Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - Digital Generation, Inc. | Financial_Report.xls |
EX-10.1 - EX-10.1 - Digital Generation, Inc. | a11-7665_1ex10d1.htm |
EX-10.2 - EX-10.2 - Digital Generation, Inc. | a11-7665_1ex10d2.htm |
EX-32.1 - EX-32.1 - Digital Generation, Inc. | a11-7665_1ex32d1.htm |
EX-10.4 - EX-10.4 - Digital Generation, Inc. | a11-7665_1ex10d4.htm |
EX-31.2 - EX-31.2 - Digital Generation, Inc. | a11-7665_1ex31d2.htm |
EX-10.3 - EX-10.3 - Digital Generation, Inc. | a11-7665_1ex10d3.htm |
EX-31.1 - EX-31.1 - Digital Generation, Inc. | a11-7665_1ex31d1.htm |
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 March 31, 2011 | |
| |
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: 0-27644
DG FastChannel, 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
(Registrants 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 o 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 x |
|
Accelerated filer o |
|
|
|
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 May 5, 2011, the Registrant had 27,411,446 shares of Common Stock, par value $0.001, outstanding.
DG FASTCHANNEL, 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 companys 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 managements 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:
· our potential inability to further identify, develop and achieve commercial success for new products;
· the possibility of delays in product development;
· the development of competing distribution products;
· our ability to protect our proprietary technologies;
· patent-infringement claims;
· risks associated with integrating acquisitions with our operations, personnel or technologies;
· risks of new, changing and competitive technologies; and
· other factors discussed elsewhere herein under the heading Risk Factors.
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.
DG FASTCHANNEL, INC. AND SUBSIDIARIES
(In thousands, except par value amounts)
|
|
March 31, |
|
December 31, |
| ||
|
|
(unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
82,731 |
|
$ |
73,409 |
|
Accounts receivable (less allowances of $1,946 in 2011 and $2,503 in 2010) |
|
56,015 |
|
64,099 |
| ||
Deferred income taxes |
|
1,955 |
|
1,955 |
| ||
Other current assets |
|
3,661 |
|
2,626 |
| ||
Total current assets |
|
144,362 |
|
142,089 |
| ||
Property and equipment, net |
|
38,695 |
|
39,461 |
| ||
Goodwill |
|
226,257 |
|
226,257 |
| ||
Deferred income taxes, net of current portion |
|
10,088 |
|
12,774 |
| ||
Intangible assets, net |
|
94,613 |
|
98,096 |
| ||
Other non-current assets |
|
1,317 |
|
1,327 |
| ||
Total assets |
|
$ |
515,332 |
|
$ |
520,004 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Accounts payable |
|
$ |
8,433 |
|
$ |
6,546 |
|
Accrued liabilities |
|
6,606 |
|
11,139 |
| ||
Deferred revenue |
|
1,741 |
|
1,450 |
| ||
Total current liabilities |
|
16,780 |
|
19,135 |
| ||
Other non-current liabilities |
|
3,945 |
|
3,957 |
| ||
Total liabilities |
|
20,725 |
|
23,092 |
| ||
|
|
|
|
|
| ||
STOCKHOLDERS EQUITY: |
|
|
|
|
| ||
Preferred stock, $0.001 par valueAuthorized 15,000 shares; issued and outstandingnone |
|
|
|
|
| ||
Common stock, $0.001 par valueAuthorized 200,000 shares; 28,588 issued and 27,411 outstanding at March 31, 2011; 28,579 issued and 27,922 outstanding at December 31, 2010 |
|
29 |
|
29 |
| ||
Additional capital |
|
616,207 |
|
614,705 |
| ||
Accumulated deficit |
|
(91,117 |
) |
(103,796 |
) | ||
Accumulated other comprehensive income (loss) |
|
60 |
|
(25 |
) | ||
Treasury stock, at cost |
|
(30,572 |
) |
(14,001 |
) | ||
Total stockholders equity |
|
494,607 |
|
496,912 |
| ||
Total liabilities and stockholders equity |
|
$ |
515,332 |
|
$ |
520,004 |
|
The accompanying notes are an integral part of these financial statements.
DG FASTCHANNEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
|
Three Months Ended |
| ||||
|
|
2011 |
|
2010 |
| ||
Revenues: |
|
|
|
|
| ||
Video and audio content distribution |
|
$ |
62,038 |
|
$ |
50,986 |
|
Other |
|
2,687 |
|
3,216 |
| ||
Total revenues |
|
64,725 |
|
54,202 |
| ||
Cost of revenues (excluding depreciation and amortization): |
|
|
|
|
| ||
Video and audio content distribution |
|
21,259 |
|
16,526 |
| ||
Other |
|
1,361 |
|
1,415 |
| ||
Total cost of revenues |
|
22,620 |
|
17,941 |
| ||
Operating expenses: |
|
|
|
|
| ||
Sales and marketing |
|
2,703 |
|
3,112 |
| ||
Research and development |
|
2,672 |
|
2,115 |
| ||
General and administrative |
|
8,620 |
|
7,953 |
| ||
Depreciation and amortization |
|
7,037 |
|
7,259 |
| ||
Total operating expenses |
|
21,032 |
|
20,439 |
| ||
Income from operations |
|
21,073 |
|
15,822 |
| ||
Other (income) expense: |
|
|
|
|
| ||
Interest expense |
|
49 |
|
2,045 |
| ||
Interest (income) and other expense, net |
|
(108 |
) |
31 |
| ||
Income before income taxes |
|
21,132 |
|
13,746 |
| ||
Provision for income taxes |
|
8,453 |
|
5,704 |
| ||
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
|
|
|
|
|
| ||
Earnings per common share: |
|
|
|
|
| ||
Basic |
|
$ |
0.45 |
|
$ |
0.33 |
|
Diluted |
|
$ |
0.45 |
|
$ |
0.32 |
|
|
|
|
|
|
| ||
Weighted average common shares outstanding: |
|
|
|
|
| ||
Basic |
|
27,794 |
|
24,349 |
| ||
Diluted |
|
28,093 |
|
24,879 |
|
The accompanying notes are an integral part of these financial statements.
