10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

o 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: 1-35643

Digital Generation, Inc.

(Exact name of registrant as specified in its charter)

Delaware	94-3140772
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

750 West John Carpenter Freeway, Suite 700

Irving, Texas 75039

(Address of principal executive offices) (Zip Code)

(972) 581-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of November 6, 2013, the registrant had 27,985,957 shares of Common Stock, par value $0.001, outstanding.

DIGITAL GENERATION, INC.

Cautionary Note Regarding Forward-Looking Statements

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Certain statements contained herein may be deemed to constitute “forward-looking statements.”

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “future,” “intends,” “will,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, among other things:

·whether or not the pending transactions with Extreme Reach regarding the sale of the television business will be completed including:

·our ability to obtain shareholder approval in a timely manner or otherwise;

·failure to satisfy other conditions to consummation of the transactions;

·the ability of NewCo to achieve the benefits of the transactions or that such benefits may take longer to realize than expected; and

·the potential impact the announcement of the transactions or consummation of the transactions may have on relationships with employees, suppliers, customers and competitors;

·our ability to further identify, develop and achieve commercial success for new products;

·delays in product development;

·the development of competing distribution and online services and products, and the pricing of competing services and products;

·our ability to protect our proprietary technologies;

·the shift of advertising spending by our customers to online and non-traditional media from television and radio;

·the demand for High Definition (HD) ad delivery by our customers;

·integrating MediaMind and other acquisitions with our operations, systems, personnel and technologies;

·our ability to successfully transition customers from our previous online acquisitions to our MediaMind digital platform for ad delivery;

·operating in a variety of foreign jurisdictions;

·fluctuations in currency exchange rates;

·adaption to new, changing, and competitive technologies;

·potential additional impairment of our goodwill and potential impairment of our other long-lived assets; and

·other factors discussed elsewhere under the heading “Risk Factors” in Part II, Item 1A included in this Form 10-Q and in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2012.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained herein might not occur. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law. All subsequent forward-looking statements attributable to management or to any person authorized to act on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

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TABLE OF CONTENTS

PART I—FIN ANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012 (audited)
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012
	Unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012
	Notes to Unaudited Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
	SIGNATURES
	CERTIFICATIONS

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PART I—FINANCIAL INFORMATION

Item I.FINANCIAL STATEMENTS

DIGITAL GENERATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	September 30, 2013			December 31, 2012
	(unaudited)
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	60,223		$	84,520
Short-term investments	—			314
Accounts receivable (less allowances of $3,029 in 2013 and $2,499 in 2012)	86,919			97,583
Deferred income taxes	865			864
Other current assets (includes restricted cash of $1,692 in 2013 and $1,917 in 2012)	16,215			21,997
Total current assets	164,222			205,278
Property and equipment, net	64,984			66,169
Goodwill	368,556			369,137
Intangible assets, net	157,287			180,156
Deferred income taxes	171			171
Other non-current assets (includes restricted cash of $3,809 in 2013 and $4,178 in 2012)	16,480			16,300
Total assets	$	771,700		$	837,211
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Current portion of long-term debt	$	34,335		$	76,950
Accounts payable	5,480			7,794
Accrued liabilities	31,576			38,291
Deferred income taxes	24			37
Deferred revenue	1,828			1,627
Total current liabilities	73,243			124,699
Long-term debt, net of current portion	352,026			376,968
Deferred income taxes	25,285			28,028
Other non-current liabilities	19,712			16,322
Total liabilities	470,266			546,017
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value—Authorized 15,000 shares; issued and outstanding—none	—			—
Common stock, $0.001 par value—Authorized 200,000 shares; 29,485 issued and 27,981 outstanding at September 30, 2013; 29,163 issued and 27,659 outstanding at December 31, 2012	29			29
Treasury stock, at cost	(35,548		)	(35,548		)
Additional capital	658,306			647,515
Accumulated other comprehensive loss	(2,810		)	(1,655		)
Accumulated deficit	(318,543		)	(319,147		)
Total stockholders’ equity	301,434			291,194
Total liabilities and stockholders’ equity	$	771,700		$	837,211

The accompanying notes are an integral part of these financial statements.

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DIGITAL GENERATION, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Revenues:
Television	$	51,902		$	60,102		$	164,859	$	183,534
Online	38,228			33,716			113,564		99,469
Total revenues	90,130			93,818			278,423		283,003
Cost of revenues (excluding depreciation and amortization):
Television	20,387			22,061			61,737		65,065
Online	13,262			12,636			39,370		37,993
Total cost of revenues	33,649			34,697			101,107		103,058
Operating expenses:
Sales and marketing	15,831			16,476			51,900		46,727
Research and development	4,305			5,501			14,564		18,599
General and administrative	11,252			13,959			32,710		40,824
Acquisition, integration and other	3,677			1,379			7,364		5,556
Depreciation and amortization	13,626			14,542			42,361		41,403
Goodwill impairment	—			208,166			—		208,166
Total operating expenses	48,691			260,023			148,899		361,275
Income (loss) from operations	7,790			(200,902		)	28,417		(181,330		)
Other expense:
Interest expense	8,446			7,835			25,842		23,766
Interest and other, net	518			346			441		700
Income (loss) before income taxes	(1,174		)	(209,083		)	2,134		(205,796		)
Provision (benefit) for income taxes	(308		)	10,644			1,530		12,134
Income (loss) from continuing operations	(866		)	(219,727		)	604		(217,930		)
Discontinued operations:
Loss from discontinued operations	—			—			—		(1,080		)
Net income (loss)	$	(866	)	$	(219,727	)	$	604	$	(219,010	)
Basic income (loss) per common share:
Continuing operations	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued operations	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Diluted income (loss) per common share:
Continuing operations	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued operations	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Weighted average common shares outstanding:
Basic	27,941			27,600			27,791		27,423
Diluted	27,941			27,600			28,302		27,423

The accompanying notes are an integral part of these financial statements.

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DIGITAL GENERATION, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income (loss)	$	(866	)	$	(219,727	)	$	604		$	(219,010	)
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives, net of tax	(88		)	296			(205		)	122
Unrealized gain (loss) on available for sale securities, net of tax	763			(440		)	723			(443		)
Foreign currency translation adjustment	1,817			2,534			(1,673		)	2,378
Total other comprehensive income (loss)	2,492			2,390			(1,155		)	2,057
Total comprehensive income (loss)	$	1,626		$	(217,337	)	$	(551	)	$	(216,953	)

The accompanying notes are an integral part of these financial statements.

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DIGITAL GENERATION, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

	Common Stock			Treasury Stock					Additional Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2012	29,163	$	29	(1,504	)	$	(35,548	)	$	647,515		$	(1,655	)	$	(319,147	)	$	291,194
Common stock issued on exercise of stock options	174	—		—		—			1,239			—			—			1,239
Common stock issued on vesting of restricted stock units	16	—		—		—			—			—			—			—
Common stock issued on vesting of restricted stock units, net of shares tendered to satisfy required tax withholding	114	—		—		—			(272		)	—			—			(272		)
Common stock issued under employee stock purchase plan	18	—		—		—			152			—			—			152
Share-based compensation	—	—		—		—			9,672			—			—			9,672
Other comprehensive loss	—	—		—		—			—			(1,155		)	—			(1,155		)
Net income	—	—		—		—			—			—			604			604
Balance at September 30, 2013	29,485	$	29	(1,504	)	$	(35,548	)	$	658,306		$	(2,810	)	$	(318,543	)	$	301,434

The accompanying notes are an integral part of these financial statements.

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DIGITAL GENERATION, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	604		$	(219,010	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment	—			208,166
Depreciation of property and equipment	19,855			19,117
Amortization of intangibles	22,506			22,286
Deferred income taxes	(2,770		)	7,167
Provision for accounts receivable losses	1,561			2,510
Share-based compensation	9,672			13,816
Loss on sale of Springbox unit	—			1,000
Other	616			672
Changes in operating assets and liabilities:
Accounts receivable	8,980			8,204
Other assets	8,471			3,504
Accounts payable and other liabilities	(1,868		)	(14,592		)
Deferred revenue	208			(852		)
Net cash provided by operating activities	67,835			51,988
Cash flows from investing activities:
Purchases of property and equipment	(7,238		)	(17,166		)
Capitalized costs of developing software	(12,064		)	(9,491		)
Acquisitions, net of cash acquired	—			(10,089		)
Long-term investment	—			(1,017		)
Proceeds from sale of short-term investments	314			10,390
Other	1,179			(141		)
Net cash used in investing activities	(17,809		)	(27,514		)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of costs	1,404			174
Payment of debt amendment costs	(2,635		)	—
Payments on seller financing, earnouts and other	(4,031		)	(398		)
Repayments of long-term debt	(68,375		)	(28,675		)
Net cash used in financing activities	(73,637		)	(28,899		)
Effect of exchange rate changes on cash and cash equivalents	(686		)	451
Net decrease in cash and cash equivalents	(24,297		)	(3,974		)
Cash and cash equivalents at beginning of year	84,520			72,575
Cash and cash equivalents at end of period	$	60,223		$	68,601
Supplemental disclosures of cash flow information:
Cash paid for interest	$	21,891		$	20,916
Cash (received) for income taxes	$	(1,145	)	$	(1,184	)
Non-cash component of purchase price to acquire a business	$	—		$	5,645
Landlord lease incentives	$	—		$	5,599

The accompanying notes are an integral part of these financial statements.

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DIGITAL GENERATION, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  Pending Merger Transaction with Extreme Reach

On August 12, 2013, Digital Generation, Inc. and subsidiaries (the “Company,” “we,” “us” or “our”) entered into a merger agreement with Extreme Reach, Inc. (“ER”) and a wholly-owned subsidiary of ER whereby the parties agreed to a series of transactions summarized as follows:

(i)ER will pay us $485 million which we will use primarily to retire all of our outstanding debt ($386 million at September 30, 2013) and fund a distribution to our shareholders of $3 per share;

(ii)We will contribute our online business, and substantially all the working capital of our television business, to a newly formed wholly-owned subsidiary (“NewCo”);

(iii)NewCo, if requested by ER, will purchase an amount of ER’s preferred stock valued at $45 million for a purchase price of $40 million, otherwise, ER will pay NewCo $5 million at closing.  NewCo’s agreement to purchase ER’s preferred stock is intended to facilitate closing of the transaction; 

(iv)Immediately prior to consummating the merger, we will distribute the shares of NewCo to our shareholders and NewCo will become a newly issued publicly held company; and

(v)DG, which at this point will consist of the television business without any debt or working capital, will merge with one of ER’s subsidiaries and will then become a wholly-owned subsidiary of ER.

In effect, we have agreed to sell our television business, excluding its working capital, to ER for $485 million.  NewCo will become a publicly traded company with our online business. 

The transaction is expected to close during the first quarter of 2014 and is subject to the satisfaction of certain conditions including (i) approval from our stockholders and (ii) ER obtaining financing on specified terms.  As part of the transaction and immediately prior to closing, all outstanding and unvested restricted stock units (“RSUs”) and stock options will become fully vested.  The RSUs will be converted into shares of our common stock and in-the-money stock options will be converted into shares of our common stock on a net exercise basis.  All of our equity incentive plans will be terminated at or immediately prior to closing.  Our outstanding shares will be partially redeemed for shares of NewCo which are expected to be listed on the NASDAQ Global Market.  In addition to ongoing costs related to the transaction such as legal and accounting fees and retention costs, there are also investment banking fees to be paid upon the successful completion of the transaction.

These and other considerations will be set forth in greater detail in a proxy and information statement that we will file with the Securities and Exchange Commission (“SEC”) and distribute to our stockholders in advance of a special meeting anticipated to be held in the first quarter of 2014 to approve the transaction.

2.  General

The Company

We are a provider of digital technology services that enable the electronic delivery of advertisements, syndicated programs, and video news releases to traditional broadcasters, online publishers and other media outlets. We also provide digital advertising campaign management solutions to media agencies and advertisers. We provide our customers with an integrated campaign management platform that helps advertisers and agencies simplify the complexities of managing their advertising budgets across multiple digital media channels and formats, including online, mobile, rich media, in-stream video, display and search. We provide our customers with the ability to plan, create, deliver, measure, track

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and optimize digital media campaigns. We also offer a variety of other ancillary products and services to the advertising industry. Our business has grown largely from acquisitions.

We market our services directly in the United States and through our subsidiaries in several countries, including Canada, Israel, the United Kingdom, France, Germany, Australia, Ireland, Spain, Japan, China, Mexico and Brazil. See Note 12.

Basis of Presentation

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

These financial statements have been prepared by us without audit, pursuant to the rules and regulations of the SEC.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  However, we believe the disclosures are adequate to make the information presented not misleading.  The unaudited consolidated financial statements reflect all adjustments, which are, in the opinion of management, of a normal and recurring nature and necessary for a fair presentation of our financial position as of the balance sheet dates, and the results of operations and cash flows for the periods presented.  These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Annual Report”).

Seasonality and Political Advertising

Our business is seasonal.  Revenues tend to be the highest in the fourth quarter as a large portion of our revenues follow the advertising patterns of our customers.  Further, our revenues are affected by political advertising, which peaks every other year consistent with the national, state and local election cycles in the United States.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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. On an ongoing basis, we evaluate our estimates, including those related to the recoverability and useful lives of our long-lived assets, the adequacy of our allowance for doubtful accounts and credit memo reserves, office closure exit costs, contingent consideration and income taxes. We base our estimates on historical experience, future expectations and on other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

During the three months ended June 30, 2013 we reversed a $0.8 million revenue earnout liability as payment was predicated on collected revenues and collections fell short of the amount requiring an earnout payment.  The reversal was credited to cost of revenues.  The revised estimate increased income from continuing operations, net income and diluted earnings per share by $0.5 million, $0.5 million and $0.02, respectively, during the three months ended June 30, 2013.  See Note 3.

During the three months ended March 31, 2012, we reduced our estimated bonus for 2011 by approximately $1.1 million. The reduction was credited to general and administrative expense during the three months ended March 31, 2012.  The revised estimate increased income from continuing operations, net income and diluted earnings per share by $0.6 million, $0.6 million and $0.02, respectively, during the three months ended March 31, 2012.

See Note 5 for a discussion of the risk of a future impairment of our goodwill.

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Derivative Instruments

We enter into foreign currency forward contracts and options with a single counterparty (i.e., an Israeli bank) to hedge the exposure to the variability in expected future cash flows resulting from changes in related foreign currency exchange rates between the New Israeli Shekel (“NIS”) and the U.S. Dollar. Portions of these transactions are designated as cash flow hedges, as defined by Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging.”

ASC Topic 815 requires that we recognize derivative instruments as either assets or liabilities in our balance sheet at fair value. These contracts are Level 2 fair value measurements in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.” For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss), net of taxes, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffectiveness, which historically has not been material, is recognized in the statement of operations (interest income and other, net).

Our cash flow hedging strategy is to hedge against the risk of overall changes in cash flows resulting from certain forecasted foreign currency rent and salary payments during the next 12 months. We hedge portions of our forecasted expenses denominated in the NIS with foreign currency forward contracts and options. At September 30, 2013, we had $7.7 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value asset balance of $0.3 million ($0.3 million asset, net of a $0.0 million liability). The net asset is included in “other current assets” and is expected to be recognized in our results of operations in the next 12 months. As a result of our hedging activities we incurred the following gains (losses) in our consolidated results of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Hedging gain (loss) recognized in operations	$	214	$	(302	)	$	695	$	(542	)

The vast majority of any gain or loss from hedging activities is included in our various operating expenses.  It is our policy to offset fair value amounts recognized for derivative instruments executed with the same counterparty when we have the right of, or ability to cause, net settlement.  In connection with our foreign currency forward contracts and options and other banking arrangements, we have agreed to maintain $1.7 million of cash in a bank account with our counterparty (an Israeli bank).

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Acquisition, Integration and Other Expenses

Acquisition, integration and other expenses reflect the expenses incurred in acquiring or disposing of a business (e.g., investment banking fees, legal fees), costs to integrate an acquired operation (e.g., severance pay, office closure costs) into the Company and certain other expenses.  Strategic alternatives costs principally relate to the pending transaction with ER.  These costs are ongoing (see Note 1).  A summary of our acquisition, integration and other expenses are as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
Description	2013			2012		2013		2012
Legal, accounting and due diligence fees	$	—		$	76	$	—	$	746
Severance	93			474		1,133		3,635
Strategic alternatives (1)	3,645			605		4,780		605
MediaMind preacquisition liability	—			—		720		—
Proxy contest	—			—		446		—
Integration costs	(61		)	224		285		570
Total	$	3,677		$	1,379	$	7,364	$	5,556

(1)  See Note 1.

Discontinued Operations

In 2011, management committed to a plan to sell certain assets and the operations of our Springbox unit since it was not deemed to be part of our core business going forward.  As a result, the Springbox operating results have been reclassified to discontinued operations in the accompanying consolidated statements of operations.  The Springbox operation was sold on June 1, 2012.  For the five months ended May 31, 2012, Springbox reported revenues, loss from discontinued operations and diluted loss per share from discontinued operations of $1.6 million, $1.1 million and $0.04, respectively.

Recently Adopted Accounting Guidance

Effective January 1, 2013, we adopted ASU 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” which provides entities with the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.  If the entity concludes that it is more likely than not that the asset is impaired, it is required to determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with Topic 350.  If the entity concludes otherwise, no further quantitative assessment is required.  Presently, our only indefinite long-lived intangible asset is goodwill. The adoption of ASU 2012-02 did not have a material impact on our consolidated financial statements.

Effective January 1, 2013, we adopted ASU 2013-02, “Comprehensive Income (Topic 350)” which requires entities to disclose information showing the effect of items reclassified from accumulated other comprehensive income (loss) to the line items in the statement of operations.  The provisions of this new guidance were effective prospectively beginning January 1, 2013.  Accordingly, we have included enhanced footnote disclosure for the three and nine months ended September 30, 2013 in Note 7.  Other than the additional disclosure, the adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.

3.  Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·Level 1—Quoted prices in active markets for identical assets or liabilities.

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·Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

·Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We have classified our assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

The tables below set forth by level, assets and liabilities that were accounted for at fair value as of September 30, 2013 and December 31, 2012.  The tables do not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):

			Fair Value Measurements at September 30, 2013
	Balance Sheet Location		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Currency forward derivatives/options		(b)	$	—	$	267	$	—	$	267
Springbox revenue sharing		(b)(c)	—		—		512		512
Marketable equity securities		(c)	1,060		—		—		1,060
Total			$	1,060	$	267	$	512	$	1,839
Liabilities:
Revenue earnout		(d)(e)	$	—	$	—	$	855	$	855

			Fair Value Measurements at December 31, 2012
	Balance Sheet Location		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Money market funds		(a)	$	4,004	$	—	$	—	$	4,004
Currency forward derivatives/options		(b)	—		445		—		445
Springbox revenue sharing		(b)(c)	—		—		768		768
Marketable equity securities		(c)	337		—		—		337
Total			$	4,341	$	445	$	768	$	5,554
Liabilities:
Revenue earnouts		(d)(e)	$	—	$	—	$	2,857	$	2,857

(a) Included in cash and cash equivalents.

(b) Included in other current assets.

(c) Included in other non-current assets.

(d) Included in accrued liabilities.

(e) Included in other non-current liabilities.

The fair value of our money market funds and marketable equity securities were determined based upon quoted market prices. Our marketable equity securities relate to a single issuer with an adjusted cost basis of $0.3

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million.  The currency forwards/options are derivative instruments whose value is based upon quoted market prices from various market participants.

