-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0OHsDXFMhJkgPf0ML1v8DpRT7SQD5r5ZNr44ABHz4w6+ks7Bri4kKGJcdegNejq KPE+HFd9ao0Jvmt/WVc0BQ== /in/edgar/work/20000814/0000929624-00-001162/0000929624-00-001162.txt : 20000921 0000929624-00-001162.hdr.sgml : 20000921 ACCESSION NUMBER: 0000929624-00-001162 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL GENERATION SYSTEMS INC CENTRAL INDEX KEY: 0000934448 STANDARD INDUSTRIAL CLASSIFICATION: [7311 ] IRS NUMBER: 943140772 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27644 FILM NUMBER: 698277 BUSINESS ADDRESS: STREET 1: 875 BATTERY ST STREET 2: STE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4155466600 MAIL ADDRESS: STREET 1: 875 BATTERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-Q 1 0001.txt SECOND QUARTER REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ____________________. Commission file number: 0-27644 DIGITAL GENERATION SYSTEMS, INC. (Exact name of registrant as specified in its charter) California 94-3140772 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 875 Battery Street San Francisco, California 94111 (Address of principal executive offices, including zip code) (415) 276-6600 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of registrant's Common Stock, without par value, outstanding as of June 30, 2000: 28,172,828 ================================================================================ DIGITAL GENERATION SYSTEMS, INC. The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," and similar expressions are used to identify forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and we assume no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Business Considerations" as reported in the Company's Annual Report on Form 10-K filed on March 28, 2000, as well as those risks discussed in this Report, and in the Company's other United States Securities and Exchange Commission filings. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements.................................................................. 3 Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999.......... 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2000 and July 3, 1999........................................................ 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and July 3, 1999...................................................................... 5 Notes to Condensed Consolidated Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................ 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................... 12 Item 6. Exhibits and Reports on Form 8-K...................................................... 12 SIGNATURES............................................................................ 12
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIGITAL GENERATION SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
June 30, December 31, 2000 1999 ------------------- ------------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,204 $ 5,420 Accounts receivable, less allowance for doubtful accounts of $2,431 on June 30, 2000 and $1,659 on December 31, 1999 12,277 12,799 Prepaid expenses and other 1,489 1,717 --------------------- --------------------- Total current assets 16,970 19,936 --------------------- --------------------- PROPERTY AND EQUIPMENT, at cost: Network equipment 36,853 35,304 Office furniture and equipment 6,247 5,833 Leasehold improvements 844 793 --------------------- --------------------- 43,944 41,930 Less - Accumulated depreciation and amortization (36,590) (33,772) --------------------- --------------------- Property and equipment, net 7,354 8,158 --------------------- --------------------- GOODWILL AND OTHER ASSETS, net 12,864 13,672 --------------------- --------------------- TOTAL ASSETS $ 37,188 $ 41,766 ===================== ===================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,259 $ 7,781 Accrued liabilities 2,890 3,230 Current portion of long-term debt 2,920 7,689 --------------------- --------------------- Total current liabilities 10,069 18,700 LONG-TERM DEBT, net of current portion 5,313 2,513 --------------------- --------------------- TOTAL LIABILITIES 15,382 21,213 --------------------- --------------------- SHAREHOLDERS' EQUITY: Convertible preferred stock, no par value -- Authorized -- 15,000,000 shares Outstanding -- none -- -- Common stock, no par value -- Authorized -- 100,000,000 shares Outstanding -- 28,172,828 shares at June 30, 2000 and 27,530,170 shares at December 31, 1999 121,711 119,519 Treasury stock, at cost (101) -- Receivable from issuance of common stock (93) (194) Accumulated other comprehensive income 65 52 Accumulated deficit (99,776) (98,824) --------------------- --------------------- Total shareholders' equity 21,806 20,553 --------------------- --------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,188 $ 41,766 ===================== ===================== The accompanying notes are an integral part of these condensed consolidated financial statements.
