equipment financed
with capitalized lease
obligations...................... $ 873 $ -- $ 1,977 $ 1,663 $ 400
Long-term debt used to finance
Mediatech acquisition............ -- -- -- -- 3,850
Common stock issued to finance
Mediatech acquisition............ -- -- -- -- 1,906
Preferred stock deemed dividend... -- -- -- 1,764 15,161
Conversion of preferred stock to
common stock..................... -- -- -- 31,561 --
Common stock issued for services.. -- -- -- 80 --
Treasury stock purchased in
exchange for cancellation of
note............................. 101 -- -- -- --
</TABLE>
Presentation of Unaudited Financial Statements
The unaudited consolidated financial statements as of June 30, 2000 and for
the six months ended June 30, 2000 and July 3, 1999 have been prepared in
accordance with the rules of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes otherwise necessary
for a fair presentation of financial position, results of operations and cash
flows, in conformity with generally accepted accounting principles. However,
the information furnished, in the opinion of management, reflects all
adjustments necessary to present fairly the financial position, results of
operations and cash flows on a consistent basis. Such adjustments consisted
only of normal recurring items. The results of operations are not necessarily
indicative of results which may be expected for any other interim period or
for the year as a whole.
F-10
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
Reclassifications
Certain reclassifications were made to the 1997 and 1998 condensed
consolidated financial statements to conform to the 1999 presentation.
3. Acquisitions:
Mediatech
On July 18, 1997, DG Systems acquired 100% of the capital stock of Starcom
Mediatech, Inc. ("Mediatech"), a wholly-owned subsidiary of IndeNet, Inc.
("IndeNet"), for final consideration totaling approximately $25.2 million
("Mediatech Acquisition"). The consideration consisted of approximately
$14.0 million in cash, 324,355 shares of DG Systems common stock and $9.2
million of debt. Mediatech is a media duplication and distribution company
whose principal offices are located in Chicago, Illinois.
The Mediatech acquisition was accounted for as a purchase. The excess of
purchase price and acquisition costs over the fair value of net assets
acquired of approximately $17.8 million was included in Goodwill and Other
Assets. The operating results of Mediatech have been included in the
consolidated results of DG Systems from the date of the closing of the
transaction, July 18, 1997.
Due to a change in Mediatech's business, in September 1998 DG Systems wrote
off the remaining goodwill resulting from the Mediatech acquisition ($16.7
million) and a portion of the fixed assets ($340,000), as it was determined
that their carrying values were not recoverable.
DCI
On September 25, 1998, DG Systems acquired substantially all of the property
and assets of Digital Courier International, Inc. ("DCI"), including all
accounts receivable, inventories, contracts, equipment, real property leases
and other related assets. DCI is in the business of supplying electronic
distribution and communications services for the radio broadcast industry in
the United States and Canada.
DG Systems paid $13.5 million in Canadian dollars (approximately US $9.06
million) for DCI. The DCI acquisition was accounted for as a purchase. The
excess of purchase price and acquisition costs over the fair value of assets
acquired of approximately $6.2 million is included in Goodwill and Other
Assets in the accompanying consolidated balance sheets, and is being amortized
over a twenty year period. The operating results of DCI have been included in
the consolidated results and balances of DG Systems from the date of the
closing of the transaction.
Pro Forma Results
The following table reflects unaudited pro forma combined results of
operations of DG Systems for the year ended December 31, 1998 on the basis
that the acquisition of DCI had taken place at the beginning of 1998:
<TABLE>
<CAPTION>
<S> <C>
Revenues......................................................... $ 44,506
Net loss......................................................... $ (35,277)
Basic and diluted net loss per common share...................... $ (3.10)
</TABLE>
F-11
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
The unaudited pro forma combined results of operations are not necessarily
indicative of the actual results that would have occurred had the acquisition
of DCI been consummated at the beginning of 1998, or of future operations of
the combined companies.
4. Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Telecommunications costs...................................... $ 4 $ 715
Employee compensation......................................... 1,115 897
Legal and professional fees................................... 135 557
Other......................................................... 1,976 1,912
------ ------
$3,230 $4,081
====== ======
</TABLE>
5. Commitments and Contingencies:
DG Systems leases its facilities and certain equipment under non-cancelable
operating leases. As of December 31, 1999, future minimum annual payments
under these leases are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000................................................................. $1,485
2001................................................................. 898
2002................................................................. 535
2003................................................................. 503
2004................................................................. 503
Thereafter........................................................... 953
------
$4,877
======
</TABLE>
Rent expense totaled approximately $1,432,000, $1,391,000 and $1,540,000 in
1999, 1998 and 1997, respectively.
In addition, as of December 31, 1999, DG Systems had non-cancelable future
minimum purchase commitments with its primary telephone service provider.
These commitments range between $4.6 million and $6.2 million per year and
extend through December 2001.
DG Systems is subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business from time to time.
While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of the pending legal
matters will have a material adverse effect on DG Systems' results of
operations, financial position or liquidity.
DG Systems has employment agreements with certain of its key executives. In
general, the agreements provide for base salaries, bonuses, option grants
based on certain performance criteria, and termination payments.
6. Line of Credit:
Mediatech was a party to a financing agreement with a bank providing a
revolving line of credit to fund the working capital requirements of
Mediatech. The agreement was collateralized by a security agreement covering
F-12
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
substantially all of the assets of Mediatech, with interest on advances at the
bank's reference rate, approximately equal to the prime rate, plus 2.25%.
There was no balance outstanding under this agreement at December 31, 1999 and
the arrangement was terminated in January 2000.
7. Long-Term Debt:
DG Systems has used several lease and loan agreements to finance the
purchase of certain property and equipment. Borrowings are secured by the
equipment. The cost of equipment under capital lease and term loan obligations
at December 31, 1999 and 1998 was $14,321,000 and $22,588,000, respectively.
Related accumulated depreciation at December 31, 1999 and 1998 was $10,135,000
and $15,644,000, respectively. The reduction in the cost of equipment under
lease in 1999 is due to the primary lease term expiring for certain of the
equipment under lease with such equipment continuing to be leased on a month-
to-month basis thereafter. The term loan obligations have repayment terms of
36 to 60 months and DG Systems has the option at the end of the terms to
purchase the equipment at mutually agreed upon prices not to exceed 10 to 20%
of the equipment's original cost. As of December 31, 1999, approximately $0.1
million remained available under these agreements to fund future capital
requirements.
In December 1997 DG Systems entered an agreement to finance an additional
$2.0 million of equipment purchases and $3.5 million of working capital
through a long-term facility. At December 31, 1999, $5.4 million has been
financed through this agreement. The agreement has repayment terms consistent
with those discussed in the preceding paragraph.
In August 1999 DG Systems entered into an agreement to finance an additional
$2.0 million of equipment purchases through a long-term facility with a
repayment term of 24 months. The cost of equipment under this lease obligation
at December 31, 1999 was $2.0 million. Related accumulated depreciation at
December 31, 1999 was $0.2 million.
Mediatech has long-term debt outstanding per the terms of a promissory note
signed in February 1997. The remaining principal balance of the note was $1.1
million at December 31, 1999. The note bears interest at the bank's reference
rate, approximately equal to the prime rate, plus 2.25% (10.75% at December
31, 1999) and principal and interest payments are due monthly. This note is
payable to the same creditor that provided the line of credit discussed in
Note 6 and is collateralized by substantially all of the assets of Mediatech.
Future minimum lease and long-term debt payments as of December 31, 1999,
are as follows (in thousands):
<TABLE>
<CAPTION>
Lease Long-term
Years Ending December 31, Payments Debt
------------------------- -------- ---------
<S> <C> <C>
2000.................................................... $6,694 $1,690
2001.................................................... 2,373 297
------ ------
Total minimum debt payments............................. 9,067 $1,987
------ ======
Less--Amount representing interest (effective interest
rates ranging from 9 percent to 19 percent)............ (852)
------
Present value of minimum lease payments................. 8,215
Less--Current portion................................... (5,999)
------
Long-term portion....................................... $2,216
======
</TABLE>
F-13
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
Effective April 6, 2000, DG Systems entered into a loan and security
agreement with Foothill Capital Corporation for a revolving credit facility
providing borrowings of 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 DG Systems is subject to a borrowing base of eligible
receivables less outstanding letters of credit, as defined in the revolving
credit facility. 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.
8. Capital Stock:
In July and August 1998, the board of directors authorized the issuance of
up to $13.0 million of common stock in a private placement transaction. DG
Systems issued 4,589,287 common shares to current institutional and closely
associated investors at $2.80 per share. Proceeds to DG Systems, net of
issuance costs, were approximately $12.7 million.
In December 1998, the board of directors authorized the issuance of up to
$11.0 million of common stock in a private placement transaction. DG Systems
issued 2,920,134 common shares to Scott K. Ginsburg, DG Systems' Chief
Executive Officer, at $3.25 per share. In addition, DG Systems authorized the
sale and issuance of up to $3.0 million of common stock in a private placement
transaction. DG Systems issued 923,078 common shares to current institutional
and closely associated investors at a price of $3.25 per share.
In December 1999, the board of directors authorized the issuance of common
stock in a private placement transaction. DG Systems issued 725,199 common
shares to current institutional and closely associated investors at a price of
$5.17 per share.
In December 1999, DG Systems wrote off a note receivable from an executive
officer in the amount of $175,000 that was issued in connection with a
restricted stock purchase agreement, pursuant to which the executive officer
purchased an aggregate of 487,500 shares of DG Systems' common stock. A charge
to expense of $175,000 was recorded in 1999 for this transaction.
DG Systems and a former employee are parties to a restricted stock purchase
agreement, pursuant to which DG Systems loaned the employee money under a full
recourse note and the employee purchased an aggregate of 50,000 shares of DG
Systems' common stock, which were subject to DG Systems' right to repurchase
under certain circumstances. In March, 2000, DG Systems exercised its right to
repurchase 22,917 shares by forgiving the related note receivable in the
amount of $101,250.
Series A Convertible Preferred Stock
During 1997, DG Systems issued 4,950,495 shares of Series A convertible
preferred stock. There was a beneficial conversion feature associated with the
Series A preferred stock. The difference between the publicly traded price per
share and the sales price per share has been reflected as a deemed dividend to
the preferred shareholders in the accompanying consolidated statements of
shareholders' equity. This deemed dividend results in an increase in loss
attributable to common shareholders in the computation of basic and diluted
loss per share for the year ended December 31, 1997. In July 1998, the Series
A preferred stock was converted to common stock per the terms of the Series A
Preferred Stock Conversion Agreement effective August 14, 1998. The conversion
of the Series A preferred stock to common stock resulted in an additional
deemed dividend to the preferred shareholders. This deemed dividend results in
an increase in loss attributable to common shareholders in the computation of
basic and diluted earnings per share for the year ended December 31, 1998.
F-14
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
Warrants
DG Systems has issued warrants in connection with certain financing and
leasing transactions and common stock offerings. All of the outstanding
warrants are convertible into common stock. A summary of outstanding warrants
at December 31, 1999, 1998 and 1997 and changes during the years then ended
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Warrants Ex. Price Warrants Ex. Price Warrants Ex. Price
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year............ 3,926,244 $3.55 492,177 $5.69 193,025 $5.58
Granted................. -- -- 3,470,067 3.25 299,152 5.77
Exercised............... (71,174) 2.70 -- -- -- --
--------- ----- --------- ----- ------- -----
Outstanding at end of
the year............... 3,891,070 $3.57 3,962,244 $3.55 492,177 $5.69
========= ===== ========= ===== ======= =====
</TABLE>
The warrants outstanding at December 31, 1999 expire on various dates from
2001 through 2006. The warrants exercised in 1999 were done by exchanging the
entire warrant for shares of common stock equal to the net value of the
warrant.
9. Stock Plans:
DG Systems has three Stock Option Plans:
1992 Stock Option Plan
Under DG Systems' 1992 Stock Option Plan, (the "1992 Plan"), DG Systems may
issue up to 4,950,000 shares of common stock to employees, officers, directors
and consultants. At DG Systems' Annual Shareholders' Meeting in September
1999, the shareholders approved an increase of 2,000,000 shares from the
previously authorized total of 2,950,000. The exercise price and terms of the
options granted is determined by the board of Directors, provided that such
price cannot be less than the fair value of the common stock on the date of
grant for incentive stock options or, in the case of non-statutory options,
less than 85 percent of the fair value of the common stock on the date of
grant. The options generally vest over four years. The 1992 Plan provides
that, in the event of a change in control of DG Systems, executive officers of
DG Systems will receive accelerated vesting for a portion of their unvested
option shares. The term of the options granted is seven years. No options have
been granted at less than fair value under this plan.
1996 Supplemental Option Plan
In 1996, DG Systems' board of Directors adopted the 1996 Supplemental Option
Plan. Under this Plan, DG Systems may issue up to 750,000 shares of common
stock to employees, officers, directors and consultants. The exercise price
and terms of the options granted are determined by the board of directors. The
options generally vest over four years. The term of the options granted is
seven years.
1995 Director Option Plan
In 1995, DG Systems' board of directors adopted the 1995 Director Option
Plan (the "Director Plan"). A total of 300,000 shares of common stock has been
reserved for issuance under the Director Plan. At DG Systems' Annual
Shareholders' Meeting in September 1999, the shareholders approved an increase
of 200,000 shares from
F-15
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
the previously authorized total of 100,000. The Director Plan provides that
each future non-employee director of DG Systems will be automatically granted
an option to purchase 10,000 shares of common stock (the "First Option") on
the date on which the optionee first becomes a non-employee director of DG
Systems and an additional option to purchase 2,500 shares of common stock (the
"Subsequent Option") on each anniversary date thereafter. The exercise price
per share of all options granted under the Director Plan shall be equal to the
fair market value of a share of DG Systems' common stock on the date of grant.
Shares subject to the First Option vest over 36 months, and the Subsequent
Option shares vest over 12 months beginning with the month following the
second anniversary of its date of grant. The terms of the options granted is
ten years.
Accounting for Stock Option Compensation Expense
DG Systems applies the principles of APB Opinion No. 25 and related
interpretations in accounting for the its stock option plans. Had compensation
cost for DG Systems' stock option plans been determined based on the fair
value at the date of grant of the stock options consistent with the method of
SFAS No. 123, the net loss (in thousands) and loss per share would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported......................... $ (8,763) $(30,237) $(14,775)
Pro forma.................................... $(11,689) $(32,409) $(15,876)
Basic and diluted net loss per common share
as reported................................. $ (0.33) $ (1.97) $ (2.52)
Pro forma.................................... $ (0.44) $ (2.10) $ (2.61)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the multiple option approach of the Black-Scholes option pricing model with
the following assumptions used for grants in 1999, 1998 and 1997,
respectively; risk-free interest rates of 6.4%, 4.7% and 7.8%; a dividend
yield of 0%; and volatility factors of the expected market price of DG Systems
common stock of 112%, 194% and 75%.
A summary of DG Systems' fixed stock option plans at December 31, 1999, 1998
and 1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- ---------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year............ 3,087,031 $3.78 2,682,707 $4.21 1,806,355 $5.29
Granted................. 2,024,500 4.95 1,270,250 3.12 2,187,000 4.94
Exercised............... (507,686) 2.99 (164,701) 2.25 (144,699) 0.55
Canceled................ (573,006) 4.50 (701,225) 4.61 (1,165,949) 7.71
--------- ----- --------- ----- ---------- -----
Outstanding at end of
the year............... 4,030,839 $4.36 3,087,031 $3.78 2,682,707 $4.21
========= ===== ========= ===== ========== =====
Exercisable at end of
the year............... 1,262,767 $3.90 1,159,767 $3.79 543,653 $2.74
Weighted average fair
value of options
granted................ $3.55 $2.85 $2.69
</TABLE>
F-16
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- --------------------------
Weighted- Weighted-
Number Weighted-Average Average Number Average
Range of Exercise Prices Outstanding Remaining Contractual Life Exercise Price Exercisable Exercise Price
------------------------ ----------- -------------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.20--$2.65............ 381,673 4.70 $1.87 232,974 $1.42
$2.75--$5.00............ 1,714,916 5.15 $3.75 821,088 $4.02
$5.125--$10.125......... 1,934,250 6.18 $5.40 208,705 $6.21
--------- ---------
$0.20--$10.125.......... 4,030,839 1,262,767
========= =========
</TABLE>
As of December 31, 1999, there were 937,804 shares available for future
grant under the stock option plans.
10. Income Taxes
There was no income tax expense (benefit) in 1999, 1998, or 1997 due to the
existence of net operating losses and a full valuation allowance for related
deferred tax assets.
Components of deferred tax assets at December 31, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $16,992 $16,338
Cumulative temporary differences........................... 3,841 3,366
Research and development credit............................ 768 768
------- -------
Total gross deferred tax asset............................. 21,601 20,472
Less valuation allowance................................... (21,601) (20,472)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
</TABLE>
The net operating loss and research and development credit carryforwards of
approximately $48 million and $768,000, respectively, will expire on various
dates from 2007 to 2019. Utilization of these carryforwards may be annually
limited if there is a change in DG Systems' ownership, as defined by the
Internal Revenue Code.
A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding the realization of the asset including the
limited operating history of DG Systems, the lack of profitability to date and
the variability of operating results.
11. Net Loss Per Share
Under SFAS No. 128 "Earnings per Share," DG Systems is required to compute
earnings per share under two different methods (basic and diluted). Basic
earnings per share is calculated by dividing net income (loss) attributable to
common shareholders by the weighted average shares of common stock outstanding
during the period. Diluted earnings per share is calculated by dividing net
income (loss) attributable to common shareholders by the weighted average
shares of outstanding common stock and common stock equivalents during the
period. Due to losses, inclusion of common stock equivalents would be anti-
dilutive. Therefore, basic and diluted earnings per share for DG Systems are
the same.
For the year ended December 31, 1998, the net loss per share was computed as
net loss of $30,237,000 plus $1,764,000 relating to the preferred stock deemed
dividend (Note 8) divided by the weighted average common
F-17
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
shares outstanding. For the year ended December 31, 1997, the net loss per
share was computed as net loss of $14,775,000 plus $15,161,000 relating to the
preferred stock deemed dividend (Note 8) divided by the weighted average
common shares outstanding.
12. Segment Information
DG Systems 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. DG
Systems has defined its operating segments based on these geographic areas.
The information in the following tables is derived directly from the
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 December 31, 1999, 5% of operating
assets are located outside of the United States. At December 31, 1998 and
1997, the balance sheet information for DG Systems' Los Angles segment was
maintained as part of the Chicago segment and was impractical to break out
separately.
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
-------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Vancouver Consolidated
------------- -------- -------- ----------- --------- ------------
(In $000's)
<S> <C> <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)
Total identifiable
assets................. $ 23,119 $ 8,875 $ 3,500 $1,694 $ -- $ 37,188
<CAPTION>
Six Months Ended July 3, 1999
-------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Vancouver Consolidated
------------- -------- -------- ----------- --------- ------------
(In $000's)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 9,237 $ 5,901 $ 6,173 $ 772 $ 1,497 $ 23,580
Net income (loss)....... $ (4,292) $ 798 $ (777) $ (539) $ (882) $ (5,692)
Total identifiable
assets................. $ 15,516 $ 9,938 $ 6,695 $ -- $ 9,089 $ 41,238
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Vancouver Consolidated
------------- -------- -------- ----------- --------- ------------
(In $000's)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 16,340 $12,037 $ 13,605 $2,219 $ 4,523 $ 48,724
Net income (loss)....... $(12,458) $ 2,877 $ 1,805 $ 240 $(1,227) $ (8,763)
Total identifiable
assets................. $ 15,875 $10,081 $ 4,943 $1,996 $ 8,871 $ 41,766
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Vancouver Consolidated
------------- -------- -------- ----------- --------- ------------
(In $000's)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 15,976 $10,125 $ 10,829 $2,842 $ 1,498 $ 41,270
Net income (loss)....... $(10,910) $ 1,265 $(19,975) $ (191) $ (426) $(30,237)
Total identifiable
assets................. $ 22,737 $10,060 $ 7,514 $ -- $ 9,481 $ 49,792
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Vancouver Consolidated
------------- -------- -------- ----------- --------- ------------
(In $000's)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 13,461 $ 8,384 $ 7,330 $ -- $ -- $ 29,175
Net income (loss)....... $(12,745) $ 410 $ (2,440) $ -- $ -- $(14,775)
Total identifiable
assets................. $ 29,997 $ 2,485 $ 28,214 $ -- $ -- $ 60,697
</TABLE>
F-18
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
13. Pretax Savings Plan
DG Systems has a 401(k) retirement plan for full-time United States based
employees. Employees who are at least 21 years of age and have completed at
least six months of service are eligible to participate in the plan. Employees
may contribute up to 20% of gross pay with a maximum dollar limit for 1998 of
$10,000. The employer contribution is made at the end of the plan year in an
amount set by corporate resolution, based on participants' compensation. DG
Systems made no contributions to the plan in 1999, 1998 or 1997.
14. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This new
standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Under SFAS No. 133, gains or
losses resulting from changes in the values of derivatives are to be reported
in the statement of operations or as a deferred item, depending on the use of
the derivatives and whether they qualify for hedge accounting. DG Systems is
required to adopt SFAS No. 133 in the first quarter of 2001. To date, DG
Systems has not engaged in any hedging activity and does not expect adoption
of this new standard to have a significant impact on DG Systems.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB No. 101). SAB No. 101 summarizes the SEC's staff's views in applying
generally accepted accounting principles to selected revenue recognition
issues. DG Systems understands that the SEC staff is preparing a document to
address significant implementation issues related to SAB No. 101. To the
extent that SAB No. 101 ultimately changes revenue recognition practices, DG
Systems will adopt SAB No. 101 no later than the fourth quarter of fiscal year
2000 through a cumulative effect adjustment. Any cumulative effect adjustment
will be computed as of January 1, 2000. DG Systems cannot determine the
potential impact that SAB No. 101 may have on its consolidated financial
position or results of operations at this time.
In March, 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25." Among other issues, Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25 (APB No. 25)
regarding (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock options in a business combination. The provisions of Interpretation
No. 44 affecting DG Systems are to be applied on a prospective basis effective
July 1, 2000.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
StarGuide Digital Networks, Inc.:
We have audited the accompanying consolidated balance sheets of StarGuide
Digital Networks, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' deficit and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of
StarGuide Digital Network's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of StarGuide
Digital Networks, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Dallas, Texas
March 3, 2000
F-20
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------
2000 1999 1998
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 5,454,968 $ 2,144,572 $ 1,875,962
Trade accounts receivable, net of
allowance for doubtful accounts of
$250,914 in 2000, $234,587 in 1999
and $141,225 in 1998 (note 8)...... 4,333,430 7,784,143 1,505,731
Inventories, net (notes 2 and 8).... 2,190,695 1,968,943 2,429,547
Prepaid expenses and other current
assets............................. 537,164 858,014 96,070
------------ ------------ -----------
Total current assets.............. 12,516,257 12,755,672 5,907,310
Property and equipment, net (notes 3
and 8)............................... 772,911 725,445 959,240
Investments in and amounts due from
joint venture (note 5)............... -- -- 54,765
Other assets, net (note 4)............ 422,671 580,724 925,470
------------ ------------ -----------
Total assets........................ $ 13,711,839 $ 14,061,841 $ 7,846,785
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank lines of credit (note 8)....... $ -- $ 430,000 $ 545,000
Current portion of long-term debt
(note 7)........................... -- 222,520 1,040,346
Trade accounts payable and accrued
liabilities........................ 3,298,331 5,353,119 4,287,801
Deferred revenue (note 12).......... 3,201,252 3,122,455 1,487,882
Other current liabilities........... 291,274 368,208 237,339
------------ ------------ -----------
Total current liabilities......... 6,790,857 9,496,302 7,598,368
Deferred revenue (note 12)............ 10,967,159 12,048,834 644,183
Long-term debt, net of current portion
(note 7)............................. -- 5,000,000 5,586,047
Excess of losses over investment in
and amounts due from joint venture
(note 5)............................. 2,682,842 2,191,728 --
------------ ------------ -----------
Total liabilities................... 20,440,858 28,736,864 13,828,598
------------ ------------ -----------
Shareholders' deficit (note 9):
Class A common stock, $0.001 par
value;
Authorized 60,000,000 shares;
issued and outstanding 13,200,000
shares............................ 13,200 13,200 13,200
Class B common stock, $0.001 par
value.