In connection with the sale of Springbox we are entitled to receive a percentage of the revenues collected by the business for three years after the closing date (June 1, 2012). We have estimated the future revenues of Springbox based on the historical revenues and certain other factors, discounted to their present value.  The following table provides a reconciliation of changes in the fair values of our Level 3 assets (in thousands):

	Revenue Sharing Arrangement
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period	$	768		$	—
Additions	—			768
Collections	(200		)	—
Change in fair value recognized in earnings	(56		)	—
Balance at end of period	$	512		$	768

In connection with an acquisition of a business, we sometimes include a contingent consideration component of the purchase price based on future revenues. We estimate future revenues based on historical revenues and certain other factors. Each reporting period, we update our estimate of the future revenues of each earnout party and the corresponding earnout levels achieved, discounted to their present values. The change in fair value is recorded in cost of revenues in the accompanying consolidated statements of operations. The following table provides a reconciliation of changes in the fair value of our Level 3 liabilities (in thousands):

	Revenue Earnouts
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period	$	2,857		$	1,673
Additions	—			1,855
Payments	(1,201		)	—
Change in fair value recognized in earnings	(801		)	(439		)
Balance at end of period	$	855		$	3,089

The fair value of our debt (see Note 6) at September 30, 2013 was approximately $387.3 million based on the average trading price (a Level 1 fair value measurement).

4.  Acquisitions

During 2012 we completed the following acquisitions:

Business Acquired	Date of Closing	Net Assets Acquired (in millions)		Form of Consideration
North Country	July 31, 2012	$	3.7	Cash
Peer 39	April 30, 2012	15.7		Cash/Stock

Each of the acquired businesses has been included in our results of operations since the date of closing.  Accordingly, 2013 and 2012 operating results are not entirely comparable due to these acquisitions and related costs.

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The following unaudited pro forma information presents our results of operations for the three and nine months ended September 30, 2012 as if (i) the acquisitions of North Country and Peer 39 and (ii) the disposition of the Chors assets had occurred on January 1, 2012 (in thousands, except per share amounts).  A table of actual amounts is provided for reference.

	As Reported						Pro Forma
	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Revenue	$	93,818		$	283,003		$	94,125		$	285,045
Loss from continuing operations	(219,727		)	(217,930		)	(219,723		)	(219,368		)
Loss per share—continuing operations:
Basic	$	(7.96	)	$	(7.95	)	$	(7.96	)	$	(7.95	)
Diluted	$	(7.96	)	$	(7.95	)	$	(7.96	)	$	(7.95	)

5. Goodwill

Changes in the carrying value of our goodwill by reporting unit for the nine months ended September 30, 2013 are as follows (in thousands):

	Television			Online			SourceEcreative		Total
Balance at December 31, 2012:
Goodwill	$	364,344		$	353,679		$	1,998	$	720,021
Accumulated impairment losses	(131,291		)	(219,593		)	—		(350,884		)
	233,053			134,086			1,998		369,137
Foreign currency translation	(581		)	—			—		(581		)
Balance at September 30, 2013:
Goodwill	363,763			353,679			1,998		719,440
Accumulated impairment losses	(131,291		)	(219,593		)	—		(350,884		)
	$	232,472		$	134,086		$	1,998	$	368,556

Risk of Future Impairment

We test goodwill for possible impairment each year on December 31st and whenever events or changes in circumstances indicate the carrying value of our goodwill may not be recoverable.  As of September 30, 2013, we continue to believe that the fair value of our reporting units exceed their respective carrying values.  Accordingly, we have not performed an interim goodwill impairment test.

During 2012, we recorded a total of $219.6 million of goodwill impairment charges related to our online reporting unit.  The 2012 charges primarily related to reducing our forecasts to address weaker than previously expected operating results, and softer market conditions and trends.  As a result of the charges, the online reporting unit’s goodwill was adjusted to its then implied fair value.  We determine fair value based on a combination of the discounted cash flow methodology (which uses our internal forecasts as to future cash flows by reporting unit) and the guideline public company approach.  If our actual operating results, or our future expected operating results, were to fall sufficiently below our current forecasts, we may be required to record another goodwill impairment charge for the online reporting unit.

Further, at December 31, 2012, the fair value of our television reporting unit only exceeded its carrying value by 13%.  Similar to the online reporting unit, to the extent our actual or future expected operating results of the television reporting unit were to fall sufficiently below our current forecasts, we may be required to record a goodwill impairment charge for the television reporting unit.  The pending transaction with ER (see Note 1) to sell our television business is an indication that the fair value of the television reporting unit continues to exceed its carrying value.  At December 31, 2012, the fair value of our SourceEcreative reporting unit exceeded its carrying value by 977%.

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6.  Long-Term Debt

Long-term debt is summarized as follows (in thousands):

	September 30, 2013			December 31, 2012
Term loans	$	389,275		$	457,650
Less unamortized discount	(2,914		)	(3,732		)
Revolving loans	—			—
Subtotal	386,361			453,918
Less current portion	(34,335		)	(76,950		)
Long-term portion	$	352,026		$	376,968

Amended Credit Facility

In July 2011, we entered into a credit agreement that originally provided for $490 million of term loans (the “Term Loans”) and $120 million of revolving loans (the “Revolving Loans”). In March 2013, we and our lenders amended the credit agreement to (i) increase the maximum allowable consolidated leverage ratio covenants, (ii) reduce the minimum fixed charge coverage ratio covenants, (iii) reduce the Revolving Loans to a maximum of $50 million, (iv) increase the interest rate on our borrowings, (v) increase the scheduled quarterly principal payments, (vi) revise the mandatory excess cash flow (“ECF”) principal payments, (vii) require an additional $50 million principal payment (which was made in March 2013), and (viii) make certain other changes. The credit agreement, as amended in March 2013, is referred to herein as the “Amended Credit Facility.”

The Term Loans were fully funded at the July 2011 closing net of a 1.0% original issue discount.  The Term Loans, as amended, mature in July 2018, bear interest at the greater of (i) LIBOR plus 6.0% or (ii) 7.25% per annum, payable not less frequently than each quarter, and require scheduled quarterly principal payments as follows:

Fiscal Quarter Ending	Minimum Quarterly Principal Payment (in thousands)
December 31, 2013	$	8,575
Each quarter thereafter	6,125

The Term Loans also require an annual principal payment based on a percentage of our ECF (as defined in the Amended Credit Facility) which at September 30, 2013 was estimated to be $7.4 million and is included in the current portion of long-term debt. The ECF principal payments are reduced by scheduled and voluntary principal payments and fluctuate based on our consolidated leverage ratio (as defined in the Amended Credit Facility) as follows:

Consolidated Leverage Ratio	ECF Prepayment as a Percentage of Consolidated EBITDA (as defined)
Greater than 3.00	75	%
2.25 to 3.00	50	%
1.25 to 2.25	25	%
Less than 1.25	0	%

The Revolving Loans mature in July 2016 and bear interest at the alternative base rate or LIBOR, plus the applicable margin for each rate that fluctuates with the consolidated leverage ratio. At September 30, 2013, we had $47.0 million of funds available under the Revolving Loans and $3.0 million of outstanding letters of credit issued under the credit facility.  Letters of credit outstanding under the credit facility reduce the availability under the Revolving Loans.  Our ability to borrow funds under the Revolving Loans is subject to maintaining compliance with the financial covenants discussed below.  Thus, depending upon (i) how much room we have under our financial

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covenants at the time of the borrowing and, potentially (ii) whether or not the purpose for the borrowing would impact our consolidated EBITDA (as would be the case if we were to acquire another business), our ability to borrow against the Revolving Loans may be limited.

In connection with entering into the original credit facility in July 2011 we incurred debt issuance costs of $12.0 million.  In connection with the March 2013 amendment, we incurred an additional $2.6 million of debt issuance costs.  The debt issuance costs are being amortized to interest expense over the term of the credit facility and are expected to increase our effective borrowing rate by 0.58%.  As a result of accelerating our expected principal payments on the Term Loans, including the $50 million prepayment made in March 2013, and reducing the maximum amount that may be borrowed against the revolving loans by $70 million, we wrote off $1.3 million of previously existing debt issuance costs and unamortized original issue discount to interest expense in March 2013.  At September 30, 2013 our effective interest rate under the Term Loans, including the amortization of (i) debt issuance costs (ii) the original issue discount and (iii) other required fees, was approximately 8.1%.

The Amended Credit Facility contains financial covenants pertaining to (i) the maximum consolidated leverage ratio and (ii) the minimum fixed charge coverage ratio as follows:

Period	Maximum Allowable Consolidated Leverage Ratio	Minimum Allowable Consolidated Fixed Charge Coverage Ratio
March 8, 2013 to June 29, 2014	4.00 to 1.00	1.05 to 1.00
June 30, 2014 to June 29, 2015	3.50 to 1.00	1.10 to 1.00
June 30, 2015 and thereafter	3.25 to 1.00	1.10 to 1.00

At September 30, 2013, our consolidated leverage ratio and consolidated fixed charge coverage ratio were 3.08 to 1.00 and 2.16 to 1.00, respectively.

The Amended Credit Facility also contains a variety of customary restrictive covenants, such as limitations on borrowings and investments, and provides for customary events of default including a change in control (as defined in the Amended Credit Facility). The Amended Credit Facility restricts the payment of cash dividends and limits acquisitions, capital expenditures, share redemptions and repurchases. The Amended Credit Facility is guaranteed by all of our domestic subsidiaries and is collateralized by a first priority lien on substantially all of our assets. At September 30, 2013, we were in compliance with the financial and nonfinancial covenants of our Amended Credit Facility.

As discussed in Note 1, the pending merger transaction with ER contemplates retiring all of our outstanding debt with the proceeds from the transaction.

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7.  Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss (“AOCL”), net of tax, for the three and nine months ended September 30, 2013 were as follows (in thousands):

	Three Months Ended September 30, 2013
	Foreign Currency Translation			Unrealized Gain on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Accumulated Other Comprehensive Loss
Balance at June 30, 2013	$	(5,514	)	$	256		$	(44	)	$	(5,302	)
Other comprehensive income (loss) before reclassifications	1,817			105			763			2,685
Amounts reclassified out of AOCL	—			(193		)	—			(193		)
Net current period activity	1,817			(88		)	763			2,492
Balance at September 30, 2013	$	(3,697	)	$	168		$	719		$	(2,810	)

	Nine Months Ended September 30, 2013
	Foreign Currency Translation			Unrealized Gain on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Accumulated Other Comprehensive Loss
Balance at December 31, 2012	$	(2,024	)	$	373		$	(4	)	$	(1,655	)
Other comprehensive income (loss) before reclassifications	(1,673		)	421			723			(529		)
Amounts reclassified out of AOCL	—			(626		)	—			(626		)
Net current period activity	(1,673		)	(205		)	723			(1,155		)
Balance at September 30, 2013	$	(3,697	)	$	168		$	719		$	(2,810	)

The following table summarizes the reclassifications from accumulated other comprehensive loss to the consolidated statement of operations for the three and nine months ended September 30, 2013 (in thousands):

	Amounts Reclassified out of AOCL
	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013		Affected Line Items in the Consolidated Statement of Operations
Gains (losses) on cash flow hedges:
Foreign currency derivatives	28		83		Cost of revenues
Foreign currency derivatives	15		47		Sales and marketing
Foreign currency derivatives	162		477		Research and development
Foreign currency derivatives	39		128		General and administrative
Foreign currency derivatives	(30	)	(40	)	Interest income and other, net
Total before taxes	214		695
Tax amounts	(21	)	(69	)
Income after tax	193		626

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8.  Share-based Compensation

During the first quarter of 2013, we granted 644,677 restricted stock units (“RSUs”) to certain of our executive officers.  The RSUs were valued at $4.1 million and vest over three years.  Vesting for 212,384 of the RSUs is subject to (i) the grantees continued employment or providing service to us and (ii) reduction if the aggregate fair value of each grant exceeds a specified percentage of our Adjusted EBITDA (as defined) for 2013 (i.e., a market condition).  Vesting for the remaining 432,293 RSUs is subject to the grantees continued employment or providing service to us, and reaching certain revenue and Adjusted EBITDA growth targets (i.e., performance conditions).

In addition, during the first quarter of 2013 we also granted 84,622 RSUs to our outside directors as compensation for services.  These RSUs were valued at $0.6 million and vest over one to three years.

During the second quarter of 2013, we granted 430,470 RSUs to certain of our employees.  The RSUs were valued at $2.7 million and vest over three years.  Vesting is subject to the grantees continued employment with us or providing service to us, and reaching certain revenue and Adjusted EBITDA growth targets (i.e., performance conditions).

We recognized $3.2 million and $4.4 million in share-based compensation expense related to stock options, restricted stock awards and RSUs during the three months ended September 30, 2013 and 2012, and $9.7 million and $13.8 million during the nine months then ended, respectively. Unrecognized compensation costs related to unvested options and RSUs were $17.6 million at September 30, 2013. These costs are expected to be recognized over the weighted average remaining vesting period of 1.7 years.

As discussed in Note 1, immediately prior to the consummation of the merger transaction with ER all unvested stock options and RSUs will become fully vested.

9.  Income Taxes

For the nine months ended September 30, 2013, our effective tax rate was 71.7% compared to (5.9%) for the nine months ended September 30, 2012.  The effective tax rates for each period differ from the expected federal statutory rate of 35.0% as a result of state and foreign income taxes, federal and foreign tax credits, certain non-deductible expenses, an adjustment for an uncertain tax position and, for the 2012 period, the recording of a valuation allowance against our federal net operating loss carryforwards (“NOLs”). For 2012, the vast majority of the goodwill impairment charge was not deductible for income tax purposes.

For the nine months ended September 30, 2013 and 2012, our income tax expense differs from the amount that would result from applying the federal statutory rate to our income or loss before income taxes as follows (dollars in thousands):

	Nine Months Ended September 30,
	2013			2012
Federal statutory tax rate	35		%	35		%
Expected tax expense (benefit)	$	747		$	(72,029	)
State and foreign income taxes, net of federal benefit	(463		)	(1,787		)
Non-deductible compensation	440			549
Non-deductible goodwill impairment	—			62,421
Change in uncertain tax positions	1,002			—
Change in valuation allowance	(50		)	23,000
Other	(146		)	(20		)
Provision for income taxes	$	1,530		$	12,134

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than not sustain the position following an audit.  For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.  During the nine months ended September 30, 2013, we recognized a liability for an uncertain tax position in the amount of $1.0

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million.  Interest and penalties related to uncertain tax positions are recognized in income tax expense.  For the nine months ended September 30, 2013, we recognized $0.3 million of interest or penalties related to uncertain tax positions in our financial statements compared to zero for the nine months ended September 30, 2012.

The changes in uncertain tax positions for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	Nine Months Ended September 30,
	2013		2012
Balance at beginning of period	$	3,797	$	100
Additions for tax positions related to prior periods	1,002		—
Balance at end of period	$	4,799	$	100

If we reduced our reserve for uncertain tax positions it would result in us recognizing a tax benefit.

As of September 30, 2013, we had NOL carryforwards with a tax-effected carrying value of approximately $32.2 million and $5.3 million for federal and state purposes, respectively, available to offset future taxable income.  As of September 30, 2013, we provided a valuation allowance against substantially all of these NOL carryforwards as ultimate realization of the NOLs was not determined to be more-likely-than not.  Accordingly, we have NOL carryforwards available to us (should we have sufficient future taxable income to utilize them) that are not reflected in our consolidated balance sheets at September 30, 2013 and December 31, 2012.

We are subject to U.S. federal income tax, income tax from multiple foreign jurisdictions including Israel and the United Kingdom, and income taxes of multiple state jurisdictions. U.S. federal, state and local income tax returns for 2009 through 2012 remain open to examination.  Israeli and United Kingdom income tax returns remain open to examination for 2007 through 2011, and 2006 through 2011, respectively.

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10.  Earnings (Loss) per Share

Basic earnings (loss) per common share excludes dilution and is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per common share is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period, as adjusted for the potential dilutive effect of non-participating share-based awards such as stock options and RSUs.  The following table presents earnings (loss) per common share for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Income (loss) from continuing operations	$	(866	)	$	(219,727	)	$	604	$	(217,930	)
Weighted average common shares outstanding — basic	27,941			27,600			27,791		27,423
Dilutive securities	—			—			511		—
Weighted average common shares outstanding - diluted	27,941			27,600			28,302		27,423
Basic income (loss) per common share:
Continuing	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Diluted income (loss) per common share:
Continuing	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Antidilutive securities not included:
Stock options and RSUs	1,422			2,748			2,134		2,818

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11.  Segment Information

Our two reportable segments consist of television and online. The television segment revenues are principally derived from delivering advertisements, syndicated programs, and video news releases from advertising agencies and other content providers to traditional broadcasters and other media outlets. The online segment revenues are principally derived from online advertising and related services. We use segment adjusted EBITDA before corporate overhead as our measure of segment profit. Segment adjusted EBITDA before corporate overhead reflects income from operations before corporate overhead, acquisition, integration and other expenses, share-based compensation expense, depreciation and amortization, and goodwill impairment charges. Certain prior year amounts have been reclassified to conform to the current year presentation.  We do not disclose assets by reportable segment since some of our assets are commingled. Our reportable segments are as follows (in thousands):

	Three Months Ended September 30,
	2013							2012
	Television		Online		Consolidated			Television		Online		Consolidated
Revenues	$	51,902	$	38,228	$	90,130		$	60,102	$	33,716	$	93,818
Segment adjusted EBITDA before corporate overhead	24,741		9,597		34,338			30,602		4,306		34,908
Less corporate overhead					(5,998		)					(7,284		)
Adjusted EBITDA					28,340							27,624
Less:
Depreciation and amortization					(13,626		)					(14,542		)
Share-based compensation					(3,247		)					(4,439		)
Acquisition, integration and other					(3,677		)					(1,379		)
Goodwill impairment					—							(208,166		)
Income (loss) from operations					$	7,790						$	(200,902	)

	Nine Months Ended September 30,
	2013							2012
	Television		Online		Consolidated			Television		Online		Consolidated
Revenues	$	164,859	$	113,564	$	278,423		$	183,534	$	99,469	$	283,003
Segment adjusted EBITDA before corporate overhead	82,762		23,708		106,470			96,055		11,492		107,547
Less corporate overhead					(18,656		)					(19,936		)
Adjusted EBITDA					87,814							87,611
Less:
Depreciation and amortization					(42,361		)					(41,403		)
Share-based compensation					(9,672		)					(13,816		)
Acquisition, integration and other					(7,364		)					(5,556		)
Goodwill impairment					—							(208,166		)
Income (loss) from operations					$	28,417						$	(181,330	)

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12.  Geographical Information

Revenues by geographical area are based principally on (i) the location of where the advertising content was delivered for the television segment and (ii) the address of the agency or customer who ordered the services for the online segment. The following table sets forth revenues by geographic area (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenues:
United States	$	65,146	$	69,984	$	201,053	$	208,042
North America (excluding U.S.)	5,372		5,677		16,988		17,780
Europe, Middle East and Africa	11,218		10,413		36,214		37,320
Asia Pacific	6,407		5,241		19,483		15,039
Latin America	1,987		2,503		4,685		4,822
Total	$	90,130	$	93,818	$	278,423	$	283,003

13.  Litigation

On May 2, 2013, a purported securities class action complaint was filed in the U.S. District Court for the Northern District of Texas, entitled Anastacia Shaffer v. Digital Generation, Inc., et al., No. 3:13-cv-1684, alleging civil violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder.  The complaint names as defendants the Company and certain of its current and former officers.  The purported class period is alleged to be June 20, 2011 through February 19, 2013.

On May 29, 2013, a purported shareholder derivative suit was filed captioned Boyler v. certain officers and directors of Digital Generation, Inc., Cause No: DC-13-05971-I, in the 162nd Judicial District Court of Dallas County, Texas.  The action alleges breach of fiduciary duty, abuse of control, and gross mismanagement related to DG’s acquisition of several online media companies, its subsequent write-down of these assets, and the inability of a Special Committee of the Board of Directors to find a strategic buyer for the Company.  The suit seeks damages, restitution, disgorgement, attorneys’ fees, and corporate governance reforms.

