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TABLE OF CONTENT
INDEX TO FINANCIAL STATEMENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



FORM 10-K



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

For The Fiscal Year Ended December 31, 2009

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
(State or Other Jurisdiction of Incorporation or Organization)
  94-3140772
(I.R.S. Employer Identification Number)

750 West John Carpenter Freeway, Suite 700
Irving, Texas 75039
(Address Of Principal Executive Offices, Including Zip Code)

(972) 581-2000
(Registrant's Telephone Number, Including Area Code)

         Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of each exchange on which registered
Common Stock, $0.001 par value   Nasdaq Global Market

         Securities registered pursuant to Section 12(g) of the Act: None



         Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

         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 and (2) has been subject to such filing requirements for the past 90 days. Yes ý    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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

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

         The aggregate market value of the Common Stock held by non-affiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $604 million as of December 31, 2009, and approximately $385 million as of June 30, 2009, the last business day of the Registrant's most recently completed second quarter. Shares of Common Stock held by each officer and director of the Registrant and by each person who may be deemed to be an affiliate have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

         As of March 1, 2010 the Registrant had 24,679,681 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         None


Table of Contents


DG FASTCHANNEL, INC.

        The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," "will" and similar expressions are used to identify forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and we assume no obligation to update any such forward-looking statements, except as required by law. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" as well as those discussed elsewhere in this Report, and the risks discussed in the Company's other filings with the United States Securities and Exchange Commission.

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PART I

       

ITEM 1.

 

BUSINESS

    4  

 

General

    4  

 

Available Information

    5  

 

Industry Background

    6  

 

Services

    7  

 

Markets and Customers

    11  

 

Sales, Marketing and Customer Service

    11  

 

Competition

    13  

 

Intellectual Property and Proprietary Rights

    14  

 

Employees

    14  

ITEM 1A.

 

RISK FACTORS

    14  

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

    30  

ITEM 2.

 

PROPERTIES

    30  

ITEM 3.

 

LEGAL PROCEEDINGS

    31  

 

PART II

       

ITEM 5.

 

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

    31  

ITEM 6.

 

SELECTED FINANCIAL DATA

    33  

ITEM 7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    35  

 

Introduction

    35  

 

Cautionary Note Regarding Forward-Looking Statements

    36  

 

Overview

    36  

 

Results of Operations

    38  

 

Financial Condition

    42  

 

Liquidity and Capital Resources

    43  

 

Critical Accounting Policies

    45  

 

Recently Adopted and Recently Issued Accounting Guidance

    47  

 

Contractual Payment Obligations

    47  

 

Off-Balance Sheet Arrangements

    48  

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    48  

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    48  

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    48  

ITEM 9A.

 

CONTROLS AND PROCEDURES

    48  

ITEM 9B.

 

OTHER INFORMATION

    51  

 

PART III

       

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

    52  

ITEM 11.

 

EXECUTIVE COMPENSATION

    61  

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

    79  

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

    81  

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

    82  

 

PART IV

       

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    83  

SIGNATURES

    84  

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DG FASTCHANNEL, INC.

PART I

ITEM 1.    BUSINESS

General

        DG FastChannel, Inc. (the "Company" or "DGF") is a leading 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 ("Irving NOC"), Atlanta, Georgia ("Atlanta NOC") and Jersey City, New Jersey ("New Jersey NOC"), which link more than 5,000 advertisers, advertising agencies and content owners with more than 23,000 radio, television, cable, network and print publishing destinations and over 5,000 online publishers electronically throughout the United States, Canada, and Europe. Through our NOCs, we deliver video, audio, image and data content that comprise transactions among advertisers, content owners, and various media outlets, including those in the broadcast industries. We offer a variety of other ancillary products that serve the advertising industry.

        For the year ended December 31, 2009, we provided delivery services for 22 of the top 25 advertisers, as ranked by Ad Age. The majority of our revenue is derived from multiple services relating to electronic delivery of video and audio advertising content. Our primary source of revenue is the delivery of television and radio advertisements, or spots, which is typically performed digitally but sometimes physically. We offer a digital alternative to dub and ship delivery of spot advertising. We generally bill our services on a per transaction basis.

        Our services include online creative research, media production and duplication, distribution, management of existing advertisements and broadcast verification. This suite of 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 and helps simplify the overall process of content delivery. Information regarding the Company's business segments is presented in the Consolidated Financial Statements filed herewith.

        The Company was organized in 1991 and is incorporated in Delaware. Over the past five fiscal years, we have completed several strategic transactions including the following:

    On April 15, 2005, we acquired substantially all the assets and assumed certain liabilities of privately-held Media DVX, Inc. ("MDX") for $10.0 million (excluding transaction costs) consisting of (i) $1.5 million in cash, (ii) a $6.5 promissory note, and (iii) 155,039 shares of the Company's common stock valued at $2.0 million. MDX distributed advertising content to radio and television stations utilizing conventional and electronic duplication technologies. The acquisition increased the Company's customer base and resulted in operating synergies.

    On May 31, 2006, we completed a tax-free merger transaction with privately-held FastChannel Network, Inc. ("FastChannel") whereby FastChannel became a wholly-owned subsidiary of the Company. The $28.8 million purchase price consisted of (i) approximately 5.2 million shares of the Company's common stock valued at $27.4 million, and (ii) approximately $1.4 million of transaction costs. Similar to the Company, FastChannel operated a digital distribution network serving the advertising and broadcast industries. The merger with FastChannel expanded the Company's "footprint" (i.e., electronic network), increased our customer base, and resulted in operating synergies.

    On June 4, 2007, we acquired privately-held Pathfire, Inc. ("Pathfire") for $29.7 million in cash. Pathfire distributes third-party long-form content, such as news and syndicated programming,

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      through a proprietary server-based network via satellite and Internet channels. The acquisition increased the Company's customer base and resulted in operating synergies.

    In December 2006 and early 2007, we acquired an approximate 16% interest in Point.360. On August 13, 2007, we completed the purchase of all of the issued and outstanding shares of common stock of Point.360 that we did not already own (approximately 84%) in exchange for 2.0 million shares of our common stock. In the aggregate, the total purchase price was valued at $49.7 million. The acquisition increased the Company's customer base and resulted in operating synergies. Immediately prior to the exchange, Point.360 spun off its post-production operations to its shareholders (other than the Company), such that on the closing date, Point.360 consisted solely of an advertising services operation.

    On August 31, 2007, we acquired substantially all the assets of privately-held GTN, Inc. ("GTN") for $11.5 million in cash (including transaction costs). GTN provided media services in Detroit, Michigan and was focused on the automotive advertising market. GTN also had post production operations that the Company sold immediately following the closing of the acquisition for $3.0 million in cash. The acquisition increased the Company's customer base and resulted in operating synergies.

    On March 13, 2008, we amended and restated our $85 million credit agreement with a new six-year, $145 million senior credit facility (the "Senior Credit Facility") with our existing and two additional lenders.

    On June 5, 2008, we completed the acquisition of substantially all of the assets and certain liabilities of the Vyvx advertising services business ("Vyvx"), including its distribution, post-production and related operations, from Level 3 Communications, Inc. ("Level 3") for approximately $135.4 million in cash (including transaction costs). Vyvx operated an advertising services and distribution business similar to the Company's video and audio content distribution business. The purpose of the acquisition was to expand the Company's customer base and operations, and resulted in operating synergies.

    In May 2007 we acquired 10.8 million shares, or 13% of the then outstanding shares, of Enliven Marketing Technologies Corporation's ("Enliven") common stock. On October 2, 2008, we completed a merger with Enliven. Pursuant to the merger agreement, as amended, we exchanged 0.033 of a share of our common stock for each of the approximately 88 million shares of Enliven common stock outstanding and not previously held by us. In the aggregate, we issued approximately 2.9 million shares of our common stock in the exchange. In the aggregate, including shares of Enliven previously held, the purchase price was $74.6 million. The purpose of the acquisition was to expand our customer base and expand our service offerings.


Available Information

        We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act").

        The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

        We also make available free of charge through our website (www.dgfastchannel.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if

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applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.


Industry Background

        There are approximately 11,000 commercial radio and 4,500 television, cable and network broadcast stations in the United States and Canada. These stations primarily generate revenue by selling airtime to advertisers. In addition, there are approximately 8,100 daily and weekly newspapers in circulation in the United States. Newspapers also primarily generate revenues from advertising. Advertising is most frequently produced under the direction of advertising agencies for large national or regional advertisers or by station personnel for local advertisers. Television advertising is characterized as network or spot, depending on how it is purchased and distributed. Network advertising typically is delivered to stations as part of a network feed (bundled with network programming), while spot advertising is delivered to stations independently of other programming content.

        Advertising agencies and advertisers use third-party service companies to ensure their media assets are delivered to multiple broadcast destinations on a time-sensitive basis. Certain advertising campaigns can be extremely complex and include dozens of commercial television and radio spots which may require delivery to hundreds of discrete media locations across the United States. Additionally, advertising agencies and advertisers require certain quality control standards, web-based order management capabilities and certain tagging/editing functions by the third party service provider. Finally, these service providers must offer immediate confirmation of the delivery of the commercial content to the media outlet and detailed billing services.

        Broadcast media time is typically purchased by advertising agencies or media buying firms on behalf of advertisers. Advertisers, their agencies and media buying firms select individual stations or groups of stations to support marketing objectives, which usually are based on the stations' geographic and demographic characteristics. The actual commercials or spots are typically produced at a digital production studio and recorded on digital tape. Variations of the spot intended for specific demographic groups are also produced at this time. The spots undergo a review of quality and content before being cleared for distribution to broadcast stations, and can be delivered physically, via the traditional dub and ship method, or electronically.

        While many radio and television broadcasters now embrace digital technology for much of their production processes and in-station media management, current methods for the distribution of audio and video advertising content still include manual duplication and physical delivery of analog tapes. Many companies, commonly known as dub and ship houses, duplicate audio and video tapes, assemble them according to agency specified bills of material and package them for air express delivery. Advertisers and their agencies can choose to have advertising content delivered electronically via the Internet and satellite transmissions. Electronic transmission has several advantages over dub and ship delivery, including: cost, transmission time, labor, materials, quality of content and control of distribution. The amount of advertising content transmitted electronically has steadily increased, and we estimate that approximately 95% of radio spots and approximately 60% of video spots are now electronically distributed. We believe that these figures will continue to grow as advertisers continue to take advantage of the benefits of electronic distribution.

        Radio and television continue to attract significant portions of the advertising dollars spent by advertisers and advertising agencies and represent powerful mediums for cost-effectively reaching large, targeted audiences and offer the accountability and returns that advertisers increasingly demand.

        The unique capabilities of online advertising, the growing number of Internet users and increased Internet traffic have contributed to rapid growth in online advertising spending over the last several years. According to eMarketer, an advertising trade journal, online advertising represented 13.7% of

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the total United States advertising market in 2009. ZenithOptimedia predicts worldwide online advertising spending will increase to 16.2% of the total worldwide advertising market by 2012. Additionally, according to the ZenithOptimedia, global online advertising expenditures are projected to grow from $54.1 billion in 2009 to $77.5 billion in 2012, representing a compound annual growth rate of 12.75%. eMarketer predicts online advertising expenditures in the United States are to grow from $22.4 billion in 2009 to $34.0 billion in 2014, representing a compound annual growth rate of 8.7%.

        While historically a large component of online advertising market growth was driven by Internet-centric publishers, retailers and direct marketing providers, traditional media advertisers, including consumer packaged goods and brand advertisers, are increasingly recognizing the significance and unique capabilities of the Internet and are allocating more of their marketing budgets to online advertising. The growth in online advertising is also being driven by strong increases in online brand marketing through display ads, rich media and video ads. While the majority of online advertising spending is still allocated to direct response campaigns, including paid search ads, classifieds, e-mail advertising and lead generation or referrals, advertisers are increasingly recognizing the potential offered by the unique branding capabilities of the Internet. As a result, many advertisers seek to utilize innovative media formats to create highly engaging brand experiences for their online customers. According to eMarketer, online video advertising and rich media advertising are expected to be the fastest growing advertising formats in the United States and spending is projected to increase from $1.0 billion and $1.5 billion in 2009 to over $5.2 billion and $2.1 billion, respectively, in 2014, representing a compound annual growth rate of 39% and 7%, respectively. Emerging media formats and channels, such as mobile devices, game consoles and on-demand television, provide significant opportunities for advertisers to expand audience reach and strengthen their relationship with their target audience in innovative ways. Forrester Research projects United States advertising spending in emerging media channels to grow from $1.0 billion in 2007 to $10.6 billion in 2012, representing a compound annual growth rate of 59%.

        In 2009, a shift began from digital marketing to an interactive approach with consumers. Interactive marketing creates a two-way interaction with consumers. Marketing dollars to interactive marketing such as social media via the Internet or mobile devices are increasing. Forrester Research projects United States advertising spending on interactive media to grow from $25.6 billion in 2009 to $55.0 billion in 2014, representing a compound annual growth rate of 17%.


Services

        Through our suite of innovative services, we seek to address the needs of advertisers at various stages along the value chain of advertisement creation and delivery. These include idea generation, production and duplication, content distribution, media asset management and broadcast verification products. By offering services that encompass multiple stages of content creation and delivery, we are able to simplify the workflow process for advertisers. We believe our solutions offer advertisers tools essential to the creation and strategic distribution of advertisements in a cost-effective manner. We continually upgrade our systems to meet our customer's needs. During the years ended December 31, 2009, 2008, and 2007 we spent $6.3 million, $4.3 million and $3.2 million, respectively, on research and development activities, none of which were sponsored by customers. Our services address our clients' needs for efficient, accurate and reliable solutions for the development and delivery of advertising content across a wide spectrum of media, and include the following offerings:

        Advertising Distribution.    We provide primarily electronic and, to a lesser extent, physical distribution of broadcast advertising content to broadcast stations throughout the United States and Canada. We operate a digital network, currently connecting more than 5,000 advertisers and advertising agencies with approximately 4,500 television, cable and network broadcast destinations, approximately 11,000 radio stations, and approximately 8,100 daily and weekly newspapers in circulation in the United States and Canada. Our network enables the rapid, cost-effective and reliable electronic transmission of

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video and audio spots and other content and provides a high level of quality, accountability and flexibility to both advertisers and broadcasters. Our technologically advanced digital network delivers near master quality video and audio to broadcasters, which is equal or superior to the content currently delivered on dub and ship analog tapes. Our network routes transmissions to stations through an automated online transaction and delivery system, enabling delivery in as little as one hour after an order is received.

    Video.  We receive video content electronically primarily via our proprietary file transfer software that is deployed in post production studios. Video content also can be ingested through our various regional operations facilities throughout the United States. When video content is received, our employees conduct a quality control of the content, digitize the material and upload the content to our NOC, where it is combined with the customer's electronic transaction to transmit the various combinations of video to designated television stations. Video transmissions are sent via a high-speed fiber link to the digital satellite uplink facility over which they are then delivered directly to Company-owned servers, called DG FastChannel HD Xtreme™ servers, that we have placed in television stations and cable interconnects.

    Audio.  Audio content can be uploaded via the Internet electronically. In addition, audio can be received using our Upload Internet audio collection system. Audio transmissions are delivered over the Internet via our SpotCentral audio application that allows the radio stations to download the radio spots on demand.

    Print.  Print content can be uploaded via the Internet electronically into our print media distribution system. Print transmissions are delivered over the Internet to various newspaper locations via proprietary web-based software applications. The print transmissions are modified to the specific format as required by the individual newspapers.