DG FASTCHANNEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
|
|
Common Stock |
|
Treasury Stock |
|
Additional |
|
Accumulated |
|
Accumulated |
|
Total |
| ||||||||||
Balance at December 31, 2010 |
|
28,579 |
|
$ |
29 |
|
(657 |
) |
$ |
(14,001 |
) |
$ |
614,705 |
|
$ |
(25 |
) |
$ |
(103,796 |
) |
$ |
496,912 |
|
Common stock issued on exercise of stock options |
|
6 |
|
|
|
|
|
|
|
123 |
|
|
|
|
|
123 |
| ||||||
Common stock issued under employee stock purchase plan |
|
3 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
85 |
| ||||||
Purchase of treasury stock |
|
|
|
|
|
(520 |
) |
(16,571 |
) |
|
|
|
|
|
|
(16,571 |
) | ||||||
Share-based compensation |
|
|
|
|
|
|
|
|
|
1,294 |
|
|
|
|
|
1,294 |
| ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
85 |
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,679 |
|
12,679 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,764 |
| ||||||
Balance at March 31, 2011 |
|
28,588 |
|
$ |
29 |
|
(1,177 |
) |
$ |
(30,572 |
) |
$ |
616,207 |
|
$ |
60 |
|
$ |
(91,117 |
) |
$ |
494,607 |
|
The accompanying notes are an integral part of these financial statements.
DG FASTCHANNEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Three Months Ended |
| ||||
|
|
2011 |
|
2010 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation of property and equipment |
|
3,553 |
|
4,238 |
| ||
Amortization of intangibles |
|
3,484 |
|
3,021 |
| ||
Deferred income taxes |
|
2,686 |
|
5,111 |
| ||
Provision for accounts receivable losses |
|
527 |
|
929 |
| ||
Share-based compensation |
|
1,294 |
|
1,048 |
| ||
Other |
|
(19 |
) |
37 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
|
7,557 |
|
1,018 |
| ||
Other assets |
|
(1,025 |
) |
(730 |
) | ||
Accounts payable and other liabilities |
|
(2,569 |
) |
(4,047 |
) | ||
Deferred revenue |
|
291 |
|
271 |
| ||
Net cash provided by operating activities |
|
28,458 |
|
18,938 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchases of property and equipment |
|
(1,420 |
) |
(2,226 |
) | ||
Capitalized costs of developing software |
|
(1,368 |
) |
(1,349 |
) | ||
Proceeds from disposal of property |
|
29 |
|
|
| ||
Net cash used in investing activities |
|
(2,759 |
) |
(3,575 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from issuance of common stock, net of costs |
|
208 |
|
7,224 |
| ||
Purchases of treasury stock |
|
(16,571 |
) |
|
| ||
Repayments of capital leases |
|
(99 |
) |
|
| ||
Repayments of long-term debt |
|
|
|
(5,375 |
) | ||
Net cash provided by (used in) financing activities |
|
(16,462 |
) |
1,849 |
| ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
85 |
|
(66 |
) | ||
Net increase in cash and cash equivalents |
|
9,322 |
|
17,146 |
| ||
Cash and cash equivalents at beginning of period |
|
73,409 |
|
33,870 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
|
$ |
82,731 |
|
$ |
51,016 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid for interest |
|
$ |
11 |
|
$ |
1,523 |
|
Cash paid for income taxes |
|
$ |
3,279 |
|
$ |
2,037 |
|
The accompanying notes are an integral part of these financial statements.
DG FASTCHANNEL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The Company
DG FastChannel, Inc. and subsidiaries (the Company, we, us or our) is 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 operate three nationwide digital networks out of our network operation centers (NOCs) located in Irving, Texas; Roswell, Georgia and Jersey City, New Jersey, which link more than 5,000 advertisers, advertising agencies and content owners with more than 29,000 television, radio, cable, print and web publishing destinations electronically throughout the United States, Canada, and Europe. We also offer a variety of other ancillary products and services to the advertising industry.
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 Securities and Exchange Commission (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, 2010 (Annual Report). Revenues presented in the financial statements are net of sales taxes collected.
Our business is seasonal, as a large portion of our revenues follow the advertising patterns of our customers. Revenues tend to be lowest in the first quarter, build throughout the year and are generally the highest in the fourth quarter. Further, our revenues are affected by political advertising, which peaks every other year consistent with the national, state and local election cycles.
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 allowance for doubtful accounts and credit memo reserves, intangible assets, office closure exit costs, contingent consideration and income taxes. We base our estimates on historical experience 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.
2. RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29 which changes the disclosures of supplementary pro forma information for business combinations. The new standard clarifies that if a public entity completes a business combination and presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Accounting Standards Codification (ASC) topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for any business combination we complete on or after January 1, 2011. The revised disclosure requirements will not affect our financial position, results of operations or cash flows.
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 1Quoted prices in active markets for identical assets or liabilities.
· Level 2Observable 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 3Unobservable 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 March 31, 2011 and December 31, 2010. 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 March 31, 2011 |
| ||||||||||
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents |
|
$ |
50,300 |
|
$ |
|
|
$ |
|
|
$ |
50,300 |
|
Equity securitiesrestricted stock |
|
|
|
300 |
|
|
|
300 |
| ||||
Put/call option on equity securities |
|
|
|
200 |
|
|
|
200 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
50,300 |
|
$ |
500 |
|
$ |
|
|
$ |
50,800 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Match Point earnout |
|
$ |
|
|
$ |
|
|
$ |
1,702 |
|
$ |
1,702 |
|
|
|
Fair Value Measurements at December 31, 2010 |
| ||||||||||
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents |
|
$ |
36,537 |
|
$ |
|
|
$ |
|
|
$ |
36,537 |
|
Equity securitiesrestricted stock |
|
|
|
300 |
|
|
|
300 |
| ||||
Put/call option on equity securities |
|
|
|
200 |
|
|
|
200 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
36,537 |
|
$ |
500 |
|
$ |
|
|
$ |
37,037 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Match Point earnout |
|
$ |
|
|
$ |
|
|
$ |
1,602 |
|
$ |
1,602 |
|
Our cash equivalents consist of highly liquid money market funds. Fair values of our cash equivalents and equity securitiesrestricted stock was determined based upon market prices. The value of the put option, net of a call option, is based upon the Black-Scholes pricing model using observable inputs.