While we cannot predict the outcome of these cases with certainty, it is our present belief these matters are not likely to have a material adverse effect on our annual operating results and we intend to defend them vigorously. We believe the purported claims and our defense costs will qualify for reimbursement under our insurance coverage, which are subject to the applicable deductible and the limits of our policies.

Settlement of Meruelo Litigation

In October 2013, we entered into an agreement with Alex Meruelo, Meruelo Investment Partners LLC and the Alex Meruelo Living Trust (the “Meruelo Stockholders”) relating to the Meruelo Stockholders intention to propose director nominees to our Board of Directors and to seek certain governance changes.  The Meruelo Stockholders have agreed to dismiss with prejudice their lawsuit challenging certain provisions of our Bylaws with respect to its classified Board.

14.  Subsequent Event — Acquisition of Republic Project

On October 4, 2013, we acquired the assets of Republic Project, a cloud-based ad platform that enables agencies and brands to create, deliver and measure social and mobile rich media campaigns, for $1.4 million in cash and an additional earn out ranging from zero to $13.1 million based on reaching revenue and adjusted EBITDA performance targets in 2014 and 2015.

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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 (“MD&A”) should be read in conjunction with our unaudited consolidated financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q (“Report”).

Critical Accounting Policies and Estimates

The following discussion and analysis of the financial condition and results of operations are based on the unaudited consolidated financial statements and notes to unaudited consolidated financial statements contained in this Report that have been prepared in accordance with the rules and regulations of the SEC and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with GAAP.  The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of our assets and liabilities that are not readily available from other sources.  Actual results may differ from these estimates.

Our significant accounting policies are described in Note 2 to the consolidated financial statements presented in our Annual Report for the year ended December 31, 2012.  Our critical accounting policies are described in MD&A in our Annual Report.  Our significant and critical accounting policies have not changed significantly since the filing of our Annual Report.  See also Recently Adopted Accounting Guidance in Note 2 to our unaudited consolidated financial statements contained in this Report.

See Note 5 of our unaudited consolidated financial statements regarding the risk of a future impairment of our goodwill.

Overview

We operate a leading ad management and distribution platform. We help advertisers engage with consumers across television and online media, while delivering timely and impactful ad campaigns. Our technology and high quality service help advertisers overcome the fragmentation in the market and get optimal results for their advertising spending. We operate our business in two distinct segments, television and online. As detailed below, we completed two acquisitions in 2012 which affects the comparability of our financial results.

Our business can be impacted by several factors, including general economic conditions, the overall advertising market, new emerging digital technologies, the trend towards delivering high definition (“HD”) data files, and the continued growth of online advertising.

Pending Merger Transaction with Extreme Reach

See Note 1 of our unaudited consolidated financial statements regarding (i) the pending merger transaction with ER which, in effect, represents the sale of our television business, (ii) the retirement of all our outstanding debt with the proceeds from the sale and (iii) the planned distribution to our stockholders of (a) the shares of NewCo, the newly formed company containing our online business and (b) $3 per share of our stock in cash. The pending transaction is summarized in Note 1 and will be set forth in greater detail in a proxy and information statement that we will file with the SEC and distribute to our stockholders in advance of a special meeting anticipated to be held in the first quarter of 2014 to approve the transaction.

Television Segment

Revenues from our television segment are principally derived from delivering advertisements, syndicated programs, and video news releases from advertising agencies and other content providers to traditional broadcasters and other media outlets. The television segment includes the operating results of our ADS operation, SourceEcreative, Match Point, MIJO and North Country. The majority of our television segment revenue results from the delivery of television advertisements, or spots, which are typically delivered digitally but sometimes physically. We generally bill our services on a per transaction basis. We also offer a variety of other ancillary products that serve the television advertising industry. These services include creative research, media production and duplication, management and storage of existing advertisements and broadcast verification. This suite of

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innovative services addresses the needs of our customers at multiple stages along the value chain of advertisement creation and delivery in a cost-effective manner that helps simplify the overall process of content delivery.

Online Segment

Revenues from our online segment are principally derived from services related to online advertising. We earn fees from our customers to create, execute, monitor and measure advertising campaigns on our platforms. During 2013 we operated three separate online advertising platforms (the MediaMind, EyeWonder and Unicast platforms). However, we are in the process of transitioning all of our online business over to the MediaMind platform and expect to complete the transition later in 2013. In September 2013, 99% of our online AD serving revenue was processed using the MediaMind platform.

Our MediaMind platform offers an integrated campaign management solution that helps advertisers and agencies simplify the complexities of managing their advertising budgets across multiple digital media channels and formats, including online, mobile, rich media, in-stream video, display and search. The MediaMind platform provides our customers with an easy-to-use, end-to-end solution to enhance planning, creative, delivery, measurement and optimization of digital media campaigns. Our solutions are delivered through a scalable technology infrastructure that allows delivery of digital media advertising campaigns of any size. We manage campaigns for customers in about 78 countries throughout North America, South America, Europe, Asia Pacific, Africa and the Middle East.

Acquisitions

During 2012, we acquired two businesses involved in the distribution of media content as follows:

Business Acquired	Date of Closing	Net Assets Acquired (in millions)		Operating Segment
North Country	July 31, 2012	$	3.7	Television
Peer 39	April 30, 2012	15.7		Online

Each of the acquired businesses has been included in our results of operations since the date of closing. As a result of these acquisitions, the operating results for 2013 and 2012 are not entirely comparable. In addition, in October 2013 we acquired Republic Project, a cloud based ad platform for $1.4 million in cash and an additional amount ranging from zero to $13.1 million based on reaching revenue and adjusted EBITDA performance targets in 2014 and 2015.

Political Advertising

Our revenues are affected by political advertising, which peaks every other year consistent with the national, state and local election cycles in the United States.

Third Quarter Highlights

·Overall revenues were down $3.7 million, or 4%, compared to 2012.

·Revenues from our online segment increased $4.5 million, or 13%, from 2012.

·Revenues from our television segment decreased $8.2 million, or 14%, from 2012 principally due to lower (i) HD and SD pricing, (ii) political advertising ($2.4 million), and (iii) SD volumes.

·Excluding the goodwill impairment charge in the 2012 period, our operating income improved $0.5 million, or 7%, from 2012 principally due to lower costs and expenses.

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Results of Operations

Three Months Ended September 30, 2013 vs. Three Months Ended September 30, 2012

The following table sets forth certain historical financial data (dollars in thousands):

							% Change		As a % of Revenue
	Three Months Ended						2013		Three Months Ended
	September 30,						vs.		September 30,
	2013			2012			2012		2013		2012
Revenues	$	90,130		$	93,818		(4	)%	100.0	%	100.0	%
Costs and expenses:
Cost of revenues (a)	33,649			34,697			(3	)	37.3		37.0
Sales and marketing (a)	15,831			16,476			(4	)	17.6		17.5
Research and development (a)	4,305			5,501			(22	)	4.8		5.8
General and administrative (a)	11,252			13,959			(19	)	12.5		14.9
Acquisition, integration and other	3,677			1,379			167		4.1		1.5
Depreciation and amortization	13,626			14,542			(6	)	15.1		15.5
Goodwill impairment	—			208,166			(100	)	—		221.9
Total costs and expenses	82,340			294,720			(72	)	91.4		314.1
Income (loss) from operations	7,790			(200,902		)	(104	)	8.6		(214.1	)
Other expense:
Interest expense	8,446			7,835			8		9.4		8.3
Interest (income) and other, net	518			346			50		0.5		0.4
Loss before income taxes	(1,174		)	(209,083		)	(99	)	(1.3	)	(222.8	)
Provision (benefit) for income taxes	(308		)	10,644			(103	)	(0.3	)	11.3
Loss from continuing operations	(866		)	(219,727		)	(100	)	(1.0	)	(234.1	)
Loss from discontinued operations	—			—			—		—		—
Net loss	$	(866	)	$	(219,727	)	(100	)	(1.0	)	(234.1	)

(a)     Excludes depreciation and amortization.

Reconciliation of Income (Loss) from Operations to Adjusted EBITDA and Segment Adjusted EBITDA before Corporate Overhead (Non-GAAP financial measures)

Income (loss) from operations	$	7,790	$	(200,902	)	(104	)%	8.6	%	(214.1	)%
Depreciation and amortization	13,626		14,542			(6	)	15.1		15.5
Share-based compensation	3,247		4,439			(27	)	3.6		4.6
Acquisition, integration and other	3,677		1,379			167		4.1		1.5
Goodwill impairment	—		208,166			(100	)	—		221.9
Adjusted EBITDA (b)	28,340		27,624			3		31.4		29.4
Corporate overhead	5,998		7,284			(18	)	6.7		7.8
Segment adjusted EBITDA before corporate overhead (b)	$	34,338	$	34,908		(2	)	38.1		37.2

(b)     See discussion of Non-GAAP financial measures on page 34.

Revenues.    For the three months ended September 30, 2013, revenues decreased $3.7 million, or 4%, as an increase in our online segment revenues was more than offset by a decrease in our television segment revenues.  For further discussion on revenues by reportable segment, see each of the television and online segments.

Cost of Revenues.    For the three months ended September 30, 2013, cost of revenues decreased $1.0 million,

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or 3%, as compared to the same period in the prior year.  Cost of revenues decreased due to lower (i) personnel costs ($1.2 million) and (ii) facilities costs ($0.4 million), partially offset by an increase in trading costs ($0.8 million).  The increase in trading costs is proportional to an increase in our online trading revenues.  The reduction in personnel costs is commensurate with a reduction in our television revenues.

Sales and Marketing.    For the three months ended September 30, 2013, sales and marketing expense decreased $0.6 million, or 4%, as compared to the same period in the prior year.  The decrease was primarily due to lower personnel costs ($0.6 million).  Personnel costs decreased due to a reduction in incentive and share-based compensation.  The reduction in incentive compensation is consistent with a reduction in our revenues.

Research and Development.    For the three months ended September 30, 2013, research and development costs decreased $1.2 million, or 22%, as compared to the same period in the prior year.  The decrease was due to higher capitalized wages ($0.9 million) and lower personnel costs ($0.5 million).  The increase in capitalized wages was due to an increase in the number of hours worked on software development projects that qualified for capitalization.  The decrease in personnel costs is primarily attributable to reductions in incentive and share-based compensation.

General and Administrative.    For the three months ended September 30, 2013, general and administrative expense decreased $2.7 million, or 19%, as compared to the same period in the prior year.  As a percentage of revenues, general and administrative expense decreased to 12.5% in the current year period, as compared to 14.9% in the same period in the prior year.  The decrease was primarily due to lower (i) personnel costs ($1.1 million), (ii) professional fees ($0.7 million), (iii) facilities costs ($0.3 million) and (iv) travel and entertainment costs ($0.2 million).  The decrease in personnel costs is attributable to a reduction in the number of employees and the average cost per general and administrative employee.  The decrease in professional fees is due to lower legal fees and audit and tax fees.

Acquisition, Integration and Other.    For the three months ended September 30, 2013, acquisition, integration and other expense increased $2.3 million as compared to the same period in the prior year.  The increase was due to costs associated with our strategic alternatives review process ($3.0 million) which resulted in us entering into a merger transaction with ER (for more information, see Note 1 to the consolidated financial statements), partially offset by lower severance costs ($0.4 million) and integration costs ($0.3 million). Severance and integration costs were higher in the prior year period as in 2012 we were in the process of transitioning our three previously separate online businesses into a single operation.

Depreciation and Amortization.    For the three months ended September 30, 2013, depreciation and amortization expense decreased $0.9 million, or 6%, as compared to the same period in the prior year.  The decrease was principally due to writing off certain capitalized software development projects in 2012 that were no longer being pursued.

Interest Expense.    For the three months ended September 30, 2013, interest expense increased $0.6 million, or 8%, as compared to the same period in the prior year.  The increase was attributable to an increase in the interest rate we are charged on our credit facility, partially offset by a lower level of debt outstanding during the 2013 period.  In March 2013 we amended our credit facility to, among other things, loosen our financial covenants.  As part of the amendment, the interest rate we are charged on the facility increased.  See Note 6 of our consolidated financial statements.

Interest Income and Other, net.    For the three months ended September 30, 2013, interest income and other, net increased $0.2 million as compared to the same period in the prior year.  The increase was due to higher foreign currency exchange losses.

Provision (Benefit) for Income Taxes.    For the three months ended September 30, 2013, our effective tax rate was 26.2%, compared to (5.1)% for the three months ended September 30, 2012.  The effective tax rates for each period differ from the expected federal statutory rate of 35.0% as a result of state and foreign income taxes, non-deductible expenses, adjustments for uncertain tax positions and, principally for the 2012 period, the recording of a valuation allowance against all of our federal net operating loss carryforwards.  For 2012, the vast majority of the goodwill impairment charge was not deductible for income tax purposes.

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Nine Months Ended September 30, 2013 vs. Nine Months Ended September 30, 2012

The following table sets forth certain historical financial data (dollars in thousands):

						% Change		As a % of Revenue
	Nine Months Ended					2013		Nine Months Ended
	September 30,					vs.		September 30,
	2013		2012			2012		2013		2012
Revenues	$	278,423	$	283,003		(2	)%	100.0	%	100.0	%
Costs and expenses:
Cost of revenues (a)	101,107		103,058			(2	)	36.3		36.4
Sales and marketing (a)	51,900		46,727			11		18.6		16.5
Research and development (a)	14,564		18,599			(22	)	5.2		6.6
General and administrative (a)	32,710		40,824			(20	)	11.8		14.4
Acquisition, integration and other	7,364		5,556			33		2.7		2.0
Depreciation and amortization	42,361		41,403			2		15.2		14.6
Goodwill impairment	—		208,166			(100	)	—		73.6
Total costs and expenses	250,006		464,333			(46	)	89.8		164.1
Income (loss) from operations	28,417		(181,330		)	(116	)	10.2		(64.1	)
Other expense:
Interest expense	25,842		23,766			9		9.3		8.4
Interest (income) and other, net	441		700			(37	)	0.2		0.2
Income (loss) before income taxes	2,134		(205,796		)	(101	)	0.7		(72.7	)
Provision for income taxes	1,530		12,134			(87	)	0.5		4.3
Income (loss) from continuing operations	604		(217,930		)	(100	)	0.2		(77.0	)
Loss from discontinued operations	—		(1,080		)	(100	)	—		(0.4	)
Net income (loss)	$	604	$	(219,010	)	(100	)	0.2		(77.4	)

(a)     Excludes depreciation and amortization.

Reconciliation of Income (Loss) from Operations to Adjusted EBITDA and Segment Adjusted EBITDA before Corporate Overhead (Non-GAAP financial measures)

Income (loss) from operations	$	28,417	$	(181,330	)	(116	)%	10.2	%	(64.1	)%
Depreciation and amortization	42,361		41,403			2		15.2		14.6
Share-based compensation	9,672		13,816			(30	)	3.5		4.9
Acquisition, integration and other	7,364		5,556			33		2.7		2.0
Goodwill impairment	—		208,166			(100	)	—		73.6
Adjusted EBITDA (b)	87,814		87,611			—		31.6		31.0
Corporate overhead	18,656		19,936			(6	)	6.7		7.0
Segment adjusted EBITDA before corporate overhead (b)	$	106,470	$	107,547		(1	)	38.3		38.0

(b)     See discussion of Non-GAAP financial measures on page 34.

Revenues.    For the nine months ended September 30, 2013, revenues decreased $4.6 million, or 2%, as an increase in our online segment revenues were more than offset by a decrease in our television segment revenues.  For further discussion on revenues by reportable segment, see each of the television and online segments.

Cost of Revenues.    For the nine months ended September 30, 2013, cost of revenues decreased $2.0 million, or 2%, as compared to the same period in the prior year.  As a percentage of revenues, cost of revenues decreased to

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36.3% in 2013, as compared to 36.4% in 2012.   Cost of revenues decreased due to lower (i) personnel costs ($2.9 million) and (ii) ad system costs ($1.2 million), partially offset by an increase in trading costs ($2.4 million).  The reduction in personnel costs is commensurate with a reduction in our television revenues.  Ad systems costs decreased due to transitioning the majority of our customers’ online advertising over to a single advertising platform in 2013 from the three separate advertising platforms we operated in 2012.  The increase in trading costs is proportional to an increase in our online trading revenues.

Sales and Marketing.    For the nine months ended September 30, 2013, sales and marketing expense increased $5.2 million, or 11%, as compared to the same period in the prior year.  The increase was primarily due to higher (i) personnel costs ($2.4 million), (ii) sales and marketing expenses ($2.2 million) and (iii) facilities costs ($0.4 million).  Personnel costs increased due to (i) an increase in the number and average cost per sales and marketing employee and (ii) higher incentive compensation.  Sales and marketing expenses increased due to greater spending on business partnerships and advertising.  Business partnerships involve paying a commission or fee to the party responsible for causing the customer to use our platform in their online advertising.   As a percentage of revenues, sales and marketing expense increased to 18.6% in the current year period, as compared to 16.5% in the same period of the prior year.  The percentage increase is due to the factors discussed above.

Research and Development.    For the nine months ended September 30, 2013, research and development costs decreased $4.0 million, or 22%, as compared to the same period in the prior year.  The decrease was due to higher capitalized wages ($3.6 million) and lower compensation costs ($0.9 million), partially offset by an increase in other expenses.  The increase in capitalized wages is due to working on more software development projects that qualify for capitalization.  The decrease in compensation costs is primarily attributable to a reduction in share-based compensation.

General and Administrative.    For the nine months ended September 30, 2013, general and administrative expense decreased $8.1 million, or 20%, as compared to the same period in the prior year.  As a percentage of revenues, general and administrative expense decreased to 11.8% in the current year period, as compared to 14.4% in the same period in the prior year.  The decrease was primarily due to lower (i) professional fees ($3.1 million), (ii) personnel costs ($2.9 million) and (iii) facilities costs ($1.3 million).  The decrease in professional fees is due to lower (i) legal fees, (ii) audit and tax fees and (iii) consulting fees.  The decrease in personnel costs is attributable to a reduction in the number and average cost per general and administrative employee.

Acquisition, Integration and Other.    For the nine months ended September 30, 2013, acquisition, integration and other expense increased $1.8 million as compared to the same period in the prior year.  The increase was primarily due to costs associated with our strategic alternatives review process ($4.2 million) which resulted in us entering into a merger transaction with ER (for more information, see Note 1 of our consolidated financial statements), partially offset by a reduction in severance costs ($2.5 million).  Severance costs were higher in the prior year period as in 2012 we were in the process of transitioning our three previously separate online businesses into a single operation.

Depreciation and Amortization.    For the nine months ended September 30, 2013, depreciation and amortization expense increased $1.0 million, or 2%, as compared to the same period in the prior year.  The increase was due to (i) depreciation of leasehold improvements related to our office facility in New York City which was placed into service in June 2012 and (ii) increased amortization associated with the intangibles assets acquired in the Peer 39 and North Country transactions.

Interest Expense.    For the nine months ended September 30, 2013, interest expense increased $2.1 million as compared to the same period in the prior year.  The increase was due to amending our credit facility in March 2013 ($1.3 million) and increasing the interest rate charged on our borrowings, partially offset by a reduction in interest expense due to a lower average outstanding balance.  In March 2013 we amended our credit facility which resulted in (i) an immediate $50 million principal payment, (ii) higher scheduled principal payments, and (iii) a reduction in the size of our revolving credit facility from $120 million to $50 million.  These changes caused us to write off $1.3 million of the existing debt issuance costs and original issue discount.  In addition, the amendment requires that we pay an increased interest rate on our borrowings.  See Note 6 of our consolidated financial statements.

Interest Income and Other, net.    For the nine months ended September 30, 2013, interest income and other, net decreased $0.3 million as compared to the same period in the prior year.  The decrease was due to a reduction in foreign currency exchange losses.

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Provision for Income Taxes.    For the nine months ended September 30, 2013, our effective tax rate was 71.7%, compared to (5.9)% for the nine months ended September 30, 2012.  The effective tax rates for each period differ from the expected federal statutory rate of 35.0% as a result of state and foreign income taxes, non-deductible expenses, adjustments for uncertain tax positions and, principally for the 2012 period, the recording of a valuation allowance against all of our federal net operating loss carryforwards.  For 2012, the vast majority of the goodwill impairment charge was not deductible for income tax purposes.