        Video and audio transmissions are received at designated television and radio stations on DG FastChannel Spot Boxes, Client Workstations and Digital Media Managers. The servers enable stations to receive and play back material delivered through our digital distribution network. The units are owned by us and typically installed in the master control or production area of the stations. Upon receipt, station personnel generally review the content and transfer the spot to a standardized internal station and format for subsequent broadcast. Through our NOCs, we monitor the spots stored in each of our servers and ensure that space is always available for new transmissions. We can quickly transmit video or audio at the request of a station or in response to a customer who wishes to alter an existing order, allowing us to effectively adapt to customer needs and to distribute to hundreds of locations in as little as one hour, which would be impossible for traditional physical dub and ship houses.

        We offer various levels of digital video and audio distribution services to advertisers distributing content to broadcasters. These include the following: DGFC Priority, a service which guarantees arrival of the first spot on an order within one hour; DGFC Express, which guarantees arrival within four hours; DGFC Standard, which guarantees arrival by noon the next day; and DGFC Economy, which guarantees arrival by noon on the second day. We also offer a set of premium services enabling advertisers to distribute video or audio spots provided after normal business hours. We generally charge a fee per delivery for our advertising distribution service, which varies based on the service level ordered by the customer.

        In addition to our standard services, we have developed unique products to service customers with particular time-sensitive delivery needs, including the delivery of political advertising during election campaigns, providing a rapid response mechanism for candidates and issue groups.

        Online Advertising Solutions.    We offer an online advertising campaign management and deployment product known as the "Unicast Advertising Platform" ("UAP"). UAP permits publishers, advertisers, and their agencies to manage the complex process of deploying online advertising

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campaigns. This process includes creating the advertising assets, selecting the sites on which the advertisements will be deployed, setting the campaign parameters (ad rotation, the frequency with which an ad may be deployed, and others), deployment, and tracking of campaign results.

        The UAP integrates creative assembly with campaign management and detailed performance analysis. In addition, UAP has the broad capabilities to deliver multiple ad formats and media types, including several different video formats, 3D content, and all major "rich media" formats.

        UAP is "technology agnostic," meaning it delivers advertisements that utilize all major technologies and formats. UAP offers a suite of products including Unicast Transitional (full screen and partial screen video and interactive ads that are shown to consumers as they navigate between pages), Unicast In-Page (video and interactive ads embedded within web pages including standard and expandable banners, pre-roll and post-roll ads), and Unicast Over-the-Page (video and interactive ads that "float"/play over the top of an Internet site page).

        We offer these advertising formats delivered through UAP to customers, charging them in the standard manner consistent with industry practices with fees based on the number of times an advertisement is deployed (i.e., on a "CPM", or cost per thousand impression basis). CPM fees vary by type of advertisement, with static ads realizing relatively low fees and rich media ads—particularly video ads—realizing higher fees. Rates charged for advertising ranged from $0.02 to $5.25 per thousand impressions in 2009.

        Long-form Programming Distribution.    The Company also delivers its digital video broadcast services through our Digital Media Gateway® ("DMG") owned and operated by Pathfire, our wholly-owned subsidiary. The DMG consists of hardware and a suite of software applications that enable content creators and distributors to ingest, digitize, transport, store and prepare digital video media assets for broadcast. The DMG incorporates a sophisticated IP multicast network of satellites and can deliver all forms of video content including news, Video News Releases ("VNR"s), syndicated programming, infomercials, and Electronic Press Kits ("EPK"s). Another feature of the DMG is a terrestrial-based return-path network, which automatically tracks and notifies the Atlanta NOC of transmission failures, system health problems and content usage data. When notified of a transmission failure, the system automatically resends lost data packets using the minimum bandwidth necessary to complete the transmission. The DMG also uses the terrestrial network to send notification that the complete digital video transmission has been received in the DMG server at the broadcast television station. This system is fully automated and involves only minimal intervention by station technicians and customer support staff.

        The DMG platform consists of both hardware and software applications. These applications are responsible for three main tasks: managing the flow of digital video content from its source to Pathfire-enabled digital uplinks; managing the transmission of digital video content using Pathfire's IP multicast store-and-forward software algorithms from the digital uplink system to DMG caching servers at the stations; and managing the workflows for video assets from the DMG caching servers through various station systems.

        The first group of applications, Pathfire DMG submission and associated tools, works with both analog and digital video. If post-production output is on videotape, Pathfire's software digitizes or encodes the video into the appropriate digital format and delivers it to the uplink system. If post-production output is in digital video format, the application checks the digital formatting, makes any necessary changes, extracts the video attributes as metadata and pulls the digital files into the uplink transmission system.

        The second group of applications stores the content in the uplink system, prepares it for the satellite uplink by managing the transmission scheduling based on bandwidth and Service Level Agreement ("SLA") requirements and then sends the video through the satellite network to the DMG

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server at the receiving station. The distribution system is capable of managing transmission over the multicast satellite network and the Internet simultaneously. The distribution system repairs any lost data either by employing a packet-based algorithm or by retransmitting missing data based on an intelligent retry scheme built into the multicast protocol, or a combination of both. The receiving system sends confirmation that the digital files have been received through the Internet-based return path network to the Atlanta NOC.

        The third group of applications provides asset management functionality and manages the flow of content once it is received at the station by the DMG server. These applications provide stations with metadata, which helps the stations organize and manage the video for preview and for moving high resolution content from the DMG server through the station's infrastructure to the station's on-air system. Pathfire's asset management products in the station allow content to be moved as analog video or as a digital file. Interfaces have also been designed to deliver content and frame accurate metadata to the station's edit systems, newsroom computer systems, traffic systems, automation systems and play-to-air servers.

        The Pathfire DMG platform includes several content-specific solutions such as DMG Syndication, DMG News and DMG EPKs.

        For syndicated television shows and movies, Pathfire created Pathfire DMG Syndication. The application suite enables syndicators to deliver, track, manage and verify both standard definition and high definition programming to broadcast stations more efficiently. By automating processes, providing tracking information and greatly reducing missed feeds, Pathfire Syndication facilitates content delivery between syndicators and stations. Automated content delivery to broadcast stations through the Pathfire network minimizes the need to schedule or monitor satellite feeds and eliminates the need for tape. Broadcast-quality content arrives on Pathfire servers at stations, where users can access and manage content and metadata through the DMG desktop application. Pathfire DMG Syndication also integrates with existing downstream gear and helps with automation tasks at the station reducing manual labor costs. Pathfire DMG Syndication delivers frame-accurate timing sheets and desktop control for program directors and traffic managers, significantly reducing show preparation labor because station personnel no longer have to manually time syndicated show segments.

        Online Creative Research.    We own and maintain an online database of content and credits of U.S. television commercials for the advertising and TV commercial production industry. We believe that this is the most comprehensive online television commercial information service available to advertising agencies and production companies. Our SourceEcreative (formerly known as "Source TV") database includes information relating to commercials, individuals and companies. Customers can use our robust search engine specifically designed for the advertising industry. SourceEcreative allows users to find out which director, post house, composer or other production resource worked on specific spots, enabling advertising agencies to identify creative and production resources, and to accelerate their creative development process. Information can be provided via fax, phone, e-mail or over the Internet. SourceEcreative services most of the major U.S. advertising agencies and production companies, as well as television networks, programs and industry associations.

        Creative and Digital Marketing Solutions    In 2008, as part of our Enliven acquisition, we acquired Springbox, Ltd. ("Springbox"), an Austin-based interactive marketing firm with expertise in digital web marketing and creative solutions that provides fee-based professional services for creating content and implementing visualization solutions. Springbox provides web based marketing solutions for numerous global clients. Springbox was acquired to align with our strategy to enhance our web based product offerings, in order to meet the escalating demand for creative digital and Internet solutions from our clients. Springbox provides creative solutions that can be leveraged across the UAP and integrated with our premium rich media ad delivery capabilities. This combined offering is the next step in the

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evolution of our business, and will better position us to take advantage of the market opportunity for integrated online marketing solutions.

        Springbox allows us to provide full service interactive marketing solutions for our clients. Additionally, the division supports the development of advanced advertising formats and advertising content making use of UAP more appealing to marketers. Finally these services keep us on the cutting-edge of the industry, giving us hands-on experience with the design, creation and deployment of rich media websites.

        Media Production and Duplication.    Our production and duplication capabilities allow us to provide customers with ancillary services, which are offered in addition to our primary distribution service. Our services include storage of client masters or storyboards, editing of materials, tagging content, dubbing, video duplication and copying of media onto various physical multimedia formats, such as CD, DVD or tape. We believe these add-on service offerings allow us to better service our customers by reducing the number of vendors necessary to create and distribute advertisements.

        Media Asset Management.    Our digital media asset management solution simplifies spot management, access, storage and collaboration for our customers. Our media asset management solution is integrated with our distribution system, enabling automatic archiving of trafficked spots, online search, send-for-review and review-and-approval capabilities, automated digital storyboarding, streaming previews, a comprehensive order and market data history for each spot, script attachment capability and online search, sort, retrieve and hardcopy fulfillment.


Markets and Customers

        A large portion of our revenue is derived from the delivery of spot television and radio advertising to broadcast stations, cable systems and networks. We derive revenue from brand advertisers and advertising agencies, and from our marketing partners, which are typically dub and ship houses that have signed agreements with us to consolidate and forward the deliveries of their advertising agency customers to broadcast stations, cable systems and networks via our electronic delivery service in exchange for price discounts from us. The relative volumes of advertisements distributed by us are representative of the five leading national advertising categories of automotive, retail, business and consumer services, food and related products and entertainment. The volume of advertising from these segments is subject to seasonal, quarterly, and cyclical variations. No single customer accounts for more than 10% of our annual revenue.


Sales, Marketing and Customer Service

        Brand Strategy.    Our brand strategy is to position our services as the standard transaction method for the radio, television, cable, and network broadcast industries. We focus our marketing messages and programs at multiple segments within the advertising and broadcast industries. Each of the segments interacts with us for a different reason. Agencies purchase services from us on behalf of their advertisers. Production studios facilitate the transmission of audio and video to either the Irving or Atlanta NOCs. Production studios and dub and ship houses resell delivery services to agencies. Stations join the network to receive the content from their customers: the agencies and advertisers.

        Internet/E-Commerce Strategy.    SpotCentral provides advertisers and agencies with an intuitive web portal to visualize and manage the distribution of their valuable advertising content. Users can upload spots, choose or create new destination groups, attach traffic instructions, view invoices, distribute media electronically to thousands of destinations across our massive digital network and confirm delivery at the station level through our powerful new media server, the DG FastChannel Spot Box. Users have immediate access to key statistics, order status and other data, while workflow automation tools help user groups save routing instructions and destination paths for repeat orders. Users can

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search billing history and view invoices from any web-connected location. Customized search features let users research order history by brand, service level or transmission date. In addition, spots can be previewed at any time of the day or point in the order process. This design introduces new levels of simplicity, transparency, accountability and customer satisfaction to the spot distribution process.

        Sales.    We employ a direct sales force that calls on various departments at advertising agencies to communicate the capabilities and comparative advantages of our electronic distribution system, ad serving platform, and related products and services. In addition, our sales force calls on corporate advertisers who are in a position to either direct or influence agencies in directing deliveries to us. A separate staff sells to and services audio and video dealers, who resell our distribution services. We currently have regional sales offices in New York, Los Angeles and Chicago. Our sales force includes regional sales, inside sales, and telemarketing personnel.

        Marketing.    Our marketing programs are directed to stimulate demand with an emphasis on popularizing the benefits of digital delivery, including fast turnaround (same day services), increased flexibility, higher quality, and greater reliability and accountability. These marketing programs include direct mail and telemarketing campaigns, newsletters, collateral material (including brochures, data sheets, etc.), application stories, and corporate briefings in major United States cities. We also engage in public relations activities including trade show participation, the stimulation of articles in the trade and business press, press tours and advertisements in advertising and broadcast oriented trade publications.

        We market to broadcast stations to arrange for the placement of our DG FastChannel Spot Boxes for the receipt of video advertisements.

        Customer Service.    Our approach to customer service is based on a model designed to provide focused support from key market centered offices, located in Los Angeles, Dallas, Chicago, Detroit, New York and San Francisco. Clients work with specific, assigned account coordinators to place production service and distribution orders. National distribution orders are electronically routed to the NOCs for electronic distribution or, for off-line destinations, to our national duplication center in Louisville, Kentucky. Our distributed service approach provides direct support in key market cities enabling us to develop closer relationships with clients as well as the ability to support client needs for local production services. We also maintain a customer service team dedicated to supporting the needs of radio, television, and network stations. This support is available 7 days a week, 24 hours a day, to respond to station requests for information, traffic instructions or additional media. Providing direct support alleviates the need for client traffic departments to deal with individual stations or the challenges of staffing for off-hours support. Our customer service operation centers are linked to our order management and media storage systems, and national distribution network. These resources enable us to manage the distribution of client orders to the fulfillment location best suited to meet critical customer requirements as well as providing order status and fulfillment confirmation. This distribution model also provides us with significant redundancy and re-route capability, enabling us to meet customer needs when weather or other conditions prevent deliveries using traditional courier services.

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Competition

        Competition within the markets for media distribution is intense. In our advertising distribution business, numerous companies already distribute video and other content to a variety of destinations. Companies such as Google TV Ads, Comcast, and Ascent Media deliver television advertising spots to satellite TV systems, broadcast TV stations and/or cable head ends. At the same time, many companies, including Akamai and Limelight Networks are implementing technologies to distribute video to the established traditional channels and new media outlets. Additionally, numerous companies are offering technologies to distribute video content through a variety of means including software-only solutions at broadcast TV stations.

        We also compete with a variety of dub and ship houses and production studios that have traditionally distributed taped advertising spots via physical delivery. As local distributors, these entities have long-standing ties with advertising agencies that are often difficult for us to replace. In addition, these dub and ship houses and production studios often provide an array of ancillary video services, including archival storage and retrieval, closed captioning and format conversions, enabling them to deliver to their advertiser and agency customers a full range of customizable, media post-production, preparation, distribution and trafficking services. We plan to continue pursuing potential dub and ship house partners where such partnerships make strategic sense.

        In our advertising distribution business, we compete with dub and ship houses across the country but additionally with one or more satellite-based video distribution networks. We also anticipate that certain common and/or value-added telecommunications carriers may develop and deploy high bandwidth network services targeted at the advertising and broadcast industries, although we believe that no such carriers have yet begun spot advertising distribution.

        We compete with other companies that are focusing or may in the future focus significant resources on developing and marketing products and services that will compete with ours. We believe that our ability to compete successfully depends on a number of factors, both within and outside of our control, including: (1) the price, quality and performance of our products and those of our competitors; (2) the timing and success of new product introductions; (3) the emergence of new technologies; (4) the number and nature of our competitors in a given market; (5) the protection of intellectual property rights; and (6) general market and economic conditions.

        Competitors in our online advertising solution business include full service advertising delivery companies like Microsoft and Google. Additionally, certain companies specialize in delivering rich media and video advertisements like Pointroll (a division of Gannett), Eyewonder, Eyeblaster, and Flashtalking. Competitors in the services sector include advertising agencies, online agencies and independent creative talent that can build content in the Unicast format or in other rich media formats.

        We expect competition to continue to intensify as existing and new competitors begin to offer products, services, or systems that compete with our products. Our current or future competitors, many of whom, individually or together with their affiliates, have substantially greater financial resources, research, and development resources, distribution, marketing, and other capabilities than us, may apply these resources and capabilities to compete successfully against our products and service. A number of the markets in which we sell our products and services are also served by technologies that currently are more widely accepted than ours. Although we believe that our products and services are less expensive to use and more functional than competing products and services that rely on other technologies, it is uncertain whether our potential customers will be willing to make the initial capital investment that may be necessary to convert to our products and services. The success of our systems against these competing technologies depends in part upon whether our systems can offer significant improvements in productivity and sound and video quality in a cost-effective manner. It is uncertain whether our competitors will be able to develop systems compatible with, or that are alternatives to, our proprietary technology or systems. It is also not certain that we will be able to compete successfully

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against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, operating results, and financial condition.