The earnout was determined based upon our estimate of expected future Match Point revenues and the corresponding earnout levels achieved, discounted to their present value. The change in fair value has been recorded in cost of revenues in the accompanying consolidated statement of income. The earnout liability is recorded net of a $1.0 million escrow deposit made. The following table provides a reconciliation of changes in the fair values of our level 3 liabilities (in thousands):
|
|
Match Point Earnout |
| |
Beginning balance, December 31, 2010 |
|
$ |
1,602 |
|
Additions |
|
|
| |
Change in fair value during the period |
|
100 |
| |
Payments |
|
|
| |
|
|
|
| |
Ending balance, March 31, 2011 |
|
$ |
1,702 |
|
4. ACQUISITION RELATED EXIT COSTS
In connection with the acquisition of the Vyvx advertising services business (Vyvx) in June 2008 and Enliven Marketing Technologies Corporation (Enliven) in October 2008, we recorded exit costs related to discontinuing certain activities and personnel of the acquired operations. Below is a rollforward of acquisition related exit costs from the acquisition dates to March 31, 2011 (in thousands):
|
|
Total |
|
Plus Interest |
|
Balance at |
|
New |
|
Plus Interest |
|
Balance at |
| ||||||
Vyvx: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Office closures |
|
$ |
3,298 |
|
$ |
(1,649 |
) |
$ |
1,649 |
|
$ |
|
|
$ |
(101 |
) |
$ |
1,548 |
|
Enliven: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unfavorable contract |
|
502 |
|
(40 |
) |
462 |
|
|
|
(63 |
) |
399 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
3,800 |
|
$ |
(1,689 |
) |
$ |
2,111 |
|
$ |
|
|
$ |
(164 |
) |
$ |
1,947 |
|
At March 31, 2011, $1.4 million and $0.5 million of such amounts were included in other non-current liabilities and accrued liabilities, respectively, on the accompanying consolidated balance sheet. At December 31, 2010, $1.6 million and $0.5 million of such amounts were included in other non-current liabilities and accrued liabilities, respectively, on the accompanying consolidated balance sheet.
5. LONG-TERM DEBT
Prior to April 2010, we had a $185 million credit facility (the Prior Senior Credit Facility) that contained term loans, acquisition loans and a $30 million revolving credit facility. Borrowings under the Prior Senior Credit Facility bore interest at the base rate or LIBOR, plus the applicable margin for each that fluctuated with the total leverage ratio. In April 2010, we issued 3.7 million shares of our common stock in a public equity offering that raised $108 million in net proceeds and used $97 million of the proceeds to retire all of our outstanding debt.
In May 2011, we entered into a $150 million revolving credit facility. See Note 11.
6. SHARE-BASED COMPENSATION
We issued stock options in the amounts and for the periods shown in the following table. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
Three months ended |
| ||||
|
|
March 31, |
| ||||
|
|
2011 |
|
2010 |
| ||
Number of options granted |
|
12,000 |
|
None |
| ||
Grant date fair value of options granted (in thousands) |
|
$ |
205 |
|
$ |
|
|
Weighted average exercise price of options granted |
|
$ |
29.62 |
|
$ |
|
|
Volatility (1) |
|
59 |
% |
|
% | ||
Risk free interest rate (2) |
|
2.7 |
% |
|
% | ||
Expected term (in years) (3) |
|
6.3 |
|
|
| ||
Expected annual dividends |
|
None |
|
None |
|
(1) |
|
Expected volatility is based on the historical volatility of our common stock over a preceding period commensurate with the expected term of the award. |
|
|
|
(2) |
|
The risk free rate for periods within the expected term of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. |
|
|
|
(3) |
|
The expected term was calculated as the average between the vesting term and the contractual term, weighted by tranche. We used this simplified method as we do not have sufficient historical data in order to calculate a more appropriate estimate. |
We recognized approximately $1.3 million and $1.0 million in share-based compensation expense related to stock options and restricted stock awards during the three months ended March 31, 2011 and 2010, respectively. Unrecognized compensation costs related to unvested options and restricted stock was $8.5 million at March 31, 2011. These costs are expected to be recognized over the weighted-average remaining vesting period of 2.6 years.
7. EARNINGS PER SHARE
In calculating earnings per common share, we allocate our earnings between common shareholders and holders of unvested share-based payment awards (e.g. restricted stock) that contain rights to nonforfeitable dividends. This earnings allocation is referred to as the two-class method.
Under the two-class method undistributed earnings are allocated between common stock and participating securities (restricted stock) as if all of the net earnings for the period had been distributed. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares 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 warrants. The following table reconciles earnings per common share for the three months ended March 31, 2011 and 2010 (in thousands, except per share data):
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2011 |
|
2010 |
| ||
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
Less net income allocated to participating unvested share awards |
|
(63 |
) |
(83 |
) | ||
Net income attributable to common shares |
|
$ |
12,616 |
|
$ |
7,959 |
|
|
|
|
|
|
| ||
Weighted average common shares outstanding - basic |
|
27,794 |
|
24,349 |
| ||
Dilutive stock options and warrants |
|
299 |
|
530 |
| ||
Weighted average common shares outstanding - diluted |
|
28,093 |
|
24,879 |
| ||
|
|
|
|
|
| ||
Earnings per common share: |
|
|
|
|
| ||
Basic |
|
$ |
0.45 |
|
$ |
0.33 |
|
Diluted |
|
$ |
0.45 |
|
$ |
0.32 |
|
|
|
|
|
|
| ||
Antidilutive securities not included: |
|
|
|
|
| ||
Options and warrants |
|
564 |
|
239 |
|
8. COMPREHENSIVE INCOME
The following table summarizes total comprehensive income for the three months ended March 31, 2011 and 2010 (in thousands):
|
|
Three Months Ended |
| ||||
|
|
2011 |
|
2010 |
| ||
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
Unrealized gain on interest rate swaps, net of tax expense of $67 for the three months ended March 31, 2010 |
|
|
|
95 |
| ||
Foreign currency translation adjustment |
|
85 |
|
(66 |
) | ||
|
|
|
|
|
| ||
Total comprehensive income |
|
$ |
12,764 |
|
$ |
8,071 |
|
9. SEGMENT INFORMATION
Our two segments consist of (i) digital and physical distribution of video and audio content and broadcast business intelligence and (ii) all other. The all other segment includes creative research services (i.e., SourceEcreative) and Internet marketing services (i.e., Springbox). Our reportable segments have been determined based on related products and services. Our reportable segments were as follows (in thousands):
|
|
Three Months Ended March 31, |
| ||||||||||||||||