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Three Months Ended September 30, 2013 vs. Three Months Ended September 30, 2012

Television Segment

The following table sets forth certain historical financial data for our television segment (dollars in thousands):

					% Change
	Three Months Ended				2013
	September 30,				vs.
	2013		2012		2012
Revenues	$	51,902	$	60,102	(14	)%
Segment adjusted EBITDA before corporate overhead	24,741		30,602		(19	)

The television segment includes the results of our ADS operation, SourceEcreative, Match Point, MIJO and North Country.  North Country was acquired in July 2012.

Revenues.    For 2013, revenues decreased $8.2 million, or 14%, as compared to 2012.  The decrease was primarily due to declines in (i) high definition (“HD”) revenue ($4.6 million), (ii) standard definition (“SD”) revenue ($3.4 million) and (iii) production service revenue ($2.1 million), partially offset by higher direct response revenue ($0.6 million) and syndication revenue ($0.6 million).

HD revenue decreased due to a reduction in the average price we charge per delivery, partially offset by an increase in the number of deliveries.  The reduction in SD revenue was principally due to a decrease in the number of deliveries and a slight decline in the average price we charge per delivery.  The reduction in SD deliveries was partially due to customers choosing other forms of advertising, such as online, as well as customers switching to HD deliveries and the loss of certain customers. The pricing of both HD and SD declined largely due to the competitive environment.  We decreased our HD pricing in part to entice our SD customers to switch to delivering HD content.  For the three months ended September 30, 2013, HD deliveries were 46% of total deliveries vs. 33% of total deliveries in the same period in the prior year.

Segment Adjusted EBITDA before Corporate Overhead.    For 2013, the television segment adjusted EBITDA before corporate overhead decreased $5.9 million as compared to 2012. The decrease was principally due to a reduction in television revenues as discussed above ($8.2 million), partially offset by lower (i) personnel costs ($1.5 million), (ii) professional fees ($0.3 million) and travel and entertainment costs ($0.2 million).  We have been reducing our television cost structure as our television revenues decline.

Online Segment

The following table sets forth certain historical financial data for our online segment (dollars in thousands):

					% Change
	Three Months Ended				2013
	September 30,				vs.
	2013		2012		2012
Revenues	$	38,228	$	33,716	13	%
Segment adjusted EBITDA before corporate overhead	9,597		4,306		123

The online segment includes the results of MediaMind, Eyewonder, Unicast and Peer 39. Peer 39 was acquired on April 30, 2012.  We are in the process of transferring all of our online advertising related business to the MediaMind platform.  In September 2013, 99% of our online ad serving revenue was processed using the MediaMind platform.  We expect to complete the transition in 2013.

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Revenues.    For 2013, revenues increased $4.5 million, or 13%, as compared to 2012. The increase was principally due to growth in our (i) impression based services revenue ($1.7 million), (ii) premium and other services revenue ($1.5 million) and (iii) trading revenue ($1.3 million).  Impression based services revenue grew as a result of an increase in the number of impressions served, partially offset by a decrease in the average selling price per impression served.  The increase in the number of impressions served was due, in part, to our improved execution and the stabilization of our service offerings.  Our premium and other services revenue grew due to greater usage of our (i) smart versioning, (ii) data and (iii) viewability and verification services.  Trading revenue involves the purchase of media airtime (at our customer’s request) and reselling it to them.  Our trading revenue grew to $2.4 million in the current year period as compared to $1.1 million in the comparable prior year period, an increase of 114%.

Segment Adjusted EBITDA before Corporate Overhead.    For 2013, the online segment adjusted EBITDA before corporate overhead increased $5.3 million as compared to 2012.  The increase was attributable to higher revenue as discussed above ($4.5 million) and lower operating costs ($0.8 million).  Our lower costs were due to (i) greater capitalized wages due to the nature of the research and development projects ($0.9 million), and (ii) lower personnel ($0.4 million) and facilities costs ($0.3 million), partially offset by higher trading costs ($0.8 million).  We purchased more media airtime on behalf of our customers which corresponds to an increase in trading revenue.

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Nine Months Ended September 30, 2013 vs. Nine Months Ended September 30, 2012

Television Segment

The following table sets forth certain historical financial data for our television segment (dollars in thousands):

					% Change
	Nine Months Ended				2013
	September 30,				vs.
	2013		2012		2012
Revenues	$	164,859	$	183,534	(10	)%
Segment adjusted EBITDA before corporate overhead	82,762		96,055		(14	)

The television segment includes the results of our ADS operation, SourceEcreative, Match Point, MIJO and North Country.  North Country was acquired in July 2012.

Revenues.    For 2013, revenues decreased $18.7 million as compared to 2012.  The decrease was primarily due to declines in (i) SD revenue ($11.1 million), (ii) HD revenue ($7.9 million) and (iii) production service revenue ($4.1 million), partially offset by including nine months of North Country’s operating results in 2013 versus only two months in 2012 ($2.0 million) and higher syndication revenue ($1.8 million) and direct response revenue ($1.5 million).

The reduction in SD revenue was principally due to a decrease in the number of deliveries and a decline in the average price we charge per delivery.  The reduction in SD deliveries was partially due to customers choosing other forms of advertising, such as online, as well as customers switching to HD deliveries and the loss of certain customers.  HD revenue decreased due to a reduction in the average price we charge per delivery, partially offset by an increase in the number of deliveries.  The pricing of both HD and SD declined largely due to the competitive environment.  We decreased our pricing in part to entice our SD customers to switch to delivering HD content.  For the nine months ended September 30, 2013, HD deliveries were 41% of total deliveries vs. 29% of total deliveries in the same period in the prior year.

Segment Adjusted EBITDA before Corporate Overhead.    For 2013, the television segment adjusted EBITDA before corporate overhead decreased $13.3 million as compared to 2012. The decrease was principally due to a reduction in television revenues as discussed above ($18.7 million), partially offset by (i) lower personnel costs ($2.4 million), (ii) lower professional fees ($1.6 million), (iii) higher capitalized wages ($1.1 million) and (iv) the reversal of an earnout liability related to Match Point ($0.8 million).

Online Segment

The following table sets forth certain historical financial data for our online segment (dollars in thousands):

					% Change
	Nine Months Ended				2013
	September 30,				vs.
	2013		2012		2012
Revenues	$	113,564	$	99,469	14	%
Segment adjusted EBITDA before corporate overhead	23,708		11,492		106

The online segment includes the results of MediaMind, Eyewonder, Unicast and Peer 39. Peer 39 was acquired on April 30, 2012.

Revenues.    For 2013, revenues increased $14.1 million, or 14%, as compared to 2012. The increase was due to growth in our (i) premium and other services revenue ($7.8 million), (ii) trading revenue ($3.5 million) and (iii) impression based services revenue ($2.8 million).  Our premium and other services revenue grew due to (i) growth in our other services revenue which consists predominantly of flat fee (fixed price not based on impressions) services and (ii) greater usage of our

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data and smart versioning services.  Our trading revenue grew to $6.7 million in the current year period as compared to $3.2 million in the comparable prior year period, an increase of 111%.  Impression based services revenue grew as a result of an increase in the number of impressions served, partially offset by a decrease in the average selling price per impression served.  The increase in the number of impressions served was due, in part, to our improved execution and the stabilization of our service offerings.

Segment Adjusted EBITDA before Corporate Overhead.    For 2013, the online segment adjusted EBITDA before corporate overhead increased $12.2 million as compared to 2012.  The increase was attributable to higher revenue as discussed above ($14.1 million) partially offset by higher operating costs ($1.9 million).  Our operating costs increased due to higher (i) trading costs ($2.4 million) which corresponds with an increase in trading revenue, (ii) business partnerships costs ($1.7 million) which involves paying a commission or fee to the party responsible for causing the customer to use our platform in their online advertising and (iii) personnel costs ($1.6 million) reflecting a greater number of employees to service our growing online business; partially offset by increased capitalization of software development projects ($2.5 million) due to more of our software development projects qualifying for capitalization and lower ad system costs ($1.2 million) caused by the transition of the majority of our customers’ online advertising to a single platform from three separate platforms in 2012.

Non-GAAP Financial Measures

In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), we have historically provided additional financial measures that are not prepared in accordance with GAAP (non-GAAP). Legislative and regulatory changes discourage the use of and emphasis on non-GAAP financial measures and require companies to explain why non-GAAP financial measures are relevant to management and investors. We believe that the inclusion of adjusted EBITDA and segment adjusted EBITDA before corporate overhead as non-GAAP financial measures helps investors gain a meaningful understanding of our past performance and future prospects, consistent with how we measure and forecast our performance, especially when comparing such results to previous periods or forecasts. We use adjusted EBITDA and segment adjusted EBITDA before corporate overhead as non-GAAP financial measures, in addition to GAAP financial measures, as the basis for measuring our core operating performance and comparing such performance to that of prior periods and to the performance of our competitors. These measures are also used by us in our financial and operational decision making. There are limitations associated with reliance on non-GAAP financial measures because they are specific to our operations and financial performance, which makes comparisons with other companies’ financial results more challenging. By providing both GAAP and non-GAAP financial measures, we believe that investors are able to compare our GAAP results to those of other companies, while also gaining a better understanding of how we evaluate our operating performance.

We consider adjusted EBITDA to be an important indicator of our overall performance because it eliminates the effects of events that are non-cash, or are not expected to recur as they are not part of our ongoing operations.

We define “adjusted EBITDA” as income (loss) from operations, before depreciation and amortization, share-based compensation, acquisition, integration and other expenses, and restructuring / impairment charges and benefits. We consider adjusted EBITDA to be an important indicator of our operational strength and performance and a good measure of our historical operating trends.

Adjusted EBITDA eliminates items that are either not part of our core operations, such as acquisition, integration and other expenses, or do not require a cash outlay, such as share-based compensation and impairment charges. Adjusted EBITDA also excludes depreciation and amortization expense, which is based on our estimate of the useful life of tangible and intangible assets. These estimates could vary from actual performance of the asset, are based on historical costs and may not be indicative of current or future capital expenditures.

Segment adjusted EBITDA before corporate overhead represents adjusted EBITDA before corporate overhead on a segment by segment basis. Note 11 of our consolidated financial statements reconciles adjusted EBITDA and segment adjusted EBITDA before corporate overhead to income from operations.

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Adjusted EBITDA and segment adjusted EBITDA before corporate overhead should be considered in addition to, not as a substitute for, our operating income, as well as other measures of financial performance reported in accordance with GAAP.

Reconciliation of Non-GAAP Financial Measures

In accordance with the requirements of Regulation G issued by the SEC, on pages 26 and 28 we are presenting the most directly comparable GAAP financial measure and reconciling the non-GAAP financial measures to the comparable GAAP measure.

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Financial Condition

The following table sets forth certain major balance sheet accounts as of September 30, 2013 and December 31, 2012 (in thousands):

	September 30, 2013		December 31, 2012
Assets:
Cash and cash equivalents	$	60,223	$	84,520
Accounts receivable, net	86,919		97,583
Property and equipment, net	64,984		66,169
Deferred income taxes	1,036		1,035
Goodwill and intangible assets, net	525,843		549,293
Liabilities:
Accounts payable and accrued liabilities	37,056		46,085
Deferred income taxes	25,309		28,065
Debt	386,361		453,918
Stockholders’ equity	301,434		291,194

Cash and cash equivalents fluctuate with changes in operating, investing and financing activities. In particular, cash and cash equivalents fluctuate with (i) operating results, (ii) the timing of payments, (iii) capital expenditures, (iv) acquisition and investment activity, (v) borrowings and repayments of debt, and (vi) capital activity. The decrease in cash and cash equivalents during the first nine months of 2013 primarily relates to (i) principal payments on our debt ($68.4 million) and (ii) the purchase of property and equipment and the capitalization of costs to develop software ($19.3 million), in excess of cash generated from operating activities ($67.8 million).

Accounts receivable generally fluctuate with revenues. As revenues increase or decrease, accounts receivable tend to increase or decrease, respectively. The number of days of revenue included in accounts receivable was 89 days and 87 days at September 30, 2013 and December 31, 2012, respectively.

Property and equipment tends to increase when we make significant improvements to our equipment or properties, expand our network or capitalize software development initiatives. It also can increase as a result of acquisition activity. Further, the balance of property and equipment is affected by recording depreciation expense. For 2013 and 2012, purchases of property and equipment were $7.2 million and $17.2 million, respectively. For 2013 and 2012, capitalized costs of developing software were $12.1 million and $9.5 million, respectively. Purchases of property and equipment were higher in the 2012 period as a result of costs incurred to finish out our new office facility in New York City which we took possession of in June 2012.

Goodwill and intangible assets decreased during 2013 principally as a result of the amortization of intangible assets.

Accounts payable and accrued liabilities decreased $9.0 million during 2013. The decrease primarily relates to (i) the timing of payments, (ii) payment of the Peer 39 installment obligation, (iii) payment of our 2012 North Country earnout obligation, and (iv) reversal of the Match Point earnout obligation.

Debt decreased $67.6 million during 2013 as a result of (i) making a $50.0 principal payment in connection with amending our credit facility in March 2013 and (ii) scheduled quarterly principal payments ($18.4 million), partially offset by the accretion of interest on the original issue discount ($0.8 million).

Stockholders’ equity increased $10.2 million during 2013. The increase principally relates to (i) reporting net income ($0.6 million), (ii) recognizing $9.7 million of share-based compensation expense and (iii) the issuance of stock upon the exercise of employee stock options and employee stock purchases ($1.4 million), in excess of recognizing an other comprehensive loss of $1.2 million and settling vested RSUs on a net of tax basis ($0.3 million).

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Liquidity and Capital Resources

The following table sets forth a summary of our statements of cash flows (in thousands):

	Nine Months Ended September 30,
	2013			2012
Operating activities:
Net income (loss)	$	604		$	(219,010	)
Goodwill impairment	—			208,166
Depreciation and amortization	42,361			41,403
Share-based compensation and other	9,079			25,165
Changes in operating assets and liabilities, net	15,791			(3,736		)
Total	67,835			51,988
Investing activities:
Purchases of property and equipment	(7,238		)	(17,166		)
Capitalized costs of developing software	(12,064		)	(9,491		)
Acquisitions, net of cash acquired	—			(10,089		)
Proceeds from short-term investments and other	1,493			9,232
Total	(17,809		)	(27,514		)
Financing activities:
Proceeds from issuance of common stock, net	1,404			174
Payment of debt amendment costs	(2,635		)	—
Repayments of long-term debt	(68,375		)	(28,675		)
Payments of seller financing, earnouts and other	(4,031		)	(398		)
Total	(73,637		)	(28,899		)
Effect of exchange rate changes on cash and cash equivalents	(686		)	451
Net decrease in cash and cash equivalents	$	(24,297	)	$	(3,974	)

We generate cash from operating activities principally from net income adjusted for certain non-cash expenses such as (i) depreciation and amortization, (ii) share-based compensation and (iii) impairment charges.  In 2013, we generated $67.8 million in cash from operating activities, as compared to $52.0 million in 2012.

Historically, we have invested our cash in (i) property and equipment, (ii) the development of software, (iii) strategic investments and (iv) the acquisition of complementary businesses.

Cash is obtained from financing activities principally as a result of issuing debt and equity instruments. We use cash in financing activities principally in the repayment of debt.

Sources of Liquidity

Our sources of liquidity include:

·cash and cash equivalents on hand (including $13.3 million held outside the United States at September 30, 2013, the majority of which can be repatriated into the United States with little or no adverse tax consequences),

·cash generated from operating activities,

·borrowings from our existing or any new credit facility, and

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·the issuance of equity securities.

As of September 30, 2013, we had $60.2 million of cash and cash equivalents on hand.  Historically, we have generated significant amounts of cash from operating activities. We expect this trend will continue.

We have a credit agreement which was amended in March 2013 (the “Amended Credit Facility”) that provides for $490 million of term loans (the “Term Loans”) and $50 million of revolving loans (the “Revolving Loans”).  As of September 30, 2013, we had $47.0 million of borrowing capacity available to us under the Revolving Loans. The Term Loans mature in 2018 and the Revolving Loans mature in 2016 (see Note 6 of our consolidated financial statements).

We also have the ability to issue equity instruments.

As of September 30, 2013, we had net operating loss (“NOL”) carryforwards with a tax-effected carrying value of approximately $32.2 million and $5.3 million for federal and state purposes, respectively, available to offset future taxable income.  As of September 30, 2013, we provided a valuation allowance against substantially all of these NOL carryforwards as ultimate realization of the NOLs was not determined to be more-likely-than not.  Accordingly, we have NOL carryforwards available to us (should we have sufficient future taxable income to utilize them) that are not reflected in our consolidated balance sheets.

We believe our sources of liquidity, including (i) cash and cash equivalents on hand, (ii) the Revolving Loans under our Amended Credit Facility, and (iii) cash generated from operating and financing activities will satisfy our capital needs for the next 12 months.  Further, we expect to remain in compliance with the financial covenants of our Amended Credit Facility for at least the next twelve months.

See Note 1 of our unaudited consolidated financial statements regarding the pending merger transaction with ER, which contemplates using a portion of the purchase price consideration to retire all of our outstanding debt.

Cash Requirements

We expect to use cash in connection with:

·the purchase of capital assets,

·the repayment of our debt,

·the organic growth of our business, and

·the strategic acquisition of media related businesses as permitted under our credit facility.

During 2013, we expect we will purchase property and equipment and incur capitalized software development costs ranging from $25 to $28 million.  Our Amended Credit Facility limits capital expenditures to $30 million per year. We expect to use cash to further expand and develop our business.

Off-Balance Sheet Arrangements

We have entered into operating leases for all of our office facilities and certain equipment rentals. Generally these leases are for periods of three to ten years and usually contain one or more renewal options. We use leasing arrangements to preserve capital.  We expect to continue to lease the majority of our office facilities under arrangements substantially consistent with the past.

Other than our operating leases, we are not a party to any off-balance sheet arrangement that we believe is likely to have a material impact on our current or future financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material changes to the disclosure on this matter made in our Annual Report.

Item 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company maintains a system of disclosure controls and procedures that are designed to ensure information required to be disclosed by the Company is recorded, processed, summarized, and reported to management, including our chief executive officer and chief financial officer, in a timely manner.

An evaluation of the effectiveness of this system of disclosure controls and procedures was performed under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, as of the end of the period covered by this report. Based upon this evaluation, the Company’s management, including the Company’s chief executive officer and chief financial officer, concluded that the current system of disclosure controls and procedures was not effective, as described below.

Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process, therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

2012 Material Weakness and Plans for Remediation

As discussed in our 2012 Annual Report, during 2011 we made three business acquisitions which significantly expanded our operations into international markets.  As a result, our provision for income taxes, which was previously focused on US income tax matters, became significantly more complex.  In addition, we previously used a third-party subject matter expert to prepare and review the provision for income taxes, with additional oversight and review by management.  During the fourth quarter of 2012, we replaced our third-party subject matter expert with internal resources who prepared and reviewed the provision for income taxes.  While management did perform a review, the review was not sufficient to detect misstatements in our provision for income taxes.

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In addition, we did not have an adequate design or operation of controls that provided reasonable assurance that the accounting for income taxes and related disclosures were free of material misstatements.  Specifically, we did not have controls that were designed to a level of precision that would have detected a material misstatement of our financial statements. Further, we did not have sufficient staffing and technical expertise in the tax function to provide adequate review of the complete and accurate recording of tax provisions and accruals.

This material weakness contributed to post-closing adjustments proposed by our independent auditor and we correctly reflected them in the financial statements for the year ended December 31, 2012.  These adjustments resulted in changes in deferred income tax assets and liabilities, accrued tax liability, income tax expense, and related disclosures.  As a result of the material weakness, management concluded that our internal control over financial reporting was ineffective as of December 31, 2012.