Intellectual Property and Proprietary Rights

        We primarily rely upon a combination of copyright, trademark and trade secret laws and license agreements to establish and protect proprietary rights in our technologies. We currently have 55 patents issued with expiration dates ranging from March 2016 to May 2026 and 12 other patent applications pending. We also have 71 trademark registrations, 15 trademark applications and approximately 30 copyright registrations.


Employees

        As of December 31, 2009, we had a total of 739 employees, including 155 in research and development, 67 in sales and marketing, 438 in operations, and 79 in finance and administration; 724 of these employees are located in the United States and 15 are located in the United Kingdom. Our employees are not represented by a collective bargaining agreement and we have not experienced a work stoppage. We consider our relations with our employees to be good.

        Our business and prospects depend in significant part upon the continued service of our key management, sales and marketing and administrative personnel. The loss of key management or technical personnel could materially adversely affect our operating results and financial condition. We believe that our prospects depend in large part upon our ability to attract and retain highly skilled managerial, sales and marketing and administrative personnel. Competition for such personnel is intense, and we may not be successful in attracting and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on our operating results and financial condition.

ITEM 1A.    RISK FACTORS

        In evaluating an investment in our Company, the following risk factors should be considered.

The media distribution products and services industry is divided into several distinct markets, some of which are relatively mature while others are growing rapidly. If the mature markets begin to decline at a time when the developing markets fail to grow as anticipated, it will be increasingly difficult to maintain profitability.

        To date, our design and marketing efforts for our products and services have involved the identification and characterization of the broadcast market segments within the media distribution products and services industry that will be the most receptive to our products and services. We may not have correctly identified and characterized such markets and our planned products and services may not address the needs of those markets. Furthermore, our current technologies may not be suitable for specific applications within a particular market and further design modifications, beyond anticipated changes to accommodate different markets, may be necessary.

        While the electronic distribution of media has been available for several years and growth of this market is modest, many of the products and services now on the market are relatively new. It is difficult to predict the rate at which the market for these new products and services will grow, if at all. Even if the market does grow, it will be necessary to quickly conform our products and services to customer needs and emerging industry standards in order to be a successful participant in those markets, such as the market for High Definition "HD" spots. If the market fails to grow, or grows more slowly than anticipated, it will be difficult for any market participant to succeed and it will be increasingly difficult for us to maintain profitability.

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        To sustain profitability and growth, we must expand our product and service offerings beyond the broadcast markets to include additional market segments within the media distribution products and services industry. Potential new applications for our existing products in new markets include distance learning and training, finance and retail. While our products and services could be among the first commercial products that may be able to serve the convergence of several industry segments, including digital networking, telecommunications, compression products and Internet services, our products and services may not be accepted by that market. In addition, it is possible that:

    the convergence of several industry segments may not continue;

    the markets may not develop as a result of such convergence; or

    if markets develop, such markets may not develop either in a direction beneficial to our products or product positioning or within the time frame in which we expect to launch new products and product enhancements.

        Because the convergence of digital networking, telecommunications, compression products and Internet services is new and evolving, the growth rate, if any, and the size of the potential market for our products cannot be predicted. If markets for these products fail to develop, develop more slowly than expected or become served by numerous competitors, or if our products do not achieve the anticipated level of market acceptance, our future growth could be jeopardized. Broad adoption of our products and services will require us to overcome significant market development hurdles, many of which we cannot predict.

The industry is in a state of rapid technological change and we may not be able to keep up with that pace.

        The advertisement distribution and asset management industry is characterized by extremely rapid technological change, frequent new products, service introductions and evolving industry standards. The introduction of products with new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend upon our ability to enhance existing products and services, develop and introduce new products and services that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of our customers, including the need for "HD" spots. We may not succeed in developing and marketing product enhancements or new products and services that respond to technological change or emerging industry standards. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these products and services. Our products and services may not adequately meet the requirements of the marketplace and achieve market acceptance. If we cannot, for technological or other reasons, develop and introduce products and services in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if we have pre-announced the product and service releases, our business, financial condition, results of operations and cash flows will be harmed.

The marketing and sale of our products and services involve lengthy sales cycles. This makes business forecasting extremely difficult and can lead to significant fluctuations in quarterly results.

        Due to the complexity and substantial cost associated with providing integrated product and services to provide audio, video, data and other information across a variety of media and platforms, licensing and selling products and services to our potential customers typically involves a significant technical evaluation. In addition, there are frequently delays associated with educating customers as to the productive applications of our products and services, complying with customers' internal procedures for approving large expenditures and evaluating and accepting new technologies that affect key operations. In addition, certain customers have even longer purchasing cycles that can greatly extend the amount of time it takes to place our products and services with these customers. Because of the lengthy sales cycle and the large size of our potential customers' average orders, if revenues projected

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from a specific potential customer for a particular quarter are not realized in that quarter, product revenues and operating results for that quarter could be harmed. Revenues will also vary significantly as a result of the timing of product and service purchases and introductions, fluctuations in the rate of development of new markets and new applications, the degree of market acceptance of new and enhanced versions of our products and services, and the level of use of satellite networking and other transmission systems. In addition, increased competition and the general strength of domestic and international economic conditions also impact revenues.

        Because expense levels such as personnel and facilities costs are based, in part, on expectations of future revenue levels, if revenue levels are below expectations, our business, financial condition, results of operations and cash flows will be harmed.

We may be adversely affected by cyclicality or an extended downturn in the United States or worldwide economy in or related to the industries we serve.

        Our revenues are generated primarily from providing online campaign management solutions and services to advertising agencies and advertisers across digital media channels and a variety of formats. Demand for these services tends to be tied to economic cycles, reflecting overall economic conditions as well as budgeting and buying patterns. For example, in 1999, advertisers spent heavily on Internet advertising, which was followed by a downturn in advertising spending on the Internet in 2002. In addition, during a period of economic weakness in 2001, advertising spending online decreased at a faster rate than overall ad spending, although we believe this was because many of the companies advertising online were Internet companies experiencing significant financial distress. Following the recent negative developments in the world economy, several agency and analyst organizations now predict that the growth in online advertising may be slower than previously expected. We cannot assure you that advertising budgets and expenditures by advertising agencies and advertisers will not decline in any given period or that advertising spending will not be diverted to more traditional media or other online marketing products and services, which would lead to a decline in the demand for our campaign management solutions and services. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective customers' spending priorities. As a result, our revenues may not increase or may decline significantly in any given period.

Seasonality in buying patterns also makes forecasting difficult and can result in widely fluctuating quarterly results.

        Historically, the industry has experienced lower sales for services in the first quarter, which is somewhat offset with higher sales in the fourth quarter due to increased customer advertising volumes for the holiday selling season. In addition, product and service revenues are influenced by political advertising, which generally occurs every two years. Nevertheless, in any single period, product and service revenues and delivery costs are subject to variation based on changes in the volume and mix of deliveries performed during such period. In addition, we have historically operated with little or no backlog. The absence of backlog and fluctuations in revenues and costs due to seasonality increases the difficulty of predicting our operating results.

The markets in which we operate are highly competitive, and competition may increase further as new participants enter the market and more established companies with greater resources seek to expand their market share.

        Competition within the markets for media distribution is intense. In our advertising distribution business, numerous companies already distribute video and other content to a variety of destinations. Companies such as Google TV Ads, Comcast, and Ascent Media deliver television advertising spots to satellite TV systems, broadcast TV stations and/or cable head ends. At the same time, many companies, including Akamai and Limelight Networks are implementing technologies to distribute video to the

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established traditional channels and new media outlets. Additionally, numerous companies are offering technologies to distribute video content through a variety of means including software-only solutions at broadcast TV stations.

        While we offer products and services focused on the electronic distribution of media, we compete with dub and ship houses and production studios. Many dub and ship houses and production studios, such as Ascent Media, have long-standing ties to local distributors that can be difficult to replace. Many of these dub and ship houses and production studios also have greater financial, distribution and marketing resources than we and have achieved a higher level of brand recognition. Production studios, advertising agencies and media buying firms also could deliver directly through entities with package delivery expertise such as Federal Express, United Parcel Service and the United States Postal Service.

        In addition, we compete with one or more satellite-based video distribution networks. We also anticipate that certain common and/or value-added telecommunications carriers and other companies may develop and deploy high bandwidth network services targeted at the advertising and broadcast industries.

        In our online advertising solution business we face formidable competition from other companies that provide solutions and services similar to ours. Currently, the primary online video competitors are Google and Microsoft. In March 2008, Google acquired DoubleClick and in May 2007, Microsoft acquired aQuantive. DoubleClick and Atlas offer solutions and services similar to ours and compete directly with us. We expect that Google and Microsoft will use their substantial financial and engineering resources to expand the DoubleClick and Atlas businesses and increase their ability to compete with us.

        Google and Microsoft have significantly greater name recognition and greater financial, technical and marketing resources than we offer in our online advertising solution business. Microsoft also has a longer operating history and more established relationships with customers. In addition, we believe that both Google and Microsoft have a greater ability to attract and retain customers due to numerous competitive advantages, including their ability to offer and provide their marketing and advertising customers with a significantly broader range of related solutions and services than us. Google and Microsoft may also use their experience and resources to compete with us in a variety of ways, including through acquisitions of competitors or related businesses, research and development, and marketing for new customers more aggressively. Furthermore, Google or Microsoft could use campaign management solutions as a loss leader or may provide campaign management solutions or portions of such solutions without charge or below cost in order to encourage customers to use their other product offerings. If Google or Microsoft is successful in providing solutions or services that are better than ours, leverage platforms more effectively than ours or that are perceived by customers as being more cost-effective, we could experience a significant decline in our customer base and in their use of our solutions and services. Such a decline could have a material adverse effect on our business, financial condition and results of operations.

        In addition to Google and Microsoft, we face competition from other companies in our online advertising solutions business. Among our competitors are rich-media solutions companies (such as Pointroll, Eyeblaster, Eyewonder and Flashtalking) and ad serving companies (such as Zedo and CheckM8). In addition, we may experience competition from companies that provide web analytics or web intelligence. Our competitors may develop services that are equal or superior to our services or that achieve greater market acceptance than our services. Many of our competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than us.

        We believe that our ability to compete successfully with all of our service offerings depends on a number of factors, both within and outside of our control, including: (1) the price, quality and performance of our products and those of our competitors; (2) the timing and success of new product

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introductions; (3) the emergence of new technologies; (4) the number and nature of our competitors in a given market; (5) the protection of intellectual property rights; and (6) general market and economic conditions. In addition, the assertion of intellectual property rights by others factor into the ability to compete successfully. The competitive environment could result in price reductions that could result in lower profits and loss of our market share.

        With respect to new markets, such as the delivery of other forms of content to radio and television stations, competition is likely to come from companies in related communications markets and/or package delivery markets. Some of the companies capable of offering products and services with superior functionality include telecommunications providers, such as AT&T, Verizon and other fiber and telecommunication companies, each of which would enjoy materially lower electronic delivery transportation costs. Radio networks such as ABC Radio Networks or Westwood One could also become competitors by selling and transmitting advertisements as a complement to their content programming.

        Further, other companies may in the future focus significant resources on developing and marketing products and services that will compete with ours.

        In addition, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties and several of our competitors have combined or may combine in the future with larger companies with greater resources than ours. This growing trend of cooperative relationships and consolidation within our industry may create a great number of powerful and aggressive competitors that may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to existing and potential employees and customers than we are able to. They may also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. Any increase in the level of competition from these, or any other competitors, is likely to result in price reductions, reduced margins, loss of market share and a potential decline in our revenues. We cannot assure you that we will be able to compete successfully with our existing or future competitors. If we fail to withstand competitive pressures and compete successfully, our business, financial condition and results of operations could be materially adversely affected.

We have a history of losses which must be considered in assessing our future prospects.

        2003 was the first year we reported net income after having been unprofitable since our inception. While we reported profit again in 2004, 2007, 2008, and 2009, we experienced a loss in 2005 and 2006. We could begin to generate net losses in the future, which could depress our stock price. Decreases in revenues could occur, which could impair our ability to operate profitably in the future. Future success also depends in part on obtaining reductions in delivery and service costs, particularly our ability to continue to automate order processing and to reduce telecommunications costs. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets, such as risks that the market might fail to grow, expenses relating to modifying products and services to meet industry standards as they change over time, and difficulties in gaining and maintaining market share. To address these risks, we must, among other things, respond to competitive developments, attract, retain and motivate qualified persons, continually upgrade our technologies and begin to commercialize products incorporating such technologies. We may not be successful in addressing any or all of these risks and may not be able to sustain profitability.

We may not be able to obtain additional financing to satisfy our future capital needs.

        We intend to continue making capital expenditures to market, develop, produce and deploy at no cost to our customer, the various equipment required by the customers to receive our services and to

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introduce additional services. In addition, we will need to make the investments necessary to maintain and improve our network. We also expect to expend capital to consummate any mergers and acquisitions that we undertake in the future. We may require additional capital sooner than currently anticipated and may not be able to obtain additional funds adequate for our capital needs. We cannot predict any of the factors affecting the revenues and costs of these activities with any degree of certainty. Accordingly, we cannot predict the precise amount of future capital that we will require, particularly if we pursue one or more additional acquisitions.

        Furthermore, additional financing may not be available to us, or if it is available, it may not be available on acceptable terms. Our inability to obtain the necessary financing on acceptable terms may prevent us from deploying our products and services effectively, maintaining and improving our products and network and completing advantageous acquisitions. Our inability to obtain the necessary financing could seriously harm our business, financial condition, results of operations and prospects. Consequently, we could be required to:

    significantly reduce or suspend certain of our operations;

    seek an additional merger partner; or

    sell additional securities on terms that are dilutive to our stockholders.

Our business is highly dependent upon radio and television advertising. If demand for, or margins from, our radio and television advertising delivery services decline, our business results could decline.

        We expect that a significant portion of our revenues will continue to be derived from the delivery of radio and television advertising spots from advertising agencies, production studios and dub and ship houses to radio and television stations in the United States. A decline in demand for, or average selling prices of, our radio and television advertising delivery services for any of the following reasons, or otherwise, would seriously harm our business, financial condition, results of operations and prospects:

    competition from new advertising media;

    new product introductions or price competition from competitors;

    a shift in purchases by customers away from our premium services; and

    a change in the technology used to deliver such services.

        Additionally, we are dependent on our relationship with the radio and television stations in which we have installed communications equipment. Should a substantial number of these stations go out of business, experience a change in ownership or discontinue the use of our equipment in any way, our business, financial condition, results of operations and prospects would be harmed.

If we are not able to maintain and improve service quality, our business and results of operations could decline.

        Our business will depend on making cost-effective deliveries to broadcast stations within the time periods requested by our customers. If we are unsuccessful in making these deliveries, for whatever reason, a station might be prevented from selling airtime that it otherwise could have sold. Our ability to make deliveries to stations within the time periods requested by customers depends on a number of factors, some of which will be outside of our control, including:

    equipment failure;

    interruption in services by telecommunications service providers; and

    inability to maintain our installed base of audio and video units that will comprise our distribution network.