|
|
2011 |
|
2010 |
| ||||||||||||||
|
|
Video and |
|
Other |
|
Consolidated |
|
Video and |
|
Other |
|
Consolidated |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
$ |
62,038 |
|
$ |
2,687 |
|
$ |
64,725 |
|
$ |
50,986 |
|
$ |
3,216 |
|
$ |
54,202 |
|
Depreciation and amortization |
|
6,930 |
|
107 |
|
7,037 |
|
7,161 |
|
98 |
|
7,259 |
| ||||||
Income from operations |
|
20,673 |
|
400 |
|
21,073 |
|
14,880 |
|
942 |
|
15,822 |
| ||||||
10. CONTINGENCY
In September 2010, a securities class-action lawsuit captioned Duncan v. Ginsburg, et al, was filed against the Company and certain of its officers and directors in the U.S. District Court for the Southern District of New York (10 Civ. 6523). Subsequently, an identical lawsuit by the same plaintiff, also captioned Duncan v. Ginsburg, et al, was filed in the U.S. District Court for the Northern District of Texas (10 Civ. 1769), and a similar lawsuit, captioned Tours v. DG FastChannel Inc., et al, was filed in the U.S. District Court for the Southern District of New York by a different plaintiff (10 Civ. 6930). The Northern District of Texas lawsuit was voluntarily dismissed by the plaintiff and the other two lawsuits were consolidated before Judge Richard J. Sullivan in the U.S. District Court for the Southern District of New York, captioned In re DG FastChannel, Inc. Securities Litigation (10 Civ. 6523). On November 24, 2010, Judge Sullivan appointed a lead plaintiff and ordered that a consolidated amended complaint be filed. On January 24, 2011, the lead plaintiff filed a consolidated amended complaint on behalf of a purported class of persons who purchased or otherwise acquired DG FastChannel common stock between August 4, 2010 and August 27, 2010, inclusive. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The lawsuit alleges, among other things, that the defendants made false or misleading statements of material fact, or failed to disclose material facts, about the Companys financial condition during the class period. The plaintiffs seek unspecified monetary damages and other relief. While the outcome of such lawsuits cannot be predicted with certainty, the Company intends to defend the action vigorously.
We expect our defense costs and any loss that may result from this claim will be covered under our insurance policies.
We are involved in a variety of other legal actions arising from the ordinary course of business. We do not believe the ultimate resolution of these matters will have a material effect on our financial statements.
11. SUBSEQUENT EVENTS
Acquisition
On April 1, 2011, we acquired substantially all the assets and operations, and assumed certain liabilities, of private-held MIJO Corporation (MIJO) for approximately $43.5 million (USD), which includes a $2.5 million working capital payment that is subject to adjustment. MIJO, established in 1978 and based in Toronto, Canada, provides broadcast and digital media services to the Canadian advertising, entertainment and broadcast industries.
Increase in Share Repurchase Program
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. The stock repurchase plan has no expiration date. Through March 31, 2011, we had repurchased 1.1 million shares at a cost of $29.7 million under the share repurchase program. On April 19, 2011, our Board of Directors authorized an increase to our share repurchase program from $30 million to $80 million.
Revolving Credit Facility
On May 2, 2011, we entered into a five-year, $150 million revolving credit facility with a group of lenders (the Revolving Credit Facility). Borrowings under the Revolving Credit Facility bear interest at the alternative base rate or LIBOR, plus the applicable margin for each that fluctuates with the consolidated leverage ratio (as defined). The Revolving Credit Facility provides for future acquisitions and contains financial covenants pertaining to (i) the maximum consolidated leverage ratio and (ii) the minimum fixed charge coverage ratio. The Revolving Credit Facility also contains a variety of
restrictive covenants, such as limitations on borrowings and investments, and provides for customary events of default. There are no restrictions on accumulated deficit or net income other than the declaration or payment of cash dividends. Further, there are no restrictions in our Revolving Credit Facility with respect to transfers of cash or other assets from our subsidiaries to us. The Revolving Credit Facility is guaranteed by substantially all of our subsidiaries and is collateralized by a first priority lien on substantially all of our assets.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following managements 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 report on Form 10-Q.
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. 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 Issued Accounting Guidance in Note 2 to our unaudited consolidated financial statements contained in this Report.
Overview
We are a leading provider of digital technology services that enable the electronic delivery of advertisements, syndicated programs, and video news releases from advertising agencies and other content providers to traditional broadcasters, online publishers and other media outlets. Our primary source of revenue is the delivery of television and radio advertisements, or spots, which are typically delivered digitally but sometimes physically. We offer a digital alternative to the dub and ship delivery of spots. We generally bill our services on a per transaction basis. Our business can be impacted by several factors including general economic conditions, the overall advertising market, the financial stability of our customers, new emerging digital technologies, the increasing trend towards delivering high definition (HD) data files, and the continued transition from the traditional dub and ship delivery method to digital broadcast signal transmission.
Part of our business strategy is to acquire similar and/or ancillary businesses that will increase our market penetration and, in some cases, result in operating synergies. During the last three fiscal years we purchased three separate businesses involved in the distribution of media content.
Our business is seasonal as a large portion of our revenues follow the advertising patterns of our customers. Revenues tend to be lowest in the first quarter, build throughout the year and are generally the highest in the fourth quarter. Further, our revenues are affected by political advertising, which peaks every other year consistent with the national, state and local election cycles.
First Quarter Highlights
· Our diluted earnings increased to $0.45 per share, or 41%, compared to $0.32 per share in last years first quarter.
· Revenues from HD advertising increased $12.7 million, or 64%, from last years first quarter.
· We repurchased 519,500 shares of our common stock for $16.6 million.