3 DIGITAL GENERATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Six Months Ended June 30, 2000 and July 3, 1999 (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, July 3, June 30, July 3, 2000 1999 2000 1999 ----------------------------- ------------------------------ (Unaudited) (Unaudited) REVENUES $ 13,540 $ 12,120 $ 26,250 $ 23,580 --------------- ------------ --------------- ------------- COSTS AND EXPENSES: Delivery and material costs 3,250 4,769 7,213 9,308 Customer operations 4,082 3,971 8,237 7,528 Sales and marketing 1,250 1,414 2,273 2,651 Research and development 757 680 1,634 1,292 General and administrative 2,310 1,102 4,055 2,609 Depreciation and amortization 1,614 2,435 3,199 4,925 --------------- ------------ --------------- ------------- Total expenses 13,263 14,371 26,611 28,313 --------------- ------------ --------------- ------------- INCOME (LOSS) FROM OPERATIONS 277 (2,251) (361) (4,733) --------------- ------------ --------------- ------------- OTHER INCOME (EXPENSE): Interest income 46 58 96 153 Interest expense (406) (508) (686) (1,112) --------------- ------------ --------------- ------------- NET LOSS $ (83) $ (2,701) $ (951) $ (5,692) =============== ============ =============== ============= BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.10) $ (0.03) $ (0.21) =============== ============ =============== ============= WEIGHTED AVERAGE COMMON SHARES 28,152 26,591 27,812 26,490 =============== ============ =============== ============= The accompanying notes are an integral part of these condensed consolidated financial statements.
4 DIGITAL GENERATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2000 and July 3, 1999 (in thousands)
Six Months Ended June 30, July 3, 2000 1999 ------------------------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (951) $ (5,692) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 2,824 4,492 Amortization of goodwill and intangibles 361 387 Provision for doubtful accounts 789 170 Changes in operating assets and liabilities -- Accounts receivable (267) (244) Prepaid expenses and other assets 675 (306) Accounts payable and accrued liabilities (3,862) 790 -------------- -------------- Net cash used in operating activities (431) (403) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (1,147) (2,589) -------------- -------------- Net cash used in investing activities (1,147) (2,589) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 2,192 1,244 Proceeds from line of credit 17,018 1,148 Payments on line of credit (14,790) (1,406) Proceeds from issuance of long-term debt 3,000 -- Payments on long-term debt (8,070) (4,602) -------------- -------------- Net cash used in financing activities (650) (3,616) -------------- -------------- EFFECT OF EXCHANGE RATE CHANGES 12 (30) NET DECREASE IN CASH AND CASH EQUIVALENTS (2,216) (6,638) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,420 13,025 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,204 $ 6,387 ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 686 $ 1,391 Acquisition of property and equipment through capital lease $ 873 $ -- Treasury stock purchased in exchange for cancellation of note $ 101 $ -- The accompanying notes are an integral part of these condensed consolidated financial statements.
5 DIGITAL GENERATION SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The financial statements included herein have been prepared by Digital Generation Systems, Inc. (the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Effective for fiscal 2000, beginning January 1, the Company elected to adjust its fiscal quarters so that each quarter ends on a calendar quarter. Quarters end on March 31, June 30, and September 30. The Company's fiscal year will continue to end on December 31. The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results of operations and cash flows for the three and six month periods ended June 30, 2000 and July 3, 1999. The results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results expected for the full fiscal year. Certain reclassifications were made to the 1999 condensed consolidated financial statements to conform to the 2000 presentation. The reclassifications have no significant effect on previously reported financial position, results of operations, or cash flows. 2. DEBT TRANSACTIONS On April 6, 2000, the Company entered into a long-term loan and security agreement with Foothill Capital Corporation for a revolving credit facility providing borrowings up to a maximum of $11 million. The credit facility is secured primarily by accounts receivable and has a term of three years. The amount available to the Company is based on eligible receivables less outstanding letters of credit, as defined in the revolving credit facility agreement. As of June 30, 2000, $2.2 million was outstanding under the revolving credit facility and an additional $2.3 million was available for borrowing. 3. EQUITY TRANSACTIONS During the six months ended June 30, 2000, 642,658 shares of common stock were issued pursuant to the exercise of options and warrants for $2,191,475. 6 4. RECONCILIATION FOR BASIC AND DILUTIVE LOSS PER SHARE ("EPS")