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        Stations may assert claims for lost air-time in these circumstances and dissatisfied advertisers may refuse to make further deliveries through us in the event of a significant occurrence of lost deliveries, which would result in a decrease in our revenues or an increase in our expenses, either of which could lead to a reduction in net income or an increase in net loss. Although we expect that we will maintain insurance against business interruption, such insurance may not be adequate to protect us from significant loss in these circumstances or from the effects of a major catastrophe (such as an earthquake or other natural disaster), which could result in a prolonged interruption of our business.

Our business is highly dependent on electronic video advertising delivery service deployment.

        Our inability to maintain units necessary for the receipt of electronically delivered video advertising content in an adequate number of television stations or to capture market share among content delivery customers, which may be the result of price competition, new product introductions from competitors or otherwise, would be detrimental to our business objectives and deter future growth. We have made a substantial investment in upgrading and expanding our Irving NOC and in populating television stations with the units necessary for the receipt of electronically delivered video advertising content. However, we cannot assure you that the maintenance of these units will cause this service to achieve adequate market acceptance among customers that require video advertising content delivery.

        In addition, to more fully address the needs of video delivery customers we have developed a set of ancillary services that typically are provided by dub and ship houses. These ancillary services include cataloging, physical archiving, closed-captioning, modification of slates and format conversions. We believe that we will need to provide these services on a localized basis in each of the major cities in which we provide services directly to agencies and advertisers. We currently provide certain of such services to a portion of our customers through our facilities in New York, Los Angeles, San Francisco, Detroit and Chicago. However, we may not be able to successfully provide these services to all customers in those markets or any other major metropolitan area at competitive prices. Additionally, we may not be able to provide competitive video distribution services in other U.S. markets because of the additional costs and expenses necessary to do so and because we may not be able to achieve adequate market acceptance among current and potential customers in those markets.

        While we are taking the steps we believe are required to achieve the network capacity and scalability necessary to deliver video content, such as HD content, reliably and cost effectively as video advertising delivery volume grows, we may not achieve such goals because they are highly dependent on the services provided by our telecommunication providers and the technological capabilities of both our customers and the destinations to which content is delivered. If our telecommunication providers are unable or unwilling to provide the services necessary at a rate we are willing to pay or if our customers and/or our delivery destinations do not have the technological capabilities necessary to send and/or receive video content, our goals of adequate network capacity and scalability could be jeopardized.

        In addition, we may be unable to retain current audio delivery customers or attract future audio delivery customers who may ultimately demand delivery of both media content unless we can successfully continue to develop and provide video transmission services. The failure to retain such customers could result in a reduction of revenues, thereby decreasing our ability to maintain profitability.

We rely on bandwidth providers and other third parties for key aspects of the process of providing products and services to our customers, and any failure or interruption in the services and products provided by these third parties could harm our ability to operate our business and damage our reputation.

        We rely on third-party vendors, including bandwidth providers. Any disruption in the network access services provided by these third-party providers or any failure of these third-party providers to

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handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology from third parties to facilitate aspects of our connectivity operations. We have experienced and expect to continue to experience interruptions and delays in service and availability for such elements. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies could negatively impact our relationship with users and adversely affect our business and could expose us to liabilities to third parties.

If we were no longer able to rely on our existing providers of transmissions services, our business and results of operations could be harmed.

        We obtain our local access transmission services and long distance telephone access through contracts with Sprint and Verizon, both of which expire in November 2010. The agreement with Sprint provides for reduced pricing on various services provided in exchange for minimum purchases of $0.4 million each year and the Verizon contract provides reduced pricing in exchange for minimum purchases of $0.3 million each year. The agreements provide for certain achievement credits once specified purchase levels are met. Any interruption in the supply or a change in the price of either local access or long distance carrier service could increase costs or cause a significant decline in revenues, thereby decreasing our operating results.

We face various risks associated with purchasing satellite capacity.

        As part of our strategy of providing transmittal of audio, video, data and other information using satellite technology, we periodically purchase satellite capacity from third parties owning satellite systems. Although our management attempts to match these expenditures against anticipated revenues from sales of products or services to customers, they may not be successful at estimating anticipated revenues, and actual revenues from sales of products or services may fall below expenditures for satellite capacity. In addition, purchases of satellite capacity require a significant amount of capital. Any inability to purchase satellite capacity or to achieve revenues sufficient to offset the capital expended to purchase satellite capacity may make our business more vulnerable and significantly affect our financial condition, cash flows and results of operations.

If the existing relationship with Clear Channel Satellite Services or Intelsat is terminated, or if either Clear Channel Satellite Services or Intelsat fails to perform as required under its agreement with us, our business could be interrupted.

        We have designed and developed the necessary software to enable our current video delivery systems to receive digital satellite transmissions over the AMC-9 and Galaxy 18 satellite systems. However, the Clear Channel or Galaxy 18 satellite systems may not have the capacity to meet our future delivery commitments and broadcast quality requirements on a cost-effective basis, if at all. We have a non-exclusive agreement with Clear Channel that expires in June 2010 and Intelsat that expires in December 2013. We expect to renew and extend our agreement with Clear Channel before its expiration. The agreements provide for fixed pricing on dedicated bandwidth and give us access to satellite capacity for electronic delivery of digital audio and video transmissions by satellite. Clear Channel and Intelsat are required to meet performance specifications as outlined in the agreements, and we are given a credit allowance for future fees if Clear Channel or Intelsat do not meet these requirements. The agreements state that Clear Channel or Intelsat can terminate the agreement if we do not make timely payments or become insolvent.

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Certain of our products depend on satellites; any satellite failure could result in interruptions of our service that could negatively impact our business and reputation.

        A reduction in the number of operating satellites or an extended disruption of satellite transmissions would impair the current utility of the accessible satellite network and the growth of current and additional market opportunities. Satellites and their ground support systems are complex electronic systems subject to weather conditions, electronic and mechanical failures and possible sabotage. The satellites have limited design lives and are subject to damage by the hostile space environment in which they operate. The repair of damaged or malfunctioning satellites is nearly impossible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. In addition, satellite transmission can be disrupted by natural phenomena causing atmospheric interference, such as sunspots.

        Certain of our products rely on signals from satellites, including, but not limited to, satellite receivers and head-end equipment. Any satellite failure could result in interruptions of our service, negatively impacting our business. We attempt to mitigate this risk by having our customers procure their own agreements with satellite providers.

Interruption or failure of our information technology and communications systems could impair our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.

        Our provision of our products and services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand could be damaged if people believe our system is unreliable. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our Irving or Atlanta NOCs could result in lengthy interruptions in our service.

        We have experienced system failures in the past and may in the future. Any unscheduled interruption in our service puts a burden on our entire organization and may result in a loss of revenue. If we experience frequent or persistent system failures in our Irving or Atlanta NOC or web-based management systems, our reputation and brand could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled downtime.

The market price of our common stock is likely to continue to be volatile.

        Some of the factors that may cause the market price of our common stock to fluctuate significantly include:

    the addition or departure of key personnel;

    variations in our quarterly operating results;

    announcements by us or our competitors of significant contracts, new or enhanced products or service offerings, acquisitions, distribution partnerships, joint ventures or capital commitments;

    changes in coverage and financial estimates by securities analysts;

    changes in market valuations of networking, Internet and telecommunications companies;

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    fluctuations in stock market prices and trading volumes, particularly fluctuations of stock prices quoted on the Nasdaq Global Market; and

    sale of a significant number of shares of our common stock by us or our significant holders.

Sales of substantial amounts of our common stock in the public market could harm the market price of our common stock.

        The sale of substantial amounts of our shares (including shares issuable upon exercise of outstanding options and warrants to purchase our common stock) may cause substantial fluctuations in the price of our common stock. Because investors would be more reluctant to purchase shares of our common stock following substantial sales, the sale of these shares also could impair our ability to raise capital through the sale of additional stock.

Our inability to enter into or develop strategic relationships in key market segments could harm our operating results.

        Our strategy depends in part on the development of strategic relationships with leading companies in key market segments, including media broadcasters and digital system providers. We may not be able to successfully form or enter into such relationships, which may jeopardize our ability to generate sales of our products or services in those segments. Specific product lines are dependent to a significant degree on strategic alliances and joint ventures formed with other companies. Various factors could limit our ability to enter into or develop strategic relationships, including, but not limited to, our relatively short operating history, history of losses and the resources available to our competitors. Moreover, the terms of strategic alliances and joint ventures may vest control in a party other than us. Accordingly, the success of the strategic alliance or joint venture may depend upon the actions of that party and not us.

Our business may not grow if the Internet advertising market does not continue to develop or if we are unable to successfully implement our business model.

        An emerging part of our service offering is to generate revenue by providing interactive marketing solutions to advertisers, ad agencies and web publishers. The profit potential for this business model is unproven. For a portion of our business to be successful, Internet advertising will need to achieve increasing market acceptance by advertisers, ad agencies and web publishers. The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising. These alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general.

        Intensive marketing and sales efforts are necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services. Advertisers could be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. Acceptance of our Internet advertising solutions will depend on the continued emergence of Internet commerce, communication, and advertising, and demand for our solutions. We cannot assure you that use of the Internet will continue to grow or that current uses of the Internet are sustainable.

Insiders have substantial control over us which could limit others' ability to influence the outcome of key transactions, including changes in control.

        As of December 31, 2009, our executive officers and directors and their respective affiliates owned approximately 10% of our common stock. As a result, these stockholders may be able to control or significantly influence all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may have the effect

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of delaying or preventing a change in control of us even if a change of control is in the best interest of all stockholders.

Our business may be harmed if we are not able to protect our intellectual property rights from third-party challenges or if the intellectual property we use infringes upon the proprietary rights of third parties.

        The steps taken to protect our proprietary information may not prevent misappropriation of such information, and such protection may not preclude competitors from developing confusingly similar brand names or promotional materials or developing products and services similar to ours. We consider our trademarks, copyrights, advertising and promotion design and artwork to be of value and important to our businesses. We rely on a combination of trade secret, copyright and trademark laws and nondisclosure and other arrangements to protect our proprietary rights. We generally enter into confidentiality or license agreements with our distributors and customers and limit access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

        We cannot assure you that our intellectual property does not infringe on the proprietary rights of third parties. While we believe that our trademarks, copyrights, advertising and promotion design and artwork do not infringe upon the proprietary rights of third parties, we may still receive future communications from third parties asserting that we are infringing, or may be infringing, on the proprietary rights of third parties. Any such claims, with or without merit, could be time-consuming, require us to enter into royalty arrangements or result in costly litigation and diversion of management attention. If such claims are successful, we may not be able to obtain licenses necessary for the operation of our business, or, if obtainable, such licenses may not be available on commercially reasonable terms, either of which could prevent our ability to operate our business.

We may enter into or seek to enter into business combinations and acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

        We acquired Enliven, the Vyvx advertising services business of Level 3 Communications, LLC, Pathfire, Point.360, GTN, and FastChannel Network Inc. Our business strategy might include the acquisition of additional complementary businesses and product lines. Any such acquisitions would be accompanied by the risks commonly encountered in such acquisitions, including:

    the difficulty of assimilating the operations and personnel of the acquired companies;

    the potential disruption of our business;

    the inability of our management to maximize our financial and strategic position by the successful incorporation of acquired technology and rights into our product and service offerings;

    difficulty maintaining uniform standards, controls, procedures and policies, with respect to accounting matters and otherwise;

    the potential loss of key employees of acquired companies; and

    the impairment of relationships with employees and customers as a result of changes in management and operational structure.

        We may not be able to successfully complete any acquisition or, if completed, the acquired business or product line may not be successfully integrated with our operations, personnel or technologies. Any inability to successfully integrate the operations, personnel and technologies associated with an acquired business and/or product line may negatively affect our business and results of operation. We may dispose of any of our businesses or product lines in the event that we are unable

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to successfully integrate them, or in the event that management determines that any such business or product line is no longer in our strategic interests.

Failure to manage future growth could hinder the future success of our business.

        Our personnel, systems, procedures and controls may not be adequate to support our existing as well as future operations. We will need to continue to implement and improve our operational, financial and management information systems, procedures and controls on a timely basis and to expand, train, motivate and manage our work force. We must also continue to further develop our products and services while implementing effective planning and operating processes, such as continuing to implement and improve operational, financial and management information systems; hiring and training additional qualified personnel; continuing to expand and upgrade our core technologies; and effectively managing multiple relationships with various customers, joint venture and technological partners and other third parties.

We depend on key personnel to manage the business effectively, and if we are unable to retain our key employees or hire additional qualified personnel, our ability to compete could be harmed.

        Our future success will depend to a significant extent upon the services of Scott K. Ginsburg, Chairman of the Board and Chief Executive Officer, Neil Nguyen, President and Chief Operating Officer, and Omar A. Choucair, Chief Financial Officer. Uncontrollable circumstances, such as the death or incapacity of any key executive officer, could have a serious impact on our business.

        Our future success will also depend upon our ability to attract and retain highly qualified management, sales, operations, technical and marketing personnel. At the present time there is, and will continue to be, intense competition for personnel with experience in the markets applicable to our products and services. Because of this intense competition, we may not be able to retain key personnel or attract, assimilate or retain other highly qualified technical and management personnel in the future. The inability to retain or to attract additional qualified personnel as needed could have a considerable impact on our business.

Certain provisions of our bylaws may have anti-takeover effects that could prevent a change in control even if the change would be beneficial to our stockholders.

        We have a classified board which might, under certain circumstances, discourage the acquisition of a controlling interest of our stock because such acquirer would not have the ability to replace directors except as the term of each class expires. The directors are divided into three classes with respect to the time for which they hold office. The term of office of one class of directors expires at each annual meeting of stockholders. At each annual meeting of stockholders, directors elected to succeed those directors whose terms then expire are elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.

Our board of directors may issue, without stockholder approval, preferred stock with rights and preferences superior to those applicable to the common stock.

        Our certificate of incorporation includes a provision for the issuance of "blank check" preferred stock. This preferred stock may be issued in one or more series, with each series containing such rights and preferences as the board of directors may determine from time to time, without prior notice to or approval of stockholders. Among others, such rights and preferences might include the rights to dividends, superior voting rights, liquidation preferences and rights to convert into common stock. The rights and preferences of any such series of preferred stock, if issued, may be superior to the rights and preferences applicable to the common stock and might result in a decrease in the price of the common stock.

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We depend upon a number of single or limited-source suppliers, and our ability to produce audio and video distribution equipment could be harmed if those relationships were discontinued.

        We rely on fewer than five single or limited-source suppliers for integral components used in the assembly of our audio and video units. If a supplier were to experience financial or operational difficulties that resulted in a reduction or interruption in component supply to us, this would delay our deployment of audio and video units. We rely on our suppliers to manufacture components for use in our products. Some of our suppliers also sell products to our competitors and may in the future become our competitors, possibly entering into exclusive arrangements with our existing competitors. In addition, our suppliers may stop selling our products or components to us at commercially reasonable prices or completely stop selling our products or components to us. If a reduction or interruption of supply were to occur, it could take a significant period of time for us to qualify an alternative subcontractor, redesign our products as necessary and contract for the manufacture of such products. This would have the effect of depressing our business until we were able to establish sufficient component supply through an alternative source. We believe that there are currently alternative component manufacturers that could supply the components required to produce our products, but based on the financial condition and service levels of our current suppliers, we do not feel the need to pursue agreements or understandings with such alternative sources or pursue long-term contracts with our current suppliers. We have experienced component shortages in the past, and material component shortages or production or delivery delays may occur in the future.

We determined that there were material weaknesses in our disclosure controls and procedures such that those controls and procedures were not effective as of December 31, 2007, December 31, 2006, and December 31, 2004. In the event a material weakness occurs again in the future, our financial statements and results of operations could be harmed and you may not be justified in relying on those financial statements.