Results of Operations
Three Months Ended March 31, 2011 vs. Three Months Ended March 31, 2010
The following table sets forth certain historical financial data (dollars in thousands).
|
|
|
|
|
|
% Change |
|
As a % of Revenue |
| ||||
|
|
Three Months Ended |
|
2011 |
|
Three Months Ended |
| ||||||
|
|
March 31, |
|
vs. |
|
March 31, |
| ||||||
|
|
2011 |
|
2010 |
|
2010 |
|
2011 |
|
2010 |
| ||
Revenues |
|
$ |
64,725 |
|
$ |
54,202 |
|
19 |
% |
100.0 |
% |
100.0 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
| ||
Cost of revenues (a) |
|
22,620 |
|
17,941 |
|
26 |
|
34.9 |
|
33.1 |
| ||
Sales and marketing |
|
2,703 |
|
3,112 |
|
(13 |
) |
4.2 |
|
5.7 |
| ||
Research and development |
|
2,672 |
|
2,115 |
|
26 |
|
4.1 |
|
3.9 |
| ||
General and administrative |
|
8,620 |
|
7,953 |
|
8 |
|
13.3 |
|
14.7 |
| ||
Depreciation and amortization |
|
7,037 |
|
7,259 |
|
(3 |
) |
10.9 |
|
13.4 |
| ||
Total costs and expenses |
|
43,652 |
|
38,380 |
|
14 |
|
67.4 |
|
70.8 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Income from operations |
|
21,073 |
|
15,822 |
|
33 |
|
32.6 |
|
29.2 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
| ||
Interest expense |
|
49 |
|
2,045 |
|
(98 |
) |
0.1 |
|
3.8 |
| ||
Interest (income) and other expense, net |
|
(108 |
) |
31 |
|
NM |
|
(0.2 |
) |
0.1 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Income before income taxes |
|
21,132 |
|
13,746 |
|
54 |
|
32.7 |
|
25.3 |
| ||
Provision for income taxes |
|
8,453 |
|
5,704 |
|
48 |
|
13.1 |
|
10.5 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
58 |
|
19.6 |
|
14.8 |
|
(a) Excludes depreciation and amortization.
NM Not meaningful
Reconciliation of Income from Operations to Adjusted EBITDA (Non-GAAP financial measure)
Income from operations |
|
$ |
21,073 |
|
$ |
15,822 |
|
33 |
% |
32.6 |
% |
29.2 |
% |
Depreciation and amortization |
|
7,037 |
|
7,259 |
|
(3 |
) |
10.9 |
|
13.4 |
| ||
Share-based compensation |
|
1,294 |
|
1,048 |
|
23 |
|
2.0 |
|
1.9 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Adjusted EBITDA (b) |
|
$ |
29,404 |
|
$ |
24,129 |
|
22 |
% |
45.5 |
|
44.5 |
|
Reconciliation of Net Income to Non-GAAP Net Income (Non-GAAP financial measure)
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
58 |
% |
19.6 |
% |
14.8 |
% |
Amortization of intangibles |
|
3,484 |
|
3,021 |
|
15 |
|
5.4 |
|
5.6 |
| ||
Share-based compensation |
|
1,294 |
|
1,048 |
|
23 |
|
2.0 |
|
1.9 |
| ||
Income tax effect of above items |
|
(1,911 |
) |
(1,689 |
) |
13 |
|
(3.0 |
) |
(3.1 |
) | ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Non-GAAP net income (b) |
|
$ |
15,546 |
|
$ |
10,422 |
|
49 |
% |
24.0 |
|
19.2 |
|
(b) See discussion on Non-GAAP financial measures on a following page.
Revenues. For the three months ended March 31, 2011, revenues increased $10.5 million, or 19%, as compared to the same period in the prior year. The video and audio content distribution segment increased $11.0 million, partially offset by a $0.5 million decrease in the all other segment. The increase in the video and audio content distribution segment was primarily due to (i) a $12.7 million increase in HD revenue ($32.4 million in 2011 vs. $19.7 million in 2010), (ii) a $0.7 million increase in Unicast revenue, both of which were driven by an increase in deliveries, and (iii) the acquisition of Match Point on
October 1, 2010 which contributed $5.2 million of revenue, partially offset by a decrease in standard definition (SD) revenue ($6.1 million) and Pathfire revenue ($0.9 million). HD revenue increased due to a continuing trend of delivering more HD advertising content and less SD content. Both HD and SD revenue per delivery decreased due to volume discounts and the competitive environment. HD revenue pricing per delivery also decreased in 2011 as a result of a higher percentage of electronic deliveries (electronic deliveries are priced lower than physical deliveries). The all other segment revenues decreased $0.5 million due to a $0.7 million decline in Springbox revenue ($1.2 million in 2011 vs. $1.9 million in 2010) partially offset by a $0.2 million increase in SourceEcreative revenue.
Cost of Revenues. For the three months ended March 31, 2011, cost of revenues increased $4.7 million, or 26%, as compared to the same period in the prior year. As a percentage of revenues, cost of revenues increased to 34.9% in the current period as compared to 33.1% in the same period in the prior year. Costs of revenues increased due to the inclusion of Match Point, a direct response advertiser, in our operating results ($3.4 million) and higher personnel costs ($1.5 million) associated with an increase in our revenues. The decrease in our gross margin percentage is due to the acquisition of Match Point which has a lower gross margin percentage than the balance of the Company.
Sales and Marketing. For the three months ended March 31, 2011, sales and marketing expense decreased $0.4 million, or 13%, as compared to the same period in the prior year. The decrease was principally attributable to a reduction in personnel costs.
Research and Development. For the three months ended March 31, 2011, research and development costs increased $0.6 million, or 26%, as compared to the same period in the prior year. The increase relates primarily to an increase in the number of engineers and related benefit costs associated with the growth in our revenues.
General and Administrative. For the three months ended March 31, 2011, general and administrative expense increased $0.7 million, or 8%, as compared to the same period in the prior year. The increase was primarily attributable to higher personnel costs ($1.2 million) partially offset by a reduction of professional fees ($0.6 million). Personnel costs increased largely due to an increase in incentive compensation associated with our improved operating results and a larger staff principally associated with the acquisition of Match Point. Professional fees declined as the prior year quarter included higher legal costs associated with a vendor lawsuit which was settled in September 2010.
Depreciation and Amortization. For the three months ended March 31, 2011, depreciation and amortization expense decreased $0.2 million, or 3%, as compared to the same period in the prior year. The decrease was primarily attributable to a reduction of depreciation expense ($0.7 million) as a result of fully depreciating certain fixed assets in the prior year, partially offset by an increase in amortization expense ($0.5 million) associated with amortizing certain intangible assets obtained in the October 2010 acquisition of Match Point.
Interest Expense. For the three months ended March 31, 2011, interest expense decreased $2.0 million, or 98%, as compared to the same period in the prior year. The decrease was due to retiring all of our outstanding debt in April 2010.