We believe the error described above was the result of a material weakness in our internal control over financial reporting related to certain deficiencies in the controls surrounding monitoring and oversight of accounting and financial reporting related to accounting for income taxes.  Specifically, we did not have sufficient personnel with adequate knowledge regarding accounting for income taxes, nor did we have adequate procedures in place to ensure that accounting for income taxes was accounted for in accordance with generally accepted accounting principles.

We have taken steps to remediate the above material weakness.  Specifically, we have:

·revised and enhanced our procedures for accounting for income taxes, including the creation of a detailed accounting for income taxes checklist that will be completed and reviewed by our tax personnel prior to forwarding the tax provision on for further review;

·engaged a third party subject matter specialist to review our accounting for income taxes, including the preparation of a summary tax memorandum by the third party reviewer that will identify significant income tax matters during the period which will be completed prior to providing the income tax provision to our external auditors; and

·engaged a third-party subject matter expert to design and implement controls over the income tax accounting process at a sufficiently precise level of detail so as to detect a material misstatement.

We will not be able to fully remediate the 2012 material weakness until such time as we have properly tested the operation of our enhanced internal controls and have concluded they are operating effectively which is likely to be in the fourth quarter of 2013.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended September 30, 2013, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than the additional procedures relating to accounting for income taxes described above.

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PART II.               OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

For further information on legal proceedings, see Note 13 to the consolidated financial statements, “Litigation,” that is included in Part I of this Report and is incorporated herein by reference.

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 30, 2010, our Board of Directors authorized the purchase of up to $30 million of our common stock in the open market or unsolicited negotiated transactions. On April 19, 2011, our Board of Directors authorized an increase to our share repurchase program from $30 million to $80 million. As of September 30, 2013, $45.3 million remained outstanding under the share repurchase plan. However, under our Amended Credit Facility share redemptions and repurchases are limited. The stock repurchase plan has no expiration date. The following table sets forth information with respect to purchases of shares of our common stock during the periods indicated:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value that May Yet be Purchased Under the Plans or Programs (in thousands)
July 1, 2013 through July 31, 2013	—	$	—	—	$	45,306
August 1, 2013 through August 31, 2013	—	$	—	—	$	45,306
September 1, 2013 through September 30, 2013	—	$	—	—	$	45,306
Total	—	$	—	—	$	45,306

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Item 6.   EXHIBITS

Exhibits
2.1(a)	Agreement and Plan of Merger by and among Extreme Reach, Inc., Dawn Blackhawk Acquisition Corp. and Digital Generation, Inc., dated as of August 12, 2013.
10.1(a)	Voting Agreement dated August 12, 2013 by and among Scott K. Ginsburg, Neil H. Nguyen and Extreme Reach, Inc.
10.2(a)	Equity Commitment Letter dated August 12, 2013 from Digital Generation, Inc. to Extreme Reach, Inc.
10.3(b)	Agreement dated October 7, 2013 by and among Digital Generation, Inc. and the Meruelo Stockholders.
31.1 **	Rule 13a-14(a)/15d-14(a) Certification.
31.2 **	Rule 13a-14(a)/15d-14(a) Certification.
32.1 **	Section 1350 Certifications.
101	The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income (Loss), (iv) Unaudited Consolidated Statements of Cash Flows, (v) Unaudited Consolidated Statement of Stockholders’ Equity, and (vi) Notes to Unaudited Consolidated Financial Statements.

(a)Incorporated by reference to the exhibit bearing the same or similar title filed with the Registrant’s Current Report on Form 8-K filed August 13, 2013.

(b)Incorporated by reference to the exhibit bearing the same or similar title filed with the Registrant’s Current Report on Form 8-K filed October 7, 2013.

** Filed herewith.

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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, INC.
Date: November 8, 2013	By:	/s/ NEIL H. NGUYEN
	Name:	Neil H. Nguyen
	Title:	Chief Executive Officer and President
Date: November 8, 2013	By:	/s/ CRAIG HOLMES
	Name:	Craig Holmes
	Title:	Chief Financial Officer

43

EX-31.1

Exhibit 31.1

DIGITAL GENERATION, INC. AND SUBSIDIARIES

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

I, Neil H. Nguyen, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Digital Generation, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2013	/s/ NEIL H. NGUYEN
	Neil H. Nguyen
	Chief Executive Officer and
	President

1

EX-31.2

Exhibit 31.2

DIGITAL GENERATION, INC. AND SUBSIDIARIES

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

I, Craig Holmes, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Digital Generation, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2013	/s/ Craig Holmes
	Craig Holmes
	Chief Financial Officer

1

EX-32.1

EXHIBIT 32.1

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report of Digital Generation, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2013, as filed with the SEC on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 8, 2013	By:	/s/ Neil H. Nguyen
		Neil H. Nguyen
		Chief Executive Officer and
		President
Date: November 8, 2013	By:	/s/ Craig Holmes
		Craig Holmes
		Chief Financial Officer

1

XML

Earnings (Loss) per Share

9 Months Ended

Sep. 30, 2013

Earnings (Loss) per Share

Earnings (Loss) per Share

10.  Earnings (Loss) per Share

Basic earnings (loss) per common share excludes dilution and is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per common share is calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period, as adjusted for the potential dilutive effect of non-participating share-based awards such as stock options and RSUs.  The following table presents earnings (loss) per common share for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Income (loss) from continuing operations	$	(866	)	$	(219,727	)	$	604	$	(217,930	)
Weighted average common shares outstanding — basic	27,941			27,600			27,791		27,423
Dilutive securities	—			—			511		—
Weighted average common shares outstanding - diluted	27,941			27,600			28,302		27,423
Basic income (loss) per common share:
Continuing	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Diluted income (loss) per common share:
Continuing	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Antidilutive securities not included:
Stock options and RSUs	1,422			2,748			2,134		2,818

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues:
Television	$ 51,902	$ 60,102	$ 164,859	$ 183,534
Online	38,228	33,716	113,564	99,469
Total revenues	90,130	93,818	278,423	283,003
Cost of revenues (excluding depreciation and amortization):
Television	20,387	22,061	61,737	65,065
Online	13,262	12,636	39,370	37,993
Total cost of revenues	33,649	34,697	101,107	103,058
Operating expenses:
Sales and marketing	15,831	16,476	51,900	46,727
Research and development	4,305	5,501	14,564	18,599
General and administrative	11,252	13,959	32,710	40,824
Acquisition, integration and other	3,677	1,379	7,364	5,556
Depreciation and amortization	13,626	14,542	42,361	41,403
Goodwill impairment		208,166		208,166
Total operating expenses	48,691	260,023	148,899	361,275
Income (loss) from operations	7,790	(200,902)	28,417	(181,330)
Other expense:
Interest expense	8,446	7,835	25,842	23,766
Interest and other, net	518	346	441	700
Income (loss) before income taxes	(1,174)	(209,083)	2,134	(205,796)
Provision (benefit) for income taxes	(308)	10,644	1,530	12,134
Income (loss) from continuing operations	(866)	(219,727)	604	(217,930)
Discontinued operations:
Loss from discontinued operations				(1,080)
Net income (loss)	$ (866)	$ (219,727)	$ 604	$ (219,010)
Basic income (loss) per common share:
Continuing operations (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.95)
Discontinued operations (in dollars per share)				$ (0.04)
Total (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.99)
Diluted income (loss) per common share:
Continuing operations (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.95)
Discontinued operations (in dollars per share)				$ (0.04)
Total (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.99)
Weighted average common shares outstanding:
Basic (in shares)	27,941	27,600	27,791	27,423
Diluted (in shares)	27,941	27,600	28,302	27,423

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Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Measurements

Fair Value Measurements

3.  Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

· Level 1—Quoted prices in active markets for identical assets or liabilities.

· Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

· Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We have classified our assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

The tables below set forth by level, assets and liabilities that were accounted for at fair value as of September 30, 2013 and December 31, 2012.  The tables do not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):

			Fair Value Measurements at September 30, 2013
	Balance Sheet Location		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Currency forward derivatives/options		(b)	$	—	$	267	$	—	$	267
Springbox revenue sharing		(b)(c)	—		—		512		512
Marketable equity securities		(c)	1,060		—		—		1,060
Total			$	1,060	$	267	$	512	$	1,839
Liabilities:
Revenue earnout		(d)(e)	$	—	$	—	$	855	$	855

			Fair Value Measurements at December 31, 2012
	Balance Sheet Location		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Money market funds		(a)	$	4,004	$	—	$	—	$	4,004
Currency forward derivatives/options		(b)	—		445		—		445
Springbox revenue sharing		(b)(c)	—		—		768		768
Marketable equity securities		(c)	337		—		—		337
Total			$	4,341	$	445	$	768	$	5,554
Liabilities:
Revenue earnouts		(d)(e)	$	—	$	—	$	2,857	$	2,857

(a) Included in cash and cash equivalents.

(b) Included in other current assets.

(c) Included in other non-current assets.

(d) Included in accrued liabilities.

(e) Included in other non-current liabilities.

The fair value of our money market funds and marketable equity securities were determined based upon quoted market prices. Our marketable equity securities relate to a single issuer with an adjusted cost basis of $0.3 million.  The currency forwards/options are derivative instruments whose value is based upon quoted market prices from various market participants.

In connection with the sale of Springbox we are entitled to receive a percentage of the revenues collected by the business for three years after the closing date (June 1, 2012). We have estimated the future revenues of Springbox based on the historical revenues and certain other factors, discounted to their present value.  The following table provides a reconciliation of changes in the fair values of our Level 3 assets (in thousands):

	Revenue Sharing Arrangement
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period	$	768		$	—
Additions	—			768
Collections	(200		)	—
Change in fair value recognized in earnings	(56		)	—
Balance at end of period	$	512		$	768

In connection with an acquisition of a business, we sometimes include a contingent consideration component of the purchase price based on future revenues. We estimate future revenues based on historical revenues and certain other factors. Each reporting period, we update our estimate of the future revenues of each earnout party and the corresponding earnout levels achieved, discounted to their present values. The change in fair value is recorded in cost of revenues in the accompanying consolidated statements of operations. The following table provides a reconciliation of changes in the fair value of our Level 3 liabilities (in thousands):

	Revenue Earnouts
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period	$	2,857		$	1,673
Additions	—			1,855
Payments	(1,201		)	—
Change in fair value recognized in earnings	(801		)	(439		)
Balance at end of period	$	855		$	3,089

The fair value of our debt (see Note 6) at September 30, 2013 was approximately $387.3 million based on the average trading price (a Level 1 fair value measurement).

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value Measurements

Schedule of assets and liabilities accounted for at fair value

The tables do not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):

			Fair Value Measurements at September 30, 2013
	Balance Sheet Location		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Currency forward derivatives/options		(b)	$	—	$	267	$	—	$	267
Springbox revenue sharing		(b)(c)	—		—		512		512
Marketable equity securities		(c)	1,060		—		—		1,060
Total			$	1,060	$	267	$	512	$	1,839
Liabilities:
Revenue earnout		(d)(e)	$	—	$	—	$	855	$	855

			Fair Value Measurements at December 31, 2012
	Balance Sheet Location		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Money market funds		(a)	$	4,004	$	—	$	—	$	4,004
Currency forward derivatives/options		(b)	—		445		—		445
Springbox revenue sharing		(b)(c)	—		—		768		768
Marketable equity securities		(c)	337		—		—		337
Total			$	4,341	$	445	$	768	$	5,554
Liabilities:
Revenue earnouts		(d)(e)	$	—	$	—	$	2,857	$	2,857

(a) Included in cash and cash equivalents.

(b) Included in other current assets.

(c) Included in other non-current assets.

(d) Included in accrued liabilities.

(e) Included in other non-current liabilities.

Schedule of reconciliation of changes in the fair values of Level 3 assets

The following table provides a reconciliation of changes in the fair values of our Level 3 assets (in thousands):

	Revenue Sharing Arrangement
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period	$	768		$	—
Additions	—			768
Collections	(200		)	—
Change in fair value recognized in earnings	(56		)	—
Balance at end of period	$	512		$	768

Schedule of reconciliation of changes in the fair values of level 3 liabilities

The following table provides a reconciliation of changes in the fair value of our Level 3 liabilities (in thousands):

	Revenue Earnouts
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Balance at beginning of period	$	2,857		$	1,673
Additions	—			1,855
Payments	(1,201		)	—
Change in fair value recognized in earnings	(801		)	(439		)
Balance at end of period	$	855		$	3,089

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Segment Information

9 Months Ended

Sep. 30, 2013

Segment Information

Segment Information

11.  Segment Information

Our two reportable segments consist of television and online. The television segment revenues are principally derived from delivering advertisements, syndicated programs, and video news releases from advertising agencies and other content providers to traditional broadcasters and other media outlets. The online segment revenues are principally derived from online advertising and related services. We use segment adjusted EBITDA before corporate overhead as our measure of segment profit. Segment adjusted EBITDA before corporate overhead reflects income from operations before corporate overhead, acquisition, integration and other expenses, share-based compensation expense, depreciation and amortization, and goodwill impairment charges. Certain prior year amounts have been reclassified to conform to the current year presentation.  We do not disclose assets by reportable segment since some of our assets are commingled. Our reportable segments are as follows (in thousands):

	Three Months Ended September 30,
	2013							2012
	Television		Online		Consolidated			Television		Online		Consolidated
Revenues	$	51,902	$	38,228	$	90,130		$	60,102	$	33,716	$	93,818
Segment adjusted EBITDA before corporate overhead	24,741		9,597		34,338			30,602		4,306		34,908
Less corporate overhead					(5,998		)					(7,284		)
Adjusted EBITDA					28,340							27,624
Less:
Depreciation and amortization					(13,626		)					(14,542		)
Share-based compensation					(3,247		)					(4,439		)
Acquisition, integration and other					(3,677		)					(1,379		)
Goodwill impairment					—							(208,166		)
Income (loss) from operations					$	7,790						$	(200,902	)

	Nine Months Ended September 30,
	2013							2012
	Television		Online		Consolidated			Television		Online		Consolidated
Revenues	$	164,859	$	113,564	$	278,423		$	183,534	$	99,469	$	283,003
Segment adjusted EBITDA before corporate overhead	82,762		23,708		106,470			96,055		11,492		107,547
Less corporate overhead					(18,656		)					(19,936		)
Adjusted EBITDA					87,814							87,611
Less:
Depreciation and amortization					(42,361		)					(41,403		)
Share-based compensation					(9,672		)					(13,816		)
Acquisition, integration and other					(7,364		)					(5,556		)
Goodwill impairment					—							(208,166		)
Income (loss) from operations					$	28,417						$	(181,330	)

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Segment Information
Number of reportable segments			2
Reportable segments
Revenues	$ 90,130	$ 93,818	$ 278,423	$ 283,003
Segment adjusted EBITDA before corporate overhead	34,338	34,908	106,470	107,547
Less corporate overhead	(5,998)	(7,284)	(18,656)	(19,936)
Adjusted EBITDA	28,340	27,624	87,814	87,611
Less:
Depreciation and amortization	(13,626)	(14,542)	(42,361)	(41,403)
Share-based compensation	(3,247)	(4,439)	(9,672)	(13,816)
Acquisition, integration and other	(3,677)	(1,379)	(7,364)	(5,556)
Goodwill impairment		(208,166)		(208,166)
Income (loss) from operations	7,790	(200,902)	28,417	(181,330)
Television
Reportable segments
Revenues	51,902	60,102	164,859	183,534
Segment adjusted EBITDA before corporate overhead	24,741	30,602	82,762	96,055
Online
Reportable segments
Revenues	38,228	33,716	113,564	99,469
Segment adjusted EBITDA before corporate overhead	9,597	4,306	23,708	11,492
Less:
Goodwill impairment					$ (219,593)

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Fair Value Measurements (Details) (Recurring basis, USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Quoted Prices in Active Markets (Level 1)
Assets:
Money market funds		$ 4,004
Marketable equity securities	1,060	337
Total	1,060	4,341
Significant Other Observable Inputs (Level 2)
Assets:
Currency forward derivatives/options	267	445
Total	267	445
Significant Unobservable Inputs (Level 3)
Assets:
Springbox revenue sharing	512	768
Total	512	768
Liabilities:
Revenue earnout	855	2,857
Total Fair Value Measurements
Assets:
Money market funds		4,004
Currency forward derivatives/options	267	445
Springbox revenue sharing	512	768
Marketable equity securities	1,060	337
Total	1,839	5,554
Liabilities:
Revenue earnout	$ 855	$ 2,857

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Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2013

Long-Term Debt

Schedule of long-term debt

Long-term debt is summarized as follows (in thousands):

	September 30, 2013			December 31, 2012
Term loans	$	389,275		$	457,650
Less unamortized discount	(2,914		)	(3,732		)
Revolving loans	—			—
Subtotal	386,361			453,918
Less current portion	(34,335		)	(76,950		)
Long-term portion	$	352,026		$	376,968

Schedule of quarterly principal payments

Fiscal Quarter Ending	Minimum Quarterly Principal Payment (in thousands)
December 31, 2013	$	8,575
Each quarter thereafter	6,125

Schedule of ECF prepayments as a percentage of consolidated EBITDA

Consolidated Leverage Ratio	ECF Prepayment as a Percentage of Consolidated EBITDA (as defined)
Greater than 3.00	75	%
2.25 to 3.00	50	%
1.25 to 2.25	25	%
Less than 1.25	0	%

Schedule of the maximum consolidated leverage ratio and minimum fixed charge coverage ratio under the entity's Amended Credit Facility

Period	Maximum Allowable Consolidated Leverage Ratio	Minimum Allowable Consolidated Fixed Charge Coverage Ratio
March 8, 2013 to June 29, 2014	4.00 to 1.00	1.05 to 1.00
June 30, 2014 to June 29, 2015	3.50 to 1.00	1.10 to 1.00
June 30, 2015 and thereafter	3.25 to 1.00	1.10 to 1.00

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Goodwill (Tables)

9 Months Ended

Sep. 30, 2013

Goodwill

Schedule of changes in carrying value of goodwill by reporting unit

Changes in the carrying value of our goodwill by reporting unit for the nine months ended September 30, 2013 are as follows (in thousands):

	Television			Online			SourceEcreative		Total
Balance at December 31, 2012:
Goodwill	$	364,344		$	353,679		$	1,998	$	720,021
Accumulated impairment losses	(131,291		)	(219,593		)	—		(350,884		)
	233,053			134,086			1,998		369,137
Foreign currency translation	(581		)	—			—		(581		)
Balance at September 30, 2013:
Goodwill	363,763			353,679			1,998		719,440
Accumulated impairment losses	(131,291		)	(219,593		)	—		(350,884		)
	$	232,472		$	134,086		$	1,998	$	368,556

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Income Taxes (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Taxes
Effective tax rate (as a percent)			71.70%	5.90%
Federal statutory tax rate (as a percent)			35.00%	35.00%
Income tax expense reconciliation to federal statutory rate
Federal statutory tax rate (as a percent)			35.00%	35.00%
Expected tax expense (benefit)			$ 747,000	$ (72,029,000)
State and foreign income taxes, net of federal benefit			(463,000)	(1,787,000)
Non-deductible compensation			440,000	549,000
Non-deductible goodwill impairment				62,421,000
Change in uncertain tax positions			1,002,000
Change in valuation allowance			(50,000)	23,000,000
Other			(146,000)	(20,000)
Provision for income taxes	(308,000)	10,644,000	1,530,000	12,134,000
Liability for an uncertain tax position	1,000,000		1,000,000
Interest or penalties related to uncertain tax positions			300,000	0
Change in uncertain tax positions
Balance at beginning of period			3,797,000	100,000
Additions for tax positions related to prior periods			1,002,000
Balance at end of period	4,799,000	100,000	4,799,000	100,000
Deferred tax assets, operating loss carryforwards
Tax-effected carrying value of federal NOL carryforwards	32,200,000		32,200,000
Tax-effected carrying value of state NOL carryforwards	$ 5,300,000		$ 5,300,000