        For the year ended December 31, 2007, we determined that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting related to certain deficiencies in the controls surrounding monitoring and oversight of accounting and financial reporting related to derivative instruments. For the year ended December 31, 2006, we determined that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting for business combinations and stock compensation as of December 31, 2006. For the year ended December 31, 2004, we determined that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting for income taxes as of December 31, 2004. In the event that these or any other material weakness occurs in the future, our financial statements and results of operations could be harmed and you may not be justified in relying on those financial statements, either of which could result in a decrease in our stock price.

Our software products may be wrongly labeled as spyware which might lead to its uninstallation causing a decrease in our revenues.

        Our software products, including the Viewpoint Toolbar and the Media Player, have been wrongly characterized as spyware by certain security software vendors. We monitor activity in this area and undertake efforts to educate vendors about the characteristics of our software, and thus far have been successful at getting the vast majority of these vendors to change their characterization of our Viewpoint Toolbar. Should we fail to persuade such vendors about the functionality of our Viewpoint Toolbar, or not learn about a false characterization on a timely basis, a substantial number of our Viewpoint Toolbars could be uninstalled leading to a decrease in our revenues and our business will be materially and adversely affected.

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Our revenues will be impacted by seasonal fluctuations and decreases or delays in advertising spending due to general economic conditions.

        We believe that our revenues will be subject to seasonal fluctuations because advertisers generally place fewer advertisements during the first and third calendar quarters of each year and direct marketers mail substantially more marketing materials in the third quarter of each year. Furthermore, Internet user traffic typically drops during the summer months, which reduces the number of advertisements to sell and deliver and searches performed. Expenditures by advertisers and direct marketers tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns. Our revenue could be materially reduced by a decline in the economic prospects of advertisers, direct marketers or the economy in general, which could alter current or prospective advertisers' spending priorities or budget cycles or extend our sales cycle. In addition, any decreases in or delays in advertising spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues. Due to such risks, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results. Our staffing and other operating expenses are based in large part on anticipated revenues. It may be difficult for us to adjust our spending to compensate for any unexpected shortfall. If we are unable to reduce our spending following any such shortfall, our results of operations would be adversely affected.

We plan to expand operations in international markets in which we have limited experience, which could harm our business, operating results and financial condition.

        We opened a Unicast office in the United Kingdom in 2007 and plan to expand our product offering in the European and other international markets. We have only limited experience in marketing and operating our products and services in international markets, and we may not be able to successfully execute our business model in these markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets.

        We believe that as the international markets in which we operate continue to grow, competition in these markets will intensify. Local companies may have a competitive advantage because of a greater understanding and focus on the local markets. In addition, certain international markets may be slower than domestic markets in adopting the Internet as an advertising and commerce medium and so our operations in international markets may not develop at a rate that supports our level of investment.

        Other risks of doing business internationally include the following:

    difficulties in developing, managing and staffing foreign operations;

    stringent local labor laws or regulations;

    currency exchange rate fluctuations;

    trade barriers and regulations;

    difficulty enforcing contracts in foreign jurisdictions;

    potentially adverse tax consequences;

    import or export restrictions; and

    difficulties in complying with local government regulation or local laws.

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Consolidation in the industries in which we operate could lead to increased competition and loss of customers.

        The Internet industry (and online advertising in particular) has experienced substantial consolidation. We expect this consolidation to continue. This consolidation could adversely affect our business and results of operations in a number of ways, including the following:

    our customers could acquire or be acquired by our competitors and terminate their relationship with us;

    our customers could merge with each other, which could reduce our ability to negotiate favorable terms; and

    competitors could improve their competitive position through strategic acquisitions.

Our ad campaign management and deployment solution may not be successful and may cause business disruption.

        Unicast Advertising Platform (UAP) is our proprietary ad deployment technology. We must, among other things, ensure that this technology will function efficiently at high volumes, interact properly with our database, offer the functionality demanded by our customers and assimilate our sales and reporting functions. Customers may become dissatisfied by any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deploy advertisements without significant delay to the viewer. Sustained or repeated system failures would reduce the attractiveness of our solutions to advertisers, ad agencies, and web publishers and could result in contract terminations, fee rebates and make-goods, thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising deployed through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be materially and adversely affected.

Privacy concerns could lead to legislative and other limitations on our ability to collect usage data from Internet users, including limitations on our use of cookie or conversion tag technology and user profiling, which is crucial to our ability to provide our solutions and services to our customers.

        Our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our customers depends on the use of "cookies" and "conversion tags" to track Internet users and their online behavior, which allows us to build anonymous user profiles and measure an advertising campaign's effectiveness. A cookie is a small file of information stored on a user's computer that allows us to recognize that user's browser when we serve advertisements. A conversion tag functions similarly to a banner advertisement, except that the conversion tag is not visible. Our conversion tags may be placed on specific pages of clients of our customers' or prospective customers' websites. Government authorities inside the United States concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, conversion tags or user profiling. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in U.S. Congress and many state legislatures. Attempts to regulate spyware may be drafted in such a way as to include technology like cookies and conversion tags in the definition of spyware, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy.

        Our foreign operations may also be adversely affected by regulatory action outside the United States. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that imposes certain restrictions

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on the use of cookies and conversion tags and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation to comply with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws limiting the use of user profiling, and other countries, both in and out of the European Union, may impose similar limitations.

        Internet users may also directly limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software. Internet browser software upgrades may also result in limitations on the use of cookies or conversion tags. Technologies like the Platform for Privacy Preferences (P3P) Project may limit collection of cookie and conversion tag information. Individuals have also brought class action suits against companies related to the use of cookies and several companies, including companies in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and use of Internet user information. We may be subject to such suits in the future, which could limit or eliminate our ability to collect such information.

        If our ability to use cookies or conversion tags or to build user profiles were substantially restricted due to the foregoing, or for any other reason, we would have to generate and use other technology or methods that allow the gathering of user profile data in order to provide our services to our customers. This change in technology or methods could require significant reengineering time and resources, and may not be complete in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially reasonable terms, if at all. If the use of cookies and conversion tags are prohibited and we are not able to efficiently and cost effectively create new technology, our business, financial condition and results of operations would be materially adversely affected.

        In addition, any compromise of our security that results in the release of Internet users' and/or our customers' data could seriously limit the adoption of our solutions and services as well as harm our reputation and brand, expose us to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business. The risk that these types of events could seriously harm our business is likely to increase as the amount of data we store for our customers on our servers (including personal information) and the number of countries where we operate has been increasing, and we may need to expend significant resources to protect against security breaches, which could have an adverse effect on our business, financial condition or results of operations.

If we fail to detect click-through fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

        We are exposed to the risk of fraudulent clicks and other invalid clicks on advertisements delivered by us from a variety of potential sources. Invalid clicks are clicks that we have determined are not intended by the user to link to the underlying content, such as inadvertent clicks on the same ad twice and clicks resulting from click fraud. Click fraud occurs when a user intentionally clicks on an ad displayed on a web site for a reason other than to view the underlying content. These types of fraudulent activities could harm our business and our brand. If fraudulent clicks are not detected, the data that our solutions provide to our customers is inaccurate and the affected advertisers may lose confidence in our solutions to deliver a return on their investment. If advertisers become dissatisfied with our solutions, they may choose to do business with our competitors or reduce their Internet advertising spending, which would have a material adverse effect on our business, financial condition and results of operations.

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Internet security poses risks to our entire business.

        The process of e-commerce aggregation by means of our hardware and software infrastructure involves the transmission and analysis of confidential and proprietary information of the advertiser, as well as our own confidential and proprietary information. The compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, prospects, financial condition and results of operations. We rely on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as credit and other proprietary information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect client transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause material interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may have a material adverse effect on our business, prospects, financial condition and results of operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None

ITEM 2.    PROPERTIES

        Company's principal executive offices are at 750 West John Carpenter Freeway in Irving, Texas. The Company's material properties are listed below:

Location
  Type   Segment   Lease
Expiration
  Square
Footage
  Square
Footage
Sublet
 

Irving, TX

  Headquarters Corporate Office   Ads   2011     26,025        

Irving, TX

  Headquarters Corporate Office   Ads   2011     2,725        

Detroit, MI

  Sales and Operations   Ads   2012     76,488     35,417  

Wilmington, DE

  Sales and Operations   Ads   2010     54,800        

Roswell, GA

  Sales and Operations   Ads   2010     32,900        

New York, NY

  Sales and Operations   Ads   2016     26,200        

Burbank, CA

  Sales and Operations   Ads   2011     24,500        

Chicago, IL

  Sales and Operations   Ads   2011     18,500        

Los Angeles, CA

  Sales and Operations   Ads   2011     17,700        

New York, NY

  Sales and Operations   Ads   2011     15,600        

Chicago, IL

  Sales and Operations   Ads   2016     13,580        

New York, NY

  Sales and Operations   Ads   2017     12,500        

Louisville, KY

  Dub and Ship Facility   Ads   2013     9,100        

Dallas, TX

  Sales and Operations   Ads   2013     6,400        

Austin, TX

  Sales and Operations   Ads   2011     5,600        

Boca Raton, FL

  Administrative, Sales and Operations   Other   2011     3,816        

London

  Sales and Production   Other   2012     775        

Austin, TX

  Sales and Operations   Other   2011     12,400        

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ITEM 3.    LEGAL PROCEEDINGS

        The Company is subject, from time to time, to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters asserted to date will have a material effect on the financial condition or results of operations of the Company.


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The common stock of the Company has been traded on the Nasdaq Global Market (formerly known as the Nasdaq National Market) under the symbol DGIT since the Company's initial public offering on February 6, 1996. On May 26, 2006, the Company's common stock was reverse split on a 1-for-10 basis.

        The following table sets forth the high and low closing sales prices of our common stock from January 1, 2008 to December 31, 2009. Such prices represent prices between dealers, do not include retail mark-ups, markdowns or commissions and may not represent actual transactions.

 
  Fiscal Year
Ended 2009
  Fiscal Year
Ended 2008
 
 
  High   Low   High   Low  

First Quarter

  $ 19.20   $ 12.90   $ 25.29   $ 17.71  

Second Quarter

    23.41     17.72     20.64     16.65  

Third Quarter

    21.12     16.70     24.06     16.26  

Fourth Quarter

    29.11     20.39     21.05     11.87  

        On November 30, 2004, the Board of Directors authorized the purchase of up to $3.5 million of the Company's common stock. No expiration date of the purchase program was specified. During 2004 and 2005, the Company purchased 56,371 shares of its common stock at an average price of $13.35, for a total of $752,173. No purchases have been made since 2005. As of December 31, 2009, $2,747,827 remains available for future purchases.

        As of February 28, 2010, the Company had issued 24,736,051 and outstanding 24,679,681 shares of its common stock. As of February 28, 2010, the Company's common stock was held by approximately 240 stockholders of record. The Company estimates that there are approximately 10,000 beneficial stockholders.

        The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain any future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. Further, the Company's Senior Credit Facility prohibits the payment of cash dividends. There are no restrictions on accumulated deficit or net income other than the declaration or payment of cash dividends.

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Stock Performance Table

        The table set forth below compares the cumulative total stockholder return on the Common Stock between December 31, 2004 and December 31, 2009 with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the Nasdaq Computer and Data Processing Index, over the same period. This table assumes the investment of $100.00 on December 31, 2003 in the common stock, the Nasdaq Composite Index and the Nasdaq Computer and Data Processing Index, and assumes the reinvestment of dividends, if any.

        The comparisons shown in the table below are based upon historical data. The Company cautions that the stock price performance shown in the table below is not indicative of, nor intended to forecast, the potential future performance of the Common Stock. Information used in the graph was obtained from information published by Nasdaq and Research Data Group, Inc., sources believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among DG Fastchannel, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Date Processing Index

GRAPHIC


*
$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

 
  12/04   12/05   12/06   12/07   12/08   12/09  

DG Fastchannel, Inc. 

    100.00     43.20     107.84     205.12     99.84     223.44  

NASDAQ Composite

    100.00     101.33     114.01     123.71     73.11     105.61  

NASDAQ Computer & Data Processing

    100.00     102.45     115.69     138.09     78.91     126.06  

        Notwithstanding anything to the contrary set forth in any of the Company's previous or future filings under the Securities Act or the Exchange Act that might incorporate this report or future filings made by the Company under those statutes, this Stock Performance Table shall not be deemed filed

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with the SEC and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes.

ITEM 6.    SELECTED FINANCIAL DATA

        The financial data set forth below was derived from the audited consolidated financial statements of the Company and should be read in conjunction with the consolidated financial statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein. The data below includes the results of acquired operations from the respective dates of closing as detailed below:

Acquired Operations
  Date of Closing
Media DVX, Inc. ("MDX")   April 15, 2005
FastChannel Network, Inc. ("FastChannel")   May 31, 2006
Pathfire, Inc. ("Pathfire")   June 4, 2007
Point.360 ("Point 360")   August 13, 2007
GTN, Inc. ("GTN")   August 31, 2007
Vyvx ("Vyvx")   June 5, 2008
Enliven Marketing Technologies Corporation ("Enliven")   October 2, 2008

        See Note 3 to the Company's consolidated financial statements for further information on acquisitions. As a result of the Company's decision to sell the assets of StarGuide Digital Networks, Inc. ("StarGuide") in 2006 and Corporate Computer Systems, Inc. ("CCS") in 2006 their operating results for all periods presented have been reflected in discontinued operations in the

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Company's consolidated financial statements and the selected financial data below. Amounts are shown in thousands (except per share amounts):

Statements of Operations Data:

 
  For the Years Ended December 31,  
 
  2009   2008   2007   2006   2005  

Revenues

  $ 190,886   $ 157,081   $ 97,687   $ 68,667   $ 51,824  

Costs and operating expenses excluding depreciation and amortization

    117,083     97,999     65,770     49,803     45,227  

Depreciation and amortization

    26,501     21,351     12,865     8,563     6,348  
                       
 

Income from operations

    47,302     37,731     19,052     10,301     249  

Other (income) expense:

                               
 

Interest expense and other, net

    11,859     11,536     2,388     2,786     2,990  
 

Unrealized loss (gain) on derivative warrant investment

        1,544     (1,707 )        
 

Reduction in fair value of long-term investment

                4,758      
                       

Income (loss) before income taxes from continuing operations

    35,443     24,651     18,371     2,757     (2,741 )

Provision (benefit) for income taxes

    14,942     9,572     7,501     2,378     (768 )
                       

Income (loss) from continuing operations

    20,501     15,079     10,870     379     (1,973 )

Income (loss) from discontinued operations

            (457 )   (1,028 )   883  
                       

Net income (loss)

  $ 20,501   $ 15,079   $ 10,413   $ (649 ) $ (1,090 )
                       

Basic earnings (loss) per share:

                               
 

Continuing operations

  $ 0.90   $ 0.81   $ 0.65   $ 0.04   $ (0.27 )
 

Discontinued operations

            (0.02 )   (0.10 )   0.12  
                       
   

Total

  $ 0.90   $ 0.81   $ 0.63     (0.06 ) $ (0.15 )
                       

Diluted earnings (loss) per share:

                               
 

Continuing operations

  $ 0.88   $ 0.79   $ 0.64   $ 0.04   $ (0.27 )
 

Discontinued operations

            (0.03 )   (0.10 )   0.12  
                       
   

Total

  $ 0.88   $ 0.79   $ 0.61   $ (0.06 ) $ (0.15 )
                       

Weighted average common shares outstanding:

                               
 

Basic

    22,572     18,642     16,631     10,568     7,378  
 

Diluted

    23,091     19,073     17,096     10,568     7,378  

 

 
  December 31,  
 
  2009   2008   2007   2006   2005  

Balance Sheet Data:

                               

Cash and cash equivalents

  $ 33,870   $ 17,180   $ 10,101   $ 24,474   $ 1,886  

Working capital

    44,150     20,856     25,601     25,106     1,722  

Property and equipment, net

    41,520     37,980     27,466     18,074     15,951  

Total assets

    478,292     473,800     252,495     172,997     110,065  

Long-term debt, net of current portion

    80,962     154,985     44,325     15,650     20,834  

Net assets of discontinued operations

                2,441     3,242  

Stockholders' equity

    347,166     269,518     192,129     141,886     80,207  

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ITEM 7.    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 consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K.