Three Months Ended Six Months Ended June 30, July 3, June 30, July 3, 2000 1999 2000 1999 ------- ------- -------- ------- Basic: Net Loss $ (83) $(2,701) $ (951) $(5,692) Weighted average shares outstanding 28,152 26,591 27,812 26,490 ------- ------- -------- ------- Loss per share $ (0.00) $ (0.10) $ (0.03) $(0.021) ======= ======= ======== ======= Diluted: Net loss $ (83) $(2,701) $ (951) $(5,692) Weighted average shares outstanding 28,152 26,591 27,812 26,490 Add: Net effect of potential dilutive shares - - - - ------- ------- -------- ------- Total 28,152 26,591 27,812 26,490 ------- ------- -------- ------- Loss per share $ (0.00) $ (0.10) $ (0.03) $ (0.21) ======= ======= ======== =======
At June 30, 2000 and July 3, 1999, warrants to purchase 3,891,070 shares of common stock at a weighted average exercise price of $3.57 were outstanding but were not included in the computation of diluted loss per share because the effect of these outstanding warrants would be antidilutive. At June 30, 2000 and July 3, 1999, options to purchase 3,284,639 and 2,814,209 shares of common stock at a weighted average exercise price of $4.78 and $3.98, respectively, were outstanding but were not included in the computation of diluted loss per share because the effect of these outstanding options would be antidilutive. 5. SEGMENT INFORMATION The Company operates predominantly in one industry segment: digital and physical distribution and post-production services for audio and video content, and its operations are managed primarily by geographic areas. The Company has defined its reportable segments based on these geographic areas. 7 DIGITAL GENERATION SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The information in the following tables is derived directly from the segments' internal financial reporting used for corporate management purposes. The expenses, assets and liabilities attributable to corporate activity are not allocated to the operating segments. As of June 30, 2000, 5% of the Company's operating assets were located outside of the United States. The assets of the Company's Los Angeles segment were maintained as a part of the Chicago segment in 1999 and it is impractical to break out such assets separately as of July 3, 1999.
For the Three Months Ended June 30, 2000 (In $000's) -------------------------------------------------------------------------------- San Francisco New York Chicago Los Angeles Consolidated --------------- -------------- -------------- -------------- --------------- Revenue $ 5,828 $3,331 $3,656 $ 725 $13,540 Net income (loss) $(3,882) $1,354 $2,040 $ 405 $ (83) Total identifiable assets $23,119 $8,875 $3,500 $1,694 $37,188 For the Three Months Ended July 3, 1999 (In $000's) -------------------------------------------------------------------------------- San Francisco New York Chicago Los Angeles Consolidated --------------- -------------- -------------- -------------- --------------- Revenue $ 5,502 $2,961 $3,125 $ 532 $12,120 Net income (loss) $(2,434) $ 358 $ (452) $(173) $(2,701) Total identifiable assets $24,605 $9,938 $6,695 $ -- $41,238 For the Six Months Ended June 30, 2000 (In $000's) -------------------------------------------------------------------------------- San Francisco New York Chicago Los Angeles Consolidated --------------- -------------- -------------- -------------- --------------- Revenue $10,947 $6,228 $7,594 $1,480 $26,250 Net income (loss) $(8,359) $2,381 $4,293 $ 734 $ (951) For the Six Months Ended July 3, 1999 (In $000's) -------------------------------------------------------------------------------- San Francisco New York Chicago Los Angeles Consolidated --------------- -------------- -------------- -------------- --------------- Revenue $10,734 $5,901 $6,173 $ 772 $23,580 Net income (loss) $(5,174) $ 798 $ (777) $(539) $(5,692)
8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those indicated in the forward-looking statements as a result of various factors. Revenues Revenues were $13,540,000 for the three months ended June 30, 2000, a 12% increase from $12,120,000 for the three months ended July 3, 1999, and revenues for the six months ended June 30, 2000 were $26,250,000, an 11% increase from $23,580,000 for the six months ended July 3, 1999. Revenues increased primarily due to increased volume as a result of greater acceptance of the Company's video delivery and postproduction services and the expanded network of Company equipment located in television stations. Delivery and Material Costs Delivery and material costs were $3,250,000 for the three months ended June 30, 2000, a 32% decrease from the $4,769,000 for the three months ended July 3, 1999. Delivery and material costs were $7,213,000 for the six months ended June 30, 2000, a 23% decrease from $9,308,000 for the six months ended July 3, 1999. As a percentage of revenue, delivery and material costs decreased to 24% from 39% for the three months ended June 30, 2000 and July 3, 1999, respectively, and decreased to 27% of revenues from 39% of revenues in the six months ended June 30, 2000 compared to the six months ended July 3, 1999. The decrease in costs in each period versus the same period of the prior year is a result of the elimination of duplicate telecommunication costs resulting from the Company's integration of the Vancouver distribution Networking