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General (Details) (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended
	Jun. 30, 2013 Reversal of revenue earnout liability	Mar. 31, 2012 Reduction in estimated bonus
Change in estimates
Reduction/reversal of estimated liability in the period	$ 0.8	$ 1.1
Increase in income from continuing operations	0.5	0.6
Increase in net income	$ 0.5	$ 0.6
Increase in diluted earnings per share (in dollars per share)	$ 0.02	$ 0.02

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Acquisitions (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Jul. 31, 2012 North Country, Inc.	Apr. 30, 2012 Peer39, Inc
Acquisition
Net assets acquired					$ 3,700,000	$ 15,700,000
As Reported Information
Revenue	90,130,000	93,818,000	278,423,000	283,003,000
Loss from continuing operations	(866,000)	(219,727,000)	604,000	(217,930,000)
Loss per share - continuing operations: Basic (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.95)
Loss per share - continuing operations: Diluted (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.95)
Pro Forma Information
Revenue		94,125,000		285,045,000
Loss from continuing operations		$ (219,723,000)		$ (219,368,000)
Loss per share - continuing operations: Basic (in dollars per share)		$ (7.96)		$ (7.95)
Loss per share - continuing operations: Diluted (in dollars per share)		$ (7.96)		$ (7.95)

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Geographical Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenue and long-lived assets by geographical segments
Revenues	$ 90,130	$ 93,818	$ 278,423	$ 283,003
United States
Revenue and long-lived assets by geographical segments
Revenues	65,146	69,984	201,053	208,042
North America (excluding U.S.)
Revenue and long-lived assets by geographical segments
Revenues	5,372	5,677	16,988	17,780
Europe, Middle East and Africa
Revenue and long-lived assets by geographical segments
Revenues	11,218	10,413	36,214	37,320
Asia Pacific
Revenue and long-lived assets by geographical segments
Revenues	6,407	5,241	19,483	15,039
Latin America
Revenue and long-lived assets by geographical segments
Revenues	$ 1,987	$ 2,503	$ 4,685	$ 4,822

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2013

Segment Information

Schedule of reportable segments

Our reportable segments are as follows (in thousands):

	Three Months Ended September 30,
	2013							2012
	Television		Online		Consolidated			Television		Online		Consolidated
Revenues	$	51,902	$	38,228	$	90,130		$	60,102	$	33,716	$	93,818
Segment adjusted EBITDA before corporate overhead	24,741		9,597		34,338			30,602		4,306		34,908
Less corporate overhead					(5,998		)					(7,284		)
Adjusted EBITDA					28,340							27,624
Less:
Depreciation and amortization					(13,626		)					(14,542		)
Share-based compensation					(3,247		)					(4,439		)
Acquisition, integration and other					(3,677		)					(1,379		)
Goodwill impairment					—							(208,166		)
Income (loss) from operations					$	7,790						$	(200,902	)

	Nine Months Ended September 30,
	2013							2012
	Television		Online		Consolidated			Television		Online		Consolidated
Revenues	$	164,859	$	113,564	$	278,423		$	183,534	$	99,469	$	283,003
Segment adjusted EBITDA before corporate overhead	82,762		23,708		106,470			96,055		11,492		107,547
Less corporate overhead					(18,656		)					(19,936		)
Adjusted EBITDA					87,814							87,611
Less:
Depreciation and amortization					(42,361		)					(41,403		)
Share-based compensation					(9,672		)					(13,816		)
Acquisition, integration and other					(7,364		)					(5,556		)
Goodwill impairment					—							(208,166		)
Income (loss) from operations					$	28,417						$	(181,330	)

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Accumulated Other Comprehensive Loss (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013
Accumulated Other Comprehensive Loss
Balance at beginning of period	$ (5,302)	$ (1,655)
Other comprehensive income (loss) before reclassifications	2,685	(529)
Amounts reclassified out of AOCL	(193)	(626)
Net current period activity	2,492	(1,155)
Balance at end of period	(2,810)	(2,810)
Foreign Currency Translation
Accumulated Other Comprehensive Loss
Balance at beginning of period	(5,514)	(2,024)
Other comprehensive income (loss) before reclassifications	1,817	(1,673)
Net current period activity	1,817	(1,673)
Balance at end of period	(3,697)	(3,697)
Unrealized Gain on Foreign Currency Derivatives
Accumulated Other Comprehensive Loss
Balance at beginning of period	256	373
Other comprehensive income (loss) before reclassifications	105	421
Amounts reclassified out of AOCL	(193)	(626)
Net current period activity	(88)	(205)
Balance at end of period	168	168
Unrealized Gain (Loss) on Available for Sale Securities
Accumulated Other Comprehensive Loss
Balance at beginning of period	(44)	(4)
Other comprehensive income (loss) before reclassifications	763	723
Net current period activity	763	723
Balance at end of period	$ 719	$ 719

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Acquisitions (Tables)

9 Months Ended

Sep. 30, 2013

Acquisitions

Schedule of acquisitions

Business Acquired	Date of Closing	Net Assets Acquired (in millions)		Form of Consideration
North Country	July 31, 2012	$	3.7	Cash
Peer 39	April 30, 2012	15.7		Cash/Stock

Schedule of as reported and pro forma information regarding results of operations related to acquisitions and disposition of assets

	As Reported						Pro Forma
	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Revenue	$	93,818		$	283,003		$	94,125		$	285,045
Loss from continuing operations	(219,727		)	(217,930		)	(219,723		)	(219,368		)
Loss per share—continuing operations:
Basic	$	(7.96	)	$	(7.95	)	$	(7.96	)	$	(7.95	)
Diluted	$	(7.96	)	$	(7.95	)	$	(7.96	)	$	(7.95	)

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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Treasury Stock	Additional Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit
Balance at Dec. 31, 2012	$ 291,194	$ 29	$ (35,548)	$ 647,515	$ (1,655)	$ (319,147)
Balance (in shares) at Dec. 31, 2012			(1,504)
Balance (in shares) at Dec. 31, 2012	29,163	29,163
Increase (Decrease) in Stockholders' Equity
Common stock issued on exercise of stock options	1,239			1,239
Common stock issued on exercise of stock options (in shares)		174
Common stock issued on vesting of restricted stock units (in shares)		16
Common stock issued on vesting of restricted stock units, net of shares tendered to satisfy required tax withholding	(272)			(272)
Common stock issued on vesting of restricted stock units, net of shares tendered to satisfy required tax withholding (in shares)		114
Common stock issued under employee stock purchase plan	152			152
Common stock issued under employee stock purchase plan (in shares)		18
Share-based compensation	9,672			9,672
Other comprehensive loss	(1,155)				(1,155)
Net income	604					604
Balance at Sep. 30, 2013	$ 301,434	$ 29	$ (35,548)	$ 658,306	$ (2,810)	$ (318,543)
Balance (in shares) at Sep. 30, 2013			(1,504)
Balance (in shares) at Sep. 30, 2013	29,485	29,485

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Pending Merger Transaction with Extreme Reach

9 Months Ended

Sep. 30, 2013

Pending Merger Transaction with Extreme Reach

Pending Merger Transaction with Extreme Reach

1.  Pending Merger Transaction with Extreme Reach

On August 12, 2013, Digital Generation, Inc. and subsidiaries (the “Company,” “we,” “us” or “our”) entered into a merger agreement with Extreme Reach, Inc. (“ER”) and a wholly-owned subsidiary of ER whereby the parties agreed to a series of transactions summarized as follows:

(i) ER will pay us $485 million which we will use primarily to retire all of our outstanding debt ($386 million at September 30, 2013) and fund a distribution to our shareholders of $3 per share;

(ii) We will contribute our online business, and substantially all the working capital of our television business, to a newly formed wholly-owned subsidiary (“NewCo”);

(iii) NewCo, if requested by ER, will purchase an amount of ER’s preferred stock valued at $45 million for a purchase price of $40 million, otherwise, ER will pay NewCo $5 million at closing.  NewCo’s agreement to purchase ER’s preferred stock is intended to facilitate closing of the transaction; 

(iv) Immediately prior to consummating the merger, we will distribute the shares of NewCo to our shareholders and NewCo will become a newly issued publicly held company; and

(v) DG, which at this point will consist of the television business without any debt or working capital, will merge with one of ER’s subsidiaries and will then become a wholly-owned subsidiary of ER.

In effect, we have agreed to sell our television business, excluding its working capital, to ER for $485 million.  NewCo will become a publicly traded company with our online business. 

The transaction is expected to close during the first quarter of 2014 and is subject to the satisfaction of certain conditions including (i) approval from our stockholders and (ii) ER obtaining financing on specified terms.  As part of the transaction and immediately prior to closing, all outstanding and unvested restricted stock units (“RSUs”) and stock options will become fully vested.  The RSUs will be converted into shares of our common stock and in-the-money stock options will be converted into shares of our common stock on a net exercise basis.  All of our equity incentive plans will be terminated at or immediately prior to closing.  Our outstanding shares will be partially redeemed for shares of NewCo which are expected to be listed on the NASDAQ Global Market.  In addition to ongoing costs related to the transaction such as legal and accounting fees and retention costs, there are also investment banking fees to be paid upon the successful completion of the transaction.

These and other considerations will be set forth in greater detail in a proxy and information statement that we will file with the Securities and Exchange Commission (“SEC”) and distribute to our stockholders in advance of a special meeting anticipated to be held in the first quarter of 2014 to approve the transaction.

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Acquisitions

9 Months Ended

Sep. 30, 2013

Acquisitions

Acquisitions

4.  Acquisitions

During 2012 we completed the following acquisitions:

Business Acquired	Date of Closing	Net Assets Acquired (in millions)		Form of Consideration
North Country	July 31, 2012	$	3.7	Cash
Peer 39	April 30, 2012	15.7		Cash/Stock

Each of the acquired businesses has been included in our results of operations since the date of closing.  Accordingly, 2013 and 2012 operating results are not entirely comparable due to these acquisitions and related costs.

The following unaudited pro forma information presents our results of operations for the three and nine months ended September 30, 2012 as if (i) the acquisitions of North Country and Peer 39 and (ii) the disposition of the Chors assets had occurred on January 1, 2012 (in thousands, except per share amounts).  A table of actual amounts is provided for reference.

	As Reported						Pro Forma
	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Revenue	$	93,818		$	283,003		$	94,125		$	285,045
Loss from continuing operations	(219,727		)	(217,930		)	(219,723		)	(219,368		)
Loss per share—continuing operations:
Basic	$	(7.96	)	$	(7.95	)	$	(7.96	)	$	(7.95	)
Diluted	$	(7.96	)	$	(7.95	)	$	(7.96	)	$	(7.95	)

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General

9 Months Ended

Sep. 30, 2013

General

General

2.  General

The Company

We are a provider of digital technology services that enable the electronic delivery of advertisements, syndicated programs, and video news releases to traditional broadcasters, online publishers and other media outlets. We also provide digital advertising campaign management solutions to media agencies and advertisers. We provide our customers with an integrated campaign management platform that helps advertisers and agencies simplify the complexities of managing their advertising budgets across multiple digital media channels and formats, including online, mobile, rich media, in-stream video, display and search. We provide our customers with the ability to plan, create, deliver, measure, track and optimize digital media campaigns. We also offer a variety of other ancillary products and services to the advertising industry. Our business has grown largely from acquisitions.

We market our services directly in the United States and through our subsidiaries in several countries, including Canada, Israel, the United Kingdom, France, Germany, Australia, Ireland, Spain, Japan, China, Mexico and Brazil. See Note 12.

Basis of Presentation

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

These financial statements have been prepared by us without audit, pursuant to the rules and regulations of the SEC.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  However, we believe the disclosures are adequate to make the information presented not misleading.  The unaudited consolidated financial statements reflect all adjustments, which are, in the opinion of management, of a normal and recurring nature and necessary for a fair presentation of our financial position as of the balance sheet dates, and the results of operations and cash flows for the periods presented.  These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Annual Report”).

Seasonality and Political Advertising

Our business is seasonal.  Revenues tend to be the highest in the fourth quarter as a large portion of our revenues follow the advertising patterns of our customers.  Further, our revenues are affected by political advertising, which peaks every other year consistent with the national, state and local election cycles in the United States.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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. On an ongoing basis, we evaluate our estimates, including those related to the recoverability and useful lives of our long-lived assets, the adequacy of our allowance for doubtful accounts and credit memo reserves, office closure exit costs, contingent consideration and income taxes. We base our estimates on historical experience, future expectations and on other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

During the three months ended June 30, 2013 we reversed a $0.8 million revenue earnout liability as payment was predicated on collected revenues and collections fell short of the amount requiring an earnout payment.  The reversal was credited to cost of revenues.  The revised estimate increased income from continuing operations, net income and diluted earnings per share by $0.5 million, $0.5 million and $0.02, respectively, during the three months ended June 30, 2013.  See Note 3.

During the three months ended March 31, 2012, we reduced our estimated bonus for 2011 by approximately $1.1 million. The reduction was credited to general and administrative expense during the three months ended March 31, 2012.  The revised estimate increased income from continuing operations, net income and diluted earnings per share by $0.6 million, $0.6 million and $0.02, respectively, during the three months ended March 31, 2012.

See Note 5 for a discussion of the risk of a future impairment of our goodwill.

Derivative Instruments

We enter into foreign currency forward contracts and options with a single counterparty (i.e., an Israeli bank) to hedge the exposure to the variability in expected future cash flows resulting from changes in related foreign currency exchange rates between the New Israeli Shekel (“NIS”) and the U.S. Dollar. Portions of these transactions are designated as cash flow hedges, as defined by Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging.”

ASC Topic 815 requires that we recognize derivative instruments as either assets or liabilities in our balance sheet at fair value. These contracts are Level 2 fair value measurements in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.” For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss), net of taxes, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffectiveness, which historically has not been material, is recognized in the statement of operations (interest income and other, net).

Our cash flow hedging strategy is to hedge against the risk of overall changes in cash flows resulting from certain forecasted foreign currency rent and salary payments during the next 12 months. We hedge portions of our forecasted expenses denominated in the NIS with foreign currency forward contracts and options. At September 30, 2013, we had $7.7 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value asset balance of $0.3 million ($0.3 million asset, net of a $0.0 million liability). The net asset is included in “other current assets” and is expected to be recognized in our results of operations in the next 12 months. As a result of our hedging activities we incurred the following gains (losses) in our consolidated results of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Hedging gain (loss) recognized in operations	$	214	$	(302	)	$	695	$	(542	)

The vast majority of any gain or loss from hedging activities is included in our various operating expenses.  It is our policy to offset fair value amounts recognized for derivative instruments executed with the same counterparty when we have the right of, or ability to cause, net settlement.  In connection with our foreign currency forward contracts and options and other banking arrangements, we have agreed to maintain $1.7 million of cash in a bank account with our counterparty (an Israeli bank).

Acquisition, Integration and Other Expenses

Acquisition, integration and other expenses reflect the expenses incurred in acquiring or disposing of a business (e.g., investment banking fees, legal fees), costs to integrate an acquired operation (e.g., severance pay, office closure costs) into the Company and certain other expenses.  Strategic alternatives costs principally relate to the pending transaction with ER.  These costs are ongoing (see Note 1).  A summary of our acquisition, integration and other expenses are as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
Description	2013			2012		2013		2012
Legal, accounting and due diligence fees	$	—		$	76	$	—	$	746
Severance	93			474		1,133		3,635
Strategic alternatives (1)	3,645			605		4,780		605
MediaMind preacquisition liability	—			—		720		—
Proxy contest	—			—		446		—
Integration costs	(61		)	224		285		570
Total	$	3,677		$	1,379	$	7,364	$	5,556

(1)  See Note 1.

Discontinued Operations

In 2011, management committed to a plan to sell certain assets and the operations of our Springbox unit since it was not deemed to be part of our core business going forward.  As a result, the Springbox operating results have been reclassified to discontinued operations in the accompanying consolidated statements of operations.  The Springbox operation was sold on June 1, 2012.  For the five months ended May 31, 2012, Springbox reported revenues, loss from discontinued operations and diluted loss per share from discontinued operations of $1.6 million, $1.1 million and $0.04, respectively.

Recently Adopted Accounting Guidance

Effective January 1, 2013, we adopted ASU 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” which provides entities with the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.  If the entity concludes that it is more likely than not that the asset is impaired, it is required to determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with Topic 350.  If the entity concludes otherwise, no further quantitative assessment is required.  Presently, our only indefinite long-lived intangible asset is goodwill. The adoption of ASU 2012-02 did not have a material impact on our consolidated financial statements.

Effective January 1, 2013, we adopted ASU 2013-02, “Comprehensive Income (Topic 350)” which requires entities to disclose information showing the effect of items reclassified from accumulated other comprehensive income (loss) to the line items in the statement of operations.  The provisions of this new guidance were effective prospectively beginning January 1, 2013.  Accordingly, we have included enhanced footnote disclosure for the three and nine months ended September 30, 2013 in Note 7.  Other than the additional disclosure, the adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.