Introduction

        MD&A is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of DG FastChannel Inc.'s (the "Company" or "us") financial condition, changes in financial condition and results of operations. MD&A is organized as follows:

    Cautionary Note Regarding Forward-Looking Statements.  This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on our current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Refer to "Risk Factors" above, for a discussion of the risk factors applicable to us.

    Overview.  This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.

    Results of Operations.  This section provides an analysis of our results of operations for three years in the period ended December 31, 2009.

    Financial Condition.  This section provides a summary of certain major balance sheet accounts and a discussion of the factors that tend to cause these accounts to change, or the reasons for the change.

    Liquidity and Capital Resources.  This section provides an analysis of our cash flows for three years in the period ended December 31, 2009, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2009. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements.

    Critical Accounting Policies.  This section discusses accounting policies that are considered important to our results of operations and financial condition, require significant judgment and require estimates on the part of management. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the accompanying consolidated financial statements.

    Recently Adopted and Recently Issued Accounting Guidance.  This section provides a discussion of recently issued accounting guidance that has been adopted or will be adopted in the near future, including a discussion of the impact or potential impact of such guidance on our consolidated financial statements when applicable.

    Contractual Payment Obligations.  This section provides a summary of our contractual payment obligations by major category and in total, and a breakdown by period.

    Off-Balance Sheet Arrangements.  This section provides a summary of our off-balance sheet arrangements and the purpose of these arrangements.

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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:

    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 of new, changing and competitive technologies;

    our need for additional capital to fund our technology development programs; 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.


Overview

        We are a leading provider of digital technology services that enable the electronic delivery of advertisements and other media content from advertising agencies and other content providers to traditional broadcasters and other media outlets. Our business can be impacted by several factors including the financial stability of our customers, the overall advertising market, new emerging digital technologies, and the continued transition from analog to digital broadcast signal transmission. We face several factors that impact the growth of digital advertising delivery, including the following:

        Increased demand for reliable and rapid means of content delivery.    In recent years, technological innovations in digital media have driven increasing demand for reliable and rapid means of information transfer, particularly in the broadcast and telecommunications industries. Digital distribution technologies are increasingly used for distributing media in forms such as video, audio, text and data. Digitized information has many advantages over analog or hard copy formats including ease and efficiency of storage, manipulation, transmission and reproduction, with less degradation and in greater volumes.

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        Increase in adoption and popularity of High Definition Television.    Consumer demand for superior quality, declining high definition television ("HDTV") set prices and increasing availability of HDTV content are driving the rapid growth in HDTV adoption, with the United States leading the charge. Currently, all major broadcasters are delivering prime time content via HD broadcasting and with the broadcast industry shifting toward HD, we believe that HDTV advertising will follow. As local television stations have completed the upgrade to their infrastructure to enable HDTV signals, advertisers are increasing the number of HDTV commercials, which we believe will likely require digital distribution.

        Emergence of video advertising content on the Internet.    The confluence of a successful online advertising industry and the penetration of personal broadband connections create a strong platform for the Internet to become a significant medium with respect to video advertisements. The increase in broadband subscribers is fueling the accelerating growth in streaming media. Largely due to this growth in broadband usage, the Internet has become a widely used medium for distributing and receiving video and audio content. As the volume and quality of dynamic content progresses, we believe there will be significant growth in video advertising over the Internet and advertisers will look to existing digital content distributors to provide the necessary capabilities to successfully leverage this emerging medium.

        Dependence on Third Parties.    We depend on several third party vendors to operate our digital distribution network. Accordingly, we are highly dependent on satellite and high-speed connectivity vendors to properly operate our digital network. Further, we are highly dependent on the video advertising aired on TV and cable networks, cable systems, and other broadcast media outlets.

        Significant Transactions.    Part of our business strategy is to merge with, acquire, or make investments in, businesses in the media services industry. The strategy in acquiring these businesses is to expand our digital distribution network, customer base and/or product offerings. Over the last three fiscal years we have completed the following transactions:

    Merger with Enliven
    On October 2, 2008, we acquired all of the issued and outstanding shares of Enliven Marketing Technologies Corporation's ("Enliven") common stock we did not previously own in exchange for 2.9 million shares of our common stock. In the aggregate, including shares of Enliven previously held, the purchase price was $74.6 million. Enliven has two principal operating units, Unicast Communications Corp. ("Unicast") and Springbox Ltd. ("Springbox"). Unicast offers an online advertising campaign management product and Springbox is an Internet based marketing firm.


    Purchase of Vyvx
    On June 5, 2008, we completed the acquisition of substantially all the assets and certain liabilities of the Vyvx advertising services business ("Vyvx"), including its distribution, post-production and related operations, from Level 3 Communications, Inc. ("Level 3"). Vyvx operated an advertising services and distribution business similar to our video and audio content distribution business. The acquisition was completed pursuant to an asset purchase agreement among Level 3, certain affiliates of Level 3 and us for a purchase price of $135.4 million in cash.


    Purchase of GTN
    On August 31, 2007, we acquired substantially all the assets of privately-held GTN, Inc. ("GTN") for $8.5 million in cash, net of selling GTN's post-production business immediately after closing to an officer of GTN for $3.0 million in cash. GTN, based in Detroit, provides media services primarily on behalf of the automotive industry.


    Merger with Point.360
    On August 13, 2007, we acquired all of the issued and outstanding shares of Point.360's common stock we did not previously own in exchange for 2.0 million shares of our common stock.

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      Immediately prior to closing, Point.360 spun off its post-production business to its shareholders other than us. As a result, at closing, Point.360's business consisted solely of its advertising distribution operation. In the aggregate, including (i) shares of Point.360 previously held, (ii) a requirement to retire $7.0 million of Point.360's debt immediately prior to closing, and (iii) working capital adjustments and transaction costs, the total purchase price was $49.7 million.

    Purchase of Pathfire
    On June 4, 2007, we acquired all of the issued and outstanding shares of privately-held Pathfire, Inc.'s ("Pathfire") common and preferred stock for $29.7 million in cash. Pathfire distributes third-party long-form content, primarily news and syndicated programming, through a proprietary server-based network via satellite and Internet channels.


Results of Operations

2009 vs. 2008

        The following table sets forth certain historical financial data from continuing operations (dollars in thousands).

 
   
   
  % Change   As a % of
Revenue
 
 
  Year Ended
December 31,
   
  Year Ended
December 31,
 
 
  2009
vs.
2008
 
 
  2009   2008   2009   2008  

Revenues

  $ 190,886   $ 157,081     22 %   100.0 %   100.0 %

Costs and expenses:

                               
 

Cost of revenues (a)

    71,702     64,443     11     37.6     41.0  
 

Sales and marketing

    12,678     8,257     54     6.6     5.3  
 

Research and development

    6,257     4,268     47     3.3     2.7  
 

General and administrative

    26,446     21,031     26     13.8     13.4  
 

Depreciation and amortization

    26,501     21,351     24     13.9     13.6  
                         
   

Total costs and expenses

    143,584     119,350     20     75.2     76.0  
                         
   

Income from operations

    47,302     37,731     25     24.8     24.0  

Other (income) expense:

                               
 

Interest expense

    11,774     12,122     (3 )   6.2     7.7  
 

Unrealized loss on warrant

        1,544     (100 )       1.0  
 

Interest income and other, net

    85     (586 )   (115 )   0.1     (0.4 )
                         
   

Income before income taxes

    35,443     24,651     44     18.5     15.7  

Provision for income taxes

    14,942     9,572     56     7.8     6.1  
                         
   

Income from continuing operations

  $ 20,501   $ 15,079     36 %   10.7 %   9.6 %
                         

(a) Excludes depreciation and amortization.

        Revenues.    For 2009, revenues increased $33.8 million, or 22%, as compared to the same period in the prior year. The increases were $28.4 million and $5.4 million from the video and audio content distribution and the other segments, respectively. The increase in the video and audio content distribution segment was primarily due to (i) a $28.2 million increase in HD revenue ($59.9 million in 2009 vs. $31.7 million in 2008) driven by an increase in HD deliveries and (ii) a $10.1 million increase in revenue from the October 2008 acquisition of Unicast, partially offset by (iii) a decrease in the number of standard definition ("SD") deliveries and (iv) a $7.2 million decrease in political advertising in 2009 that had occurred in connection with the 2008 national, state and local elections. The

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$5.4 million increase in the other segment relates to the addition of Springbox (acquired with Unicast in October 2008), partially offset by a slight decrease in SourceEcreative's ("SourceE") revenues.

        Cost of Revenues.    For 2009, cost of revenues increased $7.3 million, or 11%, as compared to the same period in the prior year. As a percentage of revenues, cost of revenues decreased to 37.6% in 2009 as compared to 41.0% in 2008. The decrease, on a percentage basis, was primarily attributable to (i) the elimination of substantially all duplicative infrastructure and personnel costs in the second quarter of 2009 associated with the June 2008 acquisition of Vyvx, (ii) a larger percentage of HD revenue, which has a higher profit margin than SD revenue, and (iii) lower delivery costs as a higher percentage of orders were delivered electronically. Prior to the second quarter of 2009, Vyvx had substantial duplicative infrastructure costs. In March 2009, we successfully completed the transition of all the former Vyvx customers over to our Irving NOC, and eliminated the costs associated with the former Vyvx NOC in Tulsa, Oklahoma.

        Sales and Marketing.    For 2009, sales and marketing expense increased $4.4 million, or 54%, as compared to the same period in the prior year. Substantially all the increase was attributable to the addition of Unicast. Unicast has been included in our operating results for twelve months in 2009 versus three months in 2008. Further, since acquiring Unicast in October 2008, we have added more resources to their sales and marketing efforts. Sales and marketing efficiencies gained, on a percentage basis, from the acquisition of Vyvx were offset by increases in costs associated with Unicast.

        Research and Development.    For 2009, research and development costs increased $2.0 million, or 47%, as compared to the same period in the prior year. The increase in research and development costs relates to the addition of Unicast ($2.5 million), partially offset by shifting some employees to software development initiatives that are capitalizable.

        General and Administrative.    For 2009, general and administrative expense increased $5.4 million, or 26%, as compared to the same period in the prior year. The increase was primarily attributable to (i) higher stock-based compensation ($2.8 million), (ii) including Unicast and Springbox in our results for 12 months in 2009 versus three months in 2008 ($2.3 million), (iii) higher facilities costs ($0.6 million) and (iv) higher salary expense ($0.6 million), partially offset by lower incentive compensation ($0.5 million) and audit and tax expense ($0.4 million).

        Depreciation and Amortization.    For 2009, depreciation and amortization expense increased $5.2 million, or 24%, as compared to the same period in the prior year. The increase was primarily attributable to (i) a full year of amortization of the Vyvx and Enliven intangible assets acquired during 2008 versus a partial year of amortization in 2008 ($3.2 million), (ii) more amortization associated with the increase in capitalized software ($1.4 million) and (iii) a full year of depreciation associated with fixed assets acquired in the acquisition of Enliven versus a partial year of depreciation in 2008 ($0.7 million).

        Interest Expense.    For 2009, interest expense decreased $0.3 million, or 3%, as compared to the same period in the prior year. The decrease was due to a lower average interest rate partially offset by an increase in the average amount of debt outstanding during the year. The increase in debt was principally associated with $115 million of borrowings in connection with the purchase of Vyvx in June 2008, a portion of which has been repaid in connection with scheduled quarterly principal payments and the proceeds from our June 2009 public equity offering. Excluding the amortization of fees and expenses, the weighted-average annual interest rate on our debt was 5.8% at December 31, 2009 versus 9.0% at December 31, 2008.

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        Unrealized Loss on Derivative Warrant.    For 2008, the fair value of our Enliven warrant decreased by $1.5 million. The warrant met the definition of a derivative instrument which required changes in its fair value to be recorded in the statement of income. In connection with the October 2008 acquisition of Enliven, our Enliven warrant was effectively canceled.

        Interest Income and Other, net.    For 2009, interest income and other decreased $0.7 million as compared to the same period in the prior year. The decrease was the result of a decrease in the average interest rate on invested cash, lower amounts of cash on hand and an increase in other expense.

        Provision for Income Taxes.    For 2009 and 2008 the provision for income taxes was 42% and 39%, 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 and foreign income taxes and certain non-deductible expenses. The majority of the increase in the effective rate for 2009 relates to executive compensation which is not expected to be deductible. In 2009, we received a tax benefit for certain foreign losses which are not expected to occur in the future. Accordingly, we expect our effective tax rate will increase to about 44% of income before income taxes in the future.

2008 vs. 2007

        The following table sets forth certain historical financial data from continuing operations (in thousands).

 
   
   
  % Change   As a % of
Revenue
 
 
  Year Ended
December 31,
   
  Year Ended
December 31,
 
 
  2008
vs.
2007
 
 
  2008   2007   2008   2007  

Revenues

  $ 157,081   $ 97,687     61 %   100.0 %   100.0 %

Costs and expenses:

                               
 

Cost of revenues (a)

    64,443     41,589     55     41.0     42.6  
 

Sales and marketing

    8,257     7,046     17     5.3     7.2  
 

Research and development

    4,268     3,233     32     2.7     3.3  
 

General and administrative

    21,031     13,902     51     13.4     14.2  
 

Depreciation and amortization

    21,351     12,865     66     13.6     13.2  
                         
   

Total costs and expenses

    119,350     78,635     52     76.0     80.5  
                         
   

Income from operations

    37,731     19,052     98     24.0     19.5  

Other (income) expense:

                               
 

Interest expense

    12,122     3,101     291     7.7     3.2  
 

Unrealized (gain) loss on warrant

    1,544     (1,707 )   (191 )   1.0     (1.8 )
 

Interest income and other, net

    (586 )   (713 )   (18 )   (0.4 )   (0.7 )
                         
   

Income before income taxes

    24,651     18,371     34     15.7     18.8  

Provision for income taxes

    9,572     7,501     28     6.1     7.7  
                         
   

Income from continuing operations

  $ 15,079   $ 10,870     39 %   9.6 %   11.1 %
                         

(a)
Excludes depreciation and amortization.

        Revenues.    For 2008, revenues increased $59.4 million, or 61%. The increases were $56.6 million and $2.8 million from the video and audio content distribution and the other segments, respectively. The increase in the video and audio content distribution segment was primarily due to (i) $28.7 million in revenues from the additional customers acquired in the 2008 Enliven and Vyvx transactions,

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(ii) 12 months of revenue associated with the Pathfire, Point.360 and GTN acquisitions during 2008 as compared to seven months, five months and four months in 2007, respectively, (iii) a $25.5 million increase in HD revenue (including $7.7 million HD revenue from Vyvx included in (i) above) and (iv) approximately $7.2 million of additional political advertising revenue in connection with the 2008 national, state and local elections. The $2.8 million increase in the other segment primarily relates to the addition of Springbox ($2.3 million), as well as an increase in demand for the services SourceE provides, particularly in the international market.