Interest Income and Other Expense, net. For the three months ended March 31, 2011, interest income and other increased $0.1 million as compared to the same period in the prior year. The increase was the result of having larger amounts of cash invested in interest bearing accounts and an increase in other income.
Provision for Income Taxes. For the three months ended March 31, 2011 and 2010, the provision for income taxes was 40.0% and 41.5%, respectively, of income before income taxes. The provisions for both periods differ from the expected federal statutory rate of 35% as a result of state income taxes and certain non-deductible expenses. The reduction in our effective tax rate is due to (i) liquidating two US subsidiaries during 2010 and (ii) having a lower level of non deductible expenses on a percentage basis as a result of having higher taxable income.
Non-GAAP Financial Measures
In addition to providing financial measurements based on 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 these non-GAAP financial measures helps investors to gain a meaningful understanding of our past performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts. Our management uses these 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 management in its financial and operational decision-making. There are limitations associated with reliance on these 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 our operating performance as evaluated by management.
We define Adjusted EBITDA as net income, before interest, taxes, depreciation and amortization, share-based compensation, restructuring / impairment charges and benefits, and gains and losses on derivative instruments. 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 net interest expense, and gains and losses from derivative instruments, or do not require a cash outlay, such as share-based compensation or 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.
We define non-GAAP net income as net income before amortization of intangible assets, impairment charges and share-based compensation expense. All amounts excluded from non-GAAP net income are reported net of the tax benefit these expenses provide.
We consider non-GAAP net income to be another 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.
Adjusted EBITDA and non-GAAP net income should be considered in addition to, not as a substitute for, our operating income and net 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, we are presenting the most directly comparable GAAP financial measures and reconciling the non-GAAP financial measures to the comparable GAAP measures.
Financial Condition
The following table sets forth certain major balance sheet accounts as of March 31, 2011 and December 31, 2010 (in thousands):
|
|
March 31, |
|
December 31, |
| ||
Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
82,731 |
|
$ |
73,409 |
|
Accounts receivable, net |
|
56,015 |
|
64,099 |
| ||
Property and equipment, net |
|
38,695 |
|
39,461 |
| ||
Deferred income taxes |
|
12,043 |
|
14,729 |
| ||
Goodwill and intangible assets, net |
|
320,870 |
|
324,353 |
| ||
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
15,039 |
|
17,685 |
| ||
|
|
|
|
|
| ||
Stockholders equity |
|
494,607 |
|
496,912 |
| ||
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 increase in cash and cash equivalents primarily relates to cash generated from operating activities ($28.5 million) in excess of cash used to purchase treasury stock ($16.6 million).
Accounts receivable generally fluctuate with the level of revenues. As revenues increase, accounts receivable tend to increase. The number of days of revenue included in accounts receivable was 78 days at both March 31, 2011 and December 31, 2010.
Property and equipment tends to increase when we make significant improvements to our equipment, expand our network or initiate capitalized software development projects. It also can increase as a result of acquisition activity. Further, the balance of property and equipment is affected by recording depreciation expense. For the three months ended March 31, 2011 and 2010, purchases of property and equipment were $1.4 million and $2.2 million, respectively. For the three months ended March 31, 2011 and 2010, capitalized costs of developing software were $1.4 million and $1.3 million, respectively.
Goodwill and intangible assets decreased during 2011 as a result of amortization of intangible assets.
Accounts payable and accrued liabilities decreased $2.6 million during 2011. The decrease primarily relates to the timing of payments and payments on capital lease obligations.
Stockholders equity decreased $2.3 million during 2011. The decrease primarily relates to the purchase of treasury stock ($16.6 million) in excess of net income ($12.7 million) and share-based compensation expense ($1.3 million).
Liquidity and Capital Resources
The following table sets forth a summary of our statements of cash flows (in thousands):
|
|
Three Months Ended |
| ||||
|
|
2011 |
|
2010 |
| ||
Operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
12,679 |
|
$ |
8,042 |
|
Depreciation and amortization |
|
7,037 |
|
7,259 |
| ||
Deferred income taxes and other |
|
4,488 |
|
7,125 |
| ||
Changes in operating assets and liabilities, net |
|
4,254 |
|
(3,488 |
) | ||
Total |
|
28,458 |
|
18,938 |
| ||
|
|
|
|
|
| ||
Investing activities: |
|
|
|
|
| ||
Purchases of property and equipment |
|
(1,420 |
) |
(2,226 |
) | ||
Capitalized costs of developing software |
|
(1,368 |
) |
(1,349 |
) | ||
Proceeds from disposal of property |
|
29 |
|
|
| ||
Total |
|
(2,759 |
) |
(3,575 |
) | ||
|
|
|
|
|
| ||
Financing activities: |
|
|
|
|
| ||
Proceeds from issuance of common stock, net |
|
208 |
|
7,224 |
| ||
Purchases of treasury stock |
|
(16,571 |
) |
|
| ||
Repayments of capital leases |
|
(99 |
) |
|
| ||
Repayments of debt |
|
|
|
(5,375 |
) | ||
Total |
|
(16,462 |
) |
1,849 |
| ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash |
|
85 |
|
(66 |
) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
$ |
9,322 |
|
$ |
17,146 |
|
We generate cash from operating activities principally from net income adjusted for certain non-cash expenses such as (i) depreciation and amortization and (ii) deferred income taxes. In 2011, we generated $28.5 million in cash from operating activities as compared to $18.9 million in 2010. The increase was largely driven by our improved operating results and a net decrease in our operating assets and liabilities.
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. During the last three fiscal years we have acquired three businesses. In April 2011, subsequent to quarter end, we acquired the net assets and operations of MIJO Corporation, an advertising distribution and services business based in Toronto, Canada, for approximately $43 million cash (see note 11 to the consolidated financial statements).
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 and purchase of treasury stock.
Sources of Liquidity
Our sources of liquidity include:
· cash on hand,
· cash generated from operating activities,
· borrowings from a credit facility, and
· the issuance of equity securities.
As of March 31, 2011, we had $82.7 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 the ability to issue equity instruments. As of March 31, 2011, we had two effective shelf registration statements on file with the SEC for the issuance of (i) up to a total of 1.47 million shares of our common stock and (ii) up to $100 million of preferred stock.
In May 2011, we entered into a $150 million revolving credit facility (see Note 11 to our consolidated financial statements).
We believe our sources of liquidity, including our cash on hand and cash generated from operating activities, will satisfy our capital needs for the next 12 months.