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Goodwill (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended				12 Months Ended
	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 Television	Dec. 31, 2012 Television	Dec. 31, 2012 Online	Sep. 30, 2013 Online	Sep. 30, 2013 SourceEcreative	Dec. 31, 2012 SourceEcreative
Changes in carrying value of goodwill by reporting unit
Balance at beginning of period		$ 720,021		$ 364,344			$ 353,679	$ 1,998	$ 1,998
Accumulated impairment losses		(350,884)		(131,291)			(219,593)
Balance at beginning of period		369,137		233,053			134,086	1,998	1,998
Foreign currency translation		(581)		(581)
Balance at end of period		719,440		363,763		353,679	353,679	1,998	1,998
Accumulated impairment losses		(350,884)		(131,291)		(219,593)	(219,593)
Balance at end of period		368,556		232,472		134,086	134,086	1,998	1,998
Goodwill impairment charges	$ 208,166		$ 208,166			$ 219,593
Excess percentage of fair value over carrying value					13.00%				977.00%

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Accumulated Other Comprehensive Loss (Tables)

9 Months Ended

Sep. 30, 2013

Accumulated Other Comprehensive Loss

Schedule of components of accumulated other comprehensive loss, (AOCL) net of tax

Components of accumulated other comprehensive loss (“AOCL”), net of tax, for the three and nine months ended September 30, 2013 were as follows (in thousands):

	Three Months Ended September 30, 2013
	Foreign Currency Translation			Unrealized Gain on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Accumulated Other Comprehensive Loss
Balance at June 30, 2013	$	(5,514	)	$	256		$	(44	)	$	(5,302	)
Other comprehensive income (loss) before reclassifications	1,817			105			763			2,685
Amounts reclassified out of AOCL	—			(193		)	—			(193		)
Net current period activity	1,817			(88		)	763			2,492
Balance at September 30, 2013	$	(3,697	)	$	168		$	719		$	(2,810	)

	Nine Months Ended September 30, 2013
	Foreign Currency Translation			Unrealized Gain on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Accumulated Other Comprehensive Loss
Balance at December 31, 2012	$	(2,024	)	$	373		$	(4	)	$	(1,655	)
Other comprehensive income (loss) before reclassifications	(1,673		)	421			723			(529		)
Amounts reclassified out of AOCL	—			(626		)	—			(626		)
Net current period activity	(1,673		)	(205		)	723			(1,155		)
Balance at September 30, 2013	$	(3,697	)	$	168		$	719		$	(2,810	)

Summary of reclassifications from accumulated other comprehensive loss to the consolidated statement of operations

The following table summarizes the reclassifications from accumulated other comprehensive loss to the consolidated statement of operations for the three and nine months ended September 30, 2013 (in thousands):

	Amounts Reclassified out of AOCL
	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013		Affected Line Items in the Consolidated Statement of Operations
Gains (losses) on cash flow hedges:
Foreign currency derivatives	28		83		Cost of revenues
Foreign currency derivatives	15		47		Sales and marketing
Foreign currency derivatives	162		477		Research and development
Foreign currency derivatives	39		128		General and administrative
Foreign currency derivatives	(30	)	(40	)	Interest income and other, net
Total before taxes	214		695
Tax amounts	(21	)	(69	)
Income after tax	193		626

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Geographical Information (Tables)

9 Months Ended

Sep. 30, 2013

Geographical Information

Schedule of revenues by geographic area

The following table sets forth revenues by geographic area (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenues:
United States	$	65,146	$	69,984	$	201,053	$	208,042
North America (excluding U.S.)	5,372		5,677		16,988		17,780
Europe, Middle East and Africa	11,218		10,413		36,214		37,320
Asia Pacific	6,407		5,241		19,483		15,039
Latin America	1,987		2,503		4,685		4,822
Total	$	90,130	$	93,818	$	278,423	$	283,003

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General (Details 4) (USD $)	9 Months Ended	5 Months Ended
	Sep. 30, 2012	May 31, 2012 Springbox unit
Discontinued Operations
Revenues		$ 1,600,000
Loss from discontinued operations	$ 1,080,000	$ 1,100,000
Diluted loss from discontinued operations (in dollars per share)	$ 0.04	$ 0.04

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Subsequent Event - Acquisition of Republic Project (Details) (Subsequent event, Republic Project, USD $) In Millions, unless otherwise specified	Oct. 04, 2013
Subsequent Event - Acquisition of Republic Project
Cash paid for acquisition	$ 1.4
Minimum
Subsequent Event - Acquisition of Republic Project
Additional earn out based on reaching revenue and adjusted EBITDA performance targets in 2014 and 2015	0
Maximum
Subsequent Event - Acquisition of Republic Project
Additional earn out based on reaching revenue and adjusted EBITDA performance targets in 2014 and 2015	$ 13.1

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Share-based Compensation (Details) (USD $)	3 Months Ended		9 Months Ended		3 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Mar. 31, 2013 Restricted Stock Units Executive officers	Mar. 31, 2013 Restricted Stock Units Outside directors	Mar. 31, 2013 Restricted Stock Units Outside directors Minimum	Mar. 31, 2013 Restricted Stock Units Outside directors Maximum	Jun. 30, 2013 Restricted Stock Units Employees
Restricted Stock information
Restricted stock units (RSUs) granted in period (in shares)					644,677	84,622			430,470
Fair value of restricted stock granted during the period (in dollars)					$ 4,100,000	$ 600,000			$ 2,700,000
Vesting period					3 years		1 year	3 years	3 years
Vesting subject to the grantees continued employment or providing service and reduction if the aggregate fair value of each grant exceeds a specified percentage of our Adjusted EBITDA (in shares)					212,384
Vesting subject to the grantees continued employment or providing service and certain revenue and Adjusted EBITDA growth targets (in shares)					432,293
Recognized compensation costs (in dollars)	3,247,000	4,439,000	9,672,000	13,816,000
Unrecognized compensation costs related to unvested options and RSUs (in dollars)	$ 17,600,000		$ 17,600,000
Weighted average remaining vesting period for recognition of compensation costs			1 year 8 months 12 days

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
CONSOLIDATED BALANCE SHEETS
Accounts receivable, allowances (in dollars)	$ 3,029	$ 2,499
Other current assets, restricted cash (in dollars)	1,692	1,917
Other non-current assets, restricted cash (in dollars)	$ 3,809	$ 4,178
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, Authorized shares	15,000	15,000
Preferred stock, issued shares	0	0
Preferred stock, outstanding shares	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, Authorized shares	200,000	200,000
Common stock, issued shares	29,485	29,163
Common stock, outstanding shares	27,981	27,659

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Accumulated Other Comprehensive Loss

9 Months Ended

Sep. 30, 2013

Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss

7.  Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss (“AOCL”), net of tax, for the three and nine months ended September 30, 2013 were as follows (in thousands):

	Three Months Ended September 30, 2013
	Foreign Currency Translation			Unrealized Gain on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Accumulated Other Comprehensive Loss
Balance at June 30, 2013	$	(5,514	)	$	256		$	(44	)	$	(5,302	)
Other comprehensive income (loss) before reclassifications	1,817			105			763			2,685
Amounts reclassified out of AOCL	—			(193		)	—			(193		)
Net current period activity	1,817			(88		)	763			2,492
Balance at September 30, 2013	$	(3,697	)	$	168		$	719		$	(2,810	)

	Nine Months Ended September 30, 2013
	Foreign Currency Translation			Unrealized Gain on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Accumulated Other Comprehensive Loss
Balance at December 31, 2012	$	(2,024	)	$	373		$	(4	)	$	(1,655	)
Other comprehensive income (loss) before reclassifications	(1,673		)	421			723			(529		)
Amounts reclassified out of AOCL	—			(626		)	—			(626		)
Net current period activity	(1,673		)	(205		)	723			(1,155		)
Balance at September 30, 2013	$	(3,697	)	$	168		$	719		$	(2,810	)

The following table summarizes the reclassifications from accumulated other comprehensive loss to the consolidated statement of operations for the three and nine months ended September 30, 2013 (in thousands):

	Amounts Reclassified out of AOCL
	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013		Affected Line Items in the Consolidated Statement of Operations
Gains (losses) on cash flow hedges:
Foreign currency derivatives	28		83		Cost of revenues
Foreign currency derivatives	15		47		Sales and marketing
Foreign currency derivatives	162		477		Research and development
Foreign currency derivatives	39		128		General and administrative
Foreign currency derivatives	(30	)	(40	)	Interest income and other, net
Total before taxes	214		695
Tax amounts	(21	)	(69	)
Income after tax	193		626

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$ (866)	$ (219,727)	$ 604	$ (219,010)
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives, net of tax	(88)	296	(205)	122
Unrealized gain (loss) on available for sale securities, net of tax	763	(440)	723	(443)
Foreign currency translation adjustment	1,817	2,534	(1,673)	2,378
Total other comprehensive income (loss)	2,492	2,390	(1,155)	2,057
Total comprehensive income (loss)	$ 1,626	$ (217,337)	$ (551)	$ (216,953)

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
CURRENT ASSETS:
Cash and cash equivalents	$ 60,223	$ 84,520
Short-term investments		314
Accounts receivable (less allowances of $3,029 in 2013 and $2,499 in 2012)	86,919	97,583
Deferred income taxes	865	864
Other current assets (includes restricted cash of $1,692 in 2013 and $1,917 in 2012)	16,215	21,997
Total current assets	164,222	205,278
Property and equipment, net	64,984	66,169
Goodwill	368,556	369,137
Intangible assets, net	157,287	180,156
Deferred income taxes	171	171
Other non-current assets (includes restricted cash of $3,809 in 2013 and $4,178 in 2012)	16,480	16,300
Total assets	771,700	837,211
CURRENT LIABILITIES:
Current portion of long-term debt	34,335	76,950
Accounts payable	5,480	7,794
Accrued liabilities	31,576	38,291
Deferred income taxes	24	37
Deferred revenue	1,828	1,627
Total current liabilities	73,243	124,699
Long-term debt, net of current portion	352,026	376,968
Deferred income taxes	25,285	28,028
Other non-current liabilities	19,712	16,322
Total liabilities	470,266	546,017
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value-Authorized 15,000 shares; issued and outstanding-none
Common stock, $0.001 par value-Authorized 200,000 shares; 29,485 issued and 27,981 outstanding at September 30, 2013; 29,163 issued and 27,659 outstanding at December 31, 2012	29	29
Treasury stock, at cost	(35,548)	(35,548)
Additional capital	658,306	647,515
Accumulated other comprehensive loss	(2,810)	(1,655)
Accumulated deficit	(318,543)	(319,147)
Total stockholders' equity	301,434	291,194
Total liabilities and stockholders' equity	$ 771,700	$ 837,211

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Income Taxes

Schedule of amounts that would result from applying the federal statutory rate to the entity's income or loss before income taxes

For the nine months ended September 30, 2013 and 2012, our income tax expense differs from the amount that would result from applying the federal statutory rate to our income or loss before income taxes as follows (dollars in thousands):

	Nine Months Ended September 30,
	2013			2012
Federal statutory tax rate	35		%	35		%
Expected tax expense (benefit)	$	747		$	(72,029	)
State and foreign income taxes, net of federal benefit	(463		)	(1,787		)
Non-deductible compensation	440			549
Non-deductible goodwill impairment	—			62,421
Change in uncertain tax positions	1,002			—
Change in valuation allowance	(50		)	23,000
Other	(146		)	(20		)
Provision for income taxes	$	1,530		$	12,134

Schedule of changes in uncertain tax positions

The changes in uncertain tax positions for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	Nine Months Ended September 30,
	2013		2012
Balance at beginning of period	$	3,797	$	100
Additions for tax positions related to prior periods	1,002		—
Balance at end of period	$	4,799	$	100

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General (Tables)

9 Months Ended

Sep. 30, 2013

General

Schedule of gains (losses) recognized due to hedging activities in consolidated results of operations

As a result of our hedging activities we incurred the following gains (losses) in our consolidated results of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Hedging gain (loss) recognized in operations	$	214	$	(302	)	$	695	$	(542	)

Summary of acquisition, integration and other expenses

A summary of our acquisition, integration and other expenses are as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
Description	2013			2012		2013		2012
Legal, accounting and due diligence fees	$	—		$	76	$	—	$	746
Severance	93			474		1,133		3,635
Strategic alternatives (1)	3,645			605		4,780		605
MediaMind preacquisition liability	—			—		720		—
Proxy contest	—			—		446		—
Integration costs	(61		)	224		285		570
Total	$	3,677		$	1,379	$	7,364	$	5,556

(1)  See Note 1.

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Accumulated Other Comprehensive Loss (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Reclassifications from accumulated other comprehensive loss to the consolidated statement of operations
Cost of revenues	$ (33,649)	$ (34,697)	$ (101,107)	$ (103,058)
Sales and marketing	(15,831)	(16,476)	(51,900)	(46,727)
Research and development	(4,305)	(5,501)	(14,564)	(18,599)
General and administrative	(11,252)	(13,959)	(32,710)	(40,824)
Interest income and other, net	(518)	(346)	(441)	(700)
Income (loss) before income taxes	(1,174)	(209,083)	2,134	(205,796)
Tax amounts	308	(10,644)	(1,530)	(12,134)
Income (loss) from continuing operations	(866)	(219,727)	604	(217,930)
Gains (losses) on cash flow hedges | Amount Reclassified out of AOCL
Reclassifications from accumulated other comprehensive loss to the consolidated statement of operations
Income (loss) before income taxes	214		695
Tax amounts	(21)		(69)
Income (loss) from continuing operations	193		626
Gains (losses) on cash flow hedges | Foreign currency derivatives | Amount Reclassified out of AOCL
Reclassifications from accumulated other comprehensive loss to the consolidated statement of operations
Cost of revenues	28		83
Sales and marketing	15		47
Research and development	162		477
General and administrative	39		128
Interest income and other, net	$ (30)		$ (40)

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Fair Value Measurements (Details 2) (USD $)	0 Months Ended	9 Months Ended
	Jun. 01, 2012	Sep. 30, 2013	Sep. 30, 2012
Assets and liabilities measured at fair value on a recurring basis
Marketable equity securities, adjusted cost basis		$ 300,000
Reconciliation of changes in the fair values of level 3 liabilities
Fair value of debt based on average trading price		387,300,000
Revenue earnouts
Reconciliation of changes in the fair values of level 3 liabilities
Balance at beginning of period		2,857,000	1,673,000
Additions			1,855,000
Payments		(1,201,000)
Change in fair value recognized in earnings		(801,000)	(439,000)
Balance at end of period		855,000	3,089,000
Springbox revenue sharing
Assets and liabilities measured at fair value on a recurring basis
Period after the date of sale entity entitled to receive a percentage of revenue collected	3 years
Changes in fair value of Level 3 assets
Balance at beginning of period		768,000
Additions			768,000
Collections		(200,000)
Change in fair value recognized in earnings		(56,000)
Balance at end of period		$ 512,000	$ 768,000

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General (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Derivative Instruments
Period for which certain forecasted foreign currency rent and salary payments are hedged			12 months
Notional amount of foreign currency forward contracts and options outstanding	$ 7,700,000		$ 7,700,000
Net fair value balance of foreign currency forward contracts and options outstanding	300,000		300,000
Fair value asset balance of foreign currency forward contracts and options outstanding	300,000		300,000
Fair value liability balance of foreign currency forward contracts and options outstanding	0		0
Period expected to be recognized in results of operations			12 months
Hedging gain (loss) recognized in operations	214,000	(302,000)	695,000	(542,000)
Amount of cash in bank accounts with the counterparty the entity has agreed to maintain	$ 1,700,000		$ 1,700,000

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General (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Deferred Revenue
Total	$ 3,677	$ 1,379	$ 7,364	$ 5,556
Acquisition and Integration
Deferred Revenue
Legal, accounting and due diligence fees		76		746
Severance	93	474	1,133	3,635
Strategic alternatives	3,645	605	4,780	605
MediaMind preacquisition liability			720
Proxy contest			446
Integration costs	$ (61)	$ 224	$ 285	$ 570

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Long-Term Debt

9 Months Ended

Sep. 30, 2013

Long-Term Debt

Long-Term Debt

6.  Long-Term Debt

Long-term debt is summarized as follows (in thousands):

	September 30, 2013			December 31, 2012
Term loans	$	389,275		$	457,650
Less unamortized discount	(2,914		)	(3,732		)
Revolving loans	—			—
Subtotal	386,361			453,918
Less current portion	(34,335		)	(76,950		)
Long-term portion	$	352,026		$	376,968

Amended Credit Facility

In July 2011, we entered into a credit agreement that originally provided for $490 million of term loans (the “Term Loans”) and $120 million of revolving loans (the “Revolving Loans”). In March 2013, we and our lenders amended the credit agreement to (i) increase the maximum allowable consolidated leverage ratio covenants, (ii) reduce the minimum fixed charge coverage ratio covenants, (iii) reduce the Revolving Loans to a maximum of $50 million, (iv) increase the interest rate on our borrowings, (v) increase the scheduled quarterly principal payments, (vi) revise the mandatory excess cash flow (“ECF”) principal payments, (vii) require an additional $50 million principal payment (which was made in March 2013), and (viii) make certain other changes. The credit agreement, as amended in March 2013, is referred to herein as the “Amended Credit Facility.”

The Term Loans were fully funded at the July 2011 closing net of a 1.0% original issue discount.  The Term Loans, as amended, mature in July 2018, bear interest at the greater of (i) LIBOR plus 6.0% or (ii) 7.25% per annum, payable not less frequently than each quarter, and require scheduled quarterly principal payments as follows:

Fiscal Quarter Ending	Minimum Quarterly Principal Payment (in thousands)
December 31, 2013	$	8,575
Each quarter thereafter	6,125

The Term Loans also require an annual principal payment based on a percentage of our ECF (as defined in the Amended Credit Facility) which at September 30, 2013 was estimated to be $7.4 million and is included in the current portion of long-term debt. The ECF principal payments are reduced by scheduled and voluntary principal payments and fluctuate based on our consolidated leverage ratio (as defined in the Amended Credit Facility) as follows:

Consolidated Leverage Ratio	ECF Prepayment as a Percentage of Consolidated EBITDA (as defined)
Greater than 3.00	75	%
2.25 to 3.00	50	%
1.25 to 2.25	25	%
Less than 1.25	0	%

The Revolving Loans mature in July 2016 and bear interest at the alternative base rate or LIBOR, plus the applicable margin for each rate that fluctuates with the consolidated leverage ratio. At September 30, 2013, we had $47.0 million of funds available under the Revolving Loans and $3.0 million of outstanding letters of credit issued under the credit facility.  Letters of credit outstanding under the credit facility reduce the availability under the Revolving Loans.  Our ability to borrow funds under the Revolving Loans is subject to maintaining compliance with the financial covenants discussed below.  Thus, depending upon (i) how much room we have under our financial covenants at the time of the borrowing and, potentially (ii) whether or not the purpose for the borrowing would impact our consolidated EBITDA (as would be the case if we were to acquire another business), our ability to borrow against the Revolving Loans may be limited.

In connection with entering into the original credit facility in July 2011 we incurred debt issuance costs of $12.0 million.  In connection with the March 2013 amendment, we incurred an additional $2.6 million of debt issuance costs.  The debt issuance costs are being amortized to interest expense over the term of the credit facility and are expected to increase our effective borrowing rate by 0.58%.  As a result of accelerating our expected principal payments on the Term Loans, including the $50 million prepayment made in March 2013, and reducing the maximum amount that may be borrowed against the revolving loans by $70 million, we wrote off $1.3 million of previously existing debt issuance costs and unamortized original issue discount to interest expense in March 2013.  At September 30, 2013 our effective interest rate under the Term Loans, including the amortization of (i) debt issuance costs (ii) the original issue discount and (iii) other required fees, was approximately 8.1%.

The Amended Credit Facility contains financial covenants pertaining to (i) the maximum consolidated leverage ratio and (ii) the minimum fixed charge coverage ratio as follows:

Period	Maximum Allowable Consolidated Leverage Ratio	Minimum Allowable Consolidated Fixed Charge Coverage Ratio
March 8, 2013 to June 29, 2014	4.00 to 1.00	1.05 to 1.00
June 30, 2014 to June 29, 2015	3.50 to 1.00	1.10 to 1.00
June 30, 2015 and thereafter	3.25 to 1.00	1.10 to 1.00

At September 30, 2013, our consolidated leverage ratio and consolidated fixed charge coverage ratio were 3.08 to 1.00 and 2.16 to 1.00, respectively.

The Amended Credit Facility also contains a variety of customary restrictive covenants, such as limitations on borrowings and investments, and provides for customary events of default including a change in control (as defined in the Amended Credit Facility). The Amended Credit Facility restricts the payment of cash dividends and limits acquisitions, capital expenditures, share redemptions and repurchases. The Amended Credit Facility is guaranteed by all of our domestic subsidiaries and is collateralized by a first priority lien on substantially all of our assets. At September 30, 2013, we were in compliance with the financial and nonfinancial covenants of our Amended Credit Facility.

As discussed in Note 1, the pending merger transaction with ER contemplates retiring all of our outstanding debt with the proceeds from the transaction.