Authorized 60,000,000 shares;
10,822,009 issued and 10,554,977
outstanding in 2000; 9,604,759
issued and 9,524,759 outstanding
in 1999; and 9,187,030 shares
issued and outstanding in 1998.... 10,822 9,605 9,187
Additional paid-in capital........... 48,404,463 17,873,641 17,297,106
Accumulated deficit.................. (54,186,134) (32,301,469) (23,301,306)
Treasury stock, 267,032 common shares
in 2000, and 80,000 common shares in
1999, at cost....................... (971,370) (270,000) --
------------ ------------ -----------
Total shareholders' deficit......... (6,729,019) (14,675,023) (5,981,813)
------------ ------------ -----------
Commitments and contingencies (notes 5
and 6)
Total liabilities and shareholders'
deficit............................ $ 13,711,839 $ 14,061,841 $ 7,846,785
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
30, Year Ended December 31,
------------------------- -------------------------------------
2000 1999 1999 1998 1997
------------ ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales (notes 5
and 12).............. $ 4,850,222 $ 3,902,846 $ 9,716,846 $ 8,817,434 $18,628,143
Service revenue....... 1,663,478 1,236,480 3,091,053 2,457,504 4,559,718
Other................. 86,716 186,561 260,419 544,232 789,221
------------ ----------- ----------- ----------- -----------
Total revenues...... 6,600,416 5,325,887 13,068,318 11,819,170 23,977,082
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues...... 4,364,654 3,229,023 8,127,697 8,137,045 14,676,111
Sales and marketing... 1,172,123 1,967,433 3,209,349 2,964,843 2,822,811
Research and
development.......... 1,480,249 1,196,824 3,382,792 2,546,589 2,770,574
General and
administrative....... 2,008,844 1,296,414 3,086,854 2,878,582 3,100,769
Noncash stock
compensation charges
(note 9)............. 18,375,000 -- -- -- --
Depreciation and
amortization......... 433,024 483,586 973,189 1,266,961 1,013,920
------------ ----------- ----------- ----------- -----------
Total costs and
expenses........... 27,833,894 8,173,280 18,779,881 17,794,020 24,384,185
------------ ----------- ----------- ----------- -----------
Operating loss.... (21,233,478) (2,847,393) (5,711,563) (5,974,850) (407,103)
Equity in losses of
joint venture
(note 5)............... (829,083) (672,546) (3,030,723) (2,282,495) (3,275,514)
Interest and other
income................. 195,509 33,579 289,038 35,090 39,793
Interest expense........ (17,613) (292,988) (546,915) (627,614) (814,877)
------------ ----------- ----------- ----------- -----------
Net loss............ $(21,884,665) $(3,779,348) $(9,000,163) $(8,849,869) $(4,457,701)
============ =========== =========== =========== ===========
Basic and diluted
net loss per
share.............. $ (0.93) $ (0.17) $ (0.40) $ (0.46) $ (0.23)
============ =========== =========== =========== ===========
Weighted average
common shares
outstanding........ 23,454,954 22,442,421 22,607,327 19,254,830 19,015,300
============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Class A Class B
common stock common stock Additional
------------------ ------------------ paid-in Treasury Accumulated
Shares Amount Shares Amount capital stock deficit Total
---------- ------- ---------- ------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 10,000,000 $10,000 9,000,000 $ 9,000 $ 8,599,123 $ -- $ (9,993,736) $ (1,375,613)
Issuance of Class B
common stock for
interest on note
payable................ -- -- 53,184 53 199,395 -- -- 199,448
Net loss................ -- -- -- -- -- -- (4,457,701) (4,457,701)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Balance at December 31,
1997................... 10,000,000 10,000 9,053,184 9,053 8,798,518 -- (14,451,437) (5,633,866)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Issuance of Class A
common stock and
warrants............... 3,200,000 3,200 -- -- 7,996,800 -- -- 8,000,000
Issuance of Class B
common stock for
interest on note
payable................ -- -- 133,846 134 501,788 -- -- 501,922
Net loss................ -- -- -- -- -- -- (8,849,869) (8,849,869)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Balance at December 31,
1998................... 13,200,000 13,200 9,187,030 9,187 17,297,106 -- (23,301,306) (5,981,813)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Issuance of Class B
common stock for
conversion of note
payable................ -- -- 417,729 418 576,535 -- -- 576,953
Purchase of treasury
stock.................. -- -- -- -- -- (270,000) -- (270,000)
Net loss................ -- -- -- -- -- -- (9,000,163) (9,000,163)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Balance at December 31,
1999................... 13,200,000 13,200 9,604,759 9,605 17,873,641 (270,000) (32,301,469) (14,675,023)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Issuance of Class B
common stock
(unaudited)............ -- -- 1,217,250 1,217 12,155,822 -- -- 12,157,039
Purchase of treasury
stock (unaudited)...... -- -- -- -- -- (701,370) -- (701,370)
Issuance of Class B
common stock warrants
(unaudited)............ -- -- -- -- 18,375,000 -- -- 18,375,000
Net loss (unaudited).... -- -- -- -- -- -- (21,884,665) (21,884,665)
---------- ------- ---------- ------- ----------- --------- ------------ ------------
Balance at June 30, 2000
(unaudited)............ 13,200,000 $13,200 10,822,009 $10,822 $48,404,463 $(971,370) $(54,186,134) $ (6,729,019)
========== ======= ========== ======= =========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------- -------------------------------------
2000 1999 1999 1998 1997
------------ ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(21,884,665) $(3,779,348) $(9,000,163) $(8,849,869) $(4,457,701)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 433,024 483,586 973,189 1,266,961 1,013,920
Noncash stock
compensation charges.. 18,375,000 -- -- -- --
Deferred income taxes.. -- -- -- -- (18,251)
Reduction in notes
payable to settle
claim................. -- (173,000) (203,906) -- --
Provision for (recovery
of) doubtful
accounts.............. 38,701 63,751 93,362 (205) 39,605
Noncash interest
expense............... -- 29,723 29,753 501,922 199,448
Equity in losses of
joint venture......... 829,083 672,546 3,030,723 2,282,495 2,770,677
Loss on disposal of
property and
equipment............. -- -- -- 16,974 --
Changes in operating
assets and
liabilities:
Accounts receivable... 3,412,012 (99,175) (6,371,774) 1,614,024 (940,695)
Inventories........... (221,752) (41,098) 460,604 114,304 993,914
Prepaid expenses and
other current
assets............... 320,092 (97,785) (761,944) (10,422) 107,733
Accounts payable and
accrued liabilities.. (2,054,788) 970,199 1,065,318 1,240,831 (1,933,128)
Deferred revenue...... (1,004,411) 2,085,145 13,826,581 205,352 780,291
Other current
liabilities.......... (76,934) 259,122 130,869 (32,332) (144,789)
------------ ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... (1,834,638) 373,666 3,272,612 (1,649,965) (1,588,976)
------------ ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (320,146) (103,098) (434,268) (188,193) (920,510)
Other assets........... -- -- (112,664) 46,557 (110,924)
Investment in and
advances to joint
venture............... (337,969) (315,456) (1,526,600) (1,249,662) (1,474,858)
------------ ----------- ----------- ----------- -----------
Net cash used in
investing activities.. (658,115) (418,554) (2,073,532) (1,391,298) (2,506,292)
------------ ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Sale of common stock
and warrants.......... 12,157,039 -- -- 8,000,000 --
Purchase of treasury
stock................. (701,370) -- (270,000) -- --
Proceeds from notes
payable............... -- -- -- 3,000,000 --
Payments on notes
payable............... -- -- -- (3,000,000) --
Proceeds from issuance
of long-term debt..... -- -- -- -- 5,000,000
Principal payments on
long-term debt........ (5,222,520) (221,710) (545,470) (1,502,520) (1,030,960)
Net proceeds from
(payments on) bank
lines of credit....... (430,000) -- (115,000) (1,918,050) 93,976
------------ ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............ 5,803,149 (221,710) (930,470) 4,579,430 4,063,016
------------ ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 3,310,396 (266,598) 268,610 1,538,167 (32,252)
Cash and cash
equivalents at
beginning of period.... 2,144,572 1,875,962 1,875,962 337,795 370,047
------------ ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 5,454,968 $ 1,609,364 $ 2,144,572 $ 1,875,962 $ 337,795
============ =========== =========== =========== ===========
Supplemental disclosures
of cash flow
information:
Income taxes paid...... $ 1,550 $ -- $ -- $ 1,319 $ 228
============ =========== =========== =========== ===========
Interest paid.......... $ 16,184 $ 52,175 $ 131,840 $ 91,888 $ 250,234
============ =========== =========== =========== ===========
Common stock issued in
lieu of debt
payments.............. $ -- $ 576,953 $ 576,953 $ -- $ --
============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
StarGuide Digital Networks, Inc. ("StarGuide") was incorporated in Nevada in
January 1996. StarGuide owns proprietary digital software, hardware and
communications technology. Its products include variable bandwidth satellite
receivers, audio compression codes, software to operate integrated digital
multimedia networks, software development for satellite applications and
engineering consulting services.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of StarGuide and
its wholly-owned subsidiary, Corporate Computer Systems, Inc. ("CCS"). CCS
also owns two subsidiaries: Corporate Computer Systems Consultants, Inc.,
which provides engineering consulting services to the research, manufacturing
and telecommunications industries, and Telmac Systems, Inc., which develops
software for satellite telemetry applications. All significant intercompany
balances and transactions have been eliminated.
(c) Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less. The carrying amounts of cash and cash
equivalents approximate fair value due to their short maturities. StarGuide
maintains substantially all of its cash and cash equivalents within several
major financial institutions in the United States. At times, such deposits may
be in excess of the amounts of insurance provided on such deposits.
(d) Financial Instruments
Financial instruments that potentially subject StarGuide to concentration of
credit risk consist principally of cash and cash equivalents and accounts
receivable. Based on rates currently available to StarGuide for debt with
similar terms and remaining maturities, the carrying amounts for notes payable
approximate fair value. StarGuide performs ongoing credit evaluations of its
customers, generally does not require collateral from its customers and
maintains a reserve for potential credit losses.
(e) Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. StarGuide's inventories include parts and
components that are specialized in nature or subject to rapid technological
obsolescence. While StarGuide has programs to minimize the required
inventories on hand and considers technological obsolescence when estimating
allowances required to reduce recorded amounts to market values, such
estimates could change in the future.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of assets (generally three years for computer equipment
and five years for furniture and office equipment) using the straight-line
method. Leasehold improvements are amortized by the straight-line method over
the shorter of the lease term or the estimated useful life of the improvement.
Expenditures for repairs and maintenance are charged to expense as incurred.
F-25
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(g) Intellectual Property Rights
Acquired intellectual property rights, which include patents, copyrights,
trademarks, know-how and certain other intangible assets, are recorded at cost
and amortized over estimated useful lives ranging from five to seven years
using the straight-line method.
(h) Investment in Joint Venture
StarGuide's investment in a joint venture is accounted for using the equity
method. Losses in excess of StarGuide's investment and its guaranteed minimum
contribution are recognized in full based on StarGuide's intent to fund excess
losses of the joint venture.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that includes
the enactment date.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Impairment of Long-lived Assets
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
(l) Comprehensive Income
Comprehensive income includes all changes in shareholders' equity (deficit)
during a period except those resulting from investments by owners and
distributions to owners. Comprehensive loss and net loss are the same for all
periods presented.
(m) Research and Development and Advertising
Research and development and advertising costs are expensed as incurred.
Advertising expense was $148,768 in 1999, $189,622 in 1998 and $300,218 in
1997.
F-26
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(n) Revenue Recognition
StarGuide recognizes revenue from product sales upon shipment or
satisfactory installation, if required by contract. Service revenue is
recognized when services are rendered. Revenue from arrangements for the sale
of products which include software components that are more than incidental to
the functionality of the related product is accounted for under AICPA
Statement of Position 97-2, Software Revenue Recognition. If vendor-specific
objective evidence of the fair values of each of the elements of the
arrangement does not exist, revenue from product sales is initially deferred
and recognized on a straight-line basis over the life of the arrangement.
(o) Software Development Costs
Costs incurred to establish the technological feasibility of a software
product to be sold are expensed as incurred. Costs of producing product
masters incurred subsequent to establishing technological feasibility are
capitalized. Capitalized software development costs are amortized on a
product-by-product basis over the estimated economic life of the product
(generally 4-5 years). Amortization is computed by using either the ratio that
current gross revenues for a product bear to the total of current and
anticipated gross revenues for that product or the straight-line method,
whichever results in a greater annual amortization.
(p) Stock-based Compensation
StarGuide uses the intrinsic value method of the Accounting Principles board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, to account
for its stock-based compensation.
(q) Presentation of Unaudited Financial Statements
The unaudited consolidated financial statements as of June 30, 2000 and for
the six months ended June 30, 2000 and 1999 have been prepared in accordance
with the rules of the Securities and Exchange Commission and, therefore, do
not include all information and footnotes otherwise necessary for a fair
presentation of financial position, results of operations and cash flows, in
conformity with generally accepted accounting principles. However, the
information furnished, in the opinion of management, reflects all adjustments
necessary to present fairly the financial position, results of operations and
cash flows on a consistent basis. Such adjustments consisted only of normal
recurring items. The results of operations are not necessarily indicative of
results which may be expected for any other interim period or for the year as
a whole.
(2) Inventories
Inventories as of December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials.......................................... $ 523,088 $ 624,820
Work-in-process........................................ 417,416 529,473
Finished goods......................................... 1,028,439 1,275,254
---------- ----------
$1,968,943 $2,429,547
========== ==========
</TABLE>
F-27
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(3) Property and Equipment
Property and equipment as of December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Office furniture and
equipment............... $ 1,191,993 $ 1,022,264
Engineering equipment.... 461,054 467,110
Production and sales
equipment............... 1,468,920 1,460,651
Leasehold improvements... 14,318 14,318
3,136,285 2,964,343
Less accumulated
depreciation and
amortization.......... (2,410,840) (2,005,103)
----------- -----------
$ 725,445 $ 959,240
=========== ===========
</TABLE>
(4) Other Assets
Other assets as of December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Intellectual property rights....................... $ 1,504,812 $ 1,807,096
Accumulated amortization........................... (1,144,185) (1,057,457)
----------- -----------
360,627 749,639
Software development costs......................... 370,289 614,900
Accumulated amortization........................... (280,109) (491,340)
----------- -----------
90,180 123,560
Total intangible assets.......................... 450,807 873,199
Other assets..................................... 129,917 52,271
----------- -----------
Total intangible and other assets................ $ 580,724 $ 925,470
=========== ===========
</TABLE>
Amortization expense for intellectual property rights was $248,700, $321,728
and $266,728 in 1999, 1998 and 1997, respectively. Amortization expense for
software development costs was $68,398, $253,053 and $143,975 in 1999, 1998
and 1997, respectively.
(5) Investment in Joint Venture
StarGuide owns a 50% interest in a joint venture, Musicam Express, L.L.C.
("Musicam"), which serves the radio industry by enabling the transmission,
exchange, storage and retrieval of programming, commercials, music releases,
affidavits of performance and other information over high-speed digital
telecommunications circuits on an on-demand basis. The remaining 50% of the
joint venture is owned equally by Westwood One, Inc. and Infinity Broadcasting
Corporation. The joint venture owners are obligated to make capital
contributions in amounts and at times agreed upon by the parties, in
proportion to their profit and loss percentages. StarGuide's obligation under
the joint venture agreement is to make contributions up to a maximum of
$1,000,000 per year for a five year period from 1996-2000. However, StarGuide
has recognized losses in excess of its investment and its guaranteed minimum
contribution based on its intent to fund these excess losses. In addition,
StarGuide has made noninterest bearing advances to Musicam to fund operations.
Included in net revenues in the consolidated statements of operations for
1999, 1998 and 1997 is approximately $122,101, $175,963 and $4,102,000,
respectively, of product sales to Musicam. StarGuide
F-28
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
deferred 50% of the gross profit related to these product sales, or
approximately $21,122, $34,880 and $701,000 in 1999, 1998 and 1997,
respectively. The amounts deferred are recognized as equity in earnings (loss)
of the joint venture on a straight-line basis over the period that Musicam
depreciates the related equipment sold by StarGuide. The balance of deferred
profit at December 31, 1999 is $146,228 and is included in deferred revenue in
the accompanying consolidated balance sheet. Included in the investment in and
amounts due from joint venture are amounts due from Musicam to StarGuide of
$3,547,200 and $3,102,102 at December 31, 1999 and 1998, respectively, related
to these sales.
Summarized financial information for Musicam as of and for the years ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Financial position:
Current assets................... $ 321,991 $ 269,864 $ 33356,465
Noncurrent assets................ 1,730,898 7,562,674 9,487,969
------------ ----------- -----------
Total assets..................... $ 2,052,889 $ 7,832,538 $ 9,844,434
============ =========== ===========
Current liabilities.............. $ 506,661 $ 1,235,051 $ 700,669
Noncurrent liabilities........... 13,030,225 12,567,391 11,336,931
Members' deficit................. (11,483,997) (5,969,904) (2,193,166)
============ =========== ===========
Total liabilities and shareholders'
deficit........................... $ 2,052,889 $ 7,832,538 $ 9,844,434
============ =========== ===========
Results of operations:
Sales............................ $ 1,609,028 $ 1,796,404 $ 878,617
Gross profit (loss).............. 118,394 (63,611) (512,939)
Net loss......................... (7,308,093) (5,276,738) (5,541,353)
</TABLE>
(6) Commitments and Contingencies
(a) Leases
StarGuide leases office space, equipment and satellite transponder space
under operating leases that expire at various times through 2004. StarGuide
also subleases a portion of the satellite transponder space to various other
customers. Future minimum rental obligations and subleases as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Rental obligations Subleases
------------------ ---------
<S> <C> <C>
2000............................................ $ 701,390 $127,800
2001............................................ 396,658 67,350
2002............................................ 189,194 1,400
2003............................................ 141,936 --
2004............................................ 94,624 --
---------- --------
Total......................................... $1,523,802 $196,550
========== ========
</TABLE>
Rent expense was $1,028,706 in 1999, $1,327,969 in 1998 and $1,474,268 in
1997. The total sublease rental income was $140,160 in 1999, $870,788 in 1998
and $1,162,950 in 1997.
StarGuide leases its transponder space from a limited number of suppliers,
which transponder space is in turn subleased to third parties. The leases in
which StarGuide is the lessee are only cancelable in the event that service
from the transponder can no longer be provided.
F-29
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(b) Litigation
StarGuide is involved in certain legal and administrative proceedings
arising in the ordinary course of business. While the ultimate outcome of any
matter is not determinable, in the opinion of management the ultimate
disposition of these proceedings will not have a material adverse effect on
StarGuide's consolidated financial position, results of operations or cash
flows.
(7) Long-term Debt
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Non-interest-bearing notes payable................ $ -- $ 710,233
Non-interest-bearing notes payable to related
parties, payable through March 2000.............. 222,520 885,832
Convertible note payable, due December 2001, with
interest at 8%................................... 5,000,000 5,000,000
Other............................................. -- 30,328
---------- -----------
5,222,520 6,626,393
Less current maturities........................... (222,520) (1,040,346)
---------- -----------
$5,000,000 $ 5,586,047
========== ===========
</TABLE>
For financial reporting purposes, StarGuide discounted the non-interest-
bearing notes at 9% per annum. Amortization of the discount is reported as
interest expense of $85,928 in 1999, $121,153 in 1998 and $280,516 in 1997.
The convertible note payable is convertible to Class B common stock at any
time at the option of the holder at a conversion rate of $3.75 per share. The
convertible note payable was repaid in full in 2000 (see note 9(a)).
(8) Bank Line of Credit
At December 31, 1999, StarGuide has $430,000 outstanding under a line of
credit agreement with a bank that provides for maximum borrowings of
$1,000,000. Borrowings under the line of credit bear interest at the bank's
base rate plus 1.5% (10% at December 31, 1999) and are collateralized by
accounts receivable, inventories and equipment of StarGuide. The borrowing
base is limited to eighty percent of CCS's prime accounts receivable, defined
as receivables less than ninety days outstanding. The line of credit was fully
repaid in 2000.
(9) Shareholders' Deficit
(a) Common Stock
StarGuide's common stock is divided into two classes, Class A and Class B.
Holders of Class A common stock are entitled to 20 votes for each share
issued. Holders of Class B common stock are entitled to one vote for each
share issued. In all other respects, the rights of the two classes are
identical.
In March 2000, StarGuide sold 1,217,250 shares of Class B common stock,
resulting in net proceeds of $12,157,039. A portion of these proceeds was used
to repay StarGuide's $5.0 million convertible note payable. In addition,
StarGuide paid the holder of the note $701,370 in exchange for 187,032 shares
previously issued to the holder in lieu of interest payments.
F-30
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(b) Common Stock Warrants and Stock Purchase Rights
In December 1998, in connection with the sale of 3,200,000 shares of Class A
common stock, StarGuide issued the purchaser a warrant to purchase 500,000
shares of Class B common stock at $5.00 per share. The warrant expires in
December 2003.
In February 2000, the board of directors approved the issuance of warrants
to its Chairman to purchase up to 2,250,000 shares of Class B common stock at
$2.50 per share, resulting in a non-cash compensation charge of $16,875,000.
The warrant expires in February 2005. In March 2000, the board of directors
approved the award of stock purchase rights for Class B common stock to a
third party in the amount of 200,000 shares at $2.50 per share, resulting in a
non-cash charge of $1,500,000. The stock purchase right expires in March 2001.
(c) Stock Options
StarGuide has a combined incentive and supplemental stock option plan (the
"Option Plan") under which the board of directors can issue options to
purchase up to 5,000,000 shares of Class B common stock to employees and
directors of, and consultants to, StarGuide.
Under the Option Plan, the board of directors has the authority to determine
to whom options will be granted, the number of shares under option, the option
term, the exercise price and the vesting period. Options cannot be granted at
less than fair market value on the grant date. The term of any incentive stock
options issued under the Option Plan may not exceed ten years from the date of
grant and options generally vest over periods ranging from one to five years.
Activity under the Option Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Weighted-
Number of average exercise
shares price
--------- ----------------
<S> <C> <C>
Balance at December 31, 1996..................... 1,332,500 $2.00
Granted.......................................... 873,250 $2.29
Cancelled........................................ (213,000) $2.64
---------
Balance at December 31, 1997..................... 1,992,750 $2.06
Granted.......................................... 28,250 $2.50
Cancelled........................................ (457,750) $2.08
---------
Balance at December 31, 1998..................... 1,563,250 $2.06
Granted.......................................... 1,595,150 $3.75
Cancelled........................................ (37,950) $2.03
---------
Balance at December 31, 1999..................... 3,120,450
=========
</TABLE>
(d) Stock-based Compensation
StarGuide has adopted the disclosure only provisions of SFAS No. 123,
Accounting for Stock Issued to Employees. StarGuide, however, applies APB No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plan. Accordingly, no compensation expense has been
recognized on stock options granted to employees. Had compensation cost for
these options been determined based on the fair value
F-31
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
at the grant date for awards consistent with the provisions of SFAS No. 123,
StarGuide's net loss for the years ended December 31, 1999, 1998 and 1997
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss--as reported...................... $9,000,163 $8,849,869 $4,457,701
========== ========== ==========
Net loss--pro forma........................ $9,253,774 $9,040,558 $4,763,809
========== ========== ==========
</TABLE>
Such pro forma disclosures may not be representative of future compensation
costs because options vest over several years and additional grants are made
each year.
The weighted average fair value of options granted during 1999, 1998 and
1997 was $1.02, $0.63 and $0.53 per share, respectively.
The fair value of each option grant is estimated on the grant date using the
minimum value method, an expected dividend yield of 0%, and the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 6.36% 5.85% 5.28%
Expected term of option.............................. 5 years 5 years 5 years
</TABLE>
The options outstanding and currently exercisable at December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
-------------------------------------- ---------------------------------------------
Number Weighted Average Weighted Average Number Weighted Average
Exercise Price Outstanding Remaining Contractual life Exercise Price Outstanding Exercise price
-------------- ----------- -------------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00 1,418,450 6.89 $2.00 1,339,450 $2.00
$2.50 106,000 8.00 $2.50 62,225 $2.50
$3.75 1,596,000 9.91 $3.75 -- --
</TABLE>
(e) Earnings Per Share
Under SFAS No. 128 "Earnings per Share," StarGuide is required to compute
earnings per share under two different methods (basic and diluted). Basic
earnings per share is calculated by dividing net income (loss) attributable to
common shareholders by the weighted average shares of common stock outstanding
during the period. Diluted earnings per share is calculated by dividing net
income (loss) attributable to common shareholders by the weighted average
shares of outstanding common stock and common stock equivalents during the
period. Due to losses, inclusion of common stock equivalents would be
antidilutive. Therefore, basic and diluted earnings per share for StarGuide
are the same.
F-32
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(10) Income Taxes
Components of deferred tax assets at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net operating loss carryforwards.................... $ 6,263,684 4,171,238
Cumulative temporary differences.................... 603,707 414,318
Research and development credit carryforwards....... 405,790 405,790
----------- ----------
Total gross deferred tax.......................... 7,273,181 4,991,346
Valuation allowance................................. (7,273,181) (4,991,346)
----------- ----------
Net deferred tax assets........................... -- --
=========== ==========
</TABLE>
As of December 31, 1999, StarGuide has federal and state net operating loss
carryforwards ("NOLs") of approximately $17,176,257. The NOLs will begin to
expire in 2011 and will continue to expire in varying amounts each year
through 2019. Due to a significant change in ownership, StarGuide's ability to
utilize these NOLs may be limited by Internal Revenue Code Section 382.
(11) Segment Information
StarGuide operates predominantly in two industry segments: satellite and
wireless transmission technology and digital compression technology. Corporate
Computer Systems, a wholly owned subsidiary of StarGuide acquired in 1995, is
responsible for the digital compression technology business.
The information in the following tables is derived directly from the
internal financial reporting used for corporate management purposes. Noncash
stock compensation expense and StarGuide's equity in losses of Musicam Express
are stated separately.
<TABLE>
<CAPTION>
Six months ended June 30, 2000
---------------------------------------------------------------------
Satellite and Digital Stock Compensation Charges and
Wireless Compression Musicam Express Consolidated
------------- ----------- ------------------------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $ 3,101 $3,499 $ -- $ 6,600
Net income (loss)....... $(2,998) $ 317 $(19,204) $(21,885)
Total identifiable
assets................. $11,085 $2,627 $ -- $ 13,712
<CAPTION>
Six months ended June 30, 1999
---------------------------------------------------------------------
Satellite and Digital
Wireless Compression Musicam Express Consolidated
------------- ----------- ------------------------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $ 2,213 $3,113 $ -- $ 5,326
Net loss................ $(2,652) $ (455) $ (672) $ (3,779)
Total identifiable
assets................. $ 4,484 $2,837 $ -- $ 7,321
<CAPTION>
Year ended December 31, 1999
---------------------------------------------------------------------
Satellite and Digital
Wireless Compression Musicam Express Consolidated
------------- ----------- ------------------------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $ 7,160 $5,908 $ -- $ 13,068
Net income (loss)....... $(5,529) $ (440) $ (3,031) $ (9,000)
Total identifiable
assets................. $11,510 $2,552 $ -- $ 14,062
</TABLE>
F-33
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1998
-------------------------------------------------------
Satellite and Digital
Wireless Compression Musicam Express Consolidated
------------- ----------- ---------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $ 4,317 $7,502 $ -- $11,819
Net loss................ $(5,761) $ (807) $(2,282) $(8,850)
Total identifiable
assets................. $ 4,961 $2,886 $ -- $ 7,847
<CAPTION>
Year ended December 31, 1997
-------------------------------------------------------
Satellite and Digital
Wireless Compression Musicam Express Consolidated
------------- ----------- ---------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $15,313 $8,664 $ -- $23,977
Net income (loss)....... $(1,446) $ 264 $(3,276) $(4,458)
Total identifiable
assets................. $ 5,976 $4,225 $ -- $10,201
</TABLE>
(12) Deferred Revenue
During 1999, StarGuide entered into contracts with two major radio
broadcasting corporations to produce and supply StarGuide's receivers, hubs
and other items. The terms of the contracts are five and seven years and cover
the related equipment and software, future software enhancements, technical
support, development work and training. As the equipment to be sold under the
contracts includes software components that are more than incidental to the
functionality of the equipment, the entire arrangement has been accounted for
under AICPA Statement of Position 97-2, Software Revenue Recognition, with
revenue being recognized on a straight-line basis over the respective contract
terms.
Revenues and cost of sales under these two contracts during 1999 were
$241,679 and $84,310, respectively. Accounts receivable related to these
contracts was $4,669,240 at December 31, 1999, and deferred revenue at
December 31, 1999 was $14,498,815 of which $12,030,864 was included in
noncurrent liabilities.
(13) Employee Benefit Plan
StarGuide has adopted a deferred compensation plan intended to qualify under
Section 401(k) of the Internal Revenue Code (the "Plan"). All employees are
eligible to participate in the Plan and may contribute from 1% to 15% of their
annual compensation, subject to certain limitations. The Plan provides for
discretionary contributions by StarGuide; however, StarGuide has not made any
contributions to the Plan.
(14) Acquisition
In April 2000, StarGuide reached an agreement to purchase the 50% interest
in Musicam owned by Westwood One, Inc. and Infinity Broadcasting Corporation
in exchange for 400,000 shares of Class B common stock plus the assumption of
any outstanding bank debt and other liabilities of Musicam. The transaction is
expected to close in the fourth quarter of 2000.
(15) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This new
standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Under SFAS No. 133, gains or
losses resulting from changes
F-34
<PAGE>
STARGUIDE DIGITAL NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
in the values of derivatives are to be reported in the statement of operations
or as a deferred item, depending on the use of the derivatives and whether
they qualify for hedge accounting. StarGuide is required to adopt SFAS No. 133
in the first quarter of 2001. To date, StarGuide has not engaged in any
hedging activity and does not expect adoption of this new standard to have a
significant impact on StarGuide.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB No. 101). SAB No. 101 summarizes the SEC's staff's views in applying
generally accepted accounting principles to selected revenue recognition
issues. StarGuide understands that the SEC staff is preparing a document to
address significant implementation issues related to SAB No. 101. To the
extent that SAB No. 101 ultimately changes revenue recognition practices,
StarGuide will adopt SAB No. 101 no later than the fourth quarter of fiscal
year 2000 through a cumulative effect adjustment. Any cumulative effect
adjustment will be computed as of January 1, 2000. StarGuide cannot determine
the potential impact that SAB No. 101 may have on its consolidated financial
position or results of operations at this time.
In March, 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25." Among other issues, Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25 (APB No. 25)
regarding (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock options in a business combination. The provisions of Interpretation
No. 44 affecting StarGuide are to be applied on a prospective basis effective
July 1, 2000.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
Musicam Express, L.L.C.:
We have audited the accompanying balance sheets of Musicam Express, L.L.C.
as of December 31, 1999 and 1998, and the related statements of operations,
members' deficit and cash flows for the years then ended. These financial
statements are the responsibility of Musicam Express, L.L.C.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Musicam Express, L.L.C. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
As discussed in note 4 to the financial statements, the Company changed its
method of accounting for the cost of start-up activities in 1999.