Cash Requirements
We expect to use cash in connection with:
· the purchase of capital assets,
· the purchase of our common stock,
· the organic growth of our business, and
· the strategic acquisition of media-related companies (see note 11 to our consolidated financial statements).
During 2011, we expect we will:
· purchase property and equipment and incur capitalized software development costs ranging from $11 to $14 million.
We expect to use cash to further expand and develop our business. We may seek to acquire or merge with another company that we believe would be in the best interest of our shareholders. Further, in April 2011, our Board of Directors authorized an increase to our share repurchase program from $30 million to $80 million.
Contractual Payment Obligations
There have been no material changes to our contractual payment obligations since December 31, 2010. Refer to our Annual Report for additional information regarding our contractual payment obligations.
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 five 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and changes in the market value of financial instruments.
Foreign Currency Exchange Risk
Historically, we have provided limited services to entities located outside the United States and, therefore, our exchange rate gains and losses have not been material. However, in April 2011 we acquired the net assets of MIJO Corporation, a Toronto, Canada advertising distribution and services business. As a result, absent hedging our foreign currency exposure, we may experience significant foreign currency transaction gains and losses.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Report, we have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2011, 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.
In September 2010, a securities class-action lawsuit captioned Duncan v. Ginsburg, et al, was filed against the Company and certain of its officers and directors in the U.S. District Court for the Southern District of New York (10 Civ. 6523). Subsequently, an identical lawsuit by the same plaintiff, also captioned Duncan v. Ginsburg, et al, was filed in the U.S. District Court for the Northern District of Texas (10 Civ. 1769), and a similar lawsuit, captioned Tours v. DG FastChannel Inc., et al, was filed in the U.S. District Court for the Southern District of New York by a different plaintiff (10 Civ. 6930). The Northern District of Texas lawsuit was voluntarily dismissed by the plaintiff and the other two lawsuits were consolidated before Judge Richard J. Sullivan in the U.S. District Court for the Southern District of New York, captioned In re DG FastChannel, Inc. Securities Litigation (10 Civ. 6523). On November 24, 2010, Judge Sullivan appointed a lead plaintiff and ordered that a consolidated amended complaint be filed. On January 24, 2011, the lead plaintiff filed a consolidated amended complaint on behalf of a purported class of persons who purchased or otherwise acquired DG FastChannel common stock between August 4, 2010 and August 27, 2010, inclusive. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The lawsuit alleges, among other things, that the defendants made false or misleading statements of material fact, or failed to disclose material facts, about the Companys financial condition during the class period. The plaintiffs seek unspecified monetary damages and other relief. While the outcome of such lawsuits cannot be predicted with certainty, the Company intends to defend the action vigorously.
We expect our defense costs and any loss that may result from this claim will be covered under our insurance policies.
We are involved in a variety of other legal actions arising from the ordinary course of business. We do not believe the ultimate resolution of these matters will have a material effect on our financial statements.
The risk factors discussed in our (i) Annual Report and (ii) Prospectus Supplement to our Registration Statement filed with the SEC on April 8, 2010, under the heading Risk Factors should be considered when reading this Report.
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. 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 |
|
Average Price |
|
Total Number |
|
Maximum |
| ||
|
|
|
|
|
|
|
|
|
| ||
January 1, 2011 through January 31, 2011 |
|
|
|
$ |
|
|
|
|
$ |
16,852 |
|
February 1, 2011 through February 28,2011 |
|
|
|
$ |
|
|
|
|
$ |
16,852 |
|
March 1, 2011 through March 31, 2011 |
|
519,500 |
|
$ |
31.90 |
|
519,500 |
|
$ |
281 |
|
|
|
|
|
|
|
|
|
|
| ||
Total |
|
519,500 |
|
$ |
31.90 |
|
519,500 |
|
$ |
281 |
|
On April 19, 2011, our Board of Directors authorized an increase to our share repurchase program from $30 million to $80 million.
Amendment to Employment Agreement with Scott K. Ginsburg
On May 10, 2011, the Company entered into an amendment (the CEO Amendment) to the existing Employment Agreement, dated October 3, 2008, with our Chief Executive Officer, Scott K. Ginsburg (the CEO Agreement). Pursuant to the CEO Amendment, the term of the CEO Agreement was extended by five months through December 31, 2011. In addition, pursuant to the CEO Amendment, Mr. Ginsburgs annualized base salary was increased to $600,000, effective retroactively to January 1, 2011, and Mr. Ginsburgs target annual bonus for 2011 was increased to 200% of his then-applicable annual base salary.
The CEO Amendment also amends the provisions of the CEO Agreement respecting severance. Pursuant to the CEO Agreement, as amended, if Mr. Ginsburg terminates his employment for good reason (as defined below) or following a change of control, or, is terminated prior to the end of the employment term by the Company other than for cause (as defined below) or death, he shall be entitled to the sum of (i) the greater of all remaining salary to the end of the employment term, or salary from the date of termination through the second anniversary of the date of termination, at the rate of salary in effect on the date of termination, payable in a lump sum payment, plus (ii) the annual bonus which he would have been entitled to receive had he remained employed by the Company for the entire year during which his termination occurs, which annual bonus shall be determined by the Compensation Committee based on the Companys performance for such year and in accordance with the terms of the applicable bonus program for such year, payable in a lump sum payment on the date on which annual bonuses for the year in which his termination occurs are paid to the Companys executive officers generally, but in all events between January 1 and March 15 of the year following the year in which the termination occurs. In the event of Mr. Ginsburgs death or his termination of employment by reason of his disability during the employment term, he will be entitled to receive the annual bonus amount as described in clause (ii) above.
Following the end of the employment term, upon termination of his employment with the Company for any reason other than cause, but upon ninety days prior written notice if such termination is by him, the Company shall pay to Mr. Ginsburg the sum of (i) his salary as then in effect for a period of six months in a lump sum payment, plus (ii) the annual bonus which he would have been entitled to receive had he remained employed by the Company for the entire year during which his termination occurs, which annual bonus shall be determined by the Compensation Committee based on the Companys performance for such year and in accordance with the terms of the applicable bonus program for such year, payable in a lump sum payment on the date on which annual bonuses for the year in which his termination occurs are paid to the Companys executive officers generally, but in all events between January 1 and March 15 of the year following the year in which the termination occurs.