        Cost of Revenues.    For 2008, cost of revenues increased $22.9 million, or 55%. The 55% increase in cost of revenues compares to a 61% increase in revenues. As a percentage of revenues, cost of revenues decreased to 41.0% in 2008 as compared to 42.6% in 2007. The decrease, on a percentage basis, was primarily attributable to the elimination of duplicative personnel, facilities, telecommunications and other expenses following the 2008 acquisition of Vyvx and the 2007 acquisitions of Pathfire, Point.360 and GTN.

        Sales and Marketing.    For 2008, sales and marketing expense increased $1.2 million, or 17%. The increase was primarily attributable to higher commissions, benefits and trade show costs associated with a larger customer base. As a percentage of revenues, sales and marketing expenses decreased to 5.3% in 2008 as compared to 7.2% in 2007. The decrease, on a percentage basis, was primarily attributable to efficiencies gained as a result of having a consolidated sales force following our recent acquisitions.

        Research and Development.    For 2008, research and development costs increased $1.0 million, or 32%. The increase was primarily attributable to increased spending for payroll, benefits and consulting necessary to develop new technologies after the acquisitions of Enliven, Vyvx, GTN, Point.360 and Pathfire.

        General and Administrative.    For 2008, general and administrative expense increased $7.1 million, or 51%. The increase was primarily attributable to higher (i) personnel costs ($3.5 million) to support our larger customer base and to reward employees for the improved operating results, (ii) audit and tax fees ($0.8 million) partly associated with the timing of audit work and partly associated with our increased complexity as a result of our recent acquisitions and related financings, (iii) rent and utilities ($0.7 million) associated with the increased number and size of office facilities following the recent acquisitions, (iv) insurance and investor relations costs ($0.4 million), and (v) bank fees ($0.3 million).

        Depreciation and Amortization.    For 2008, depreciation and amortization expense increased $8.5 million, or 66%. The increase was primarily attributable to depreciation of certain tangible assets and amortization of certain intangible assets acquired in the Enliven, Vyvx, GTN, Point.360 and Pathfire transactions, as well as increases in network equipment associated with the larger customer base. In addition, depreciation and amortization increased by $2.3 million as a result of a decision to replace our existing spot boxes (and thereby accelerate the remaining depreciation over the shortened useful life) with next generation spot boxes, which have greater storage capacity, faster processing speeds, and can accommodate multiple, simultaneous satellite feeds.

        Interest Expense.    For 2008, interest expense increased $9.0 million or 291%. The increase was due to (i) increased borrowings in connection with the acquisitions of Vyvx, GTN, Point.360 and Pathfire and (ii) an increase in the weighted-average interest rate during the period. Our weighted-average interest rate increased as a result of borrowing $65 million under the Bridge Loan facility in connection with funding the Vyvx acquisition in June 2008. Based on the expected term of the Bridge Loan facility we accrued interest at an annual effective rate of 13.3% (excluding the amortization of fees and expenses).

        Unrealized Gain / Loss on Warrant.    For 2008, the fair value of our Enliven warrant decreased by $1.5 million as compared to a $1.7 million increase in 2007. Prior to our merger with Enliven, the

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warrant had met the definition of a derivative instrument which required changes in its fair value to be recorded in the statement of income. This investment was effectively canceled in connection with the acquisition of Enliven.

        Interest Income and Other, Net.    For 2008, interest income and other of $0.6 million was very similar to the 2007 amount of $0.7 million.

        Provision for Income Taxes.    For 2008 and 2007, the provision for income taxes was 39% and 41% of income before income taxes, respectively. The provisions for both periods differ from the expected federal statutory rate of 35% for 2008 and 34% for 2007, as a result of state and foreign income taxes and certain non-deductible expenses (see Note 10 to the consolidated financial statements).

        Discontinued Operations.    For 2007, discontinued operations represent the results of our StarGuide Digital Networks, Inc. ("StarGuide") and Corporate Computer Systems, Inc. ("CCS") subsidiaries prior to the sale of their assets in 2007. The loss from discontinued operations, net of tax, was $0.5 million for 2007.


Financial Condition

        The following table sets forth certain of our major balance sheet accounts as of December 31, 2009 and 2008 (in thousands):

 
  December 31,  
 
  2009   2008  

Assets:

             
 

Cash and cash equivalents

  $ 33,870   $ 17,180  
 

Accounts receivable, net

    51,309     42,971  
 

Property and equipment, net

    41,520     37,980  
 

Deferred income taxes, net

    28,066     7,777  
 

Goodwill and intangible assets, net

    317,188     361,769  

Liabilities:

             
 

Accounts payable and accrued liabilities

    21,878     22,398  
 

Debt

    102,462     173,137  

Stockholders' equity

   
347,166
   
269,518
 

        Cash and cash equivalents fluctuate with 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 raising activity. The increase in cash and cash equivalents primarily relates to the excess of operating and capital raising activity over the repayment of debt.

        Accounts receivable generally fluctuate with the level of revenues. As revenues increase, accounts receivable tend to increase. Days' sales outstanding were 82 days and 76 days at December 31, 2009 and 2008, respectively.

        Property and equipment purchases tend to increase with the level of revenues and as a result of acquisition activity. Further, the balance of property and equipment is affected by recording depreciation expense. For 2009, purchases of property and equipment were $7.0 million in cash and $4.4 million of vendor financed purchases (total of $11.4 million), as compared to purchases of $12.4 million in 2008. For 2009 and 2008, capitalized costs of developing software were $6.9 million and $5.7 million, respectively.

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        Goodwill and intangible assets decreased during 2009 primarily as a result of recognizing $32.6 million of net operating loss carrryforwards ("NOLs") in connection with the acquisition of Enliven and amortization of intangible assets. The NOLs were initially fully reserved in the purchase price allocation until an Internal Revenue Code Section 382 study could be completed. Such study was completed during 2009 and the valuation allowance was removed.

        Accounts payable and accrued liabilities decreased $0.5 million during 2009. The decrease relates primarily to (i) the timing of when certain payments are made and (ii) paying certain liabilities incurred in connection with the purchase of Vyvx.

        Debt decreased $70.7 million during 2009 as a result of (i) using the proceeds from our June 2009 public equity offering to reduce our debt and (ii) scheduled principal payments.

        Stockholders' equity increased $77.6 million during 2009. The increase relates primarily to (i) issuing $52.5 million of equity in the June 2009 public equity offering, (ii) reporting net income of $20.5 million and (iii) recording stock compensation of $4.0 million.


Liquidity and Capital Resources

Cash Flows

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

 
  For the Years Ended December 31,  
 
  2009   2008   2007  

Operating activities:

                   
 

Net income

  $ 20,501   $ 15,079   $ 10,413  
 

Depreciation and amortization

    26,501     21,351     12,865  
 

Deferred income taxes and other

    16,814     11,720     6,486  
 

Changes in operating assets and liabilities, net

    (13,435 )   (6,770 )   (10,731 )
               
   

Total

    50,381     41,380     19,033  
               

Investing activities:

                   
 

Purchases of property and equipment

    (6,966 )   (12,384 )   (4,143 )
 

Capitalized costs of developing software

    (6,950 )   (5,661 )   (3,282 )
 

Purchases of investments and other

          7     (824 )
 

Acquisitions, net of cash acquired

          (136,692 )   (48,655 )
               
   

Total

    (13,916 )   (154,730 )   (56,904 )
               

Financing activities:

                   
 

Borrowings (repayments) of debt, net

    (72,911 )   120,218     23,304  
 

Proceeds from issuances of common stock, net

    53,203     206     191  
               
   

Total

    (19,708 )   120,424     23,495  
               

Effect of exchange rate changes on cash

    (67 )   5     3  

Net increase (decrease) in cash and cash equivalents

    16,690     7,079     (14,373 )

Cash and cash equivalents at beginning of year

    17,180     10,101     24,474  
               
   

Cash and cash equivalents at end of year

  $ 33,870   $ 17,180   $ 10,101  
               

        We generate cash from operating activities principally from net income and from adding back certain non cash expenses such as (i) depreciation and amortization and (ii) deferred income taxes. In 2009 we generated $50.4 million in cash from operating activities.

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        We invest our cash in (i) property and equipment, (ii) the development of software, (iii) strategic investments and (iv) the acquisition of complementary businesses. In 2008 we completed two acquisitions. We acquired the assets and certain liabilities of the Vyvx advertising services business for $135.4 million in cash and, we exchanged 2.9 million shares of our common stock for all of Enliven's common stock not previously held by us.

        Cash is obtained from financing activities principally as a result of issuing debt and equity instruments. In 2008 we obtained $120.2 million of cash by issuing debt, net of repayments. In 2009, we repaid a portion of this debt primarily from the proceeds of a public equity offering.

Sources of Liquidity

        Our sources of liquidity include:

    cash on hand,

    cash generated from operating activities,

    borrowings from our existing credit facility,

    borrowings from any new credit facility, and

    the issuance of equity.

        At December 31, 2009, we had $33.9 million of cash on hand. Historically, we have generated significant amounts of cash from operating activities. We expect this trend will continue.

        At December 31, 2009, we had a credit facility (the "Senior Credit Facility") with a group of lenders that had a balance of $102.5 million. In addition, the Senior Credit Facility allows us to borrow $30 million under a revolving loan feature, all of which was available to us at December 31, 2009. In 2010 our scheduled principal payments under the Senior Credit Facility are $21.5 million. A portion of the Senior Credit Facility matures in 2013 with the balance maturing in 2014. See a full description of the Senior Credit Facility in Note 8 of our consolidated financial statements.

        We also have the ability to issue equity instruments. As discussed above, we issued 2.9 million shares of our common stock in connection with our merger with Enliven. We currently have an effective shelf registration statement on file with the SEC for the issuance of (i) up to 4.5 million shares of our common stock and (ii) up to $75 million of preferred stock.

        We believe our sources of liquidity, including our cash on hand and cash generated from operating and financing activities, will satisfy our capital needs for the next 12 months.

Cash Requirements

        We expect to use cash in connection with:

    the retirement of our existing debt obligations,

    the purchase of capital assets,

    the organic growth of our business, and

    the acquisition of similar and/or ancillary businesses.

        During 2010, we expect we will:

    make required principal payments under our Senior Credit Facility of $21.5 million, and

    purchase property and equipment and incur capitalized software development costs ranging from $14 to $16 million.

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        We expect to use cash to further expand and develop our business. While we presently have no definitive plans, we may seek to acquire or merge with another company that we believe would be in the best interest of our shareholders.


Critical Accounting Policies

        The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Our significant accounting policies and methods used in the preparation of our consolidated financial statements are discussed in Note 2 of the notes to consolidated financial statements. Following is a discussion of our critical accounting policies.

        Business Combinations.    We account for business combinations under the purchase method of accounting. The total cost of an acquisition is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the nature of identifiable intangible assets and the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions. The value assigned to a specific asset or liability, and the period over which an asset is depreciated or amortized can impact future earnings. Some of the more significant estimates made in business combinations relate to the values assigned to identifiable intangible assets, such as customer relationships and trade names, and the period over which these assets are amortized.

        Goodwill.    We have three reporting units; video and audio content distribution ("ADS"), SourceE and Springbox. These reporting units were determined by operating segments and quantitative thresholds. Only the ADS and SourceE reporting units have goodwill. On an annual basis, or more frequently upon the occurrence of certain events, we test for goodwill impairment using a two-step process. The first step is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount. The fair value of a reporting unit is determined based on a discounted cash flow analysis or other methods of valuation including market capitalization. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections by reporting unit. The discount rate used reflects our weighted-average cost of capital. If necessary, the second step of the goodwill impairment test compares the fair value of the reporting unit's goodwill with its carrying amount. To the extent the carrying amount of the reporting unit's goodwill exceeds its fair value a write-down of the reporting unit's goodwill would be necessary.

        We did not recognize a goodwill impairment loss for 2009, 2008 or 2007. At December 31, 2009, the fair value of goodwill in the ADS and SourceE reporting units exceeded the carrying value by approximately $500 million and $20 million, respectively. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. Had the estimated fair value of each of these reporting units been hypothetically lower by 10% as of December 31, 2009, the fair value of goodwill would have exceeded the carrying value by approximately $408 million for ADS and $18 million for SourceE.

        Future impairment charges, while not presently anticipated or foreseen, could occur if future cash flows from these reporting units were to decline significantly. Future cash flows are impacted by a variety of factors including revenues, operating margins, income taxes and discount rates.

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        Impairment of Long-Lived Assets.    Long-lived assets principally relate to identifiable intangible assets, such as customer relationships and trade names, and property and equipment including capitalized internally-developed software and network equipment. In determining whether long-lived assets are impaired, the accounting rules do not provide for an annual impairment test. Instead they require that a triggering event occur before testing an asset for impairment. Triggering events include poor operating performance, significant negative trends and significant changes in the use of such assets. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, first a comparison of undiscounted future cash flows against the carrying value of the asset is performed. If the carrying value exceeds the undiscounted future cash flows, the asset would be written down to its fair value. If the intent is to hold the asset for sale, then to the extent the asset's carrying value is greater than its fair value less selling costs, an impairment loss is recognized for the difference. The most significant assumption relates to the projection of future cash flows. We did not recognize any impairment losses related to long-lived assets for the years ended December 31, 2009, 2008 or 2007, nor do we presently foresee any such impairment losses.

        Income Taxes.    Deferred taxes arise as a result of temporary differences between amounts recognized in accordance with generally accepted accounting principles and amounts recognized for federal income tax purposes. We have both deferred tax assets and deferred tax liabilities, which are shown on a net current and net non-current basis on the accompanying consolidated balance sheets. Deferred tax assets relate primarily to NOL carryforwards. Deferred tax liabilities relate primarily to intangible assets, such as customer relationships and trade names, some of which have little or no tax basis.

        Valuation allowances are provided against deferred tax assets if a determination is made that their ultimate realization is not likely. Significant judgment is required in making these assessments, which generally relate to an acquired operation generating future taxable income. We did not recognize any write-offs of deferred tax assets for the years ended December 31, 2009, 2008 or 2007, nor do we presently foresee any such write-offs.

        Revenue Recognition.    We derive revenue from services which consist primarily of (i) the distribution of digital and analog video and audio media content, (ii) media research resources, and (iii) support and other services. We recognize revenue only when all of the following criteria have been met:

    Persuasive evidence of an arrangement exists,

    Delivery has occurred or services have been rendered,

    Our price to the customer is fixed or determinable, and

    Collectability is reasonably assured.

        Below are descriptions of our services and other offerings, and generally the triggering point of revenue recognition, provided all other revenue recognition criteria have been met.

        Our services revenue from the digital distribution of video and audio advertising content generally is billed based on a rate per transmission, and we recognize revenue for these services upon notification the advertising content was received at the broadcast destination. Revenue for the distribution of analog video and audio content by tape is recognized when delivery has occurred, which is at the time the tapes are delivered to a common carrier. Costs of shipping tapes and other products are included in the cost of revenues.

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        We offer an online advertising campaign management and deployment product. This product allows publishers, advertisers, and their agencies to manage the process of deploying online advertising campaigns. We charge our customers on a cost per thousand ("CPM") impressions basis, and recognize revenue when the impressions are served.

        Our services revenue also includes access rights. For an agreed upon fee, we provide certain of our customers with access to our digital distribution network for a stated period. Using our network, these customers are able to deliver a variety of programming content to their intended destinations. Access rights revenue is recognized ratably over the access period. We also charge fees to monitor our network on behalf of our customers. The monitoring fees are recognized ratably over the monitoring period.