KPMG LLP
Dallas, Texas
August 2, 2000, except as to thesecond paragraph of note 6, which is as of
September 14, 2000.
F-36
<PAGE>
MUSICAM EXPRESS, L.L.C.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------
2000 1999 1998
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 94,748 $ 127,994 $ 18,905
Trade accounts receivable, net of
allowance for doubtful accounts of
$9,488 in 1998 (none in 2000 and
1999).............................. 105,743 121,925 165,670
Due from affiliate (note 7)......... 67,228 59,728 79,508
Other current assets................ 8,509 12,344 5,781
------------ ------------ -----------
Total current assets.............. 276,228 321,991 269,864
Property and equipment, net (note 3).. 565,304 1,721,523 7,058,088
Other assets, net (note 4)............ 9,375 9,375 504,586
------------ ------------ -----------
Total assets...................... $ 850,907 $ 2,052,889 $ 7,832,538
============ ============ ===========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Trade accounts payable and accrued
liabilities........................ $ 247,930 $ 394,642 $ 704,164
Bank line of credit (note 6)........ 9,596,885 -- --
Accrued interest.................... 488,063 112,019 530,887
------------ ------------ -----------
Total current liabilities......... 10,332,878 506,661 1,235,051
Due to affiliate (note 7)............. 4,026,371 3,547,200 3,102,102
Bank line of credit (note 6).......... -- 9,483,025 9,465,289
------------ ------------ -----------
Total liabilities................. 14,359,249 13,536,886 13,802,442
Members' deficit...................... (13,508,342) (11,483,997) (5,969,904)
------------ ------------ -----------
Commitments and contingencies (note 5)
Total liabilities and members'
deficit.......................... $ 850,907 $ 2,052,889 $ 7,832,538
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
MUSICAM EXPRESS, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
30, Year Ended December 31,
------------------------ ------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues................... $ 612,521 $ 818,094 $ 1,609,028 $ 1,796,404
Costs and expenses:
Cost of revenue........... 552,592 756,030 1,490,094 1,860,015
Sales and marketing....... -- 10,426 11,466 541,989
General and
administrative........... 235,668 256,485 547,848 1,669,353
Depreciation and
amortization (notes 3 and
4)....................... 403,540 1,130,884 1,860,408 2,142,008
Impairment charge (notes 3
and 4)................... 971,875 -- 4,054,798 --
----------- ----------- ----------- -----------
Total costs and
expenses.............. 2,163,675 2,153,825 7,964,614 6,213,365
----------- ----------- ----------- -----------
Operating loss......... (1,551,154) (1,335,731) (6,355,586) (4,416,961)
Interest and other income.. 16,713 44,254 30,257 24,761
Interest expense........... (489,904) (425,938) (896,646) (884,538)
----------- ----------- ----------- -----------
Loss before cumulative
effect of change in
accounting principle.. (2,024,345) (1,717,415) (7,221,975) (5,276,738)
Cumulative effect of change
in accounting principle
(note 4).................. -- (86,118) (86,118) --
----------- ----------- ----------- -----------
Net loss............... $(2,024,345) $(1,803,533) $(7,308,093) $(5,276,738)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
MUSICAM EXPRESS, L.L.C.
STATEMENTS OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
StarGuide Infinity
Digital Westwood Broadcasting
Networks, Inc. One, Inc. Corporation Total
-------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31,
1997................... $(1,280,974) $ (456,095) $ (456,097) $ (2,193,166)
Capital contributions... 750,000 375,000 375,000 1,500,000
Net loss................ (2,638,369) (1,319,185) (1,319,184) (5,276,738)
----------- ----------- ----------- ------------
Balance at December 31,
1998................... (3,169,343) (1,400,280) (1,400,281) (5,969,904)
Capital contributions... 1,081,392 356,304 356,304 1,794,000
Net loss................ (3,654,047) (1,827,023) (1,827,023) (7,308,093)
----------- ----------- ----------- ------------
Balance at December 31,
1999................... (5,741,998) (2,870,999) (2,871,000) (11,483,997)
Net loss (unaudited).... (1,012,173) (506,086) (506,086) (2,024,345)
----------- ----------- ----------- ------------
Balance at June 30, 2000
(unaudited)............ $(6,754,171) $(3,377,085) $(3,377,086) $(13,508,342)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
MUSICAM EXPRESS, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
30, Year Ended December 31,
------------------------ ------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................ $(2,024,345) $(1,803,533) $(7,308,093) $(5,276,738)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 403,540 1,130,884 1,860,408 2,142,008
Impairment charge..... 971,875 -- 4,054,798 --
Cumulative effect of
change in accounting
principle............ -- 86,118 86,118 --
Loss on disposal of
property and
equipment............ 23,810 1,756 2,648 73,040
Changes in operating
assets and
liabilities:
Trade accounts
receivable......... 16,182 42,496 43,745 (33,055)
Due from affiliate.. (7,500) 62,663 19,780 32,205
Other current
assets............. 3,835 (23,812) (6,563) 36,226
Other assets........ -- -- 2,063 --
Trade accounts
payable and accrued
liabilities........ (146,712) (237,563) (309,522) 199,630
Accrued interest.... 376,044 393,358 (418,868) 334,752
----------- ----------- ----------- -----------
Net cash used in
operating
activities....... (383,271) (347,633) (1,973,486) (2,491,932)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchases of property
and equipment.......... (279,331) (92,390) (323,224) (89,579)
Software development
costs incurred......... -- -- -- (500,000)
Proceeds from sale of
property and
equipment.............. 36,325 14,200 148,965 299,825
----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (243,006) (78,190) (174,259) (289,754)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Capital contributions... -- 312,608 1,794,000 1,500,000
Proceeds from bank line
of credit.............. 113,860 -- 17,736 965,289
Advances from
affiliate.............. 479,171 449,917 445,098 265,171
----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 593,031 762,525 2,256,834 2,730,460
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. (33,246) 336,702 109,089 (51,226)
Cash and cash equivalents
at beginning of period... 127,994 18,905 18,905 70,131
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 94,748 $ 355,607 $ 127,994 $ 18,905
=========== =========== =========== ===========
Supplemental cash flow
information:
Interest paid........... $ -- $ 32,580 $ 1,262,500 $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
MUSICAM EXPRESS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Musicam Express, L.L.C. ("Musicam"), a Delaware limited liability company,
was formed in February 1996. Musicam is owned 50% by StarGuide Digital
Networks, Inc. ("StarGuide"), 25% by Westwood One, Inc. ("Westwood") and 25%
by Infinity Broadcasting Corporation ("Infinity"). Musicam serves the radio
industry by enabling the transmission, exchange, storage and retrieval of
programming, commercials, music releases, affidavits of performance and other
information over high-speed digital telecommunications circuits on an on-
demand basis.
(b) Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less. The carrying amounts of cash and cash equivalents
approximate fair value due to their short maturities. Musicam maintains
substantially all of its cash and cash equivalents within several major
financial institutions in the United States. At times, such deposits may be in
excess of the amounts of insurance provided on such deposits.
(c) Financial Instruments
Financial instruments that potentially subject Musicam to concentration of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The carrying amounts for the bank line of credit approximate fair
value because this indebtedness is a floating rate obligation. Musicam cannot
make a reasonable estimate of the fair value of Due to Affiliate because of
its related party nature, without incurring excessive costs. Musicam performs
ongoing credit evaluations of its customers, generally does not require
collateral from its customers and maintains a reserve for potential credit
losses.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of assets, which range from three to seven years using
the straight-line method. Leasehold improvements are amortized by the
straight-line method over the shorter of the lease term or the estimated
useful life of the improvement. Expenditures for repairs and maintenance are
charged to expense as incurred.
(e) Income Taxes
Musicam is structured as a limited liability corporation. As such, all
income and losses pass through to the members. Accordingly, no Federal income
tax effects are included in these financial statements.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-41
<PAGE>
MUSICAM EXPRESS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(g) Impairment of Long-lived Assets
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
(h) Comprehensive Income
Comprehensive income includes all changes in members' deficit during a
period except those resulting from investments by owners and distributions to
owners. Comprehensive loss and net loss are the same for all periods
presented.
(i) Capital Contributions
Musicam's members are required to make capital contributions of up to
$1,000,000 per year for StarGuide and $500,000 per year each for Westwood One
and Infinity for a five-year period from 1996 - 2000, as agreed upon by the
members. Additional capital contributions can be made at the discretion of the
members. In the event any member does not make its full capital contribution
in any given year, each other member has the option to either be reimbursed by
Musicam for an amount that will make its capital contribution proportionate to
that of the other members, maintain its capital contribution (even though
disproportionate) or maintain its capital contribution and make on its own
behalf all or part of the other members' unpaid capital contribution.
(j) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $-0- in
1999 and $18,061 in 1998. Musicam suspended advertising activities at the
start of 1999 and all other sales and marketing activities in mid-1999 in
anticipation of a still-pending merger between StarGuide and a publicly-traded
competitor of Musicam.
(k) Revenue Recognition
Musicam recognizes revenue from the distribution of spot advertising upon
delivery. Revenues earned through the transmission of audio programs are
recognized during the month of transmission. Musicam also subleases its
satellite broadcast capacity to various broadcast stations. Revenue from these
arrangements is recognized ratably over the term of the sublease agreement,
which is generally 36 months in length.
(l) Software Development Costs
The provision of Musicam's services requires equipment in which the embedded
software component is essential to its functionality. Costs incurred to
establish the technological feasibility of the software are expensed as
incurred. Development costs incurred subsequent to establishing technological
feasibility of the software are capitalized. Capitalized software development
costs are amortized using the straight-line method over the estimated economic
life of the related product of five years.
F-42
<PAGE>
MUSICAM EXPRESS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(m) Unaudited Interim Financial Information
The financial statements as of June 30, 2000 and for the periods ended June
30, 2000 and June 30, 1999 are unaudited. These statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and accordingly, do not include all of the information
and disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended
June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
(2) Liquidity
Musicam has incurred losses from operations during each of the past two
years and has an accumulated deficit of $11,483,997 as of December 31, 1999.
Musicam's history of operating losses has resulted in continued dependence on
StarGuide, Westwood and Infinity to fund operations. Additionally, at December
31, 1999, the Company has a bank line of credit of $9,483,025 which is now due
and payable in June 2001. See note 6.
As discussed in note 8, StarGuide has reached an agreement with Westwood and
Infinity to purchase the 50% interest in Musicam owned by Westwood and
Infinity. StarGuide management has also indicated its intent to continue
funding Musicam's operating cash shortfalls during 2000 and withhold any
demand for payment on the $3,547,200 that Musicam owes StarGuide at December
31, 1999, at least through 2000.
(3) Property and Equipment
Property and equipment as of December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Office furniture and equipment...................... $ 204,455 248,307
Operations equipment................................ 1,338,685 1,323,705
Network equipment................................... 1,827,256 9,099,684
----------- ----------
3,370,396 10,671,696
Less accumulated depreciation and amortization...... (1,648,873) (3,613,608)
----------- ----------
$ 1,721,523 7,058,088
=========== ==========
</TABLE>
During July 1999, management of Musicam approved a plan to migrate the
method used to deliver spot advertisements and programs to radio stations to a
new, web-based technology. This new technology does not require the use of
certain of the dedicated equipment at each radio station, as required by the
old technology. As a result of this shift in delivery technology, an
impairment charge of $4,054,798 was recognized in 1999 to reduce the carrying
value of certain equipment and capitalized software development costs which
were utilized in the prior delivery methodology to their estimated fair
values. These remaining book values of the equipment and software development
costs were amortized during the remainder of 1999, corresponding with the
period in which the related equipment was phased out. The effect of the change
in useful lives was to increase depreciation and amortization expense by
$316,374 in 1999.
During January 2000, as a result of a change in the method used to receive
Musicam's service at a major customer's affiliate stations beginning in 2000,
Musicam determined that certain additional equipment was no longer necessary
to be utilized in the delivery process. As such, Musicam removed these assets
from service at the affiliate stations and recorded an impairment charge of
$971,875 during the six months ended June 30, 2000 to write off the remaining
carrying value of the related equipment.
F-43
<PAGE>
MUSICAM EXPRESS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
(4) Other Assets
Other assets consist primarily of software development costs and
organizational costs. As described in note 3, capitalized software development
costs with a net book value of $400,000 at December 31, 1998 were reduced
through an impairment charge to fair value during July 1999. The remaining
book value was amortized fully by December 31, 1999, to correspond with the
period in which the related equipment was phased out.
Musicam adopted AICPA Statement of Position No. 98-5, Reporting on the Costs
of Start-Up Activities, in 1999 through a cumulative effect of accounting
change of $86,118. SOP 98-5 requires that all start-up and organizational
costs be expensed as incurred. The adoption of the new standard had no
material effect on results of operations in 1999, exclusive of the cumulative
effect.
(5) Leases
Musicam leases office and other space under operating leases that expire at
various dates through 2002. Future minimum rental obligations as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Rental
obligations
-----------
<S> <C>
2000............................................................. $37,884
2001............................................................. 37,884
2002............................................................. 6,314
-------
Total.......................................................... $82,082
=======
</TABLE>
Rent expense was $47,285 in 1999 and $115,718 in 1998.
(6) Bank Line of Credit
At December 31, 1999, Musicam had $9,483,025 outstanding under a line of
credit agreement with a bank that provided for maximum borrowings of
$10,000,000 through June 12, 2000. Borrowings under the line of credit bear
interest at the prime rate plus 1.25% (9.75% at December 31, 1999) and are
guaranteed by Westwood One and Infinity.
On September 14, 2000, Musicam entered into an agreement with the bank to
extend the due date for the line of credit to June 12, 2001. All other terms
and conditions of the line of credit remained unchanged. Accordingly, the
amount outstanding at December 31, 1999 has been reclassified from current
liabilities to long-term liabilities.
(7) Due From Affiliate/Due To Affiliate
Amounts due from affiliate represent receivables arising from the
performance of services by Musicam for Westwood One. Amounts due to affiliate
represent advances to Musicam from StarGuide in excess of StarGuide's required
capital contributions. The amounts due to affiliate bear no interest and have
no agreed upon repayment date. As discussed in note 2, StarGuide has committed
to funding Musicam's cash shortfalls through 2000 and, as part of this
commitment, has agreed not to call this debt during 2000.
Revenues for services provided to Westwood One were approximately $696,348
and $771,607 in 1999 and 1998, respectively. Westwood One provides Musicam
with satellite transponder space through which Musicam distributes certain
programming. Cost of sales during 1999 and 1998 include $240,684 and $238,092,
F-44
<PAGE>
MUSICAM EXPRESS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and information with respect to June 30, 2000 and 1999 are unaudited)
respectively, related to the cost of using this transponder space. The
transponder space is leased on a month-to-month basis.
(8) Other
In April 2000, StarGuide reached an agreement to purchase the 50% interest
in Musicam owned by Westwood One and Infinity in exchange for 400,000 shares
of StarGuide Class B common stock plus the assumption of any outstanding bank
debt and other liabilities of Musicam. The transaction is expected to close in
the fourth quarter of 2000.
F-45
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
DIGITAL GENERATION SYSTEMS, INC.,
SG NEVADA MERGER SUB INC.,
and
STARGUIDE DIGITAL NETWORKS, INC.
dated as of July 7, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I. DEFINITIONS.................................................. 2
1.1 Certain Definitions............................................ 2
1.2 Certain Additional Definitions................................. 5
ARTICLE II. THE MERGER.................................................. 6
2.1 The Merger..................................................... 6
2.2 Closing........................................................ 6
2.3 Merger Filings; Effective Time................................. 6
2.4 Effect of the Merger........................................... 6
2.5 Articles of Incorporation and Bylaws of the Surviving
Corporation................................................... 6
2.6 Directors and Officers of the Surviving Corporation............ 7
ARTICLE III. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES..................... 7
3.1 Effect on Capital Stock........................................ 7
3.2 Exchange of Certificates....................................... 8
3.3 Dissenting Shares.............................................. 10
3.4 Employee Stock Options and Equity Incentives................... 10
3.5 Conversion of Company Common Stock Equivalents................. 11
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 11
4.1 Organization................................................... 11
4.2 Authority...................................................... 11
4.3 No Violation; Third Party Consents............................. 11
4.4 Government Consents............................................ 12
4.5 Company Capitalization......................................... 12
4.6 Subsidiaries and Investments................................... 13
4.7 Financial Statements........................................... 13
4.8 No Undisclosed Liabilities..................................... 13
4.9 Intellectual Property and Proprietary Rights................... 13
4.10 Material Company Contracts..................................... 15
4.11 Material Company Licenses...................................... 16
4.12 Company Benefit Plans.......................................... 16
4.13 Sufficiency of Assets.......................................... 17
4.14 Litigation; Governmental Orders................................ 17
4.15 Compliance with Laws........................................... 17
4.16 Tax Matters.................................................... 17
4.17 Environmental Matters.......................................... 19
4.18 No Material Misrepresentations or Omissions by the Company..... 19
4.19 Brokers........................................................ 19
4.20 Title to Properties............................................ 19
4.21 Labor Matters.................................................. 19
4.22 Insurance...................................................... 19
4.23 Dividends...................................................... 20
4.24 Fairness Opinion............................................... 20
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB....... 20
5.1 Organization................................................... 20
5.2 Authority...................................................... 20
5.3 Parent Common Stock............................................ 20
5.4 Reports and Financial Statements............................... 21
5.5 Brokers........................................................ 21
5.6 Subsidiaries................................................... 21
5.7 Dividends...................................................... 21
5.8 Fairness Opinion............................................... 21
ARTICLE VI. COVENANTS AND AGREEMENTS..................................... 22
6.1 Conduct of Business............................................ 22
6.2 Access and Information......................................... 24
6.3 Further Actions................................................ 25
6.4 Fulfillment of Conditions by the Company....................... 26
6.5 Fulfillment of Conditions by Parent and Merger Sub............. 26
6.6 Publicity...................................................... 26
6.7 Transaction Costs.............................................. 26
6.8 Employees and Employee Benefit Matters......................... 27
6.9 Indemnification; Officers' and Directors' Insurance............ 27
6.10 Treatment for Tax Purposes..................................... 28
6.11 Non-Solicitation............................................... 28
6.12 Superior Proposals............................................. 28
6.13 Sale of Company Common Stock................................... 29
6.14 Confidentiality................................................ 29
6.15 Board of Directors of Parent................................... 29
6.16 Lock-up Agreements............................................. 29
6.17 State Takeover Laws............................................ 30
ARTICLE VII. CLOSING CONDITIONS.......................................... 30
7.1 Conditions to Each Party's Obligation to Effect the Merger..... 30
7.2 Conditions to Obligations of Parent and Merger Sub............. 31
7.3 Conditions to Obligations of the Company....................... 31
ARTICLE VIII. TERMINATION................................................ 33
8.1 Termination.................................................... 33
8.2 Effect of Termination.......................................... 33
ARTICLE IX. SURVIVAL; INDEMNIFICATION.................................... 34
ARTICLE X. MISCELLANEOUS................................................. 34
10.1 Notices........................................................ 34
10.2 Attorneys' Fees and Costs...................................... 35
10.3 Assignment..................................................... 35
10.4 Amendments and Waiver.......................................... 35
10.5 Entire Agreement............................................... 35
10.6 Representations and Warranties Complete........................ 35
10.7 Third Party Beneficiaries...................................... 35
10.8 Governing Law.................................................. 36
10.9 Neutral Construction........................................... 36
10.10 Severability................................................... 36
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
10.11 Headings; Interpretation; Schedules and Exhibits................ 36
10.12 WAIVER OF JURY TRIAL............................................ 36
10.13 Counterparts.................................................... 36
</TABLE>
SCHEDULES
<TABLE>
<C> <S>
4.3 Company Third Party Consents
4.5(b) Rights To Acquire Company Stock
4.6 Company Subsidiaries and Interests
4.7 Company Financial Statements
4.8 Company Liabilities
4.9(c) Company Intellectual Property Encumbrances
4.9(e) Company Intellectual Property Claims
4.10(a) Material Company Contracts
4.12(a) Company Benefit Plans
4.14 Company Litigation
4.16(a) Company Tax Filings
4.16(c) Company Tax Adjustments
4.16(e) Company Tax Audits
4.16(g) Company Tax Waivers
4.16(m) Company Tax Claims
4.16(p) Company Tax Extensions
4.22 Company Insurance
5.2 Shareholder Voting Agreements
5.3(b) Rights To Acquire Parent Stock
6.1(c) Exceptions to Negative Covenants of Company
6.16(a) Persons Subject to Lock-up Agreements
EXHIBITS
A Articles of Merger
B Form of Lock-up Agreement
</TABLE>
A-4
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of July 7, 2000, by and among Digital Generation Systems, a California
corporation ("Parent"), SG Nevada Merger Sub Inc., a Nevada corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and StarGuide Digital
Networks, Inc., a Nevada corporation (the "Company").
WITNESSETH:
WHEREAS, Parent and the Company are each in the business of providing
digital content compression, storage, and distribution services and share
similar technology;
WHEREAS, Parent operates a nationwide digital network delivering audio,
video, image and data content from advertisers and advertising agencies to
radio and television stations in the United States and in Canada;
WHEREAS, the Company holds the rights to certain United States and foreign
patents and has filed applications for additional patents in the United States
and in foreign countries, which patents and patent applications cover certain
technology useful and necessary for the successful future operations of
Parent's business;
WHEREAS, Parent seeks to share the technology covered by the aforementioned
patents and patent applications of the Company for use in Parent's business,
and the Company seeks to provide Parent with access to such technology
pursuant to the terms and conditions herein;
WHEREAS, a Special Committee of the Board of Directors of Parent (the
"Parent Special Committee") has unanimously determined, and the Boards of
Directors of Parent, Merger Sub and the Company have each unanimously
determined, that it is in the best interests of their respective shareholders
to effect a merger of Merger Sub with and into the Company, after which the
Company will survive and become, as a result of the transactions contemplated
herein, a wholly-owned subsidiary of Parent (the "Merger"), and pursuant to
which, among other things, each issued and outstanding share of Company Common
Stock (as defined below) will be converted into the right to receive the
Conversion Number (as defined below) of a fully paid and nonassessable share
of Parent Common Stock (as defined below), all upon the terms and subject to
the conditions set forth herein;
WHEREAS, the Boards of Directors of Parent and the Company and the sole
stockholder of Merger Sub have approved and adopted this Agreement and the
Merger;
WHEREAS, Parent shareholders Lawrence D. Lenihan, Michael G. Linnert, and
Scott K. Ginsburg, and Company shareholder Scott K. Ginsburg have each
executed a Shareholder Voting Agreement with the Company, agreeing to vote in
favor of the Merger;
WHEREAS, the Company, Merger Sub, and Parent desire to make certain
representations, warranties, covenants, and agreements in connection with the
transactions contemplated hereby, all as more fully set forth herein;
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger qualify as a reorganization within the meaning of Section 368(a) of
the Code (as defined below), and this Agreement shall be, and hereby is,
adopted as a plan of reorganization for purposes of Section 368 of the Code;
and
WHEREAS, Merger Sub was formed solely for the purpose of effecting the
Merger and will conduct no other activity.
A-5
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, promises and agreements hereinafter set forth, the mutual benefits
to be gained by the performance of such covenants, promises and agreements,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged and accepted, the parties hereto hereby agree as
follows:
ARTICLE I.
DEFINITIONS
1.1 Certain Definitions. For all purposes of and under this Agreement, the
following terms shall have the respective meanings set forth below:
(a) "Action" means any claim, action, suit or proceeding, arbitral action,
governmental investigation or criminal prosecution.
(b) "Affiliate" means any "affiliate" as defined in Rule 144(a)(1)
promulgated under the Securities Act.
(c) "Benefit Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock purchase,
stock option, stock ownership, stock appreciation rights, phantom stock,
equity (or equity-based), leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, medical, accident, disability,
workmen's compensation or other insurance, severance, separation, termination,
change of control or other benefit plan, agreement (including any collective
bargaining agreement), practice, policy or arrangement, whether written or
oral, and whether or not subject to ERISA (including, without limitation, any
"employee benefit plan" within the meaning of Section 3(3) of ERISA).
(d) "Business Day" means any weekday (Monday through Friday) on which
commercial banks in New York, New York are open for business.
(e) "Code" means the Internal Revenue Code of 1986, as amended and any
successor statute thereto.
(f) "Company Common Stock" means the common stock, par value $0.001 per
share, of the Company.
(g) "Company Common Stock Equivalents" means any options or warrants for the
purchase of Company Common Stock, and any other securities of the Company
convertible into shares of Company Common Stock.
(h) "Contract" means any currently enforceable contract, agreement,
indenture, note, bond, instrument, lease, conditional sales contract,
mortgage, license, franchise agreement, concession agreement, security
interest, guaranty, binding commitment or other agreement or arrangement,
whether written or oral.
(i) "Encumbrance" means any security interest, pledge, mortgage, lien,
charge, adverse claim of ownership or use, restriction on transfer (such as a
right of first refusal or other similar right), defect of title, or other
encumbrance of any kind or character.
(j) "Environmental Law" means any Law pertaining to land use, air, soil,
surface water, groundwater (including the protection, cleanup, removal,
remediation or damage thereof), public or employee health or safety or any
other environmental matter, including, without limitation, the following laws
as in effect on the Closing Date: (i) Clean Air Act (42 U.S.C. (S)7401, et
seq.); (ii) Clean Water Act (33 U.S.C. (S)1251, et seq.); (iii) Resource
Conservation and Recovery Act (42 U.S.C. (S)6901, et seq.); (iv) Comprehensive
Environmental Resource Compensation and Liability Act (42 U.S.C. (S)9601, et
seq.); (v) Safe Drinking Water Act (42 U.S.C. (S)300f, et seq.); (vi) Toxic
Substances Control Act (15 U.S.C. (S)2601, et seq.); (vii) Rivers and Harbors
Act (33 U.S.C. (S)401, et seq.); (viii) Endangered Species Act (16 U.S.C.
(S)1531, et seq.); (ix) Occupational Safety and Health Act (29 U.S.C. (S)651,
et seq.); and (x) any other Laws relating to Hazardous Materials or Hazardous
Materials Activities.
A-6
<PAGE>
(k) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, any successor statute thereto, and the rules and regulations
promulgated thereunder.
(l) "GAAP" means generally accepted accounting principles in the United
States.
(m) "Governmental Authority" means any government, any governmental entity,
department, commission, board, agency or instrumentality, and any court,
tribunal, or judicial body of competent jurisdiction, in each case whether
federal, state, county, provincial, local or foreign.
(n) "Governmental Order" means any statute, rule, regulation, order,
judgment, injunction, decree, stipulation or determination issued, promulgated
or entered by or with any Governmental Authority.
(o) "Hazardous Material" means any material or substance that is prohibited
or regulated by any Environmental Law or that has been designated by any
Governmental Authority to be radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment, including, but not limited
to, asbestos, petroleum, radon gas and radioactive matter.
(p) "Hazardous Materials Activity" means the handling, transportation,
transfer, recycling, storage, use, treatment, manufacture, investigation,
removal, remediation, release, exposure of others to, sale or other
distribution of any Hazardous Material or any product containing a Hazardous
Material.
(q) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, any successor statute thereto, and the rules and regulations
promulgated thereunder.
(r) "Intellectual Property" means any: (i) United States and foreign
patents, patent applications, patent disclosures, and improvements thereto,
(ii) registered and unregistered United States and foreign trademarks, service
marks, trade dress, logos, trade names, and corporate names, the goodwill
associated therewith, and the registrations and applications for registration
thereof, (iii) registered and unregistered United States and foreign
copyrights, and the registrations and applications for registration thereof,
and (iv) any Know-How.
(s) "IRS" means the United States Internal Revenue Service, and any
successor agency thereto.