If Mr. Ginsburg is terminated by the Company for cause, he shall not be entitled to further compensation. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts.
Under the CEO Agreement, good reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Companys principal office by more than 20 miles, the transfer to an office other than the principal office or a material breach of the CEO Agreement by the Company. Under the CEO Agreement, cause includes conviction of or a plea of guilty or nolo contendre by Mr. Ginsburg to a felony or certain criminal conduct against the Company, habitual neglect of or failure to perform his duties to the Company or any material breach of the CEO Agreement by Mr. Ginsburg.
The above summary of the CEO Amendment is qualified in its entirety by reference to the full text of the CEO Amendment, a copy of which is being filed as an exhibit to this Quarterly Report on Form 10-Q, and the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Current Report on Form 8-K filed by the Company on October 3, 2008.
Amendment to Employment Agreement with Neil H. Nguyen
On May 10, 2011, the Company entered into an amendment (the President Amendment) to the existing Amended and Restated Employment Agreement, dated January 11, 2010, with our President and Chief Operating Officer, Neil H. Nguyen (the President Agreement). Pursuant to the President Amendment, Mr. Nguyens annualized base salary was increased to $450,000, effective retroactively to January 1, 2011.
The President Amendment also amends the provisions of the President Agreement respecting severance. Pursuant to the President Agreement, as amended, if Mr. Nguyen terminates his employment for good reason (as defined below) or following a change of control, or, is terminated prior to the end of the employment term by the Company other than for cause (as defined below) or death, he shall be entitled to the sum of (i) the greater of all remaining salary to the end of the employment term, or salary from the date of termination through the first anniversary of the date of termination, at the rate of salary in effect on the date of termination, payable over the severance period in accordance with the Companys then standard payroll practices, plus (ii) the annual bonus which he would have been entitled to receive had he remained employed by the Company for the entire year during which his termination occurs, which annual bonus shall be determined by the Compensation Committee based on the Companys performance for such year and in accordance with the terms of the applicable bonus program for such year, payable in a lump sum payment on the date on which annual bonuses for the year in which his termination occurs are paid to the Companys executive officers generally, but in all events between January 1 and March 15 of the year following the year in which the termination occurs. In the event of Mr. Nguyens death or his termination of employment by reason of his disability during the employment term, he will be entitled to receive the annual bonus amount as described in clause (ii) above.
Following the end of the employment term, upon termination of his employment with the Company for any reason other than cause, but upon ninety days prior written notice if such termination is by him, the Company shall pay to Mr. Nguyen the sum of (i) his salary as then in effect for a period of six months, payable over the severance period in accordance with the Companys then standard payroll practices, plus (ii) the annual bonus which he would have been entitled to receive had he remained employed by the Company for the entire year during which his termination occurs, which annual bonus shall be determined by the Compensation Committee based on the Companys performance for such year and in accordance with the terms of the applicable bonus program for such year, payable in a lump sum payment on the date on which annual bonuses for the year in which his termination occurs are paid to the Companys executive officers generally, but in all events between January 1 and March 15 of the year following the year in which the termination occurs.
Under the President Agreement, good reason includes the assignment of duties inconsistent with his title or a material reduction in his authority, duties or responsibility, the relocation of the Companys principal office by more than 20 miles, the transfer to an office other than the principal office or a material breach of the President Agreement by the Company. Under the President Agreement, cause includes commission of an act of fraud, theft or embezzlement or conviction of a felony or other crime involving moral turpitude, failure or refusal to follow the lawful directives of the Board, habitual neglect of or failure to perform his material duties to the Company or any material breach of the President Agreement by Mr. Nguyen.
The above summary of the President Amendment is qualified in its entirety by reference to the full text of the President Amendment, a copy of which is being filed as an exhibit to this Quarterly Report on Form 10-Q, and the full text of the President Agreement, a copy of which was filed as an exhibit to the Current Report on Form 8-K filed by the Company on January 14, 2010.
Amendment to Executive Restricted Stock Unit Awards
In March 2011, the Compensation Committee approved restricted stock unit awards to Messrs. Ginsburg and Nguyen, consisting of 90,000 performance-based restricted stock units to Mr. Ginsburg and 33,000 performance-based restricted stock units to Mr. Nguyen, pursuant to the Companys 2006 Long-Term Stock Incentive Plan. Each of the restricted stock unit awards will vest in three equal installments on each of the first three anniversaries of the date of grant, provided that the executive continues to be employed by, or provide services to, the Company through such vesting dates. However, if the aggregate fair market value of the shares subject to the
restricted stock unit award on December 31, 2011 exceeds 7% of the Companys EBITDA for the 2011 fiscal year, the number of shares subject to such award will be automatically reduced to conform to such limit.
In May 2011, the Compensation Committee amended the vesting provisions applicable to these awards to provide that they will vest on an accelerated basis in the event of (i) an executives termination of employment by the Company without cause (as defined in the employment agreements described above), (ii) an executives resignation for good reason (as defined in the employment agreements described above), (iii) an executives death, (iv) an executives termination of employment by reason of his disability, (v) a change in control, or (vi) with respect to Mr. Ginsburg, in the event of his retirement, which is defined as his termination of employment or separation from service following the date on which he attains age 60.
The above summary of the restricted stock unit awards granted to Messrs. Ginsburg and Nguyen is qualified in its entirety by reference to the full text of the Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement with each executive, copies of which are being filed as exhibits to this Quarterly Report on Form 10-Q.
Exhibits |
|
|
10.1 |
|
Amendment to Employment Agreement, dated May 10, 2011 between DG FastChannel, Inc. and Scott K. Ginsburg. |
10.2 |
|
Amendment to Amended and Restated Employment Agreement, dated May 10, 2011 between DG FastChannel, Inc. and Neil H. Nguyen. |
10.3 |
|
Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement between DG FastChannel, Inc. and Scott K. Ginsburg. |
10.4 |
|
Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement between DG FastChannel, Inc. and Neil H. Nguyen. |
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 March 31, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Cash Flow, (iv) Unaudited Consolidated Statement of Stockholders Equity, and (v) Notes to Unaudited Consolidated Financial Statements. |
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.
|
DG FASTCHANNEL, INC. | |
|
|
|
Date: May 10, 2011 |
By: |
/s/ OMAR A. CHOUCAIR |
|
Name: |
Omar A. Choucair |
|
Title: |
Chief Financial Officer |