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Earnings (Loss) per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings (Loss) per Share

Schedule of earnings (loss) per common share

The following table presents earnings (loss) per common share for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Income (loss) from continuing operations	$	(866	)	$	(219,727	)	$	604	$	(217,930	)
Weighted average common shares outstanding — basic	27,941			27,600			27,791		27,423
Dilutive securities	—			—			511		—
Weighted average common shares outstanding - diluted	27,941			27,600			28,302		27,423
Basic income (loss) per common share:
Continuing	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Diluted income (loss) per common share:
Continuing	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.95	)
Discontinued	—			—			—		(0.04		)
Total	$	(0.03	)	$	(7.96	)	$	0.02	$	(7.99	)
Antidilutive securities not included:
Stock options and RSUs	1,422			2,748			2,134		2,818

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Long-Term Debt (Details) (USD $)				1 Months Ended		1 Months Ended							1 Months Ended		1 Months Ended										1 Months Ended				1 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Credit Facility	Mar. 31, 2013 Term Loans	Sep. 30, 2013 Term Loans	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility Maximum March 8, 2013 to June 29, 2014	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility Maximum June 30, 2014 to June 29, 2015	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility Maximum June 30, 2015 and thereafter	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility Minimum March 8, 2013 to June 29, 2014	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility Minimum June 30, 2014 to June 29, 2015	Mar. 31, 2013 March 2013 Amended Credit Facility Credit Facility Minimum June 30, 2015 and thereafter	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans	Sep. 30, 2013 March 2013 Amended Credit Facility Term Loans	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Greater than 3.00	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans 2.25 to 3.00	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans 1.25 to 2.25	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Less than 1.25	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Maximum 2.25 to 3.00	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Maximum 1.25 to 2.25	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Maximum Less than 1.25	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Minimum Greater than 3.00	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Minimum 2.25 to 3.00	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Minimum 1.25 to 2.25	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans December 31, 2013	Mar. 31, 2013 March 2013 Amended Credit Facility Term Loans Each quarter thereafter	Mar. 31, 2013 March 2013 Amended Credit Facility Revolving Loans	Sep. 30, 2013 March 2013 Amended Credit Facility Revolving Loans	Jul. 31, 2011 July 2011 Credit Facility Credit Facility	Jul. 31, 2011 July 2011 Credit Facility Term Loans	Sep. 30, 2013 July 2011 Credit Facility Term Loans	Dec. 31, 2012 July 2011 Credit Facility Term Loans	Jul. 31, 2011 July 2011 Credit Facility Revolving Loans
Long-term debt
Less unamortized discount	$ (2,914,000)	$ (3,732,000)
Subtotal	386,361,000	453,918,000																													389,275,000	457,650,000
Less current portion	(34,335,000)	(76,950,000)
Long-term debt, net of current portion	352,026,000	376,968,000
Maximum borrowing capacity																												50,000,000		490,000,000			120,000,000
Additional principal payment required													50,000,000
Original issue discount (as a percent)																														1.00%
Variable rate basis													LIBOR
Applicable margin (as a percent)													6.00%
Interest rate for term loan (as a percent)													7.25%
Minimum quarterly principal payment																									8,575,000	6,125,000
Estimated principal payment based on a percentage of ECF														7,400,000
Excess Cash Flow Prepayment as a Percentage of Consolidated EBITDA															75.00%	50.00%	25.00%	0.00%
Interest rate terms																											bear interest at the alternative base rate or LIBOR, plus the applicable margin for each rate that fluctuates with the consolidated leverage ratio
Funds available under credit facility																												47,000,000
Letters of credit outstanding																												3,000,000
Debt issuance costs						2,600,000																							12,000,000
Increase in effective borrowing rate (as a percent)						0.58%
Principal payment				50,000,000
Reduction in maximum borrowing capacity																											70,000,000
Effective interest rate under the Term Loans (as a percent)					8.10%
Write-off of previously existing debt issuance costs to interest expense						$ 1,300,000
Consolidated leverage ratio			3.08				4.00	3.50	3.25										3.00	2.25	1.25	3.00	2.25	1.25
Consolidated fixed charge coverage ratio			2.16							1.05	1.10	1.10

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

Income Taxes

9.  Income Taxes

For the nine months ended September 30, 2013, our effective tax rate was 71.7% compared to (5.9%) for the nine months ended September 30, 2012.  The effective tax rates for each period differ from the expected federal statutory rate of 35.0% as a result of state and foreign income taxes, federal and foreign tax credits, certain non-deductible expenses, an adjustment for an uncertain tax position and, for the 2012 period, the recording of a valuation allowance against our federal net operating loss carryforwards (“NOLs”). For 2012, the vast majority of the goodwill impairment charge was not deductible for income tax purposes.

For the nine months ended September 30, 2013 and 2012, our income tax expense differs from the amount that would result from applying the federal statutory rate to our income or loss before income taxes as follows (dollars in thousands):

	Nine Months Ended September 30,
	2013			2012
Federal statutory tax rate	35		%	35		%
Expected tax expense (benefit)	$	747		$	(72,029	)
State and foreign income taxes, net of federal benefit	(463		)	(1,787		)
Non-deductible compensation	440			549
Non-deductible goodwill impairment	—			62,421
Change in uncertain tax positions	1,002			—
Change in valuation allowance	(50		)	23,000
Other	(146		)	(20		)
Provision for income taxes	$	1,530		$	12,134

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than not sustain the position following an audit.  For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.  During the nine months ended September 30, 2013, we recognized a liability for an uncertain tax position in the amount of $1.0 million.  Interest and penalties related to uncertain tax positions are recognized in income tax expense.  For the nine months ended September 30, 2013, we recognized $0.3 million of interest or penalties related to uncertain tax positions in our financial statements compared to zero for the nine months ended September 30, 2012.

The changes in uncertain tax positions for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	Nine Months Ended September 30,
	2013		2012
Balance at beginning of period	$	3,797	$	100
Additions for tax positions related to prior periods	1,002		—
Balance at end of period	$	4,799	$	100

If we reduced our reserve for uncertain tax positions it would result in us recognizing a tax benefit.

As of September 30, 2013, we had NOL carryforwards with a tax-effected carrying value of approximately $32.2 million and $5.3 million for federal and state purposes, respectively, available to offset future taxable income.  As of September 30, 2013, we provided a valuation allowance against substantially all of these NOL carryforwards as ultimate realization of the NOLs was not determined to be more-likely-than not.  Accordingly, we have NOL carryforwards available to us (should we have sufficient future taxable income to utilize them) that are not reflected in our consolidated balance sheets at September 30, 2013 and December 31, 2012.

We are subject to U.S. federal income tax, income tax from multiple foreign jurisdictions including Israel and the United Kingdom, and income taxes of multiple state jurisdictions. U.S. federal, state and local income tax returns for 2009 through 2012 remain open to examination.  Israeli and United Kingdom income tax returns remain open to examination for 2007 through 2011, and 2006 through 2011, respectively.

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Goodwill

9 Months Ended

Sep. 30, 2013

Goodwill

Goodwill

5. Goodwill

Changes in the carrying value of our goodwill by reporting unit for the nine months ended September 30, 2013 are as follows (in thousands):

	Television			Online			SourceEcreative		Total
Balance at December 31, 2012:
Goodwill	$	364,344		$	353,679		$	1,998	$	720,021
Accumulated impairment losses	(131,291		)	(219,593		)	—		(350,884		)
	233,053			134,086			1,998		369,137
Foreign currency translation	(581		)	—			—		(581		)
Balance at September 30, 2013:
Goodwill	363,763			353,679			1,998		719,440
Accumulated impairment losses	(131,291		)	(219,593		)	—		(350,884		)
	$	232,472		$	134,086		$	1,998	$	368,556

Risk of Future Impairment

We test goodwill for possible impairment each year on December 31st and whenever events or changes in circumstances indicate the carrying value of our goodwill may not be recoverable.  As of September 30, 2013, we continue to believe that the fair value of our reporting units exceed their respective carrying values.  Accordingly, we have not performed an interim goodwill impairment test.

During 2012, we recorded a total of $219.6 million of goodwill impairment charges related to our online reporting unit.  The 2012 charges primarily related to reducing our forecasts to address weaker than previously expected operating results, and softer market conditions and trends.  As a result of the charges, the online reporting unit’s goodwill was adjusted to its then implied fair value.  We determine fair value based on a combination of the discounted cash flow methodology (which uses our internal forecasts as to future cash flows by reporting unit) and the guideline public company approach.  If our actual operating results, or our future expected operating results, were to fall sufficiently below our current forecasts, we may be required to record another goodwill impairment charge for the online reporting unit.

Further, at December 31, 2012, the fair value of our television reporting unit only exceeded its carrying value by 13%.  Similar to the online reporting unit, to the extent our actual or future expected operating results of the television reporting unit were to fall sufficiently below our current forecasts, we may be required to record a goodwill impairment charge for the television reporting unit.  The pending transaction with ER (see Note 1) to sell our television business is an indication that the fair value of the television reporting unit continues to exceed its carrying value.  At December 31, 2012, the fair value of our SourceEcreative reporting unit exceeded its carrying value by 977%.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net income (loss)	$ 604	$ (219,010)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment		208,166
Depreciation of property and equipment	19,855	19,117
Amortization of intangibles	22,506	22,286
Deferred income taxes	(2,770)	7,167
Provision for accounts receivable losses	1,561	2,510
Share-based compensation	9,672	13,816
Loss on sale of Springbox unit		1,000
Other	616	672
Changes in operating assets and liabilities:
Accounts receivable	8,980	8,204
Other assets	8,471	3,504
Accounts payable and other liabilities	(1,868)	(14,592)
Deferred revenue	208	(852)
Net cash provided by operating activities	67,835	51,988
Cash flows from investing activities:
Purchases of property and equipment	(7,238)	(17,166)
Capitalized costs of developing software	(12,064)	(9,491)
Acquisitions, net of cash acquired		(10,089)
Long-term investment		(1,017)
Proceeds from sale of short-term investments	314	10,390
Other	1,179	(141)
Net cash used in investing activities	(17,809)	(27,514)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of costs	1,404	174
Payment of debt amendment costs	(2,635)
Payments on seller financing, earnouts and other	(4,031)	(398)
Repayments of long-term debt	(68,375)	(28,675)
Net cash used in financing activities	(73,637)	(28,899)
Effect of exchange rate changes on cash and cash equivalents	(686)	451
Net decrease in cash and cash equivalents	(24,297)	(3,974)
Cash and cash equivalents at beginning of year	84,520	72,575
Cash and cash equivalents at end of period	60,223	68,601
Supplemental disclosures of cash flow information:
Cash paid for interest	21,891	20,916
Cash (received) for income taxes	(1,145)	(1,184)
Non-cash component of purchase price to acquire a business		5,645
Landlord lease incentives		$ 5,599

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Earnings (Loss) per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Earnings (Loss) per Share
Income (loss) from continuing operations	$ (866)	$ (219,727)	$ 604	$ (217,930)
Weighted average common shares outstanding - basic	27,941	27,600	27,791	27,423
Dilutive securities (in shares)			511
Weighted average common shares outstanding - diluted	27,941	27,600	28,302	27,423
Basic income (loss) per common share:
Continuing (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.95)
Discontinued (in dollars per share)				$ (0.04)
Total (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.99)
Diluted income (loss) per common share:
Continuing (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.95)
Discontinued (in dollars per share)				$ (0.04)
Total (in dollars per share)	$ (0.03)	$ (7.96)	$ 0.02	$ (7.99)
Antidilutive securities not included:
Stock options and RSUs (in shares)	1,422	2,748	2,134	2,818

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Pending Merger Transaction with Extreme Reach (Details) (USD $)			0 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Aug. 12, 2013 Forecast	Aug. 12, 2013 NewCo Forecast	Aug. 12, 2013 Television Business Forecast
Pending merger transaction with Extreme Reach, Inc.
Cash proceeds from sale of business					$ 485,000,000
Amount of outstanding debt to be retired using proceeds of pending sale of business	386,361,000	453,918,000
Per share distribution to shareholders (in dollars per share)			$ 3
Value of preferred stock to be purchased, if requested to facilitate closing of the transaction				45,000,000
Price of preferred stock to be purchased, if requested to facilitate closing of the transaction				40,000,000
Cash to be received at closing, if purchase of preferred stock is not requested				$ 5,000,000

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Geographical Information

9 Months Ended

Sep. 30, 2013

Geographical Information

Geographical Information

12.  Geographical Information

Revenues by geographical area are based principally on (i) the location of where the advertising content was delivered for the television segment and (ii) the address of the agency or customer who ordered the services for the online segment. The following table sets forth revenues by geographic area (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenues:
United States	$	65,146	$	69,984	$	201,053	$	208,042
North America (excluding U.S.)	5,372		5,677		16,988		17,780
Europe, Middle East and Africa	11,218		10,413		36,214		37,320
Asia Pacific	6,407		5,241		19,483		15,039
Latin America	1,987		2,503		4,685		4,822
Total	$	90,130	$	93,818	$	278,423	$	283,003

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Share-based Compensation

9 Months Ended

Sep. 30, 2013

Share-based Compensation

Share-based Compensation

8.  Share-based Compensation

During the first quarter of 2013, we granted 644,677 restricted stock units (“RSUs”) to certain of our executive officers.  The RSUs were valued at $4.1 million and vest over three years.  Vesting for 212,384 of the RSUs is subject to (i) the grantees continued employment or providing service to us and (ii) reduction if the aggregate fair value of each grant exceeds a specified percentage of our Adjusted EBITDA (as defined) for 2013 (i.e., a market condition).  Vesting for the remaining 432,293 RSUs is subject to the grantees continued employment or providing service to us, and reaching certain revenue and Adjusted EBITDA growth targets (i.e., performance conditions).

In addition, during the first quarter of 2013 we also granted 84,622 RSUs to our outside directors as compensation for services.  These RSUs were valued at $0.6 million and vest over one to three years.

During the second quarter of 2013, we granted 430,470 RSUs to certain of our employees.  The RSUs were valued at $2.7 million and vest over three years.  Vesting is subject to the grantees continued employment with us or providing service to us, and reaching certain revenue and Adjusted EBITDA growth targets (i.e., performance conditions).

We recognized $3.2 million and $4.4 million in share-based compensation expense related to stock options, restricted stock awards and RSUs during the three months ended September 30, 2013 and 2012, and $9.7 million and $13.8 million during the nine months then ended, respectively. Unrecognized compensation costs related to unvested options and RSUs were $17.6 million at September 30, 2013. These costs are expected to be recognized over the weighted average remaining vesting period of 1.7 years.

As discussed in Note 1, immediately prior to the consummation of the merger transaction with ER all unvested stock options and RSUs will become fully vested.

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General (Policies)

9 Months Ended

Sep. 30, 2013

General

Basis of Presentation

Basis of Presentation

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

These financial statements have been prepared by us without audit, pursuant to the rules and regulations of the SEC.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  However, we believe the disclosures are adequate to make the information presented not misleading.  The unaudited consolidated financial statements reflect all adjustments, which are, in the opinion of management, of a normal and recurring nature and necessary for a fair presentation of our financial position as of the balance sheet dates, and the results of operations and cash flows for the periods presented.  These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Annual Report”).

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP 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. On an ongoing basis, we evaluate our estimates, including those related to the recoverability and useful lives of our long-lived assets, the adequacy of our allowance for doubtful accounts and credit memo reserves, office closure exit costs, contingent consideration and income taxes. We base our estimates on historical experience, future expectations and on other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

During the three months ended June 30, 2013 we reversed a $0.8 million revenue earnout liability as payment was predicated on collected revenues and collections fell short of the amount requiring an earnout payment.  The reversal was credited to cost of revenues.  The revised estimate increased income from continuing operations, net income and diluted earnings per share by $0.5 million, $0.5 million and $0.02, respectively, during the three months ended June 30, 2013.  See Note 3.

During the three months ended March 31, 2012, we reduced our estimated bonus for 2011 by approximately $1.1 million. The reduction was credited to general and administrative expense during the three months ended March 31, 2012.  The revised estimate increased income from continuing operations, net income and diluted earnings per share by $0.6 million, $0.6 million and $0.02, respectively, during the three months ended March 31, 2012.

See Note 5 for a discussion of the risk of a future impairment of our goodwill.

Derivative Instruments

Derivative Instruments

We enter into foreign currency forward contracts and options with a single counterparty (i.e., an Israeli bank) to hedge the exposure to the variability in expected future cash flows resulting from changes in related foreign currency exchange rates between the New Israeli Shekel (“NIS”) and the U.S. Dollar. Portions of these transactions are designated as cash flow hedges, as defined by Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging.”

ASC Topic 815 requires that we recognize derivative instruments as either assets or liabilities in our balance sheet at fair value. These contracts are Level 2 fair value measurements in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.” For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss), net of taxes, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffectiveness, which historically has not been material, is recognized in the statement of operations (interest income and other, net).

Our cash flow hedging strategy is to hedge against the risk of overall changes in cash flows resulting from certain forecasted foreign currency rent and salary payments during the next 12 months. We hedge portions of our forecasted expenses denominated in the NIS with foreign currency forward contracts and options. At September 30, 2013, we had $7.7 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value asset balance of $0.3 million ($0.3 million asset, net of a $0.0 million liability). The net asset is included in “other current assets” and is expected to be recognized in our results of operations in the next 12 months. As a result of our hedging activities we incurred the following gains (losses) in our consolidated results of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Hedging gain (loss) recognized in operations	$	214	$	(302	)	$	695	$	(542	)

The vast majority of any gain or loss from hedging activities is included in our various operating expenses.  It is our policy to offset fair value amounts recognized for derivative instruments executed with the same counterparty when we have the right of, or ability to cause, net settlement.  In connection with our foreign currency forward contracts and options and other banking arrangements, we have agreed to maintain $1.7 million of cash in a bank account with our counterparty (an Israeli bank).

Acquisition, Integration and Other Expenses

Acquisition, Integration and Other Expenses

Acquisition, integration and other expenses reflect the expenses incurred in acquiring or disposing of a business (e.g., investment banking fees, legal fees), costs to integrate an acquired operation (e.g., severance pay, office closure costs) into the Company and certain other expenses.  A summary of our acquisition, integration and other expenses are as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
Description	2013			2012		2013		2012
Legal, accounting and due diligence fees	$	—		$	76	$	—	$	746
Severance	93			474		1,061		3,635
Strategic alternatives (1)	3,645			605		4,802		605
MediaMind preacquisition liability	—			—		720		—
Proxy contest	—			—		446		—
Integration costs	(61		)	224		335		570
Total	$	3,677		$	1,379	$	7,364	$	5,556

(1)  See Note 1.

Discontinued Operations

Discontinued Operations

In 2011, management committed to a plan to sell certain assets and the operations of our Springbox unit since it was not deemed to be part of our core business going forward.  As a result, the Springbox operating results have been reclassified to discontinued operations in the accompanying consolidated statements of operations.  The Springbox operation was sold on June 1, 2012.  For the five months ended May 31, 2012, Springbox reported revenues, loss from discontinued operations and diluted loss per share from discontinued operations of $1.6 million, $1.1 million and $0.04, respectively.

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Litigation

9 Months Ended

Sep. 30, 2013

Litigation

Litigation

13.  Litigation

On May 2, 2013, a purported securities class action complaint was filed in the U.S. District Court for the Northern District of Texas, entitled Anastacia Shaffer v. Digital Generation, Inc., et al., No. 3:13-cv-1684, alleging civil violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder.  The complaint names as defendants the Company and certain of its current and former officers.  The purported class period is alleged to be June 20, 2011 through February 19, 2013.

On May 29, 2013, a purported shareholder derivative suit was filed captioned Boyler v. certain officers and directors of Digital Generation, Inc., Cause No: DC-13-05971-I, in the 162nd Judicial District Court of Dallas County, Texas.  The action alleges breach of fiduciary duty, abuse of control, and gross mismanagement related to DG’s acquisition of several online media companies, its subsequent write-down of these assets, and the inability of a Special Committee of the Board of Directors to find a strategic buyer for the Company.  The suit seeks damages, restitution, disgorgement, attorneys’ fees, and corporate governance reforms.

While we cannot predict the outcome of these cases with certainty, it is our present belief these matters are not likely to have a material adverse effect on our annual operating results and we intend to defend them vigorously. We believe the purported claims and our defense costs will qualify for reimbursement under our insurance coverage, which are subject to the applicable deductible and the limits of our policies.

Settlement of Meruelo Litigation

In October 2013, we entered into an agreement with Alex Meruelo, Meruelo Investment Partners LLC and the Alex Meruelo Living Trust (the “Meruelo Stockholders”) relating to the Meruelo Stockholders intention to propose director nominees to our Board of Directors and to seek certain governance changes.  The Meruelo Stockholders have agreed to dismiss with prejudice their lawsuit challenging certain provisions of our Bylaws with respect to its classified Board.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 06, 2013
Document and Entity Information
Entity Registrant Name	Digital Generation, Inc.
Entity Central Index Key	0000934448
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		27,985,957
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

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Subsequent Event - Acquisition of Republic Project

9 Months Ended

Sep. 30, 2013

Subsequent Event - Acquisition of Republic Project

Subsequent Event - Acquisition of Republic Project

14.  Subsequent Event — Acquisition of Republic Project

On October 4, 2013, we acquired the assets of Republic Project, a cloud-based ad platform that enables agencies and brands to create, deliver and measure social and mobile rich media campaigns, for $1.4 million in cash and an additional earn out ranging from zero to $13.1 million based on reaching revenue and adjusted EBITDA performance targets in 2014 and 2015.