(t) "Know-How" means any know-how, special knowledge, technical or other
information, whether or not patented or patentable, owned or controlled by any
Person or its Affiliates at any time prior to or during the term of this
Agreement.
(u) "Law" means any federal, state, county, provincial, local or foreign
statute, law, ordinance, regulation, rule, code, or rule of common law.
(v) "Liability" means any direct or indirect debt, obligation, or liability
of any kind or nature, whether accrued or fixed, absolute or contingent,
determined or determinable, matured or unmatured, and whether due or to become
due, asserted or unasserted, or known or unknown.
(w) "License" means any franchise, approval, permit, order, authorization,
consent, license, registration, or filing, certificate, variance, and any
other similar right obtained from or filed with any Governmental Authority.
(x) "Material Adverse Effect" means any change or effect that is materially
adverse to the assets, liabilities, properties, operations, business,
prospects, condition (financial or otherwise), or results of operations of the
Company, Parent, or Merger Sub, as applicable, except for any such changes or
effects resulting directly or indirectly from (i) the transactions
contemplated by this Agreement, (ii) the announcement or other disclosure of
the transactions contemplated by this Agreement, (iii) changes in any Law, or
(iv) local, state, national, or international economic conditions in general.
(y) "NGCL" means (i) the General Corporation Law of the State of Nevada,
Chapter 92A of the Nevada Revised Statutes, the Mergers and Share Exchange
Law, and any successor statutes thereto.
A-7
<PAGE>
(z) "Parent Common Stock" means the common stock, without par value, of
Parent.
(aa) "Parent Common Stock Equivalents" means any options or warrants for the
purchase of Parent Common Stock, and any other securities of Parent
convertible into shares of Parent Common Stock.
(bb) "Permitted Encumbrances" means (i) Encumbrances for inchoate mechanics'
and materialmen's liens for construction in progress and workmen's,
repairmen's, warehousemen's, and carriers' liens arising in the ordinary
course of business, (ii) Encumbrances for Taxes and other Liabilities not yet
due and payable, and for Taxes and other Liabilities being contested in good
faith, (iii) Encumbrances in favor of Parent and Merger Sub arising out of,
under, or in connection with this Agreement, (iv) Encumbrances reflected on
the Company Financial Statements, (v) Encumbrances and imperfections of title
the existence of which would not reasonably be expected to materially detract
from the value of, interfere with, or otherwise affect the use and enjoyment
of the property subject thereto or affected thereby, consistent with past
practice, and (vi) solely with respect to each parcel of real property owned,
as of the date hereof, by the Company, provided that the following are not
violated by existing improvements in any material respect and do not prohibit
or materially restrict the continued use and operation of such real property
for the same uses and operations as currently conducted, or grant any third
party any option or right to acquire or lease a material portion thereof, (A)
easements, rights of way, and other similar restrictions which would be shown
by a current title report, (B) conditions that may be shown by a current
survey, title report, or physical inspection, and (C) zoning, building, and
other similar restrictions imposed by applicable Law.
(cc) "Person" means any individual, general or limited partnership, firm,
corporation, limited liability company, association, trust, unincorporated
organization, or other entity.
(dd) "Proprietary Rights" means (i) Intellectual Property; (ii) trade
secrets and confidential business information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, research and development
information, software, drawings, specifications, designs, plans, proposals,
technical data, copyrightable works (including all work in progress),
financial, marketing, and business data, pricing and cost information,
business and marketing plans, and customer and supplier lists and
information); (iii) copies and tangible embodiments thereof (in whatever form
or medium); and (iv) licenses granting any rights with respect to any of the
foregoing.
(ee) "SEC" means the United States Securities and Exchange Commission, and
any successor agency thereto.
(ff) "Subsidiary" means (unless otherwise indicated), with respect to a
Person, any other Person in which such Person has a direct or indirect equity
or other ownership interest in excess of fifty percent (50%).
(gg) "Securities Act" means the Securities Act of 1933, as amended, any
successor statute thereto, and the rules and regulations promulgated
thereunder.
(hh) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
any successor statute thereto, and the rules and regulations promulgated
thereunder.
(ii) "Tax" means any and all federal, state, local, foreign, provincial,
territorial or other taxes, imposts, tariffs, fees, levies or other similar
assessments or liabilities and other charges imposed by any taxing authority,
including income taxes, ad valorem taxes, excise taxes, withholding taxes,
estimated taxes, stamp taxes or other taxes of or with respect to gross
receipts, premiums, real property, personal property, windfall profits, sales,
use, transfers, licensing, employment, social security, workers' compensation,
unemployment, payroll and franchises imposed by or under any Law; and such
terms will include any interest, fines, penalties, assessments or additions to
tax resulting from, attributable to or incurred in connection with any such
tax or any contest or dispute thereof.
(jj) "Tax Return" means any declaration, return, report, schedule,
certificate, statement or other similar document (including relating or
supporting information) required to be filed with a Governmental Authority, or
where none is required to be filed with a Governmental Authority, the
statement or other document issued by a
A-8
<PAGE>
Governmental Authority in connection with any Tax, including, without
limitation, any information return, claim for refund, amended return or
declaration of estimated Tax.
(kk) "Treasury Regulations" means temporary and final regulations
promulgated under the Code.
1.2 Certain Additional Definitions
For all purposes of and under this Agreement, the following terms shall have
the respective meanings ascribed thereto in the respective Sections of this
Agreement set forth opposite each such term below:
<TABLE>
<CAPTION>
Term Section
---- --------
<S> <C>
Agreement........................................................ Preamble
Articles of Merger............................................... 2.3
Certificates..................................................... 3.2(b)
Closing.......................................................... 2.2
Closing Date..................................................... 2.2
COBRA............................................................ 4.12(a)
Company.......................................................... Preamble
Company Articles of Incorporation................................ 2.5(a)
Company Business Personnel....................................... 4.21
Company Bylaws................................................... 2.5(b)
Company Copyrights............................................... 4.9(a)
Company Equity Sale.............................................. 6.13
Company Financial Statements..................................... 4.7
Company Financial Statement Date................................. 4.7
Company Indemnified Parties...................................... 6.10(a)
Company Intellectual Property.................................... 4.9(a)
Company License Agreements....................................... 4.9(a)
Company Multiemployer Plan....................................... 4.12(b)
Company Patents.................................................. 4.9(a)
Company Plan..................................................... 4.12(a)
Company Software................................................. 4.9(a)
Company Stockholders' Representative............................. 10.7
Company Stock Option Plan........................................ 3.5(c)
Company Technology............................................... 4.9(a)
Company Trademarks............................................... 4.9(a)
Conversion Number................................................ 3.1(c)
Disclosing Party................................................. 6.14
Dissenting Shares................................................ 3.3(a)
Effective Time................................................... 2.3
Exchange Agent................................................... 3.2(a)
Exchange Fund.................................................... 3.2(a)
Form S-4......................................................... 6.5(b)
Lenihan.......................................................... 5.2
Linnert.......................................................... 5.2
Lock-up.......................................................... 6.16(a)
Lock-up Agreement................................................ 6.16(a)
Lock-up Period................................................... 6.16(a)
Lock-up Shareholders............................................. 6.16(a)
Lock-up Shares................................................... 6.16(b)
Material Company Contract(s)..................................... 4.10(a)
Material Company License(s)...................................... 4.11
Maximum Amount................................................... 6.9(b)
</TABLE>
A-9
<PAGE>
<TABLE>
<CAPTION>
Term Section
---- --------
<S> <C>
Merger........................................................... Recitals
Merger Sub....................................................... Preamble
Merger Sub Articles of Incorporation............................. 5.1
Merger Sub Bylaws................................................ 5.1
Non-Union Employees.............................................. 6.8
Parent........................................................... Preamble
Parent Bylaws.................................................... 5.1
Parent Certificate of Incorporation.............................. 5.1
Parent SEC Reports............................................... 5.6
Parent Shareholders Meeting...................................... 6.5(b)
Parent Special Committee......................................... Recitals
Pre-Existing NDA................................................. 6.14
Receiving Party.................................................. 6.14
Section 4.9 Schedule............................................. 4.9
Superior Proposal................................................ 6.12(a)
Surviving Corporation............................................ 2.1
Termination Date................................................. 8.1(b)
</TABLE>
ARTICLE II.
THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions set forth
herein and in the applicable provisions of the NGCL, at the Effective Time (as
defined below), Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall thereupon cease, and the
Company shall continue as the surviving corporation of the Merger. The
surviving corporation of the Merger shall sometimes be referred to herein as
the "Surviving Corporation."
2.2 Closing. Unless this Agreement is earlier terminated pursuant to Section
8.1 hereof, the consummation of the Merger and the other transactions
contemplated hereby shall take place at a closing (the "Closing") to be held
at 10:00 a.m., Eastern time, on a date to be designated by Parent and the
Company, which date shall be no later than the second (2nd) Business Day after
satisfaction and fulfillment or, if permissible pursuant to the terms hereof,
waiver of the conditions set forth in Article VII (the "Closing Date"), at the
offices of Latham & Watkins, 1001 Pennsylvania Avenue, Suite 1300, Washington,
D.C. 20004, unless another time, date, or place is mutually agreed upon in
writing by Parent and the Company. At the Closing, the documents, certificates
and other instruments set forth in this Article II and Article VII hereof
shall be delivered by each of the parties thereto.
2.3 Merger Filings; Effective Time. Upon the terms and subject to the
conditions set forth herein, at the Closing, Parent, Merger Sub, and the
Company shall execute and deliver, or cause to be executed and delivered,
articles of merger in substantially the form attached hereto as Exhibit A (the
"Articles of Merger"), and, as soon as practicable thereafter, Parent, Merger
Sub, and the Company shall file, or cause to be filed, the Articles of Merger
with the Secretary of State of Nevada in accordance with the applicable
provisions of the NGCL. The Merger shall become effective (the "Effective
Time") at such time as the Articles of Merger are duly filed with the
Secretary of State of Nevada or at such other time as is designated in the
Articles of Merger.
2.4 Effect of the Merger. The Merger shall have the effects set forth in the
applicable provisions of the NGCL.
2.5 Articles of Incorporation and Bylaws of the Surviving Corporation.
(a) At the Effective Time, the Articles of Incorporation of the Company
("Company Articles of Incorporation"), as in effect immediately prior to the
Effective Time, shall thereupon be the Articles of
A-10
<PAGE>
Incorporation of the Surviving Corporation, until thereafter duly amended in
accordance with applicable Law and as provided in such Articles of
Incorporation.
(b) At the Effective Time, the Bylaws of the Company ("Company Bylaws"), as
in effect immediately prior to the Effective Time, shall thereupon be the
Bylaws of the Surviving Corporation, until thereafter duly amended in
accordance with applicable Law and as provided in the Articles of
Incorporation and such Bylaws of the Company.
2.6 Directors and Officers of the Surviving Corporation.
(a) The directors of Company immediately prior to the Effective Time shall
be the initial directors of the Surviving Corporation at and after the
Effective Time, each to hold office as a director of the Surviving Corporation
in accordance with applicable provisions of the NGCL until their respective
successors are duly elected or appointed and qualified in accordance with
applicable Law and the Articles of Incorporation and Bylaws of the Surviving
Corporation.
(b) The officers of the Company immediately prior to the Effective Time
shall be the initial officers of the Surviving Corporation at and after the
Effective Time, each to hold office in accordance with the applicable
provisions of the NGCL until their respective successors are duly elected or
appointed and qualified in accordance with applicable Law and the Articles of
Incorporation and Bylaws of the Surviving Corporation.
ARTICLE III.
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
3.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of
Company Common Stock or any shares of capital stock of Merger Sub:
(a) Capital Stock of Merger Sub. Each issued and outstanding share of
capital stock of Merger Sub shall be converted into and become one fully paid
and nonassessable share of common stock, par value $0.001 per share, of the
Surviving Corporation, and such shares shall, collectively, represent all of
the issued and outstanding capital stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Company Common Stock that
is owned by the Company or by a wholly-owned subsidiary of the Company shall
automatically be canceled and retired and shall cease to exist, and no Parent
Common Stock or other consideration shall be delivered in exchange therefor.
(c) Conversion of Company Common Stock. Subject to Section 3.2(e) hereof,
each issued and outstanding share of Company Common stock (other than shares
to be canceled in accordance with Section 3.1(b) hereof) shall be converted
into the Conversion Number (as defined below) of duly authorized, validly
issued and nonassessable shares of Parent Common Stock that have been
registered with the SEC as provided herein; provided, however, that, in any
event, if between the date of this Agreement and the Effective Time, the
outstanding shares of Parent Common Stock or Company Common Stock shall have
been changed into a different number of shares or a different class, by reason
of any declared or completed stock dividend, subdivision, reclassification,
recapitalization, split, combination, or exchange of shares, the Conversion
Number shall be correspondingly adjusted to the extent appropriate to reflect
such stock dividend, subdivision, reclassification, recapitalization, split,
combination, or exchange of shares. Subject to the provisions hereof, as of
the Effective Time, all such shares of Company Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of
Company Common Stock shall cease to have any rights with respect thereto,
except the right to receive upon the surrender of such certificates,
certificates representing the shares of Parent Common Stock, and cash in lieu
of fractional shares of Parent Common Stock. For purposes hereof, the
Conversion Number shall be
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equal to the value "X" in the following formula (subject to modification as
provided in this Section 3.1 and in Section 6.13 hereof):
X = (1.454 X A) / B
where:
"A" is equal to the sum of: (i) the total number of shares of Parent Common
Stock issued and outstanding immediately prior to the Effective Time and
(ii) the total number of shares of Parent Common Stock issuable upon
conversion of any Parent Common Stock Equivalents then in existence; and
"B" is equal to the sum of: (i) the total number of shares of Company
Common Stock issued and outstanding immediately prior to the Effective Time
and (ii) the total number of shares of Company Common Stock issuable upon
conversion of any Company Common Stock Equivalents then in existence.
3.2 Exchange of Certificates.
(a) Exchange Agent. Immediately following the Effective Time, Parent shall
deposit with ChaseMellon Shareholder Services, L.L.C., or such other bank or
trust company as may be designated by Parent and the Company (the "Exchange
Agent"), for the benefit of the holders of shares of Company Common Stock, for
exchange in accordance with this Article III, through the Exchange Agent,
certificates representing the shares of Parent Common Stock issuable pursuant
to Section 3.1 hereof in exchange for outstanding shares of Company Common
Stock together with amounts sufficient in the aggregate to provide all funds
necessary for the Exchange Agent to make payments in lieu of fractional shares
pursuant to Section 3.2(e) hereof and dividend payments pursuant to Section
3.2(c) hereof (such shares of Parent Common Stock and funds, together with any
dividends or distributions with respect thereto with a record date after the
Effective Time, being hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time of the Merger, the Exchange Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock, other
than shares to be canceled or retired in accordance with Section 3.1(b) hereof
(such certificates, the "Certificates") (i) a letter of transmittal, which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent, and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of Parent
Common Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Parent Common Stock
which such holder has the right to receive pursuant to the provisions of this
Article III, and the Certificate so surrendered shall forthwith be canceled.
In the event of a transfer of ownership of Company Common Stock which is not
registered in the transfer records of the Company, a certificate representing
the proper number of shares of Parent Common Stock may be issued to a Person
other than the Person in whose name the Certificate so surrendered is
registered, if such Certificate shall be properly endorsed or otherwise be in
proper form for transfer and the Person requesting such payment shall pay any
transfer or other taxes required by reason of the issuance of shares of Parent
Common Stock to a Person other than the registered holder of such Certificate
or establish that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 3.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing the appropriate
number of whole shares of Parent Common Stock, cash in lieu of any fractional
shares of Parent Common Stock and any dividends to the extent provided in
Section 3.2(c) hereof as contemplated by this Section 3.2. No interest will be
paid or will accrue on any cash payable in lieu of any fractional shares of
Parent Common Stock.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any
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unsurrendered Certificate with respect to the shares of Parent Common Stock
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 3.2(e) hereof until the surrender
of such Certificate in accordance with this Article III. Subject to the effect
of applicable laws, following surrender of any such Certificate, there shall
be paid to the holder of the certificate representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share
of Parent Common Stock to which such holder is entitled pursuant to Section
3.2(e) hereof and the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
shares of Parent Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such whole shares of Parent Common
Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article III (including any cash paid
pursuant to Section 3.2(c) or Section 3.2(e) hereof) shall be deemed to have
been issued (and paid) in full satisfaction of all rights pertaining to the
shares of Company Common Stock theretofore represented by such Certificates,
subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock in accordance with the terms of this Agreement
or prior to the date of this Agreement and which remain unpaid at the
Effective Time, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Company
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation or the Exchange Agent for any reason, they shall be canceled and
exchanged as provided in this Article III, except as otherwise provided by
law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of Parent Common Stock shall be issued upon the surrender for exchange
of Certificates. Each holder of Shares issued and outstanding at the Effective
Time which would otherwise be entitled to receive a fractional share of Parent
Common Stock upon surrender of Certificates for exchange pursuant to this
Article III (after taking into account all shares of Company Common Stock then
held by such holder) shall receive, in lieu thereof, cash in an amount equal
to the value of such fractional share, which shall be equal to the fraction of
a share of Parent Common Stock that would otherwise be issued multiplied by
the closing price for a share of Parent Common Stock on the NASDAQ on the
Closing Date.
(f) Withholding Rights. Each of Parent, the Company and the Exchange Agent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any stockholder of the Company such
amounts as Parent, the Company or the Exchange Agent is required to deduct and
withhold with respect to the making of such payment under the Code or any
provision of state, local or foreign Tax law. To the extent such amounts are
so withheld by Parent, the Company or the Exchange Agent, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the stockholder of the Company in respect of whom such deduction and
withholding was made.
(g) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates for six months after the
Effective Time of the Merger shall be delivered to Parent, upon demand, and
any holders of Certificates who have not theretofore complied with this
Article III shall thereafter look only to Parent for payment of their claim
for Parent Common Stock, any cash in lieu of fractional shares of Parent
Common Stock and any dividends or distributions with respect to Parent Common
Stock.
(h) No Liability. None of Parent, Merger Sub, the Company, or the Exchange
Agent shall be liable to any Person in respect of any shares of Parent Common
Stock (or dividends or distributions with respect thereto) or cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat, or similar law.
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(i) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Parent, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Parent.
(j) Lost Certificates. In the event that any Certificate shall have been
lost, stolen, or destroyed, upon the making of an affidavit of that fact by
the Person claiming such Certificate to be lost, stolen, or destroyed and, if
required by Parent, the posting by such Person of a bond in such reasonable
amount as Parent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen, or destroyed Certificate the Parent Common
Stock, and any cash in lieu of fractional shares and any unpaid dividends or
distributions with respect to Parent Common Stock, to which they are entitled
pursuant hereto.
3.3 Dissenting Shares.
(a) Notwithstanding any other term or provision of this Agreement to the
contrary, shares of Company Common Stock that are outstanding immediately
prior to the Effective Time which are held by stockholders who (i) have not
consented to the Merger, (ii) have demanded appraisal for such shares in
accordance with the provisions of Section 92A.300 to 92A.500, inclusive, of
the NGCL (if such provisions provide for appraisal rights for such shares),
and (iii) have not failed to perfect or effectively withdrawn such demand or
otherwise lost their appraisal rights (the "Dissenting Shares"), shall not be
converted pursuant to Section 3.1(c) hereof or represent the right to receive
any Parent Common Stock pursuant to this Article III (but shall be entitled to
receive dividends under Section 3.2(d) hereof). Holders of Dissenting Shares
shall be entitled to have such shares appraised in accordance with the
provisions of Section 92A.300 to 92A.500, inclusive, of the NGCL, except that
all Dissenting Shares held by stockholders who have failed to perfect or have
effectively withdrawn or otherwise lost their right to appraisal of such
shares under such provisions of the NGCL shall thereupon be deemed to have
been converted into, and to have become exchangeable for, as of the Effective
Time, the right to receive, without any interest thereon, certificates
representing the shares of Parent Common Stock, and cash in lieu of fractional
shares of Parent Common Stock and any dividends to the extent provided in
Section 3.2(c) hereof to be issued or paid in consideration therefor upon
surrender of such certificates in accordance with Section 3.2 hereof.
(b) The Company shall give Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of demands for appraisal, and
any other instruments served pursuant to the NGCL and received by the Company,
and (ii) the opportunity to participate in all negotiations and proceedings
with respect to demands for appraisal under the NGCL. The Company shall not,
except with the prior written consent of Parent, make any payment with respect
to any demands for appraisal, or offer to settle, or settle, any such demand
for appraisal rights.
3.4 Employee Stock Options and Equity Incentives.
(a) Simultaneously with the Merger, (i) each outstanding option to purchase
a share of Company Common Stock under the Company Stock Option Plans (as
defined below) shall be converted into an option to purchase the number of
shares of Parent Common Stock equal to the Conversion Number multiplied by the
number of shares of Company Common Stock which could have been obtained prior
to the Effective Time upon the exercise of each such option, at an exercise
price per share equal to the exercise price for each such share of Company
Common Stock subject to an option under the Company Stock Option Plans divided
by the Conversion Number, and all references in each such option to the
Company shall be deemed to refer to Parent, where appropriate, and (ii) Parent
shall assume the obligations of the Company under such Company Stock Option
Plans. The other terms of each such option, and the plans under which they
were issued, shall continue to apply in accordance with their terms, including
any provisions providing for acceleration.
(b) Parent shall (i) reserve for issuance the number of shares of Parent
Common Stock that will become subject to the plans referred to in this Section
3.5 and (ii) issue or cause to be issued the appropriate number of shares of
Parent Common Stock pursuant to such plans, upon the exercise or maturation of
rights existing thereunder at the Effective Time or thereafter granted or
awarded.
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(c) For purposes of this Section 3.5, "Company Stock Option Plans" means the
StarGuide Digital Networks, Inc. 1996 Stock Option Plan and the StarGuide
Digital Networks, Inc. 1999 Equity Incentive Plan.
3.5 Conversion of Company Common Stock Equivalents. Simultaneously with the
Merger, each outstanding Company Common Stock Equivalent (other than options
that are subject to Section 3.5 hereof) shall be converted into a Parent
Common Stock Equivalent of like character, convertible into the number of
shares of Parent Common Stock equal to the Conversion Number multiplied by the
number of shares of Company Common Stock which could have been obtained prior
to the Effective Time upon the exercise of the right to receive shares of
Company Common Stock under each such Company Common Stock Equivalent, at an
exercise price per share equal to the exercise price for each such share of
Company Common Stock subject to such Company Common Stock Equivalent divided
by the Conversion Number, and all references in each such Company Common Stock
Equivalent to the Company shall be deemed to refer to Parent, where
appropriate.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub as
follows:
4.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada, and has
all requisite corporate power and authority to own, operate, or lease the
assets and properties now owned, operated, or leased by it, and to conduct its
operations as presently conducted by the Company. The Company is duly
authorized, qualified, or licensed to do business as a foreign corporation,
and is in good standing, under the Laws of each state or other jurisdiction in
which the character of its properties owned, operated, or leased, or the
nature of its activities, makes such qualification necessary, except in those
states and jurisdictions where the failure to be so qualified or in good
standing would not reasonably be expected to have a Material Adverse Effect.
True and complete copies of the Company Articles of Incorporation and Company
Bylaws, each as amended and in effect as of the date of this Agreement, have
been made available to Parent.
4.2 Authority. The Company has all requisite corporate power and authority
to enter into this Agreement, to perform its obligations hereunder, and to
consummate the transactions contemplated hereby. The execution and delivery by
the Company of this Agreement, the performance by the Company of its
obligations hereunder, and the consummation by the Company of the transactions
contemplated hereby, have been duly authorized by all necessary corporate
action on the part of the Company, other than final approval of shareholders.
This Agreement has been duly executed and delivered by the Company and,
assuming the due authorization, execution, and delivery of this Agreement by
Parent and Merger Sub, this Agreement constitutes a legally valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be subject to (i) the effect of
any applicable Laws of general application relating to bankruptcy,
reorganization, insolvency, moratorium, or similar Laws affecting creditors'
rights and relief of debtors generally, and (ii) the effect of rules of law
and general principles of equity, including, without limitation, rules of law
and general principles of equity governing specific performance, injunctive
relief, and other equitable remedies (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Company
Shareholder Scott K. Ginsburg ("Ginsburg") has executed a Shareholder Voting
Agreement with respect to his rights to vote Company capital stock, and
delivered it to Parent. A copy of such executed Shareholder Voting Agreement
is included in Schedule 4.2 hereto. Such Shareholder Voting Agreement has been
duly executed and delivered by Ginsburg, and constitutes the legally valid and
binding obligation of Ginsburg, enforceable against him in accordance with its
terms.
4.3 No Violation; Third Party Consents. Except as set forth in Schedule 4.3
hereto, the execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder, and the consummation
by the Company of the transactions contemplated hereby, will not conflict with
or violate in any material respect, constitute a material default (or event
which with the giving of notice or lapse of time, or
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both, would become a material default) under, give rise to any right of
termination, amendment, modification, acceleration or cancellation of any
material obligation or loss of any material benefit under, result in the
creation of any Encumbrance other than a Permitted Encumbrance on any of the
assets of the Company pursuant to, or require the Company to obtain any
consent, waiver, approval or action of, make any filing with, or give any
notice to any Person as a result or under, the terms and provisions of (i) the
Company Articles of Incorporation or the Company Bylaws, (ii) any Contract to
which the Company is a party or is bound, or (iii) any Law applicable to the
Company, or any Governmental Order issued by a Governmental Authority by which
the Company is in any way bound or obligated, except, in the case of clauses
(ii) and (iii) of this Section 4.3, as would not, in any individual case, have
a Material Adverse Effect.
4.4 Government Consents. No consent, waiver, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any Governmental Authority is required on the part of the Company
in connection with the execution and delivery by the Company of this
Agreement, the performance by the Company of its obligations hereunder, and
the consummation by the Company of the transactions contemplated hereby,
except (a) for those consents, waivers, approvals, orders, authorizations,
registrations, qualifications, designations, declarations or filings required
under or in relation to (i) the HSR Act, (ii) state securities or "blue sky"
laws, (iii) the Securities Act, (iv) the Exchange Act, (v) the NGCL with
respect to the filing and recordation of appropriate merger documents, (vi)
antitrust or merger laws of other jurisdictions; or (b) where the failure to
obtain such consent, waiver, approval, order or authorization, or to make such
registration, qualification, designation, declaration or filing, would not, in
any individual case, reasonably be expected to have a Material Adverse Effect.
4.5 Company Capitalization
(a) The authorized capital stock of the Company consists of 120,000,000
shares of Company Common Stock, of which 24,337,729 shares were issued and
outstanding as of March 31, 2000. All such issued and outstanding shares of
Company Common Stock have been duly authorized and validly issued, are fully
paid and nonassessable and were not issued in violation of any preemptive or
similar rights created by statute, the Company Articles of Incorporation, the
Company Bylaws or any agreement to which the Company is a party or by which it
is bound. Except for (i) Company Common Stock issued after the date hereof
upon the exercise of warrants and options outstanding as of the date hereof
(as set forth in Schedule 4.5(b) hereto), and (ii) the shares of Company
Common Stock issued and outstanding as of the date hereof, there are no other
issued or outstanding shares of capital stock.
(b) Except as set forth in Schedule 4.5(b) hereto, as of the date hereof,
there are no outstanding options, warrants, calls, rights of conversion or
other rights, agreements, arrangements or commitments of any kind or
character, whether written or oral, relating to the Company Common Stock to
which the Company is a party, or by which it is bound, obligating the Company
to issue, deliver or sell, or cause to be issued, delivered, or sold, any
shares of Company Common Stock.