Operating Center ("NOC") into the San Francisco NOC. Telecommunication costs were $1,188,000 and $2,395,000 for the three months ended June 30, 2000 and July 3, 1999, respectively, and $2,873,000 and $4,641,000 for the six months ended June 30, 2000 and July 3, 1999, respectively. Delivery and material costs include telecommunication costs associated with online video and audio deliveries, video and audio tapes along with the related packaging and shipping costs required when physically duplicating and distributing a video or audio spot. In addition, delivery and material costs include the direct material and fees paid to other service providers in connection with postproduction services and other services offered by the Company. The Company expects that delivery costs will increase in absolute dollars and may fluctuate as a percentage of revenues in future periods, influenced principally by volumes, average sales prices and scale economies as video deliveries increase in volume. Customer Operations Customer operations expenses were $4,082,000 and $3,971,000 for the quarters ended June 30, 2000 and July 3, 1999, respectively, and $8,237,000 and $7,528,000 for the six months ended June 30, 2000 and July 3, 1999, respectively. The increase in 2000 versus 1999 is primarily due to the additional personnel necessary to respond to the greater volume of orders and deliveries. Customer operations expenses as a percentage of revenues decreased to 30% from 33% for the three months ended June 30, 2000 and July 3, 1999, respectively, and decreased to 31% for the six months ended June 30, 2000, as compared to 32% of revenues for the six months ended July 3, 1999. These decreases are primarily due to process improvements associated with integrating the Company's NOC and customer service center. The Company expects that customer operations expenses will increase in absolute dollars and may fluctuate as a percentage of revenues in future periods. Moreover, the Company believes that in order to compete effectively and manage future growth, it will be required to continue to implement changes that improve and increase the efficiency of its customer operations. 9 Sales and Marketing Sales and marketing expenses were $1,250,000 for the three months ended June 30, 2000, a 12% decrease from $1,414,000 for the three months ended July 3, 1999, and decreased 14% to $2,273,000 from $2,651,000 for the six months ended June 30, 2000 and July 3, 1999, respectively. These decreases in sales and marketing expense are the result of improved efficiency of the Company's sales and marketing efforts, as well as the consolidation of the Company's sales and marketing efforts among all of its locations. Sales and marketing costs as a percentage of revenues decreased to 9% from 11% for the three and six months ended June 30, 2000 and July 3, 1999, respectively, as a result of these improved efficiencies and reorganization efforts. The Company expects to continue to expand sales and marketing programs designed to introduce the Company's services to the marketplace and to attract new customers for its services. The Company expects that sales and marketing expenses will increase in absolute dollars and may fluctuate as a percentage of revenue in future periods. Research and Development Research and development expenses increased 11% to $757,000 for the quarter ended June 30, 2000 from $680,000 for the quarter ended July 3, 1999, and increased 26% to $1,634,000 for the six months ended June 30, 2000 from $1,292,000 for the six months ended July 3, 1999. The increase in research and development expense is primarily due to the capitalization of certain salaries and benefits during the six months ended July 3, 1999 for personnel involved in developing software used to integrate the Company's NOC with that of its Vancouver subsidiary. As a percentage of revenues, research and development expenses remained relatively unchanged at 6% and 5% of revenues for the six months ended June 30, 2000 and July 3, 1999, respectively. The Company expects that additional research and development spending will be necessary to remain competitive and that its future success will depend in significant part upon the technological quality of its products and processes relative to those of its competitors and its ability to develop both new and enhanced products and services. General and Administrative General and administrative expenses increased 110% to $2,310,000 for the quarter ended June 30, 2000 from $1,102,000 for the quarter ended July 3, 1999, and increased 55% to $4,055,000 from $2,609,000 for the six months ended June 30, 2000 and July 3, 1999, respectively. The increase is primarily due to the increased use of temporary labor and professional fees associated with filling open positions and cost of integrating the Company's financial systems. In addition, the Company increased its allowance for doubtful accounts receivable. General and administrative expenses have increased to 17% and 15% of revenues for the quarter and six months ended June 30, 2000 from 9% and 11% for the quarter and six months ended July 3, 1999. The Company expects that general and administrative expenses will increase in absolute dollars and may fluctuate as a percentage of revenues in future periods. Depreciation and Amortization Depreciation and amortization expenses decreased 33% to $1,614,000 in the three months ended June 30, 2000 from $2,435,000 in the three months ended July 3, 1999, and decreased 35% to $3,199,000 in the six months ended June 30, 2000 from $4,925,000 in the six months ended July 3, 1999. The Company acquired the bulk of its assets prior to December 31, 1997; therefore, beginning in fiscal year 1999, there has been a higher percentage of fixed assets which are reaching or have reached the end of their depreciable lives. The Company recorded goodwill amortization expense of $206,000 and $361,000 for the quarter and six months ended June 30, 2000, and $192,000 and $387,000 for the quarter and six months ended July 3, 1999. 