(c) As of the date hereof, there are (i) no rights, agreements, arrangements
or commitments of any kind or character, whether written or oral, relating to
the Company Common Stock to which the Company is a party, or by which it is
bound, obligating the Company to repurchase, redeem or otherwise acquire any
issued and outstanding shares of Company Common Stock and (ii) no outstanding
or authorized stock appreciation, phantom stock, profit participation, or
other similar rights with respect to the Company. As of the date hereof,
neither the Company nor any of its Subsidiaries is a party to any oral or
written agreement or plan, including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement. No holder
of any option to purchase shares of Company Common Stock, or shares of Company
Common Stock granted in connection with the performance of services for the
Company or its Subsidiaries, is or will be entitled to receive cash from the
Company or any of its Subsidiaries in lieu of or in exchange for such option
or shares as a result of the
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transactions contemplated by this Agreement (other than in lieu of fractional
shares). Neither the Company nor any Subsidiary is a party to any termination
benefits agreement or severance agreement or employment agreement which would
be triggered by the consummation of the transactions contemplated by this
Agreement.
4.6 Subsidiaries and Investments. Except as set forth in Schedule 4.6
hereto, (i) the Company does not have any Subsidiaries, (ii) none of the
Company or its Subsidiaries, directly or indirectly, own or have the right to
acquire any equity interest in any other corporation, partnership, joint
venture or other business organization, and (iii) none of the Company or its
Subsidiaries has made any material investment in or advance of cash or other
extension of credit to any Person, or has any material commitment or
obligation to do so.
4.7 Financial Statements. Attached to Schedule 4.7 hereto is a true, correct
and complete copy of (i) the audited balance sheet of the Company dated as of
December 31, 1999 and the related audited statement of income for the year
then ended, and (ii) the unaudited balance sheet of the Company dated as of
March 31, 2000 (the "Company Financial Statement Date") and the related
unaudited statement of income for the three month period then ended
(collectively, the "Company Financial Statements"). The Company Financial
Statements, as of their respective dates, fairly present in all material
respects in accordance with generally accepted accounting principles ("GAAP")
the consolidated financial position of the Company and its consolidated
Subsidiaries as at the respective dates thereof and the consolidated results
of their operations and their consolidated cash flows for the periods then
ended (subject, in the case of unaudited statements, to any other adjustments
described therein and normal year end audit adjustments and to any other
adjustments described therein). Except as required by GAAP, the Company has
not, since March 31, 2000, made any change in the accounting practices or
policies applied in the preparation of the financial statements. The books and
records of the Company and its Subsidiaries have been, and are being,
maintained in all material respects in accordance with GAAP and other
applicable legal and accounting requirements.
4.8 No Undisclosed Liabilities. The Company has no Liabilities of a type
required by GAAP to be set forth on a balance sheet other than (i) the
Liabilities reflected on the Company Financial Statements, (ii) Liabilities
set forth in Schedule 4.8 hereto, (iii) Liabilities arising under Contracts
set forth in Schedule 4.10(a) hereto, and (iv) Liabilities that individually
or in the aggregate, have not and would not reasonably be expected to have a
Material Adverse Effect.
4.9 Intellectual Property and Proprietary Rights.
(a) Except as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, the Company and each of its Subsidiaries are
the owners of or have the valid and enforceable right to make, use, sell,
offer to sell and import all Company Intellectual Property to the extent used
in or necessary for the conduct of the Company's or any of its Subsidiaries'
business, free and clear of all Encumbrances and free and clear of all
licenses to third parties granting any right to use or practice any rights
under any Company Intellectual Property. As used in this Agreement, the term
"Company Intellectual Property" shall mean: (i) the Company's or any of its
Subsidiaries' registered and unregistered trade marks, service marks
(including registrations, recordings and applications in the United States
Patent and Trademark Office, any state of the United States or any other
Governmental Authority worldwide), slogans, trade names, logos and trade dress
(collectively, together with the good will symbolized thereby or associated
with each, "Company Trademarks"); (ii) all of the Company's or any of its
Subsidiaries' national (including, but not limited to, the United States) and
multinational statutory invention registrations, patents, patent registrations
and patent applications (including, but not limited to, all reissues,
divisions, continuations, continuations in part, extensions and
reexaminations, and all rights therein provided by law, multinational treaties
or conventions) (collectively, "Company Patents"); (iii) all of the Company's
or any of its Subsidiaries' national and multinational registered and material
unregistered copyrights, including, but not limited to, copyrights in software
programs and databases (collectively, "Company Copyrights"); (iv) the
Company's or any of its Subsidiaries' software programs, documentation and
manuals used in connection therewith and databases (collectively, "Company
Software"); (v) all of the Company's or any of its Subsidiaries' (A)
inventions, whether patentable or not patentable, whether or not reduced to
practice, and not yet made the subject of a pending patent application or
applications, (B) ideas and conceptions of potentially
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patentable subject matter, including, without limitation, any patent
disclosures, whether or not reduced to practice and not yet made the subject
of a patent application, (C) trade secrets and confidential, technical
information (including ideas, formulas, compositions, inventions and
conceptions of inventions whether patentable or not patentable and whether or
not reduced to practice), (D) technology (including, without limitation, Know-
How and show-how), manufacturing and production processes and techniques,
service and repair manuals, research and development information, drawings,
specifications, designs, plans, proposals, technical data and copyrightable
works, whether secret or confidential or not, and all proprietary or
confidential business information, (E) all rights to obtain and rights to
apply for patents, and to register trademarks and copyrights and (F) all
records (including, but not limited to, laboratory, research and testing
notebooks) in any accessible format (including, but not limited to, paper
records, photographs, audio and visual tape recordings and computer storage
media and other information storage media) pertaining to patentable or
potentially patentable subject matter and all technical manuals and
documentation made or used in connection with any of the foregoing
(collectively, "Company Technology"); and (vi) agreements pursuant to which
the Company or any of its Subsidiaries has obtained or granted the right to
use any of the foregoing (collectively, and together with other agreements to
which the Company or any of its Subsidiaries are a party relating to the
development, acquisition, use, sale, offer for sale or importation of Company
Intellectual Property, "Company License Agreements").
(b) The Company has delivered a schedule to Parent (the "Section 4.9
Schedule"), which, as of the date hereof, sets forth a true, complete and
accurate list of the following Company Intellectual Property items owned by or
under obligation of assignment to the Company or any of its Subsidiaries: (i)
all registrations of and applications to register Company Trademarks material
to the business of the Company or any of its Subsidiaries as conducted on the
date of this Agreement; (ii) all unregistered Company Trademarks which are
material to the business of the Company or any of its Subsidiaries as
conducted on the date of this Agreement; (iii) all Company Patents; (iv) all
registrations of and applications to register any Company Copyrights; (v) all
Company Software; and (vi) all Company License Agreements, other than off-the-
shelf Company Software licenses and licenses accompanying the ordinary sale or
delivery of products or services by the Company or any of its Subsidiaries.
(c) Except as set forth in Schedule 4.9(c) hereto, either the Company or one
of its Subsidiaries is the sole and exclusive owner of Company Intellectual
Property items set forth in the Section 4.9 Schedule. Except as set forth in
Schedule 4.9(c) hereto, there is no Encumbrance on the right of the Company or
any of its Subsidiaries to transfer any of the Company Intellectual Property.
Except as otherwise indicated in Schedule 4.9(c) hereto, (i) as of the date of
this Agreement, none of the Company Intellectual Property is subject to any
pending proceedings, including opposition, cancellation, interference or
similar adversarial proceeding by or before any Governmental Authority and no
such proceedings are threatened, other than such proceedings that would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company.
(d) There are no royalties, honoraria, fees or other payments payable by the
Company or any of its Subsidiaries in respect of the use or the right to use
any Company Intellectual Property to any Person or Governmental Authority
(excluding Taxes, governmental or attorneys' fees required in the normal
course of obtaining patent, trademark or copyright rights and excluding
governmental maintenance fees), except as set forth in the Company License
Agreements listed in the Section 4.9 Schedule and pursuant to off-the-shelf
Company Software licenses. To the Company's knowledge the Company License
Agreements set forth in Section 4.9 Schedule are valid and binding obligations
of the parties thereto, enforceable in accordance with their terms, except as
the enforceability thereof may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that affect
the enforcement of creditors rights generally or general principals of equity,
whether considered in a proceeding at law or in equity, and there exists no
event or condition which will result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default by
the Company or any of its Subsidiaries (or, to the knowledge of the Company or
any of its Subsidiaries, any other party thereto) under any Company License
Agreement, except where such violations, breaches or defaults would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company.
(e) Except as disclosed in Schedule 4.9(e) hereto or as would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company, (i) none of the use by the Company or any of its Subsidiaries of any
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Company Intellectual Property, the exercise of rights relating to Company
Patents, Company Trademarks and Company Copyrights contained within Company
Intellectual Property or the conduct of the business of the Company or any of
its Subsidiaries infringes or otherwise violates any intellectual property
rights (either directly or indirectly, such as through contributory
infringement or inducement to infringe) of any third party and (ii) no such
claims have been asserted or, to the knowledge of the Company, threatened
against the Company or any of its Subsidiaries which have not been resolved.
Except as disclosed in Schedule 4.9(e) hereto, as of the date of this
Agreement, no claims that any third party is infringing or otherwise violating
any Company Intellectual Property rights of the Company or any of its
Subsidiaries are pending or threatened by the Company or any of its
Subsidiaries against any third party.
(f) (i) As of the date of this Agreement, there are no suits or any other
proceedings pending or, to the knowledge of the Company, threatened before any
Governmental Authority to which the Company or any of its Subsidiaries is a
party challenging (A) the Company's or such Subsidiary's rights to own or use
any Company Intellectual Property or (B) the validity, enforceability or scope
of the Company Intellectual Property and (ii) at the Effective Time, there are
no such suits to which the Company or any of its Subsidiaries is a party
challenging (A) the Company's or such Subsidiary's rights to own or use any
Company Intellectual Property that is material to the business of the Company
as conducted or proposed to be conducted on the date of this Agreement or (B)
the validity, enforceability or scope of the Company Intellectual Property
that is material to the business of the Company as conducted or proposed to be
conducted on the date of this Agreement. There are no settlement agreements,
consents, judgments, orders, forbearances to sue or similar obligations which
materially restrict any rights of the Company or any of its Subsidiaries to
(i) make, use, sell, offer for sale, import or license under any Company
Intellectual Property or (ii) conduct its business in order to accommodate a
third party's intellectual property rights.
(g) The Company and each of its Subsidiaries employ reasonable measures to
protect the confidentiality of the Company Technology. The Company and each of
its Subsidiaries require employees with access to the Company Technology to
execute a nondisclosure agreement substantially in accordance with the form(s)
previously provided by the Company to Parent. None of the current or former
employees, officers or directors of the Company or any of its Subsidiaries (i)
is suspected to be in violation of any such agreement or (ii) is suspected of
having disclosed any Company Technology to any third party except subject to
an appropriate confidentiality agreement or as required by a Governmental
Authority.
(h) The consummation of the transactions contemplated by this Agreement will
not result in the loss or impairment of any rights of the Company or any of
its Subsidiaries to own, use or license any Company Intellectual Property,
except where such losses or impairments would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(i) Since December 1, 1997, none of the Company or any of its Subsidiaries
has disposed of or permitted to lapse any rights to the use of any Company
Intellectual Property, or disposed of or disclosed to any Person other than
representatives of the Company any Company trade secret, formula, process or
Know-How not theretofore a matter of public knowledge other than in the
ordinary course of business or pursuant to a secrecy agreement.
4.10 Material Company Contracts.
(a) Schedule 4.10(a) hereto contains a list of each Contract to which the
Company is a party or by which the Company or any of its assets is bound, as
of the date hereof, which is material to the Company, (each, a "Material
Company Contract" and, collectively, the "Material Company Contracts"). For
purposes of this Agreement, any Contract to which the Company is a party and
which obligates the Company to pay or entitles the Company to receive less
than $100,000 in annual payments shall be deemed not to be a Material Company
Contract and any Contract to which the Company is a party and which obligates
the Company to pay or entitles the Company to receive more than $100,000 in
annual payments shall be deemed to be a Material Company Contract.
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(b) The Company has made available to Parent and its agents and
representatives a copy of each written Material Company Contract. Each
Material Company Contract is in full force and effect and represents a valid,
binding and enforceable obligation of the Company in accordance with the
respective terms thereof and, to the knowledge of the Company, represents a
valid, binding and enforceable obligation of each of the other parties
thereto. There exists no material breach or material default (or event that
with notice or the lapse of time, or both, would constitute a material breach
or material default) on the part of the Company or, to the knowledge of the
Company, on the part of any other party under any Material Company Contract,
in any case which has had or could reasonably be expected to have a Material
Adverse Effect. The Company is not currently renegotiating any Material
Company Contract or paying liquidated damages in lieu of the performance
thereunder.
4.11 Material Company Licenses. The Company owns or possesses all right,
title and interest in and to all Licenses which are necessary to conduct its
operations as conducted by the Company as of the date hereof, except for such
Licenses which the failure to obtain or possess would not have a Material
Adverse Effect (each, a "Material Company License" and, collectively, the
"Material Company Licenses"). No loss or expiration of any Material Company
License is pending or, to the knowledge of the Company, threatened, other than
the expiration of any Material Company Licenses in accordance with the terms
thereof which may be renewed in the ordinary course of business.
4.12 Company Benefit Plans.
(a) Schedule 4.12(a) hereto lists each Company Plan (as defined in Section
4.12(b)). With respect to each material Company Plan, the Company has made (or
as soon as practicable will make) available to Parent a true and correct copy
of (i) the three most recent annual reports (Form 5500) filed with the
Internal Revenue Service (the "IRS"), (ii) such Company Plan and any
amendments thereto, (iii) each trust agreement, insurance contract or
administration agreement relating to such Company Plan and the latest
financial statements thereof, (iv) the most recent summary plan description of
each Company Plan for which a summary plan description is required, (v) the
most recent actuarial report or valuation relating to a Company Plan subject
to Title IV of ERISA, (vi) the most recent determination letter, if any,
issued by the IRS with respect to any Company Plan intended to be qualified
under Section 401(a) of the Code and (vii) any written description that exists
as of the date of this Agreement of any unwritten Company Plan. Except as
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company, (i) each Company Plan complies with all applicable statutes and
governmental rules and regulations, including but not limited to ERISA, the
Code and the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), and (ii) no "reportable event" (within the meaning of
Section 4043 of ERISA) has occurred with respect to any Company Plan for which
the 30 day notice requirement has not been waived, (iii) none of the Company
or its Subsidiaries is or has been obligated to contribute or otherwise may
have any liability with respect to any Company Multiemployer Plan (as
hereinafter defined), (iv) no action has been taken, or is currently being
considered, to terminate any Company Plan subject to Title IV of ERISA, (v)
the Company has complied with the continued medical coverage requirements of
COBRA, (vi) no Company Plan has engaged in a "prohibited transaction" (as
defined in Section 4975 of the Code or Section 406 of ERISA) and (vii) no
liability under Title IV or Section 302 of ERISA or Section 412 of the Code
has been incurred by the Company that has not been satisfied in full, and to
the knowledge of the Company no condition exists that presents a risk to the
Company of incurring any such liability. Except as would not, individually or
in the aggregate, have a Material Adverse Effect on the Company, no Company
Plan subject to Title IV of ERISA, nor any trust created thereunder, has
incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived.
(b) All contributions required to be made with respect to any Company Plan
on or prior to the Effective Time have been timely made or are reflected on
the most recent balance sheet of the Company. With respect to the Company
Plans, no event has occurred in connection with which the Company would be
subject to any liability under the terms of such Company Plans, ERISA, the
Code or any other applicable law which would have, individually or in the
aggregate, a Material Adverse Effect on Parent. Except as set forth in
Schedule 4.12(b) hereto, with respect to any current or former employee,
director, officer, consultant or contractor of the Company or its
Subsidiaries, consummation of the transactions contemplated by this Agreement
shall not result
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in the payment or provision of additional compensation or benefits or
accelerate the vesting, payment or funding of any compensation or benefits.
All Company Plans that are intended to be qualified under Section 401(a) of
the Code have been determined by the IRS to be so qualified or a timely
application for such determination is pending, and to the knowledge of the
Company, there is no reason why any such Company Plan is not so qualified in
operation. The Company does not have any material liability or obligation
under any welfare plan to provide benefits after termination of employment to
any employee or dependent other than as required by ERISA or similar state or
local. There are no pending or, to the knowledge of the Company, threatened,
claims, suits, audits or investigations related to any Company Plan other than
claims for benefits in the ordinary course and other than claims, suits,
audits or investigations that would not, individually or in the aggregate,
have a Material Adverse Effect on the Company. As used herein, (i) "Company
Plan" means each deferred compensation and each bonus or other incentive
compensation, stock purchase, stock option and other equity compensation or
ownership plan, program, agreement or arrangement, each severance or
termination pay, medical, surgical, hospitalization, life insurance and other
"welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA);
each profit sharing, stock bonus or other "pension" plan, fund or program
(within the meaning of Section 3(2) of ERISA); each employment, retention,
consulting, termination or severance agreement; and each other employee
benefit plan, fund, program, agreement or arrangement, in each case, that is
sponsored, maintained or contributed to or required to be contributed to by
the Company or its Subsidiaries, including any plan subject to Title IV of
ERISA maintained within the past five (5) years by the Company or any of its
Subsidiaries and (ii) "Company Multiemployer Plan" means a "multiemployer
plan" (as defined in Section 4001(a)(3) of ERISA) to which the Company is or
has been obligated to contribute or otherwise may have any liability.
4.13 Sufficiency of Assets. The Company owns or has valid rights to use all
of the assets necessary for the conduct of its operations in a manner
consistent with past practice except in cases where the absence of such rights
would not reasonably be expected to have a Material Adverse Effect.
4.14 Litigation; Governmental Orders. Except as set forth in Schedule 4.14
hereto, and other than with respect to Taxes, which shall be governed by
Section 4.16, as of the date hereof, there are no pending or, to the knowledge
of the Company, threatened Actions by any Person or Governmental Authority
against or relating to the Company or, to the knowledge of the Company, any
current or former employees (in their capacity as such) of the Company, other
than those which would not, in any individual case, reasonably be expected to
have a Material Adverse Effect.
4.15 Compliance with Laws. To the knowledge of the Company, the Company is
in compliance with each material Law or Governmental Order applicable to the
Company, other than those which would not, in any individual case, reasonably
be expected to have a Material Adverse Effect.
4.16 Tax Matters.
(a) Except as set forth in Schedule 4.16(a), all material federal, state,
local and foreign Tax Returns required to be filed (taking into account
extensions) by or on behalf of the Company and each of its Subsidiaries (i)
have been timely filed and (ii) are true, complete and correct in all material
respects.
(b) All material Taxes payable by or with respect to the Company and each of
its Subsidiaries have been timely paid, or adequately reserved for (in
accordance with GAAP) in the most recent Company Financial Statements.
(c) Except as set forth in Schedule 4.16(c), no Tax deficiencies or other
adjustments relating to the income Tax Returns or other material Tax Returns
of the Company or any of its Subsidiaries have been proposed, asserted or
assessed either orally or in writing against the Company or any of its
Subsidiaries that remain unpaid. All assessments for Taxes due and owing by or
with respect to the Company or any of its Subsidiaries with respect to
completed and settled examinations or concluded litigation have been paid.
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(d) There are no material liens for Taxes on any of the assets of the
Company or any of its Subsidiaries, other than liens for Taxes not yet due and
payable and those being contested in good faith.
(e) Except as set forth in Schedule 4.16(e), no audits, examinations or
other judicial or administrative proceedings have been completed or are
presently being conducted with respect to the Company's or any of its
Subsidiaries' income Tax Returns or other material Tax Returns, nor has the
Company been notified of any request for an audit or examination.
(f) The Company and each of its Subsidiaries have complied with all rules
and Treasury regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441
and 1442 of the Code or similar provisions under any foreign Laws) and have,
within the time and in the manner required by law, withheld from employee
wages and paid over to the proper Governmental Authorities all amounts
required to be so withheld and paid over under all applicable Laws.
(g) Except as set forth in Schedule 4.16(g), the Company and each of its
Subsidiaries (i) have not waived any statutory period of limitations in
respect of Taxes or Tax Returns and no request for any such waiver is
currently pending and (ii) are not party to, bound by, or obligated under any
agreement, contract or arrangement for the sharing, allocation, or
indemnification of Taxes.
(h) The Company will make available to Parent as requested by Parent, in a
timely manner, copies of (i) all federal, state, local and foreign Tax Returns
filed by the Company and each of its Subsidiaries for all taxable periods
ending on or after December 31, 1996 and all Tax Returns for all other taxable
periods with respect to which the statute of limitations has not expired or
been closed and (ii) any audit report issued within the last three years (or
otherwise with respect to any audit or investigation in progress) relating to
Taxes due from or with respect to the Company and each of its Subsidiaries.
(i) Neither the Company nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a "subsection (f) asset" (as such term is
defined in Section 341(f)(4) of the Code) owned by the Company or any of its
Subsidiaries.
(j) The Company is not, and has not been in the last five years, a "United
States real property holding corporation" (as such term is defined in Section
897(c)(2) of the Code).
(k) No requests for rulings or determination letters or competent authority
relief with respect to the Company or any of its Subsidiaries is currently
pending with any taxing authority with respect to any Taxes, and neither the
Company nor any of its Subsidiaries has entered into any closing agreements
with respect to Taxes.
(l) The Company operates at least one significant historic business, or owns
at least a significant portion of its historic business assets, in each case
within the meaning of Treasury Regulation Section 1.368-1(d).
(m) Except as set forth in Schedule 4.16(m), no claim has been made by a
taxing authority in a jurisdiction where the Company or any of its
Subsidiaries does not file Tax Returns to the effect that the Company or any
of its Subsidiaries is or may be subject to Tax by that jurisdiction.
(n) Neither the Company nor any of its Subsidiaries (i) has been a member of
an affiliated group within the meaning of Section 1504(a) of the Code (or any
group defined under a similar or analogous state, local or foreign Law) other
than an affiliated group the common parent of which is the Company or (ii) has
any liability under Treasury Regulation Section 1.1502-6 (or similar provision
under state, local or foreign Law), as a transferee or successor, by contract
or otherwise, for Taxes of any other Person.
(o) Neither the Company nor any of its Subsidiaries has been the subject of
any distribution, or distributed the stock of any corporation, in a
transaction satisfying the requirements of Section 355(a) of the Code, since
April 16, 1997.
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(p) Except as set forth in Schedule 4.16(p), no extension of time with
respect to any date on which a Tax Return was or is to be filed by the Company
or any of its Subsidiaries is in force.
(q) Neither the Company nor any of its Subsidiaries has agreed to or is
required to include in income any adjustments under Section 481(a) of the Code
(or an analogous provision of state, local or foreign Law).
(r) Neither the Company nor any of its Subsidiaries has any deferred income
reportable for a period ending after the Closing Date but that is attributable
to a transaction (e.g., an installment sale) occurring in, or resulting from a
change of accounting method for, a period ending on or prior to the Closing
Date.
4.17 Environmental Matters. Except for Liabilities not reasonably be
expected to result in a Material Adverse Effect, (i) during the course of its
operation, the Company has not engaged in any Hazardous Materials Activity in
violation of any applicable Environmental Law, and (iii) as of the date
hereof, no Action is pending or, to the knowledge of the Company, has been
threatened in writing against the Company any of the Hazardous Materials
Activities of the Company with respect to its operations.
4.18 No Material Misrepresentations or Omissions by the Company. No
representations or warranties by the Company in this Agreement, nor any
document, exhibit, statement, certificate or schedule heretofore or
hereinafter furnished to Parent pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary to make the statements or facts contained therein not misleading.
4.19 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Company directly
with Parent without the intervention of any Person on behalf of the Company in
such manner as to give rise to any valid claim by any Person against Parent or
Merger Sub for a finder's fee, brokerage commission or similar payment, other
than Morgan Stanley Dean Witter, whose fees and expenses shall be borne by the
Company.
4.20 Title to Properties. The Company and each of its Subsidiaries owns
outright, and has good and marketable title to, all of its owned assets free
and clear of all Encumbrances or conflicting claims of any nature whatsoever.
None of such assets are subject to restrictions with respect to the
transferability thereof and title thereto will not be affected in any way by
the transactions described in the Agreement. Neither the Company nor any of
its Subsidiaries owns any real property or any interest in real property other
than leases of real property.
4.21 Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or labor contract. Neither the
Company nor any of its Subsidiaries has engaged in any unfair labor practice
with respect to any Persons employed by or otherwise performing services for
the Company or any of its Subsidiaries (the "Parent Business Personnel"), and
there is no unfair labor practice complaint or grievance against the Company
or any of its Subsidiaries by the National Labor Relations Board or any
comparable state agency pending or, to the Company 's knowledge, threatened in
writing with respect to the Company Business Personnel, except where such
unfair labor practices, complaints or grievances would not, individually or in
the aggregate, have a Material Adverse Effect on the Company. There is no
labor strike, dispute, slow down or stoppage pending or, to the knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries which may interfere with the respective business activities of
the Company or any of its Subsidiaries, except where such disputes, strikes or
work stoppages would not, individually in the aggregate, have a Material
Adverse Effect on the Company. The Company and its Subsidiaries are in
compliance with all labor, employment and wage payment related laws,
regulations and rules, except where the failure to be in such compliance would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company.
4.22 Insurance. Schedule 4.22 hereto contains a complete and accurate list
and description of all policies of fire, liability, product liability and
other forms of insurance presently in effect insuring the Company, its
Subsidiaries, and their respective assets.
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4.23 Dividends. No dividends have been paid or declared during the period
from July 5, 1999 to July 5, 2000.
4.24 Fairness Opinion. Prior to voting to approve the Merger, the Company's
Board of Directors received an oral opinion from Morgan Stanley Dean Witter
that the Conversion Number is fair to the Company's shareholders from a
financial point of view.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby jointly and severally represent and warrant to
the Company, as follows:
5.1 Organization. Each of Parent and Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, and has all requisite corporate power and authority to own,
operate or lease the assets and properties now owned, operated or leased by
it, and to conduct its operations as presently conducted by each of Parent and
Merger Sub. Each of Parent and Merger Sub is duly authorized, qualified or
licensed to do business as a foreign corporation, and is in good standing,
under the Laws of each state or other jurisdiction in which the character of
its properties owned, operated or leased, or the nature of its activities,
makes such qualification necessary, except in those states and jurisdictions
where the failure to be so qualified or in good standing would not reasonably
be expected to have a Material Adverse Effect. True and complete copies of the
Certificate of Incorporation (the "Parent Certificate of Incorporation") and
Bylaws (the "Parent Bylaws") of Parent, and the Articles of Incorporation
("Merger Sub Articles of Incorporation") and Bylaws ("Merger Sub Bylaws") of
Merger Sub, each as amended and in effect as of the date of this Agreement,
have been made available to the Company.
5.2 Authority. Each of Parent and Merger Sub has all requisite corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby. The
execution and delivery by Parent and Merger Sub of this Agreement, the
performance by Parent and Merger Sub of its obligations hereunder, and the
consummation by Parent and Merger Sub of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action on the part of
Parent and Merger Sub, other than final approval by shareholders. This
Agreement has been duly executed and delivered by Parent and Merger Sub and,
assuming the due authorization, execution and delivery of this Agreement by
the Company, this Agreement constitutes a legally valid and binding obligation
of Parent and Merger Sub, enforceable against Parent and Merger Sub in
accordance with its terms, except as such enforceability may subject to (i)
the effect of any applicable Laws of general application relating to
bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting
creditors' rights and relief of debtors generally, and (ii) the effect of
rules of law and general principles of equity, including, without limitation,
rules of law and general principles of equity governing specific performance,
injunctive relief and other equitable remedies (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Each of
Parent shareholders Lawrence D. Lenihan ("Lenihan"), Michael G. Linnert
("Linnert"), and Ginsburg has executed a Shareholder Voting Agreement with
respect to his rights to vote Parent capital stock, and delivered it to the
Company. A copy of each such executed Shareholder Voting Agreement is included
in Schedule 5.2 hereto. Each of such Shareholder Voting Agreements has been
duly executed and delivered by Lenihan, Linnert, or Ginsburg, as applicable,
and constitutes the legally valid and binding obligation of Lenihan, Linnert,
or Ginsburg, as applicable, enforceable against Lenihan, Linnert, or Ginsburg,
as applicable, in accordance with its terms.
5.3 Parent Common Stock.
(a) The authorized capital stock of Parent consists of 100,000,000 shares of
Parent Common Stock, of which 28,080,907 shares have been issued and are
outstanding as of March 31, 2000 and 15,000,000 shares of preferred stock,
none of which have been issued. All such issued and outstanding shares of
Parent Common Stock have been duly authorized and validly issued, are fully
paid and nonassessable and were not issued in violation of any preemptive or
similar rights created by statute, the Parent Certificate of Incorporation,
the Parent
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Bylaws, or any agreement to which Parent is a party or by which it is bound.
Except for (i) Parent Common Stock issued after the date hereof upon the
exercise of warrants and options outstanding as of the date hereof (as set
forth in Schedule 5.3(b) hereto), and (ii) the shares of Parent Common Stock
issued and outstanding as of the date hereof, there are no other issued or
outstanding shares of capital stock.
(b) Except as set forth in Schedule 5.3(b) hereto, as of the date hereof,
there are no outstanding options, warrants, calls, rights of conversion, or
other rights, agreements, arrangements or commitments of any kind or
character, whether written or oral, relating to the Parent Common Stock to
which Parent is a party, or by which it is bound, obligating Parent to issue,
deliver or sell, or cause to be issued, delivered, or sold, any shares of
Parent Common Stock.
(c) As of the date hereof, there are (i) no rights, agreements,
arrangements, or commitments of any kind or character, whether written or
oral, relating to the Parent Common Stock to which Parent is a party, or by
which it is bound, obligating Parent to repurchase, redeem or otherwise
acquire any issued and outstanding shares of Parent Common Stock and (ii) no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to Parent.
5.4 Reports and Financial Statements. The following reports, proxy
statements, and prospectuses filed by Parent with the SEC are publicly
available:
(a) Parent's Annual Reports on Form 10-K filed with the SEC for each of the
years ended December 31, 1997, 1998, and 1999;
(b) Each definitive proxy statement filed by Parent with the SEC since
January 1, 1997;
(c) Each final prospectus filed by Parent with the SEC since January 1,
1997; and
(d) All Current Reports on Form 8-K filed by Parent with the SEC since
December 31, 1997.
(e) 10-Q, filed by Parent with the SEC for the period ended March 31, 2000.
As of their respective dates, such reports, proxy statements, and
prospectuses filed on or prior to the date hereof (collectively, "Parent SEC
Reports") (i) complied as to form in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and (ii) did not
contain any untrue statement of material fact or omit any statement of
material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, except to the extent that any Parent SEC Reports were subsequently
amended or modified by a filing prior to the date hereof, such representation
is given only with respect to such Parent SEC Report as so amended or modified
as of the date of such amendment or modification. Since January 1, 1997 and to
the date hereof, Parent has timely filed all material reports, registration
statements and other filings required to be filed by it with the SEC under the
rules and regulations of the SEC.
5.5 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by Parent directly with
the Company without the intervention of any Person on behalf of Parent in such
manner as to give rise to any valid claim by any Person against the Company
for a finder's fee, brokerage commission or similar payment, other than Chase,
Hambrecht & Quist, whose fees and expenses shall be borne by Parent.
5.6 Subsidiaries. The representations and warranties of Parent set forth in
this Article V shall also be deemed to refer to any Subsidiary of Parent.
5.7 Dividends. No dividends have been paid or declared during the period
from July 5, 1999 to July 5, 2000.
5.8 Fairness Opinion. Prior to voting to approve the Merger, Parent's Board
of Directors received an oral opinion from Chase, Hambrecht & Quist that the
Conversion Number is fair to Parent's shareholders from a financial point of
view.
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ARTICLE VI.
COVENANTS AND AGREEMENTS
6.1 Conduct of Business.
(a) At all times during the period commencing upon the execution and
delivery hereof by each of the parties hereto and terminating upon the earlier
to occur of the Effective Time or the termination of this Agreement pursuant
to and in accordance with the terms of Section 8.1 hereof, unless Parent shall
otherwise consent in writing (which consent shall not be unreasonably withheld
or delayed), and except as otherwise set forth herein, the Company shall (a)
operate in accordance with the ordinary course of business and consistent with
past practices, (b) use commercially reasonable efforts to preserve intact the
goodwill of the Company and the current relationships of the Company with its
officers, employees, customers, suppliers, and others with significant and
recurring business dealings with the Company, and (c) maintain the books of
account and records of the Company in the usual, regular, and ordinary manner
and consistent with past practices.
(b) At all times during the period commencing upon the execution and
delivery hereof by each of the parties hereto and terminating upon the earlier
to occur of the Effective Time or the termination of this Agreement pursuant
to and in accordance with the terms of Section 8.1 hereof, unless the Company
shall otherwise consent in writing (which consent shall not be unreasonably
withheld or delayed), Parent shall (a) operate in accordance with the ordinary
course of business and consistent with past practices, (b) use commercially
reasonable efforts to preserve intact the goodwill of Parent and the current
relationships of Parent with its officers, employees, customers, suppliers and
others with significant and recurring business dealings with Parent, and (c)
maintain the books of account and records of Parent in the usual, regular and
ordinary manner and consistent with past practices.
(c) At all times during the period commencing upon the execution and
delivery hereof by each of the parties hereto and terminating upon the earlier
to occur of the Effective Time or the termination of this Agreement pursuant
to and in accordance with the terms of Section 8.1 hereof, unless Parent shall
otherwise consent in writing (which consent shall not be unreasonably withheld
or delayed), and except as otherwise contemplated hereby or as set forth in
Schedule 6.1(c) hereto, the Company shall not take, or cause to be taken, any
of the following actions:
(i) redeem or repurchase any outstanding shares of Company Common Stock;
(ii) split, combine, reclassify or recapitalize any shares of, or
declare, set aside or pay any dividend (including, without limitation, an
extraordinary dividend) or other distribution (whether in cash, stock or
property or any combination thereof) in respect of any class of Company
Common Stock or any other securities of the Company or any of its
Subsidiaries or redeem, repurchase or otherwise acquire any Company Common
Stock or any other securities of the Company or any of its Subsidiaries;
(iii) other than in conjunction with a Company Equity Sale (as defined in
Section 6.13 hereof), authorize for issuance, issue, sell, pledge, deliver
or commit to issue, sell, pledge or deliver any Company Common Stock
(including, without limitation, any options to acquire any Company Common
Stock) or any securities convertible into or exchangeable for any class of
Company Common Stock;
(iv) amend the Company Articles of Incorporation or the Company Bylaws;
(v) sell, abandon or make any other disposition of any of the assets of
the Company other than in the ordinary course of business consistent with
past practice;
(vi) except in the ordinary course of business, incur or assume any
Liability; or
(vii) make any acquisition of all or any part of the capital stock or all
or substantially all of the assets, properties or businesses of any other
Person in an amount in excess of $500,000.
(viii) change or agree to rearrange in any material respect the character
of the Company's business;
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(ix) (A) adopt, enter into or amend any arrangement which is, or would
be, a Company Plan unless otherwise required by applicable Law or this
Agreement, or (B) make any change in any actuarial methods or assumptions
used in funding any Company Plan or in the assumptions or factors used in
determining benefit equivalencies thereunder;
(x) knowingly waive any right of material value;
(xi) make any material write down of inventory or material write off as
uncollectible of accounts receivable;
(xii) increase any wage, salary, bonus or other direct or indirect
compensation payable or to become payable to any of the employees of the
Company, or make any accrual for or commitment or agreement to make or pay
the same, other than increases in wages, salary, bonuses or other direct or
indirect compensation made in the ordinary course of business consistent
with past practice, and those required by any existing Contract or Law;
(xiii) make any commitment to pay any severance or termination pay to any
employee of the Company or any independent contractor, consultant, agent or
other representative of the Company, other than commitments to pay such
employees of the Company in the ordinary course of business consistent with
past practice;
(xiv) unless otherwise required by Law, make or revoke any material Tax
election, settle or compromise any material Tax liability, change (or make
a request to any taxing authority to change) any material aspect of its
method of accounting for Tax purposes or waive or extend the statute of
limitations in respect of any material Taxes;
(xv) knowingly violate or knowingly fail to perform any material
obligation or duty imposed upon it or any Subsidiary by any applicable Law;
(xvi) take any action, other than reasonable and usual actions in the
ordinary course of business consistent with past practice, with respect to
accounting policies or procedures and other than actions required to be
taken by GAAP;
(xvii) enter into any joint venture, production or marketing arrangement
without Parent's prior written consent; or
(xviii) enter into any contract, agreement, commitment or arrangement to
take any action prohibited by this Section 6.1(c).
(d) At all times during the period commencing upon the execution and
delivery hereof by each of the parties hereto and terminating upon the earlier
to occur of the Effective Time or the termination of this Agreement pursuant
to and in accordance with the terms of Section 8.1 hereof, unless the Company
shall otherwise consent in writing (which consent shall not be unreasonably
withheld or delayed), and except as otherwise contemplated hereby, Parent
shall not take, or cause to be taken, any of the following actions:
(i) redeem or repurchase any outstanding shares of Parent Common Stock;
(ii) split, combine, reclassify or recapitalize any shares of, or
declare, set aside or pay any dividend (including, without limitation, an
extraordinary dividend) or other distribution (whether in cash, stock or
property or any combination thereof) in respect of any class of Parent
Common Stock or any other securities of Parent or any of its Subsidiaries
or redeem, repurchase or otherwise acquire any Parent Common Stock or any
other securities of Parent or any of its Subsidiaries;
(iii) authorize for issuance, issue, sell, pledge, deliver or commit to
issue, sell, pledge or deliver any Parent Common Stock (including, without
limitation, any options to acquire any Parent Common Stock) or any
securities convertible into or exchangeable for any class of Parent Common
Stock;
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(iv) amend the Parent Certificate of Incorporation or the Parent Bylaws,
permit any amendment to the Merger Sub Articles of Incorporation or the
Merger Sub Bylaws, or take any other action that would cause Merger Sub to
cease being a wholly-owned subsidiary of Parent;
(v) sell, abandon or make any other disposition of any of the assets of
Parent other than in the ordinary course of business consistent with past
practice;
(vi) except in the ordinary course of business, incur or assume any
Liability;
(vii) make any acquisition of all or any part of the capital stock or all
or substantially all of the assets, properties or businesses of any other
Person in an amount in excess of $500,000;
(viii) change or agree to rearrange in any material respect the character
of Parent's business;
(ix) (A) adopt, enter into or amend any arrangement which is, or would
be, a Parent Benefit Plan unless otherwise required by applicable Law or
this Agreement, or (B) make any change in any actuarial methods or
assumptions used in funding any Parent Benefit Plan or in the assumptions
or factors used in determining benefit equivalencies thereunder;
(x) knowingly waive any right of material value;
(xi) make any material write down of inventory or material write off as
uncollectible of accounts receivable;
(xii) increase any wage, salary, bonus or other direct or indirect
compensation payable or to become payable to any of the employees of
Parent, or make any accrual for or commitment or agreement to make or pay
the same, other than increases in wages, salary, bonuses or other direct or
indirect compensation made in the ordinary course of business consistent
with past practice, and those required by any existing Contract or Law;
(xiii) make any commitment to pay any severance or termination pay to any
employee of Parent or any independent contractor, consultant, agent or
other representative of Parent, other than commitments to pay such
employees of Parent in the ordinary course of business consistent with past
practice;
(xiv) unless otherwise required by Law, make or revoke any material Tax
election, settle or compromise any material Tax liability, change (or make
a request to any taxing authority to change) any material aspect of its
method of accounting for Tax purposes or waive or extend the statute of
limitations in respect of any material Taxes;
(xv) knowingly violate or knowingly fail to perform any material
obligation or duty imposed upon it or any Subsidiary by any applicable Law;
(xvi) take any action, other than reasonable and usual actions in the
ordinary course of business consistent with past practice, with respect to
accounting policies or procedures and other than actions required to be
taken by GAAP;
(xvii) enter into any joint venture, production or marketing arrangement
without the Company's prior written consent; or
(xviii) enter into any contract, agreement, commitment or arrangement to
take any action prohibited by this Section 6.1(d).
6.2 Access and Information. Subject to the terms of Section 6.14 hereof, at
all times during the period commencing upon the execution and delivery hereof
by each of the parties hereto and terminating upon the earlier to occur of the
Effective Time or the termination of this Agreement pursuant to and in
accordance with the terms of Section 8.1 hereof, each of the Company and
Parent shall permit the other, and its authorized agents and representatives,
to have reasonable access, upon reasonable notice and during normal business
hours, to all employees of such party, assets and all relevant books, records
and documents of or relating to such party, and shall furnish to such other
party such information and data, financial records and other documents
relating to
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such party as such other party may reasonably request. Each party shall permit
the other party and its agents and representatives reasonable access to such
party's accountants, auditors and suppliers for reasonable consultation or
verification of any information obtained by such other party during the course
of any investigation conducted pursuant to this Section 6.2, and shall use all
commercially reasonable efforts to cause such Persons to cooperate with such
other party and its agents and representatives in such consultations and in
verifying such information.
6.3 Further Actions.
(a) Upon the terms and subject to the conditions set forth in this Agreement
(including, without limitation, the terms of Section 6.3(b) hereof), the
Company, Parent and Merger Sub shall each use its respective commercially
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, and to assist and cooperate with the other
party or parties hereto in doing, all things necessary, proper or advisable
under applicable Laws to consummate the transactions contemplated hereby,
including, without limitation: (i) obtaining all necessary actions or
nonactions, waivers, consents, approvals, authorizations, qualifications and
other orders of any Governmental Authorities with competent jurisdiction over
the transactions contemplated hereby, (ii) obtaining all necessary consents,
approvals or waivers from third parties, (iii) defending any lawsuits or other
legal proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby,
including, without limitation, seeking to have vacated or reversed any stay or
temporary restraining order entered by any Governmental Authority prohibiting
or otherwise restraining the consummation of the transactions contemplated
hereby, and (iv) executing and delivering any additional instruments,
certificates and other documents necessary or advisable to consummate the
transactions contemplated hereby and to fully carry out the purposes of this
Agreement.
(b) Without limiting the generality of the foregoing, the Company, Parent
and Merger Sub hereby agree to provide promptly to Governmental Authorities
with regulatory jurisdiction over enforcement of any applicable antitrust laws
all information and documents requested by any such Governmental Authorities
or necessary, proper or advisable to permit consummation of the transactions
contemplated hereby, and to file any Notification and Report Form and related
material required under the HSR Act as soon as practicable after the date
hereof. The Company, Parent and Merger Sub shall each thereafter use its
respective commercially reasonable best efforts to complete as soon as
practicable its substantial compliance with any requests for additional
information or documentary material that may be made under the HSR Act. The
Company, Parent and Merger Sub hereby further agree to use their respective
commercially reasonable best efforts to (i) obtain any governmental clearances
required for consummation of the transactions contemplated hereby, (ii)
respond to any government request for information, (iii) contest and resist
any action, including any legislative, administrative or judicial action, and
have vacated, lifted, reversed or overturned, any Governmental Order (whether
temporary, preliminary or permanent) that restricts, prevents or prohibits the
consummation of the transactions contemplated hereby, including, without
limitation, by using all legal efforts to vigorously pursue all available
avenues of administrative and judicial appeal and all available legislative
action, and (iv) in the event that any permanent or preliminary injunction or
other order is entered or becomes reasonably foreseeable to be entered in any
proceeding that would make consummation of the transactions contemplated
hereby in accordance with the terms of this Agreement unlawful or that would
prohibit, prevent, delay or otherwise restrain the consummation of the
transactions contemplated hereby, to cause the relevant Governmental
Authorities to vacate, modify or suspend such injunction or order so as to
permit the consummation of the transactions contemplated hereby prior to the
Termination Date (as defined below).
(c) Parent shall file all reports required to be filed by Parent with the
SEC (whether required as a result of this Agreement and the transactions
contemplated thereby or otherwise) between the date commencing upon the
execution and delivery hereof by each of the parties hereto and terminating
upon the earlier to occur of the Effective Time or the termination of this
Agreement pursuant to and in accordance with the terms of Section 8.1 hereof,
and shall deliver to the Company copies of all such filings promptly.
(d) The Company, Parent, and Merger Sub each acknowledges and agrees that
any action to be taken by Parent or Merger Sub with respect to this Agreement
or the Merger shall be subject to approval by a majority of the Parent Special
Committee, and shall not require approval by a majority of the Board of
Directors of Parent.
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6.4 Fulfillment of Conditions by the Company
(a) The Company shall not knowingly take or cause to be taken, or fail to
take or cause to be taken, any action that would cause the conditions to the
obligations of the Company or Parent and Merger Sub to consummate the
transactions contemplated hereby to fail to be satisfied or fulfilled at or
prior to the Closing, including, without limitation, by taking or causing to
be taken, or failing to take or cause to be taken, any action that would cause
the representations and warranties made by the Company in Article IV hereof to
fail to be true and correct as of the Closing in all material respects. The
Company shall take, or cause to be taken, all commercially reasonable actions
within its power to cause to be satisfied or fulfilled, at or prior to the
Closing, the conditions precedent to the obligations of Parent and Merger Sub
to consummate the transactions contemplated hereby as set forth in Article VII
hereof.
(b) Without limiting the generality of the foregoing, as soon as practicable
following the date of this Agreement, the Company shall cause no less than 90%
of shares of Company Common Stock that are issued and outstanding as of the
time the vote under this Section 6.4(b) is made to vote in favor of approving
the transactions contemplated by this Agreement.
6.5 Fulfillment of Conditions by Parent and Merger Sub.
(a) Parent and Merger Sub shall not knowingly take or cause to be taken, or
fail to take or cause to be taken, any action that would cause the conditions
to the obligations of the Company or Parent and Merger Sub to consummate the
transactions contemplated hereby to fail to be satisfied or fulfilled at or
prior to the Closing, including, without limitation, by taking or causing to
be taken, or failing to take or cause to be taken, any action that would cause
the representations and warranties made by Parent and Merger Sub in Article V
hereof to fail to be true and correct as of the Closing in all material
respects. Parent and Merger Sub shall take, or cause to be taken, all
commercially reasonable actions within its respective power to cause to be
satisfied or fulfilled, at or prior to the Closing, the conditions precedent
to the obligations of the Company to consummate the transactions contemplated
hereby as set forth in Article VII hereof.
(b) Without limiting the generality of the foregoing, as soon as practicable
following the date of this Agreement, Parent shall (i) prepare and file with
the SEC a proxy statement and a registration statement on SEC Form S-4, in
which the proxy statement shall be included as a prospectus (the "Form S-4"),
(ii) use reasonable efforts to have the Form S-4 declared effective under the
Securities Act as promptly as practicable after such filing, (iii) use
reasonable efforts to cause the Proxy Statement to be mailed to Parent's
shareholders, respectively, as promptly as practicable after the Form S-4 is
declared effective under the Securities Act, (iv) take any action required to
be taken under any applicable securities or "blue sky" laws in connection with
the issuance of Parent Common Stock pursuant to the Merger, (v) subject to
Section 6.12(a) hereof, duly call, give notice of, convene and hold a meeting
of its shareholders (the "Parent Shareholders Meeting") for the purpose of
obtaining the approval of the transactions contemplated by this Agreement, and
(vi) through its Board of Directors, subject to the good faith exercise of its
fiduciary duties, recommend to Parent's shareholders that they approve the
transactions contemplated by this Agreement.
6.6 Publicity. The Company, Parent and Merger Sub shall cooperate with each
other in the development and distribution of all news releases and other
public disclosures relating to the transactions contemplated by this
Agreement. Neither the Company nor Parent and Merger Sub shall issue or make,
or allow to have issued or made, any press release or public announcement
concerning the transactions contemplated by this Agreement without the consent
of the other party or parties hereto, except as otherwise required by
applicable Law, but in any event only after giving the other party or parties
hereto a reasonable opportunity to comment on such release or announcement in
advance, consistent with such applicable legal requirements.
6.7 Transaction Costs. If the transactions contemplated hereby are
consummated, Parent shall pay directly to the applicable payee all transaction
costs and expenses (including legal, accounting and other professional fees
and expenses and other fees described in Section 4.19 and Section 5.19 hereof)
that Parent, Merger Sub, and the Company incur in connection with the
negotiation, execution and performance of this
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Agreement and the consummation of the transactions contemplated hereby. Except
as provided in Section 6.12 hereof, if the transactions contemplated hereby
are not consummated, (i) the Company shall pay all transaction costs and
expenses (including legal, accounting and other professional fees and expenses
and other fees described in Section 4.19 hereof) that it incurs in connection
with the negotiation, execution and performance of this Agreement and the
consummation of the transactions contemplated hereby, and (ii) Parent shall
pay all transaction costs and expenses (including legal, accounting and other
professional fees and expenses and other fees described in Section 5.19
hereof) that Parent and Merger Sub incur in connection with the negotiation,
execution and performance of this Agreement and the consummation of the
transactions contemplated hereby.
6.8 Employees and Employee Benefit Matters. As of the Effective Time, Parent
shall, or shall cause the Surviving Corporation to, retain the employment of
all employees of the Company. From and after the Effective Time, each employee
of the Company whose employment is not covered by a collective bargaining
agreement ("Non-Union Employees") shall be employed by the Surviving
Corporation or Parent at a salary and on terms and conditions (and with
employee benefits (including, without limitation, benefits of the type
described in Section 3(1) of ERISA)) that are at least as favorable in the
aggregate as those provided by the Company (or its Affiliates) immediately
before the execution hereof. With regard to any Non-Union Employees permitted
to participate in employee benefit plans or arrangements sponsored or
maintained by Parent, Parent shall provide each such Non-Union Employee credit
for years of service with the Company prior to the Effective Time for (i) the
purpose of eligibility and vesting under Parent's health, vacation and other
employee benefit plans (including, without limitation, any "employee benefit
plan," as defined in Section 3(2) of ERISA, maintained or sponsored by
Parent), and (ii) any and all pre-existing condition limitations and
eligibility waiting periods under group health plans of Parent, and shall
cause to be credited to any deductible out-of-pocket expenses under any health
plans of Parent any deductibles or out-of-pocket expenses incurred by Non-
Union Employees and their beneficiaries and dependents during the portion of
the calendar year prior to their participation in the health plans of Parent.
Notwithstanding any other provision of this Agreement, employees of the
Company who are covered by a collective bargaining agreement on and after the
Effective Time shall receive benefits in accordance with the terms of such
agreement.
6.9 Indemnification; Officers' and Directors' Insurance.
(a) From and after the Closing, Parent shall, and shall cause the Surviving
Corporation to, (i) indemnify and hold harmless each former director and
officer of the Company (the "Company Indemnified Parties"), against any and
all demands, claims, complaints, actions, or causes of action, suits,
proceedings, investigations, arbitrations, assessments, losses, fees, damages,
liabilities, obligations (including those arising out of any action such as a
settlement or compromise thereof or judgement or award therein) and any out-
of-pocket costs and expenses, including, without limitation, reasonable
attorneys' fees and disbursements incurred or suffered by any of the Company
Indemnified Parties in connection with any Liabilities or any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to matters existing or occurring
at or prior to the Closing, whether asserted or claimed prior to, at or after
the Closing, to the fullest extent that the Company would have been permitted
under the Company Articles of Incorporation and Company Bylaws, in each case
as in effect on the date hereof, to indemnify such Company Indemnified
Parties, and (ii) advance reasonable expenses as incurred by any Company
Indemnified Party in connection with any matters for which such Company
Indemnified Party is entitled to indemnification from Parent and the Surviving
Corporation pursuant to this Section 6.9(a) to the fullest extent permitted
under the Company Articles of Incorporation and Company Bylaws.
(b) For a period of six (6) years following the Closing, Parent shall
maintain, or shall cause the Surviving Corporation to maintain (to the extent
available in the market), in effect a directors' and officers' liability
insurance policy covering those persons who are currently covered by the
Company's directors' and officers' liability insurance policy (copies of which
have been heretofore delivered by the Company to Parent and its agents and
representatives) with coverage in amount and scope at least as favorable as
the Company's existing coverage; provided, however, that in no event shall
Parent be obligated to expend in any one year, in order to maintain or provide
insurance coverage pursuant to this Section 6.9(b) any amount in excess of
110% of the
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amount of the annual premiums made as of the date hereof by the Company for
such insurance (the "Maximum Amount"). If the amount of the premiums necessary
to maintain or procure such insurance coverage exceeds the Maximum Amount,
Parent shall use its reasonable best efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for a premium equal
to the Maximum Amount.
(c) The terms and provisions of this Section 6.9 are intended to be in
addition to the rights otherwise available to the Company Indemnified Parties
by applicable Law, charter, bylaw or agreement, and shall operate for the
benefit of, and shall be enforceable by, the Company Indemnified Parties and
their respective heirs and representatives.
6.10 Treatment for Tax Purposes. The Company and Parent intend that the
Merger qualify as, and consistent with such intention, unless in contravention
of applicable Law, the Company and Parent shall, and Parent shall cause the
Surviving Corporation to, treat the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
6.11 Non-Solicitation. Subject to the provisions of Section 6.12 hereof,
from the date hereof through the Effective Time, each of Parent and the
Company agrees that neither it nor any of its Subsidiaries, representatives,
or agents shall encourage, solicit, make, or accept any offers for or engage
in any discussions or negotiations regarding any combinations of it or any or
any if its Subsidiaries with, or sale of any assets or securities of it or any
of its Subsidiaries, to any third party.
6.12 Superior Proposals.
(a) Notwithstanding anything to the contrary in this Agreement, prior to the
Effective Time, Parent may, to the extent the Special Committee or the Board
of Directors of Parent by a majority disinterested vote determines, in the
good faith exercise of its fiduciary duties, that it would be in the best
interests of Parent or its shareholders to do so, participate in discussion or
negotiations with, and furnish non-public information, and afford access to
the properties, books, records, officers, employees and representatives of
Parent to any Person, entity or group after such Person, entity or group has
delivered to Parent in writing, a proposal to acquire all or a portion of
Parent or Parent's assets or business, which the Special Committee or the
Board of Directors of Parent by a majority disinterested vote determines, in
its good faith reasonable judgment, if consummated would be more favorable to
Parent or its shareholders than the transactions contemplated by this
Agreement (a "Superior Proposal"). In the event Parent receives a Superior
Proposal, nothing contained in this Agreement will prevent the Special
Committee from recommending and the Board of Directors of Parent from
executing or entering into an agreement relating to such Superior Proposal and
recommending such Superior Proposal to its shareholders, if the Special
Committee or the Board of Directors of Parent by a majority disinterested vote
determines in good faith that it is appropriate to do so; in such case, the
Special Committee and the Board of Directors of Parent may withdraw, modify or
refrain from making its recommendation of the Merger, and, to the extent it
does so, Parent may refrain from calling, providing notice of and holding the
Parent Shareholders Meeting to adopt this Agreement and from soliciting
proxies or consents to secure the vote or written consent of its shareholders
to adopt this Agreement and may terminate this Agreement; provided however
that Parent shall (i) promptly (and in no event later than 24 hours after
receipt thereof) notify the Company that the Special Committee or Parent's
Board of Directors, as applicable, has received a Superior Proposal,
specifying the material terms and conditions of such Superior Proposal and
identifying the Person making such Superior Proposal and (ii) terminate this
Agreement by written notice to the Company provided no sooner than 48 hours
after the Company's receipt of a copy of such Superior Proposal (or a
description of the material terms and conditions thereof). Nothing contained
in this Section 6.12 (a) shall prevent the Special Committee or the Board of
Directors of Parent from taking and disclosing to Parent's shareholders a
position as required by Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to any tender or exchange offer, provided that such disclosure
states that no action will be taken by the Special Committee or the Board of
Directors of the Company in violation of this Section 6.12. Notwithstanding
anything to the contrary in this Agreement, prior to the Effective Time,
Parent may, in connection with a possible Superior Proposal, refer any third
party to this Section 6.12 and make a copy of this Section 6.12 available to a
third party.