10 Interest Income and Interest Expense Interest income decreased 21% to $46,000 for the quarter ended June 30, 2000 from $58,000 for the quarter ended July 3, 1999, and decreased 37% to $96,000 in the six months ended June 30, 2000 from $153,000 for the six months ended July 3, 1999. This decrease is primarily the result of a decreased level of cash and cash equivalents in the first six months of 2000 as compared to the first six months of 1999. Interest expense decreased 20% to $406,000 for the quarter ended June 30, 2000 from $508,000 for the quarter ended July 3, 1999, and decreased 38% to $686,000 for the six months ended June 30, 2000, from $1,112,000 in the six months ended July 3, 1999. The decrease is primarily the result of a decrease in the Company's outstanding debt. Debt outstanding decreased to $8.2 million at June 30, 2000 from $14.1 million at July 3, 1999. Liquidity and Capital Resources Net cash used in operating activities remained relatively unchanged at $0.4 million in the six months ended June 30, 2000 and July 3, 1999. The Company made capital additions of $1.1 million during the six months ended June 30, 2000 versus $2.6 million in the six months ended July 3, 1999. The capital additions in both periods were a result of the Company's continued expansion of its network. Principal payments on long-term debt were $8.1 million in the six months ended June 30, 2000 versus $4.6 million in the six months ended July 3, 1999. The Company expects to continue to invest in the expansion of its network. In particular, the Company is in the process of expanding its infrastructure within the television broadcast industry that will require additional DG Video Transmission Systems and Digital Video Playback Systems ("DVPSs") to be built and installed in production studios and television stations. At June 30, 2000, the Company's current sources of liquidity included cash and cash equivalents of $3.2 million. Based on management's current plans and forecasts, the Company believes that its existing sources of liquidity will satisfy the Company's projected working capital, capital lease and revolving loan commitments, and other cash requirements through the foreseeable future. On April 6, 2000, the Company entered into a long-term loan and security agreement with Foothill Capital Corporation for a revolving credit facility providing borrowings up to a maximum of $11 million. The credit facility is secured primarily by accounts receivable and has a term of three years. The amount available to the Company is based on eligible receivables less outstanding letters of credit, as defined in the revolving credit facility agreement. As of June 30, 2000, $2.2 million was outstanding under the revolving credit facility and an additional $2.3 million was available for borrowing. On April 7, 2000, the Company entered into a long-term debt agreement to refinance $3 million in outstanding loans and capital leases. The term of the new agreement is two years and it expires in 2002. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has some operations in Canada and, therefore, is subject to the risk that the Canadian dollar/US dollar exchange rates will adversely impact the Company's results of operations. The Company believes this risk to be immaterial to the Company's results of operations. 11 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved in routine litigation proceedings incidental to the conduct of its business. The Company does not believe that any such proceedings presently pending will have a material adverse effect on its financial condition or results of operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit Title - -------------- ------------- 27 /(a)/ Financial Data Schedule. __________ /(a)/ Filed herewith (b) Report on Form 8-K Current Report on Form 8-K filed on July 14, 2000 regarding the proposed merger between Digital Generation Systems, Inc. and StarGuide Digital Networks, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL GENERATION SYSTEMS, INC. Dated: August 14, 2000 By /s/ OMAR A. CHOUCAIR ----------------------------------- Omar A. Choucair Chief Financial Officer (Principal Financial and Chief Accounting Officer) 12 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 3,204 0 12,277 (2,431) 302 16,970 43,944 (36,590) 37,188 10,069 0 0 0 121,711 (99,905) 37,188 0 26,250 0 26,611 0 0 590 (951) 0 (951) 0 0 0 (951) (0.03) (0.03)
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