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(b) In the event that the Merger is not consummated by virtue of the
termination of this Agreement pursuant to Section 6.12(a)(iii) or Section
8.1(c) hereof, Parent shall (i) pay to the Company $7,500,000 and (ii) pay all
transaction costs and expenses (including legal, accounting and other
professional fees and expenses and other fees described in Section 4.19
hereof), incurred by the Company in connection with the negotiation,
execution, and performance of this Agreement and the consummation of the
transactions contemplated hereby. Such payment shall be by wire transfer of
immediately available funds to an account designated by the Company promptly
after the Board of Directors of Parent has determined to recommend the
Superior Proposal.
6.13 Sale of Company Common Stock. Notwithstanding anything herein to the
contrary, the Company shall have the right, at any time prior to the earlier
of (i) the issuance by Parent of a proxy statement to its shareholders
soliciting the vote of such shareholders in favor of the Merger, or (ii) the
Closing Date, to issue and sell for cash shares of Company Common Stock in one
or more arms-length and non-affiliate transactions (each, a "Company Equity
Sale"). All terms and conditions of this Agreement shall apply with respect to
any shares of Company Common Stock issued and sold in a Company Equity Sale,
and to the holders thereof. The Company's right to sell equity through Company
Equity Sales is subject to the following conditions: (i) the price of the
shares of Company Common Stock sold through Company Equity Sales shall not
exceed $100,000,000 in the aggregate and (ii) each purchaser of shares of
Company Common Stock in a Company Equity Sale shall agree in writing prior to
consummation of such sale to vote in favor of the Merger. In the event that
the Company conducts a Company Equity Sale, prior to consummation thereof,
Parent and Company shall negotiate in good faith an adjustment to the
Conversion Number to reflect such Company Equity Sale.
6.14 Confidentiality. The parties hereby acknowledge the application of the
terms of the Reciprocal Non-Disclosure Agreement, dated October 12, 1999, by
and between Parent and the Company (the "Pre-Existing NDA"), to this Agreement
and the purposes and transactions contemplated by it, and further agree that,
in addition to the provisions thereof, no party shall, directly or indirectly:
(i) make any disclosure relating to the Merger, (ii) make any disclosure
regarding the content of this Agreement or that the parties have entered into
it, or (iii) in the case of the Company, disclose any information received
from Parent or Merger Sub or their respective representatives or agents in
connection with the Merger and, in the case of either Parent or Merger Sub,
disclose any information received from the Company or its representatives or
agents in connection with the Merger, including without limitation,
information received during such party's due diligence investigation (such
party receiving such information, the "Receiving Party" and such party
disclosing such information, the "Disclosing Party"); except as required by
law. Information will not be subject to the provisions of this Section 6.14
that (i) is or becomes publicly available other than as a result of a breach
by the Receiving Party; (ii) is or becomes available on a non-confidential
basis from a source that is not prohibited by contract or law from disclosing
such information to the Receiving Party; or (iii) was known by the Receiving
Party prior to the disclosure thereof by the Disclosing Party other than by
means that would be a violation of this Section 6.14 had it been in effect at
the time of disclosure. The parties acknowledge and agree that any breach of
this Section 6.14 by a Receiving Party would cause irreparable harm to the
Disclosing Party and that, in such event, such Disclosing Party shall have the
right, among other things, to preliminary and injunctive relief, in addition
to any other relief to which such party may be entitled. In the event that the
Merger is not consummated, the Receiving Party shall promptly return all such
written information provided by the Disclosing Party or its representatives or
agents and destroy any copies or notes derived therefrom. To the extent that
any terms or provisions of the Pre-Existing NDA conflict with the terms and
provisions herein, this Section 6.14 will control.
6.15 Board of Directors of Parent. Parent shall take all actions necessary
to ensure that, as of the Effective Time, the individuals designated by the
Company prior to the Closing are properly installed as directors of Parent,
including but not limited to actions required to increase the number of
directors authorized in order to accommodate such additional directors.
6.16 Lock-up Agreements.
(a) During the period from the date of Closing until 180 days from the
Effective Time (the "Lock-up Period"), pursuant to the terms set forth in
Section 6.16(b) below, those certain holders of Parent Common Stock
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and Company Common Stock as are listed on Schedule 6.16 hereto (the "Lock-up
Shareholders"), will not, directly or indirectly, issue, sell, offer or agree
to sell, grant any option for the sale of, pledge, make any short sale or
maintain any short position, establish or maintain an open "put equivalent
position" (within the meaning of Rule 16-a-1(h) under the Exchange Act), enter
into any swap, derivative transaction or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Parent Common Stock (whether any such transaction is to be settled by delivery
of Parent Common Stock, other securities, cash or other consideration) or
otherwise dispose (or publicly announce its intention to do any of the
foregoing) of, directly or indirectly, any Parent Common Stock, or other
capital stock of Parent, or any securities convertible into, exercisable for
or exchangeable for Parent Common Stock, or other capital stock of Parent that
such Person currently beneficially owns (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, or may beneficially own,
directly or indirectly in the future (the "Lock-up"), and each of the Lock-up
Shareholders will execute and deliver to Company's legal counsel prior to the
Closing, a lock-up agreement (the "Lock-up Agreement") substantially of the
form attached hereto as Exhibit C; provided, however, that each Lock-up
Agreement shall be subject to the following conditions: (i) there will be no
waiver of any term or condition of a Lock-up Agreement unless a majority of
the Board of Directors of Parent shall have voted in favor of such waiver, and
(ii) in the event that a waiver is obtained as to any term or condition of any
Lock-up Agreement pursuant to (i) above, then such term or condition that has
been so waived will automatically be waived for each Lock-up Shareholder.
(b) During the Lock-up Period, shares of Parent Common Stock of each Lock-up
Shareholder (the "Lock-up Shares") will be subject to the Lock-up in
accordance with the following schedule:
(i) Until 60 days from the Effective Time, 100% of such Lock-up Shares
are subject to the Lock-up;
(ii) From 60 days from the Effective Time until 90 days from the
Effective Time, 85% of such Lock-up Shares are subject to the Lock-up;
(iii) From 90 days from the Effective Time until 120 days from the
Effective Time, 70% of such Lock-up Shares are subject to the Lock-up;
(iv) From 120 days from the Effective Time until 150 days from the
Effective Time, 50% of such Lock-up Shares are subject to the Lock-up;
(v) From 150 days from the Effective Time until 180 days from the
Effective Time, 25% of such Lock-up Shares are subject to the Lock-up;
(vi) 180 days from the Effective Time the Lock-up Shares are no longer
subject to the Lock-up.
6.17 State Takeover Laws. If any "fair price," "business combination" or
"control share acquisition" statute or other similar statute or regulation
shall become applicable to the transactions contemplated hereby, Parent and
the Company and their respective Boards of Directors shall use their
reasonable best efforts to grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
minimize the effects of any such statute or regulation on the transactions
contemplated hereby.
ARTICLE VII.
CLOSING CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
obligations of the Company, Parent, and Merger Sub to effect the Merger are
subject to the satisfaction or waiver on or prior to the Closing Date of each
of the following conditions:
(a) Shareholder Approval. Each of the Company and Parent shall have obtained
all approvals of holders of shares of capital stock of the Company or Parent,
as applicable, necessary to approve this Agreement and all the transactions
contemplated hereby (including the Merger).
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(b) HSR Act. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have expired.
(c) Effective Registration Statement. The Form S-4 shall have been declared
effective by the SEC under the Securities Act, and no stop order suspending
the effectiveness of the Form S-4 shall have been issued by the SEC and no
proceedings for that purpose shall have been initiated or, to the knowledge of
Parent or the Company, threatened by the SEC, and all necessary approvals
under blue sky laws relating to the issuance or trading of the Parent Common
Stock to be issued to the stockholders of the Company in connection with the
Merger shall have been received.
(d) No Injunctions or Restraints, Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by a court or
other Governmental Authority of competent jurisdiction shall be in effect and
have the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger; provided, however, that the provisions of this
Section 7.1(d) shall not be available to any party whose failure to fulfill
its obligations pursuant to Section 6.3 hereof shall have been the cause of,
or shall have resulted in, such order or injunction.
(e) NASDAQ Listing/Quotation of Parent Common Stock. The Parent Common Stock
to be issued to the stockholders of the Company in connection with the Merger
shall have been approved for listing/quotation on NASDAQ, subject only to
official notice of issuance.
(f) Dissenting Shares. The aggregate amount of Dissenting Shares shall not
exceed ten percent of the total number of shares of Company Common Stock, on a
fully diluted, as-converted basis (i.e., assuming issuance of all shares of
Company Common Stock issuable upon the exercise or conversion of all Company
Common Stock Equivalents outstanding immediately prior to the Effective Time,
whether or not vested), issued and outstanding immediately prior to the
Effective Time.
7.2 Conditions to Obligations of Parent and Merger Sub. The obligations of
Parent to consummate the Merger and the other transactions contemplated by
this Agreement are subject to the satisfaction or fulfillment at or prior to
the Closing of the following conditions, any of which may be waived in whole
or in part by Parent and Merger Sub in writing:
(a) All representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing with the same effect as though such representations and warranties
were made at and as of the Closing (other than any representation or warranty
that is expressly made as of a specified date, which shall be true and correct
in all material respects as of such specified date only).
(b) The Company shall have performed and complied in all material respects
with all the covenants and agreements required by this Agreement to be
performed or complied with by it at or prior to the Closing; provided,
however, that the performance of the covenants set forth in Section 6.16
hereof shall not be a condition to Closing.
(c) Parent shall have received an opinion of its tax counsel, Dewey
Ballantine LLP, dated the Closing Date, in form and substance reasonably
satisfactory to it, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. Such opinion
may be based on facts and assumptions set forth in such opinion that are
consistent with the state of facts existing as of the Effective Time and on
reasonably requested representation letters from Parent, the Company and
others.
7.3 Conditions to Obligations of the Company. The obligations of the Company
to consummate the Merger and the other transactions contemplated by this
Agreement are subject to the satisfaction or fulfillment at or prior to the
Closing of the following conditions, any of which may be waived in whole or in
part by the Company in writing:
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(a) All representations and warranties of Parent and Merger Sub contained in
this Agreement shall be true and correct in all material respects at and as of
the Closing with the same effect as though such representations and warranties
were made at and as of the Closing (other than any representation or warranty
that is expressly made as of a specified date, which shall be true and correct
in all material respects as of such specified date only).
(b) Parent and Merger Sub shall have performed and complied in all material
respects with the covenants and agreements required by this Agreement to be
performed or complied with by them at or prior to the Closing; provided,
however, that the performance of the covenants set forth in Section 6.16
hereof shall not be a condition to Closing.
(c) The Company shall have received an opinion of its tax counsel, Latham &
Watkins, dated the Closing Date, in form and substance reasonably satisfactory
to it, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code. Such opinion may be based on facts
and assumptions set forth in such opinion that are consistent with the state
of facts existing as of the Effective Time and on reasonably requested
representation letters from Parent, the Company and others.
(d) The execution and delivery by each of Parent and Merger Sub of this
Agreement, the performance by each of its obligations hereunder, and the
consummation by each of the transactions contemplated hereby, shall not be in
conflict with or violate in any material respect, constitute a material
default (or event which with the giving of notice or lapse of time, or both,
would become a material default) under, give rise to any right of termination,
amendment, modification, acceleration or cancellation of any material
obligation or loss of any material benefit under, result in the creation of
any Encumbrance other than a Permitted Encumbrance on any of the assets of
Parent or Merger Sub pursuant to, or require Parent or Merger Sub to obtain
any consent, waiver, approval or action of, make any filing with, or give any
notice to any Person as a result or under, the terms and provisions of (i) the
Parent Certificate of Incorporation, the Parent Bylaws, the Merger Sub
Articles of Incorporation, or the Merger Sub Bylaws, (ii) any Contract to
which Parent is a party or is bound, or (iii) any Law applicable to Parent, or
any Governmental Order issued by a Governmental Authority by which Parent is
in any way bound or obligated, except, in the case of clauses (ii) and (iii)
of this Section, as would not, in any individual case, have a Material Adverse
Effect.
(e) No consent, waiver, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
Governmental Authority shall be required on the part of Parent or Merger Sub
in connection with the execution and delivery by Parent or Merger Sub of this
Agreement, the performance by Parent or Merger Sub of its obligations
hereunder, and the consummation by Parent or Merger Sub of the transactions
contemplated hereby, except (a) for those consents, waivers, approvals,
orders, authorizations, registrations, qualifications, designations,
declarations or filings required under or in relation to (i) the HSR Act, (ii)
state securities or "blue sky" laws, (iii) the Securities Act (iv) the
Exchange Act, (v) the NGCL with respect to the filing and recordation of
appropriate merger documents, (vi) antitrust or merger laws of other
jurisdictions; or (b) where the failure to obtain such consent, waiver,
approval, order or authorization, or to make such registration, qualification,
designation, declaration or filing, would not, in any individual case,
reasonably be expected to have a Material Adverse Effect.
(f) Except as has been disclosed publicly in the Parent SEC Reports, there
shall be no Actions by any Person or Governmental Authority pending or known
to Parent to be threatened against or relating to Parent or Merger Sub, or
known to Parent to be pending or threatened against any current or former
employees (in their capacity as such) of Parent, other than those which would
not, in any individual case, reasonably be expected to have a Material Adverse
Effect.
(g) During the period since March 31, 2000, (a) the business of Parent and
its Subsidiaries shall have been conducted only in the ordinary course,
consistent with past practice, except for the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, and
except as otherwise expressly permitted by this Agreement; (b) neither Parent
nor any of its Subsidiaries shall have taken any action or omitted
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to take any action, or entered into any contract, agreement, commitment or
arrangement to take any action or omit to take any action, which, if taken or
omitted after the date hereof, would violate Section 6.1(b) or Section 6.1(d)
hereof; and (c) there shall not have been, and nothing shall have occurred
that would have, a Material Adverse Effect on Parent.
ARTICLE VIII.
TERMINATION
8.1 Termination. This Agreement and the transactions contemplated hereby may
be terminated and abandoned:
(a) by either the Company, on the one hand, or Parent and Merger Sub, on the
other hand, at any time prior to the Closing with the mutual written consent
of the other party or parties hereto;
(b) unless the Closing has not occurred as a result of a breach of this
Agreement by the party or parties seeking such termination, by either the
Company, on the one hand, or Parent and Merger Sub, on the other hand, if the
Closing has not occurred on or prior to 5:00 p.m. (Eastern time) on December
31, 2000 (the "Termination Date").
(c) by the Company if the Board of Directors of Parent agrees to accept a
Superior Proposal;
(d) by the Company if, between the date of this Agreement and the Closing
Date, more than 50% of the issued and outstanding Parent Common Stock has been
assigned or transferred to Persons who were not shareholders of Parent as of
the date of this Agreement, or if a tender offer for such assignment or
transfer of Parent Common Stock is made;
(e) unless (i) caused by the party or parties seeking such termination or
(ii) as a result of such party's or parties' representation or warranty being
or becoming untrue, upon a failure of a condition to closing under Article VII
in existence as of the Closing Date; or
(f) by either the Company, on the one hand, or Parent and Merger Sub, on the
other hand, if any Governmental Authority with jurisdiction over such matters
shall have issued a final and nonappealable Governmental Order permanently
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement; provided, however, that neither
the Company nor Parent and Merger Sub may terminate this Agreement pursuant to
this Section 8.1(f) unless the party or parties seeking to so terminate this
Agreement has used all commercially reasonable best efforts to oppose any such
Governmental Order or to have such Governmental Order vacated or made
inapplicable to the transactions contemplated by this Agreement.
8.2 Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1 hereof, this Agreement shall become null and void and none of the
parties hereto shall have any further liability hereunder except that (i) the
provisions of Section 6.6, Section 6.7, Section 6.12(b) and Article IX hereof
generally, shall remain in full force and effect, and (ii) each party hereto
shall remain liable to each other party hereto for any breach of its
obligations under this Agreement prior to such termination, including, without
limitation, recovery of sums paid or owed by such other party under Section
4.19 or Section 5.8 hereof, as applicable. Notwithstanding the foregoing, if
either Parent or the Company breaches its obligations under this Agreement,
and the shareholders of the breaching party have voted to approve the
transactions contemplated by this Agreement, then the non-breaching party
shall have to right to seek, and, it is agreed, shall be entitled to obtain,
specific performance from the breaching party of the transactions contemplated
under this Agreement, provided, however, that if such non-breaching party does
not obtain such specific performance for any reason whatsoever, the breaching
party shall remain liable for the breach of its obligations under this
Agreement to the same extent as if the non-breaching party had not sought such
specific performance.
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ARTICLE IX.
SURVIVAL; INDEMNIFICATION
None of the representations and warranties of the Company, Parent or Merger
Sub contained in this Agreement, or in any certificate, instrument or other
document delivered by the Company, Parent or Merger Sub pursuant to this
Agreement or in connection with the transactions contemplated hereby, shall
survive the Closing. None of the covenants and agreements of the Company,
Parent or Merger Sub contained in this Agreement, or in any certificate,
instrument or other document delivered by the Company, Parent or Merger Sub
pursuant to this Agreement or in connection with the transactions contemplated
hereby, shall survive the Closing, except to the extent such covenants and
agreements by their terms contemplate performance after the Closing. No claim
shall be made or action brought by any party hereto after the Closing (i) for
the breach of, or inaccuracy in, any representation or warranties contained in
this Agreement, or in any certificate, instrument or other document delivered
pursuant to this Agreement or in connection with the transactions contemplated
hereby, or (ii) for the breach of any covenant or agreement contained in this
Agreement, or in any certificate, instrument or other document delivered
pursuant to this Agreement or in connection with the transactions contemplated
hereby, except with respect to those covenants and agreements that by their
terms contemplate performance after the Closing.
ARTICLE X.
MISCELLANEOUS
10.1 Notices. All notices that are required or may be given pursuant to this
Agreement must be in writing and delivered personally, by a recognized courier
service, by a recognized overnight delivery service, by telecopy or by
registered or certified mail, postage prepaid, to the parties at the following
addresses (or to the attention of such other person or such other address as
any party may provide to the other parties by notice in accordance with this
Section 10.1):
if to Parent or Merger Sub, to:
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, CA 94111
Attn: Lawrence D. Lenihan
with copies to:
Dewey Ballantine LLP
333 South Hope Street
Suite 3000
Los Angeles, CA 90071
Attn: Robert M. Smith
if to the Company, to:
StarGuide Digital Networks, Inc.
300 East Second Street
Suite 1510
Reno, NV 89509
Attn: Jeffrey A. Dankworth
with copies to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, DC 20004
Attn: Eric L. Bernthal, Esq.
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Any such notice or other communication will be deemed to have been given and
received (whether actually received or not) on the day it is personally
delivered or delivered by courier or overnight delivery service or sent by
telecopy (receipt confirmed) or, if mailed, when actually received.
10.2 Attorneys' Fees and Costs. If attorneys' fees or other costs are
incurred to secure performance of any obligations hereunder, or to establish
damages for the breach thereof or to obtain any other appropriate relief,
whether by way of prosecution or defense, the prevailing party will be
entitled to recover reasonable attorneys' fees and costs incurred in
connection therewith.
10.3 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder may be assigned or delegated by the Company, Parent or
Merger Sub without the prior written consent of the other party or parties
hereto and any purported assignment or delegation in violation hereof shall be
null and void.
10.4 Amendments and Waiver. This Agreement may not be modified or amended
except in writing signed by the party or parties against whom enforcement is
sought. The terms of this Agreement may be waived only by a written instrument
signed by the party or parties waiving compliance. No waiver of any provision
of this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise provided. No delay on the part of any party
or parties hereto in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.
Unless otherwise provided, the rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies which the parties
hereto may otherwise have at law or in equity. Whenever this Agreement
requires or permits consent by or on behalf of a party or parties hereto, such
consent shall be given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 10.4.
10.5 Entire Agreement. This Agreement, the Shareholder Voting Agreements,
the Pre-Existing NDA, the Lock-up Agreements, and the related documents
contained as Exhibits and Schedules hereto or expressly contemplated hereby
contain the entire understanding of the parties relating to the subject matter
hereof and supersede all prior written or oral and all contemporaneous oral
agreements and understandings relating to the subject matter hereof. The
Exhibits and Schedules to this Agreement are hereby incorporated by reference
into and made a part of this Agreement for all purposes.
10.6 Representations and Warranties Complete. The representations,
warranties, covenants and agreements set forth in this Agreement, the
Shareholder Voting Agreements, the Pre-Existing NDA, and the Lock-up
Agreements, constitute all the representations, warranties, covenants and
agreements of the parties hereto and their respective shareholders, directors,
officers, employees, affiliates, advisors (including financial, legal and
accounting), agents and representatives and upon which the parties have
relied.
10.7 Third Party Beneficiaries. Except as set forth below in this Section
10.7, this Agreement is made for the sole benefit of the parties hereto and
nothing contained herein, express or implied, is intended to or shall confer
upon any other Person any third party beneficiary right or any other legal or
equitable rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement. Notwithstanding the foregoing or anything to the
contrary contained in this Agreement, the parties hereto acknowledge and agree
that (i) the stockholders of the Company are third party beneficiaries of the
benefits under this Agreement that inure to the Company following the Closing,
and, as a result, Ginsburg, the designated representative of the stockholders
of the Company, or his successor, (the "Company Stockholders' Representative")
shall be entitled to enforce any of the stockholders' third party beneficiary
rights following the Closing for so long as any such rights remain in effect
pursuant to the terms of this Agreement, and (ii) the directors and officers
of the Company are third party beneficiaries of the benefits under Section 6.9
hereof that inure to such persons following the Closing, and, as a result, the
directors and officers of the Company (or any of them) shall be entitled to
enforce any of the third party beneficiary rights of such directors and
officers following the Closing for so long as any such rights remain in effect
pursuant to the terms of this Agreement.
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10.8 Governing Law. This provisions of this Agreement relating to the legal
effect of the Merger will be governed by and construed and interpreted in
accordance with the substantive laws of the State of Nevada, and the remainder
of this Agreement will be governed by and construed and interpreted in
accordance with the substantive laws of the State of California, in each case
without giving effect to any conflicts of law rule or principle that might
require the application of the laws of another jurisdiction.
10.9 Neutral Construction. The parties to this Agreement agree that this
Agreement was negotiated fairly between them at arms' length and that the
final terms of this Agreement are the product of the parties' negotiations.
Each party hereto represents and warrants that it has sought and received
legal counsel of its own choosing with regard to the contents of this
Agreement and the rights and obligations affected hereby. The parties hereto
agree that this Agreement shall be deemed to have been jointly and equally
drafted by them, and that the provisions of this Agreement therefore should
not be construed against any of the parties hereto on the grounds that a party
drafted or was more responsible for drafting the provision(s) hereof.
10.10 Severability. In the event that any one or more of the provisions or
parts of a provision contained in this Agreement shall for any reason be held
to be invalid, illegal or unenforceable in any respect in any jurisdiction,
such invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement or any other jurisdiction,
but this Agreement shall be reformed and construed in any such jurisdiction as
if such invalid or illegal or unenforceable provision or part of a provision
had never been contained herein and such provision or part shall be reformed
so that it would be valid, legal and enforceable to the maximum extent
permitted in such jurisdiction.
10.11 Headings; Interpretation; Schedules and Exhibits. The descriptive
headings of the several Articles and Sections of this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
References to Sections or Articles, unless otherwise indicated, are references
to Sections and Articles of this Agreement. The word "including" means
including without limitation. Words (including defined terms) in the singular
shall be held to include the plural and vice versa and words of one gender
shall be held to include the other gender as the context requires. The terms
"hereof," "herein" and "herewith" and words of similar import shall, unless
otherwise stated, be construed to refer to this Agreement as a whole
(including all of the Schedules and Exhibits hereto) and not to any particular
provision of this Agreement unless otherwise specified. It is understood and
agreed that neither the specifications of any dollar amount in this Agreement
nor the inclusion of any specific item in the Schedules or Exhibits is
intended to imply that such amounts or higher or lower amounts, or the items
so included or other items, are or are not material, and neither party shall
use the fact of setting of such amounts or the fact of the inclusion of such
item in the Schedules or Exhibits in any dispute or controversy between the
parties as to whether any obligation, item or matter is or is not material for
purposes hereof.
10.12 WAIVER OF JURY TRIAL. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE SUCH WAIVER, (II) IT UNDERSTANDS AND
HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVER, (III) IT MAKES SUCH WAIVER
VOLUNTARILY, AND (IV) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION
10.12.
10.13 Counterparts. This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, each of which shall be
deemed an original and all of which together will constitute one and the same
instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the date first above written.
StarGuide Digital Networks, Inc.
By:__________________________________
Name:
Title:
Digital Generation Systems, Inc.
By:__________________________________
Name:
Title:
SG Nevada Merger Sub Inc.
By:__________________________________
Name:
Title:
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ARTICLES OF MERGER OF
SG NEVADA MERGER SUB INC.
WITH AND INTO
STARGUIDE DIGITAL NETWORKS, INC.
Pursuant to the provisions of Nevada Revised Statutes chapter 92A, the
undersigned Nevada domestic corporations, SG Nevada Merger Sub Inc. ("Merger
Sub") and STARGUIDE DIGITAL NETWORKS, INC. (the "Surviving Corporation"),
hereby adopt and file the following Articles of Merger for the purpose of
merging Merger Sub with and into the Surviving Corporation:
1. The name of each constituent corporation in the merger contemplated
herein and the jurisdiction of their respective organizations are:
<TABLE>
<CAPTION>
Name of Corporation State
------------------- ------
<S> <C>
SG NEVADA MERGER SUB INC. ........................................ Nevada
STARGUIDE DIGITAL NETWORKS, INC. ................................. Nevada
</TABLE>
2. An Agreement and Plan of Merger (the "Plan of Merger") was adopted by the
respective Boards of Directors of both Merger Sub and the Surviving
Corporation.
3. The Plan of Merger was approved as required by law by the unanimous
written consent or written consent of a majority in voting power of the
stockholders of each of Merger Sub and the Surviving Corporation.
4. The Articles of Incorporation of the Surviving Corporation in effect on
the date hereof will remain in the Articles of Incorporation of the Surviving
Corporation without amendment.
5. A copy of the complete executed Plan of Merger is on file at a place of
business of the Surviving Corporation, located at 300 East Second Street,
Suite 1510, Reno, Nevada 89509.
6. The Merger shall take effect upon filing these Articles of Merger with
the Nevada Secretary of State.
IN WITNESS WHEREOF, the undersigned officers of Merger Sub and the Surviving
Corporation have executed these Articles of Merger on the day of ,
2000.
StarGuide Digital Networks, Inc.
By:__________________________________
, President
SG Nevada Merger Sub Inc.
By:__________________________________
, President
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LOCK-UP AGREEMENT
DIGITAL GENERATION SYSTEMS, INC.
875 Battery Street
San Francisco, California
Ladies and Gentlemen:
The undersigned, , is a holder of securities of Digital
Generation Systems, Inc., a corporation organized and existing under the laws
of the State of California (the "Company"), and wishes to facilitate the
merger of SG Nevada Merger Sub Inc., a wholly-owned subsidiary of the Company
("Merger Sub"), with and into StarGuide Digital Networks, Inc., a corporation
organized and existing under the laws of the State of Nevada ("StarGuide"),
pursuant to that certain Agreement and Plan of Merger by and among the
Company, StarGuide, and Merger Sub dated as of , 2000 (the "Agreement"
and such merger, the "Merger"). The undersigned recognizes that the Merger
will be of benefit to the undersigned. The agreements set forth in this lock-
up agreement are being executed and delivered by the undersigned pursuant to
Section 6.16 of the Agreement.
In consideration of the foregoing and in order to induce StarGuide and the
Company to effect the Merger, the undersigned hereby agrees (such agreement,
the "Lock-Up"), for the benefit of the Company and StarGuide, that during the
period beginning the date hereof and continuing to and including the date one
hundred eighty (180) days after the Effective Time (as defined in the
Agreement) (the "Lock-Up Period"), the undersigned will not, directly or
indirectly, issue, sell, offer or agree to sell, grant any option for the sale
of, pledge, make any short sale or maintain any short position, establish or
maintain an open "put equivalent position" (within the meaning of Rule 16-a-
1(h) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), enter into any swap, derivative transaction or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of any of Company's outstanding securities (the "Common Stock")
(whether any such transaction is to be settled by delivery of Common Stock,
other securities, cash or other consideration) or otherwise dispose (or
publicly announce the undersigned's intention to do any of the foregoing) of,
directly or indirectly, any Common Stock, or other capital stock of the
Company or any securities convertible into, exercisable for or exchangeable
for Common Stock, or other capital stock of the Company that the undersigned
currently beneficially owns (within the meaning of Rule 13d-3 under the
Exchange Act), directly or indirectly, or may beneficially own, directly or
indirectly in the future (collectively, the "Lock-Up Shares").
The undersigned acknowledges that agreements substantially the same as the
Lock-Up are being executed and delivered by certain other holders of
securities of the Company, as provided in the Agreement (such agreements,
together with the Lock-Up, the "Shareholder Lock-Ups" and each, a "Shareholder
Lock-Up"). The undersigned agrees that the Lock-Up is subject to the following
conditions: (i) there will be no waiver of any term or condition of any
Shareholder Lock-Up unless a majority of the Board of Directors of the Company
shall have voted in favor of such waiver; and (ii) in the event that a waiver
is obtained as to any term or condition of any Shareholder Lock-Up pursuant to
(i) above, then such term or condition that has been so waived will
automatically be waived for each Person who has executed and delivered a
Shareholder Lock-Up pursuant to Section 6.16 of the Agreement.
During the Lock-Up Period, the Lock-Up Shares held by the undersigned will
be subject to the Lock-Up in accordance with the following schedule:
(1) Until 60 days from the Effective Time, 100% of such Lock-Up Shares
are subject to the Lock-Up;
(2) From 60 days from the Effective Time until 90 days from the Effective
Time, 85% of such Lock-Up Shares are subject to the Lock-Up;
(3) From 90 days from the Effective Time until 120 days from the
Effective Time, 70% of such Lock-Up Shares are subject to the Lock-Up;
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(4) From 120 days from the Effective Time until 150 days from the
Effective Time, 50% of such Lock-Up Shares are subject to the Lock-Up;
(5) From 150 days from the Effective Time until 180 days from the
Effective Time, 25% of such Lock-Up Shares are subject to the Lock-Up.
The undersigned further: (i) authorizes the Company during the Lock-Up
Period to cause the transfer agent to decline to transfer and/or to note stop
transfer restrictions on the transfer books and records of the Company with
respect to any Common Stock and any securities convertible into exercisable or
exchangeable for Common Stock for which the undersigned is the record holder
and, in the case of any such share or securities for which the undersigned is
the beneficial but not the record holder, agrees to cause the record holder to
cause the transfer agent to decline to transfer and/or to note stop transfer
restrictions on such books and records with respect to such shares or
securities; (ii) agrees, from the date hereof until the end of the Lock-Up
Period, that the undersigned will not exercise and will waive his, her or its
rights, if any, to require the Company to register its Common Stock and to
receive notice thereof; and (iii) represents and warrants that the undersigned
has full power and authority to enter into the agreements set forth herein,
and that, upon request, the undersigned will execute any additional documents
necessary in connection with enforcement hereof. Any obligations of the
undersigned shall be binding upon the successors and assigns of the
undersigned.
Very truly yours,
dated this day of , 2000.
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Chase Securities Inc.
270 Park Avenue
New York, NY 10017-2070
July 7, 2000
Special Committee of the
Board of Directors
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, California 94111
Ladies and Gentlemen:
You have informed us that Digital Generation Systems, Inc. ("Parent"), SG
Nevada Merger Sub, Inc., a wholly-owned subsidiary of Parent ("Merger Sub"),
and StarGuide Digital Networks, Inc. (the "Company") propose to enter into an
Agreement and Plan of Merger (the "Agreement") which provides, among other
things, that Merger Sub will be merged with and into the Company (the
"Merger"), as a result of which the Company will become a wholly-owned
subsidiary of Parent. As set forth more fully in the Agreement, as a result of
the Merger, each outstanding share of common stock, par value of $0.001 per
share, of the Company (the "Company Common Stock"), other than shares of the
Company Common Stock owned by Parent, Merger Sub or any subsidiary of Parent
or Merger Sub or owned by the Company or any wholly-owned subsidiary of the
Company, all of which shall be canceled, will be converted into the right to
receive that number of shares of validly issued, duly authorized and
nonassessable common stock, with no par value, of Parent (the "Parent Common
Stock") obtained by multiplying the total number of shares of Parent Common
Stock issued and outstanding immediately prior to the Effective Time (as
defined in the Agreement) (including for such purposes the total number of
shares of Parent Common Stock issuable upon the conversion of any Parent
Common Stock Equivalents (as defined in the Agreement) then in existence) by
1.454 and dividing that product by the total number of shares of Company
Common Stock issued and outstanding immediately prior to the Effective Time
(including for such purposes the total number of shares of Company Common
Stock issuable upon the conversion of any Company Common Stock Equivalents (as
defined in the Agreement) then in existence) (the "Exchange Ratio"). You have
informed us that the Merger will be accounted for as a purchase transaction.
You have asked us whether, in our opinion, the Exchange Ratio is fair, from
a financial point of view, to Parent and its shareholders.
In arriving at the opinion set forth below, we have, among other things:
. reviewed a draft of the Agreement in the form provided to us and have
assumed that the final form of such agreement will not vary in any
regard that is material to our analysis;
. reviewed certain publicly available business and financial information
we deemed relevant relating to Parent and the respective industries in
which Parent and the Company operate;
. reviewed certain internal non-public financial and operating data
provided to us by the managements of Parent and the Company relating to
their respective businesses, including certain forecast and projection
information, including synergy information, as to future financial
results of such businesses primarily provided to us by the management of
Parent;
. discussed with members of the senior managements of Parent and the
Company, Parent's and the Company's operations, historical financial
statements and future prospects, before and after giving effect to the
Merger, as well as their views of the business, operational and
strategic benefits and other implications of the Merger and such other
matters as we deemed necessary or appropriate;
. compared the financial and operating performance of Parent and the
Company with publicly available information concerning certain other
companies we deemed comparable and reviewed the relevant
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historical stock prices and trading activity of Parent Common Stock and
certain publicly traded securities of such other companies;
. reviewed the financial terms of certain recent business combinations and
acquisition transactions we deemed reasonably comparable to the Merger
and otherwise relevant to our inquiry; and
. made such other analyses and examinations as we have deemed necessary or
appropriate.
We have assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for us, or publicly
available, for purposes of this opinion and have further relied upon the
assurances of management of Parent and the Company that they are not aware of
any facts that would make such information inaccurate or misleading. We have
neither made nor obtained any independent evaluations or appraisals of the
assets or liabilities of Parent or the Company, nor have we conducted a
physical inspection of the properties and facilities of Parent or the Company.
We have assumed that the financial forecast and projection information,
including the synergy information, provided to or discussed with us by or on
behalf of Parent and the Company have been reasonably determined on bases
reflecting the best currently available estimates and judgments of the
managements of Parent and the Company as to the future financial performance
of such companies, including after giving effect to the Merger. We have
further assumed that, in all material respects, such forecasts and projections
will be realized in the amounts and times indicated thereby. We express no
view as to such forecast or projection information or the assumptions upon
which they were based.
For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each
party contained in the Agreement are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it
under the Agreement and that all conditions to the consummation of the Merger
will be satisfied without waiver thereof. We have also assumed that all
material governmental, regulatory or other consents and approvals will be
obtained and that in the course of obtaining any necessary governmental,
regulatory or other consents and approvals, or any amendments, modifications
or waivers to any documents to which either of Parent or the Company are
party, as contemplated by the Agreement, no restrictions will be imposed or
amendments, modifications or waivers made that would have any material adverse
effect on the contemplated benefits to Parent of the Merger. We have further
assumed that the Merger will be accounted for as a purchase transaction under
United States generally accepted accounting principles and that it will
qualify as a reorganization for United States federal income tax purposes. In
addition, we have assumed that a Company Equity Sale (as defined in the
Agreement) does not occur.
Our opinion herein is necessarily based on market, economic and other
conditions as they exist and can be evaluated on the date of this letter. Our
opinion is limited to the fairness, from a financial point of view, to Parent
and its shareholders of the Exchange Ratio and we express no opinion as to the
merits of the underlying decision by Parent to engage in the Merger. This
opinion does not constitute a recommendation to any shareholder of Parent as
to how such shareholder should vote with respect to the issuance of Parent
Common Stock or any other matters relating to the Merger. In addition, we
express no opinion as to the prices at which Parent Common Stock will trade
following the announcement or the consummation of the Merger.
Chase Securities Inc., as part of its financial advisory business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. We have acted as financial advisor to the Special
Committee of the board of directors of Parent in connection with the Merger
and will receive a fee for our services, including for rendering this opinion,
payment of a significant portion of which is contingent upon the consummation
of the Merger. In addition, Parent has agreed to indemnify us for certain
liabilities arising out of our engagement. As we have previously advised you,
The Chase Manhattan Corporation and its affiliates, including Chase Securities
Inc., in the ordinary course of business, have from time to time provided, and
in the future may continue to provide, for customary compensation, commercial
and investment banking services to Parent and the Company. Specifically, Chase
served as lead manager in Parent's February 1996 initial public offering. In
the ordinary course of business, we or our affiliates may trade or act as a
market maker or broker in the debt and equity securities of Parent for our
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own accounts and for the accounts of our customers and, accordingly, may at
any time hold a long or short position in such securities.
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Exchange Ratio is fair, from a financial point of view,
to Parent and its shareholders. We express no opinion, however, as to the
fairness of the Exchange Ratio to Scott Ginsburg, Matthew Devine, Omar
Choucair and their respective affiliated entities.
This opinion is for the use and benefit of the Special Committee of the
board of directors of Parent in its evaluation of the Merger and shall not be
used for any other purpose without the prior written consent of Chase
Securities Inc.
Very truly yours,
Chase Securities Inc.
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July 7, 2000
Board of Directors
Starguide Digital Networks, Inc.
5221 N. O'Connor Blvd., Suite 950
Irving, TX 75039
Members of the Board:
We understand that Starguide Digital Networks, Inc. ("SG" or the "Company"),
Digital Generation Systems, Inc. ("DG") and SG Nevada Merger Sub Inc., a
wholly owned subsidiary of DG ("Merger Sub") have entered into an Agreement
and Plan of Merger, dated as of July 7, 2000, (the "Merger Agreement"), which
provides, among other things, for the merger (the "Merger") of Merger Sub with
and into SG. Pursuant to the Merger, (i) SG will become a wholly owned
subsidiary of DG, and (ii) each outstanding share of common stock, par value
$0.001 per share (the "SG Common Stock") of SG, other than shares owned by DG
or by a wholly owned subsidiary of DG or as to which dissenters rights have
been perfected, will be converted into the right to receive a number of shares
of common stock, without par value (the "DG Common Stock") of DG equal to the
Conversion Number as defined in the Merger Agreement. The terms and conditions
of the Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of SG Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of DG;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning SG and DG prepared by the managements of SG
and DG, respectively;
(iii) reviewed certain financial projections prepared by the managements
of SG and DG, respectively;
(iv) discussed the past and current operations and financial condition and
the prospects of SG, including information relating to the strategic,
financial and operational benefits anticipated from the Merger, with
senior executives of SG;
(v) discussed the past and current operations and financial condition and
the prospects of DG, including information relating to the strategic,
financial and operational benefits anticipated from the Merger, with
senior executives of DG;
(vi) reviewed the reported prices and trading activity for the DG Common
Stock;
(vii) compared the financial performance of the SG and DG and the prices
and trading activity of DG Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(ix) participated in discussions and negotiations among representatives of
the SG and DG and their financial and legal advisors;
(x) reviewed the Merger Agreement and certain related documents;
(xi) considered such other factors and performed such other analyses as we
have deemed appropriate.
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We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to financial projections, including information
relating to certain strategic, financial and operational benefits anticipated
from the Merger, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments for
future performance of SG and DG. We have also relied upon, without independent
verification, the assessment by the managements of SG and DG of: (i) the
strategic, financial and other benefits expected to result from the Merger;
(ii) the timing and risks associated with the integration of SG and DG; and
(iii) the validity of, and risks associated with SG and DG's existing and
future technologies, services or business models. We have not made any
independent valuation or appraisal of the assets or liabilities or technology
of the Company, nor have we been furnished with any such appraisals. Morgan
Stanley has assumed that in connection with the receipt of all the necessary
regulatory approvals for the proposed Merger, no restrictions will be imposed
that would have a material adverse effect on the contemplated benefits
expected to be derived from the Merger. In addition, we have assumed that the
Merger will be consummated in accordance with the terms set forth in the
Merger Agreement, including, among other things, that the Merger will be
treated as a tax-free reorganization pursuant to the Internal Revenue Code of
1986. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. In arriving at our opinion, we were not authorized to
solicit, and did not solicit, interest from any party with respect to the
acquisition, business combination or other extraordinary transaction involving
SG.
We have acted as financial advisor to the Board of Directors of SG in
connection with this transaction and will receive a fee for our services. It
is understood that this letter is for the information of the Board of
Directors of SG only and may not be used for any other purpose without our
prior written consent. This opinion does not in any manner address the prices
at which DG's Common Stock will trade following consummation of the Merger,
and Morgan Stanley expresses no opinion or recommendation as to how the
holders of SG Common Stock or DG Common Stock should vote at the shareholders'
meetings held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of shares of SG
Common Stock pursuant to the Merger Agreement is fair from a financial point
of view to such holders.
Very truly yours,
Morgan Stanley & Co. Incorporated
By: _________________________________
Andres Rubio
Vice President
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NEVADA REVISED STATUTES
CHAPTER 92A--MERGERS AND EXCHANGES OF INTEREST
Sections 92A.300 -- 92A.500:
RIGHTS OF DISSENTING OWNERS
NRS 92A.300 Definitions. As used in NRS 92A.300 to 92A.500, inclusive,
unless the context otherwise requires, the words and terms defined in NRS
92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those
sections.
(Added to NRS by 1995, 2086)
NRS 92A.305 "Beneficial stockholder" defined. "Beneficial stockholder" means
a person who is a beneficial owner of shares held in a voting trust or by a
nominee as the stockholder of record.
(Added to NRS by 1995, 2087)
NRS 92A.310 "Corporate action" defined. "Corporate action" means the action
of a domestic corporation.
(Added to NRS by 1995, 2087)
NRS 92A.315 "Dissenter" defined. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.400 to
92A.480, inclusive.
(Added to NRS by 1995, 2087; A 1999, 1631)
NRS 92A.320 "Fair value" defined. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
(Added to NRS by 1995, 2087)
NRS 92A.325 "Stockholder" defined. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation.
(Added to NRS by 1995, 2087)
NRS 92A.330 "Stockholder of record" defined. "Stockholder of record" means
the person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
(Added to NRS by 1995, 2087)
NRS 92A.335 "Subject corporation" defined. "Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective
or the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
(Added to NRS by 1995, 2087)
NRS 92A.340 Computation of interest. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently
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paid by the entity on its principal bank loans or, if it has no bank loans, at
a rate that is fair and equitable under all of the circumstances.
(Added to NRS by 1995, 2087)
NRS 92A.350 Rights of dissenting partner of domestic limited partnership. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with
any merger or exchange in which the domestic limited partnership is a
constituent entity.
(Added to NRS by 1995, 2088)
NRS 92A.360 Rights of dissenting member of domestic limited-liability
company. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
(Added to NRS by 1995, 2088)
NRS 92A.370 Rights of dissenting member of domestic nonprofit corporation.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his
resignation and is thereby entitled to those rights, if any, which would have
existed if there had been no merger and the membership had been terminated or
the member had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of
NRS to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
(Added to NRS by 1995, 2088)
NRS 92A.380 Right of stockholder to dissent from certain corporate actions
and to obtain payment for shares.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, a stockholder is
entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation is
a party:
(1) If approval by the stockholders is required for the merger by NRS
92A.120 to 92A.160, inclusive, or the articles of incorporation and he
is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with
its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic corporation
is a party as the corporation whose subject owner's interests will be
acquired, if he is entitled to vote on the plan.
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(c) Any corporate action taken pursuant to a vote of the stockholders to
the event that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to
him or the domestic corporation.
(Added to NRS by 1995, 2087)
NRS 92A.390 Limitations on right of dissent: Stockholders of certain classes
or series; action of stockholders not required for plan of merger.
1. There is no right of dissent with respect to a plan of merger or exchange
in favor of stockholders of any class or series which, at the record date
fixed to determine the stockholders entitled to receive notice of and to vote
at the meeting at which the plan of merger or exchange is to be acted on, were
either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the shares
provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu of
fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan of
merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc., or held of record by a
least 2,000 holders of owner's interests of record; or
(2) A combination of cash and owner's interests of the kind described in
sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130.
(Added to NRS by 1995, 2088)
NRS 92A.400 Limitations on right of dissent: Assertion as to portions only
to shares registered to stockholder; assertion by beneficial stockholder.
1. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one person and notifies the subject
corporation in writing of the name and address of each person on whose behalf
he asserts dissenter's rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his
other shares were registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares held
on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the beneficial
stockholder or over which he has power to direct the vote.
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(Added to NRS by 1995, 2089)
NRS 92A.410 Notification of stockholders regarding right of dissent.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state
that stockholders are or may be entitled to assert dissenters' rights under
NRS 92A.300 to 92A.500, inclusive, and be accompanied by a copy of those
sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the
domestic corporation shall notify in writing all stockholders entitled to
assert dissenters' rights that the action was taken and send them the
dissenter's notice described in NRS 92A.430.
(Added to NRS by 1995, 2089; A 1997, 730)
NRS 92A.420 Prerequisites to demand for payment for shares.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 and
NRS 92A.400 is not entitled to payment for his shares under this chapter.
(Added to NRS by 1995, 2089; 1999, 1631)
NRS 92A.430 Dissenter's notice: Delivery to stockholders entitled to assert
rights; contents.
1. If a proposed corporate action creating dissenters' rights is authorized
at a stockholders' meeting, the subject corporation shall deliver a written
dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to what
extent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the demand
for payment, which may not be less than 30 nor more than 60 days after the
date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
(Added to NRS by 1995, 2089)
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NRS 92A.440 Demand for payment and deposit of certificates; retention of
rights of stockholder.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares before
the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of the
notice.
2. The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of
a stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.
(Added to NRS by 1995, 2090; A 1997, 730)
NRS 92A.450 Uncertificated shares: Authority to restrict transfer after
demand for payment; retention of rights of stockholder.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
(Added to NRS by 1995, 2090)
NRS 92A.460 Payment for shares: General requirements.
1. Except as otherwise provided in NRS 92A.470, within 30 days after receipt
of a demand for payment, the subject corporation shall pay each dissenter who
complied with NRS 92A.440 the amount the subject corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
subject corporation under this subsection may be enforced by the district
court:
(a) Of the county where the corporation's registered office is located;
or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any;
(b) A statement of the subject corporation's estimate of the fair value
of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
(Added to NRS by 1995, 2090)
D-5
<PAGE>
NRS 92A.470 Payment for shares: Shares acquired on or after date of
dissenter's notice.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares,
plus accrued interest, and shall offer to pay this amount to each dissenter
who agrees to accept it in full satisfaction of his demand. The subject
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated, and a
statement of the dissenters' right to demand payment pursuant to NRS 92A.480.
(Added to NRS by 1995, 2091)
NRS 92A.480 Dissenter's estimate of fair value: Notification of subject
corporation; demand for payment of estimate.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value
of his shares and interest due, if he believes that the amount paid pursuant
to NRS 92A.460 or offered pursuant to NRS 92A.470 is less than the fair value
of his shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
(Added to NRS by 1995, 2091)
NRS 92A.490 Legal proceeding to determine fair value: Duties of subject
corporation; powers of court; rights of dissenter.
1. If a demand for payment remains unsettled, the subject corporation shall
commence a proceeding within 60 days after receiving the demand and petition
the court to determine the fair value of the shares and accrued interest. If
the subject corporation does not commence the proceeding within the 60-day
period, it shall pay each dissenter whose demand remains unsettled the amount
demanded.
2. A subject corporation shall commence the proceeding in the district court
of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it
shall commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
D-6
<PAGE>
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470.
(Added to NRS by 1995, 2091)
NRS 92A.500 Legal proceeding to determine fair value: Assessment of costs
and fees.
1. The court in a proceeding to determine fair value shall determine all of
the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable,
to the extent the court finds the dissenters acted arbitrarily, vexatiously or
not in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if the
court finds the subject corporation did not substantially comply with the
requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
(Added to NRS by 1995, 2092)
D-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Section 317 of the California Corporations Code authorizes a corporation to
indemnify any director or officer who was or is a party or is threatened to be
made a party to any proceeding (other than an action by or in the right of the
corporation to obtain a judgment in its favor) because the person is or was a
director or officer of the corporation, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with the proceeding. This indemnification is allowed only if the person acted
in good faith and in a manner the person reasonably believed to be in the best
interests of the corporation. In the case of a criminal proceeding, the person
must have had no reasonable cause to believe his or her conduct was unlawful.
A corporation may advance expenses incurred in defending any proceeding prior
to the final disposition of the proceeding if the corporation receives an
undertaking by or on behalf of the director or officer to repay that amount if
it is ultimately determined that the person is not entitled to be indemnified.
A corporation may also indemnify a director or officer against expenses
actually and reasonably incurred by that person in connection with the defense
or settlement of the action by or in the right of the corporation to obtain a
judgment in its favor. This indemnification is allowed only if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders.
The decision of whether indemnification will be provided will be made by (i)
a majority vote of a quorum consisting of directors who are not parties to the
proceeding, (ii) if a quorum is not obtainable, by independent legal counsel
in a written opinion, (iii) approval of a majority of the shareholders,
excluding the shares of the person to be indemnified; or (iv) the court in
which the proceeding is or was pending. A corporation must indemnify a
director or officer against expenses actually and reasonably incurred to the
extent the person was successful on the merits in defending the proceeding. A
corporation may not provide indemnification for (i) any claim, issue or matter
for which the person has been found liable to the corporation in the
performance of that person's duty to the corporation and its shareholders,
unless the court determines that the person is fairly and reasonably entitled
to indemnification or (ii) any amounts paid in settling or expense incurred in
defending a pending action that was concluded without court approval. In
addition, indemnification is not allowed if it would be inconsistent with (i)
a resolution of the shareholders, (ii) the company's articles of incorporation
or by-laws, (iii) an agreement in effect at the time of the cause of action,
or (iv) any condition expressly imposed by a court in approving a settlement.
Additional rights to indemnification may be provided through the
corporation's by-laws, agreements, vote of shareholders or disinterested
directors, or otherwise to the extent those rights are authorized in the
corporation's articles of incorporation. The registrant's articles of
incorporation permit the registrant through its by-laws, agreements, vote of
shareholders or disinterested directors, or otherwise to provide for
indemnification in excess of the indemnification provided by law. The
registrant's by-laws provide that the indemnification provisions in the by-
laws are not exclusive of any other rights to which a person seeking
indemnification may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise. In addition, a
California corporation may obtain and maintain insurance on behalf of any
director or officer of the corporation for any liability asserted against him
or her, whether or not the corporation has the power to indemnify him or her
against liability under the California Corporations Code. The registrant
provides liability insurance for its directors and officers.
II-1
<PAGE>
ITEM 21. Exhibits and Financial Statement Schedules
(a) Exhibits--The following are the exhibits to this Registration Statement:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated July 7, 2000, by and between
Digital Generation Systems, Inc., StarGuide Digital Networks, Inc.,
and SG Nevada Merger Sub Inc., (included as Appendix A to the proxy
statement/prospectus which is a part of this registration statement)
5.1 Opinion of Gardere & Wynne, L.L.P.*
8.1 Opinion of Latham & Watkins*
8.2 Opinion of Dewey Ballantine LLP*
15.1 Not Applicable
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP
23.4 Consent of Morgan Stanley Dean Witter**
23.5 Consent of Chase, Hambrecht & Quist**
23.6 Consent of Latham & Watkins**
23.7 Consent of Dewey Ballantine LLP**
23.8 Consent of Gardere & Wynne**
24.1 Power of Attorney (included on signature page to Registration
Statement)
99.1 Form of Proxy for Annual Meeting of DG Systems Shareholders
</TABLE>
--------
* To be filed by amendment.
**To be included in opinion.
(b) Financial Statement Schedules--Not Applicable.
(c) Report, Opinion or Appraisal--See Appendices C and D.
ITEM 22. Undertakings
Undertaking Pursuant to Item 512(b)
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Undertaking Pursuant to Item 512(g)
(1) The undersigned registrant hereby undertakes as follows: That prior to
any public re-offering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such re-offering prospectus will contain the
information called for by the applicable registration form with respect to re-
offerings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 of Regulation C of the
Securities Act of 1933, will be filed as a
II-2
<PAGE>
part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Undertaking Pursuant to Item 512(h)
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Undertakings Pursuant to Form S-4
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irving, State of Texas,
on September 15, 2000.
Digital Generation Systems, Inc.
/s/ Matthew E. Devine
By: _________________________________
Matthew E. Devine
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below constitutes and appoints Scott K. Ginsburg and Matthew E. Devine, and
each of them individually, his true and lawful attorneys-in-fact and agents,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments and
any and all post-effective amendments and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them,
or their or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Scott K. Ginsburg Chairman of the Board of September 15, 2000
______________________________________ Directors
Scott K. Ginsburg
/s/ Matthew E. Devine Director, Chief Executive September 15, 2000
______________________________________ Officer (Principal
Matthew E. Devine Executive Officer)
/s/ Omar A. Choucair Secretary and Chief September 15, 2000
______________________________________ Financial Officer
Omar A. Choucair (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Lawrence D. Lenihan, Jr. Director September 15, 2000
______________________________________
Lawrence D. Lenihan, Jr.
/s/ Michael G. Linnert Director September 15, 2000
______________________________________
Michael G. Linnert
/s/ David M. Kantor Director September 15, 2000
______________________________________
David M. Kantor
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated July 7, 2000, by and between
Digital Generation Systems, Inc., StarGuide Digital Networks, Inc.,
and SG Nevada Merger Sub Inc., (included as Appendix A to the proxy
statement/prospectus which is a part of this registration statement)
5.1 Opinion of Gardere & Wynne, L.L.P.*
8.1 Opinion of Latham & Watkins*
8.2 Opinion of Dewey Ballantine LLP*
15.1 Not Applicable
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Latham & Watkins**
23.4 Consent of Dewey Ballantine LLP**
23.5 Consent of Gardere & Wynne, L.L.P.**
24.1 Power of Attorney (included on signature page to Registration
Statement)
99.1 Form of Proxy for Annual Meeting of DG Systems Shareholders
</TABLE>
--------
* To be filed by amendment.
**To be included in opinion.