        We sell monthly, quarterly, semi-annual and annual subscriptions to access our online creative research database. We recognize revenue ratably over the subscription period.

        Media production and duplication includes a variety of ancillary services such as storage of client masters or other physical material. Revenue for these services is recognized in the month the storage service has been performed. Revenue related to our other services is recognized on a per transaction basis once the service has been performed. If the service results in a tape or other deliverable, revenue is recognized when delivery has occurred, which is at the time the tape or other deliverable is delivered to a common carrier.

        Customers pay a fixed fee per month for our media asset management and broadcast verification services. Revenue for these services is recognized ratably over the service period.

        We have a creative services group that builds content to a format specified by our customers. We charge fees for these services based on the time incurred and materials used to complete the project. Revenue related to retainers is recognized ratably over the term of the retainer contract. Certain project revenue is recognized on a completed-contract basis. For projects where we can reasonably estimate the total project costs and the portion of the entire project complete at any point, we use the proportional performance method for recognizing revenue. Under the proportional performance method, revenue is recognized based on the level of effort incurred to date compared to the total estimated level of effort required for the entire project.


Recently Adopted and Recently Issued Accounting Guidance

        See Recently Adopted and Recently Issued Accounting Guidance in Note 2 to our consolidated financial statements.


Contractual Payment Obligations

        The table below summarizes our contractual obligations, including estimated interest, at December 31, 2009 (in thousands):

 
   
  Payments Expected by Period  
Contractual Obligations
  Total   Less Than
1 Year
  1.00 - 2.99
Years
  3.00 - 4.99
Years
  After 5
Years
 

Debt (includes estimated interest)

  $ 115,194   $ 27,010   $ 42,926   $ 45,258   $  

Operating leases

    18,384     6,703     7,046     2,871     1,764  

Employment contracts

    4,876     3,094     1,782          

Unconditional purchase obligations

    13,682     8,047     3,835     1,800      
                       
 

Total contractual obligations

  $ 152,136   $ 44,854   $ 55,589   $ 49,929   $ 1,764  
                       

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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. For the years ended December 31, 2009, 2008 and 2007, rent expense, net of sublease rentals, for all operating leases amounted to approximately $6.5 million, $5.0 million and $3.2 million, respectively.

        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 7A.    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

        We provide limited services to entities located outside the United States and, therefore, believe the risk that changes in exchange rates will have a material adverse impact on our results of operations is remote. Historically, our foreign currency exchange gains and losses have been immaterial.

Interest Rate Risk

        We issued variable-rate debt that had an outstanding balance of $102.5 million at December 31, 2009. With respect to that debt, we entered into three interest rate swap agreements for a total of $87.5 million with certain of our lenders. For the portion of our variable-rate debt that is not subject to an interest rate swap agreement (i.e., $15.0 million at December 31, 2009), each 25 basis point increase or decrease in interest rates would, respectively, increase or decrease our annual interest expense and related cash payments by less than $0.1 million. These potential increases or decreases are based on certain simplifying assumptions, including a constant level of variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the year. Conversely, since almost all of our cash balances ($33.9 million at December 31, 2009) are invested in variable-rate interest earning assets, we would also earn more (less) interest income due to such an increase (decrease) in interest rates.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this Item is set forth in our consolidated financial statements and the notes thereto beginning at Page F-1 of this report.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None

ITEM 9A.    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 Annual Report on Form 10-K, we have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the

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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.

Management's Report on Internal Control Over Financial Reporting

        We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        We are using the framework set forth in the report entitled "Internal Control-Integrated Framework" published by the Committee of Sponsoring Organizations of the Treadway Commission (referred to as "COSO") to evaluate the effectiveness of our internal control over financial reporting. Based on our assessment, we have concluded our internal control over financial reporting was effective as of December 31, 2009.

        Our internal control over financial reporting as of December 31, 2009, has been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young's report on our internal control over financial reporting appears below.

Changes in Internal Controls over Financial Reporting

        During the three months ended December 31, 2009, 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.

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Report of Independent Registered Public Accounting Firm

        The Board of Directors and Shareholders of DG FastChannel, Inc.

        We have audited DG FastChannel, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying "Management's Report on Internal Control Over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based upon the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, DG FastChannel, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of DG FastChannel, Inc. and subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 10, 2010 expressed an unqualified opinion thereon.

    /s/ Ernst & Young LLP

Dallas, Texas
March 10, 2010

 

 

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ITEM 9B.    OTHER INFORMATION

        None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

        The following table sets forth certain information concerning our executive officers and directors as of February 28, 2009:

Name
  Age   Title(s)   Expiration
of Term as
Director
 
Scott K. Ginsburg(1)     57   Chief Executive Officer and Chairman of the Board     2010  
Neil H. Nguyen(1)     36   President and Chief Operating Officer and Director     2010  
Omar A. Choucair(1)     48   Chief Financial Officer and Director     2012  
William Donner(2)     57   Director     2011  
Lisa C. Gallagher(3)     53   Director     2012  
Kevin C. Howe(2),(3)     61   Director     2011  
David M. Kantor(3)     53   Director     2012  
Anthony J. LeVecchio(2)     63   Director     2011  

(1)
Member of the Executive Committee

(2)
Member of the Audit Committee

(3)
Member of the Compensation Committee

        Scott K. Ginsburg joined the Company in December 1998 as Chairman of the Board. Mr. Ginsburg assumed the additional role of Chief Executive Officer in November 2003. From 1971 until 1975, Mr. Ginsburg worked in the U.S. Congress for two Iowa Congressmen. From 1975 until 1981, Mr. Ginsburg worked in a professional capacity of Staff Director and later as Staff Director and General Counsel of the U.S. Senate Labor's Subcommittee on Employment, Poverty and Migratory Labor. He also worked for the U.S. Senate Subcommittee on Social Security and Medicare. Then, in the early 1980's, Mr. Ginsburg turned to private industry and, in 1983, founded radio broadcasting concern Statewide Broadcasting. In 1987, Mr. Ginsburg co-founded H & G Communications. In 1988, Mr. Ginsburg established Evergreen Media Corporation, and took the company public in 1993. He served as Chairman of the Board and Chief Executive Officer at Evergreen. In 1997, Evergreen Media Corporation merged with Chancellor Broadcasting to form Chancellor Media Corporation. Mr. Ginsburg served as Chancellor's Chief Executive Officer and a Director. From 1987 until 1998, the radio group headed by Mr. Ginsburg moved from the 25th ranked radio group to become the top billing radio group in the United States. Separately, Mr. Ginsburg founded the Boardwalk Auto Group in Dallas in 1998. Between 1998 and 2005, Porsche, Audi, Volkswagen, Ferrari, Maserati and Lamborghini were put into the dealership group. In 2009, the Boardwalk Auto Group acquired the Ferrari and Maserati dealership in San Francisco. Mr. Ginsburg earned a B.A. from George Washington University in 1974 and a J.D. from Georgetown University Law Center in 1978.

        Mr. Ginsburg's qualifications to serve on our Board of Directors include:

    service as the Chairman of the Board and Chief Executive Officer of Chancellor Media Corporation, AMFM, Inc. and Evergreen Media, which provides the Board a broad perspective of someone with all facets of a global media enterprise, including direct responsibility for strategic planning and operations and corporate governance items;

    extensive knowledge and experience of the advertising and media industry and its participants, as well as a deep understanding of operations in political and regulatory environments;

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    vast expertise in corporate strategy development, mergers and acquisitions proficiency, and organizational acumen;

    valuable financial expertise, including extensive experience with capital market transactions and both equity and debt capital raises;

    experience leading and directing large media businesses, which informs his judgment and risk assessment as a board member; and

    background as a attorney, and his previous role in government and as founder and sole-proprietor of several auto dealerships, provides a unique perspective to the Board.

        Neil H. Nguyen joined the Company as Executive Vice President of Sales and Operations in March 2005. In 2009 he was promoted to President and Chief Operating Officer. In December 2009, he was appointed as a member of the Board of Directors. Prior to joining the Company, from 1998 to 2002, Mr. Nguyen served as President of Point.360's MultiMedia Group and also served in various senior management roles at FastChannel Network including Executive Vice President, Strategic Planning and Vice President Global Sales and Business Development from 2003 to 2005. Mr. Nguyen received a B.S. from California State University, Northridge.

        Mr. Nguyen's qualifications to serve on our Board of Directors include:

    broad sales and marketing experience with a various media companies, as well as his executive leadership and management experience;

    extensive knowledge and experience of the advertising and media industry and its participants, as well as a deep understanding of operations in the advertising industry; and

    day to day leadership as current President and Chief Operating Officer of the Company provides him with intimate knowledge of our operations.

        Omar A. Choucair joined the Company as Chief Financial Officer in July 1999 and has been a member of the Board of Directors of the Company since November 2000. Prior to joining the Company, Mr. Choucair served as Vice President of Finance for AMFM, Inc. (formerly Chancellor Media Corporation) and served as Vice President of Finance for Evergreen Media Corporation before it was acquired by Chancellor Media Corporation in 1997. Prior to entering the media industry, Mr. Choucair was a Senior Manager at KPMG LLP, where he specialized in media and telecommunications clients. Mr. Choucair received a B.B.A. from Baylor University.

        Mr. Choucair's qualifications to serve on our Board of Directors include:

    extensive experience with public and financial accounting matters for complex business organizations, including over ten years of experience with KPMG LLP;

    extensive knowledge and experience of the advertising and media industry and its participants;

    valuable financial expertise, including extensive experience with capital market transactions and both equity and debt capital raises; and

    service in executive finance roles of Chancellor Media Corporation, AMFM, Inc. and Evergreen Media, which provides the Board a perspective of someone with all facets of a broad media enterprise, including direct responsibility for financial and accounting issues.

        William Donner has been a member of the Board of Directors of the Company since May 2006 after having served as a director of FastChannel Network, Inc. Since 2004, Mr. Donner has served as CEO of MedCommons, a personal health record storage and transport company. In the early 1980s, Mr. Donner built and ran Precision Business Systems, a Wall Street based systems integrator. Precision Business Systems was sold to Bank of America in 1988 and subsequently, a division was sold to

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Reuters, PLC, where Mr. Donner ran the Reuters Dealing 2001 and 2002 Trading Services. In 1994, Mr. Donner was named Chief Architect of Reuters where he ran the central research group. Mr. Donner joined the Greenhouse Group, Reuters' corporate venture capital arm, in 1996. In 1999, Mr. Donner joined Fenway Partners, a private equity fund, where he led the technology investment group. Mr. Donner holds a B.S.E.E. from Massachusetts Institute of Technology.

        Mr. Donner's qualifications to serve on our Board of Directors include:

    experience as a Chief Executive of MedCommons and founder of a software systems integrator, provide him unique insights into the Company's challenges, opportunities and operations;

    previous experience serving on private company boards and membership of board committees, resulting in familiarity with corporate and board functions; and

    training as an engineer and former Chief Architect of Reuters, providing him with a deep technological and financial expertise about the Company's products and current technology, as well as about anticipated future technological needs of the Company and the industry.

        Lisa C. Gallagher has been a member of the Board of Directors of the Company since May 2006 after having served first as a director, and most recently as Chairman of the Board of Directors, of FastChannel Network, Inc. since 2002. Since 2003, Ms. Gallagher has served as the Senior Vice President and Chief Operating Officer of Hawtan Leathers, a privately held international manufacturer of specialty leathers for the garment industry. She previously spent over 20 years as both a commercial as well as investment banker specializing in media transactions. She started her banking career in the early 1980s at the Bank of Boston and in 1997 moved to its investment bank, BancBoston Securities as Managing Director to run their Media & Communications Group. In 1998 she became Managing Director and Group head of the Internet/Media Convergence Group of Robertson Stephens, a leading high technology investment banking firm, upon the BancBoston Securities acquisition of Robertson Stephens. After leaving Robertson Stephens in 2001, she worked for Remy Capital Partners, a small investment banking boutique, before joining Hawtan Leathers. Ms. Gallagher holds a B.A. from Mount Holyoke College and an M.B.A. from the Simmons Graduate School of Management in Boston.

        Ms. Gallagher's qualifications to serve on our Board of Directors include:

    possesses valuable financial expertise, including extensive experience with capital markets transactions and investments in both public and private companies;

    strong investment banking background with extensive knowledge and experience of over 20 years working in the media industry and its related participants;

    previous experience serving on private company boards and membership of board committees, resulting in familiarity with corporate and board functions; and

    day to day leadership, as current Chief Operating Officer of Hawtan Leathers, provides her with valuable knowledge of operations and business challenges.

        Kevin C. Howe has been a member of the Board of Directors of the Company since February 2001. Since 1999, he has been the Managing Partner of Mercury Ventures. Mercury Ventures manages seven different funds that invest in emerging technology companies that focus on Internet applications. Mr. Howe served on the board of The Sage Group, plc. which is traded on the London Stock Exchange from 1991 to 2005. Mr. Howe also sits on the boards of two privately held technology firms. In 1985, he co-founded DacEasy, an early leader in packaged application software. In 1987, Mr. Howe led the sale of DacEasy to Insilco (a Fortune 500 company). In 1991, Mr. Howe led the carve-out of DacEasy from Insilco and subsequent sale to The Sage Group, plc. which had market capitalization of over $7 billion. He was Chief Executive Officer of the US operations of The Sage Group, plc. responsible for operations and acquisitions until 1999. In 1993, Mr. Howe also co-founded Martin

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Howe Associates, which was an early leader in the merchant credit card processing industry and a pioneer in wireless solutions. The company was sold in 1997 to PMT Services, Inc., a Nasdaq listed company. Mr. Howe received his MBA from Southern Methodist University in 1976.

        Mr. Howe's qualifications to serve on our Board of Directors include:

    valuable financial expertise, including extensive experience with capital markets transactions and investments in both public and private companies;

    experience as a director of a UK-based, international technology company provides the board with a global perspective;

    experience as a former Chief Executive Officer of a large software company and in depth management experience at premier global technology companies helps the Board address the challenges the Company faces due to constant changes in IT capabilities and communications; and

    even temperament and ability to communicate and encourage discussion, together with his experience as senior independent director of all boards on which he serves, make him an effective chairman of the Board's Compensation Committee.

        David M. Kantor has been a member of the Board of Directors of the Company since August 1999. Since 2003, Mr. Kantor has been Vice Chairperson and Chief Executive Officer of Reach Media, a company that develops, acquires and partners in quality media and marketing opportunities targeting the African-American population. Formerly, he was Senior Vice President for Network Operations of AMFM, Inc. (formerly Chancellor Media Corporation) and President of ABC Radio Network, having previously served as Executive Vice President. Prior to joining ABC Radio Network, he held executive positions with Cox Cable and Satellite Music Network. Mr. Kantor holds a B.S. from the University of Massachusetts and an MBA from Harvard Business School.

        Mr. Kantor's qualifications to serve on our Board of Directors include:

    service in the Senior Vice President for Network Operations role at Chancellor Media Corporation, AMFM, Inc. and Evergreen Media, which provides the Board a broad perspective of someone with all facets of a large media enterprise, including direct responsibility for sales and marketing, corporate strategy development and operating issues;

    service as the President of ABC Radio Network, which provides the board a broad perspective of someone with all facets of a large media enterprise, including direct responsibility for strategic operations and financial matters;

    day to day leadership, as current Chief Executive Officer of Reach Media, provides him with intimate knowledge of advertising and media operations and media industry challenges; and

    extensive knowledge and experience of the advertising and media industry and its participants, as well as a deep understanding of operations in regulatory environments.

        Anthony J. LeVecchio has been a member of the Board of Directors of the Company since August 2004. Since its formation in 1988, he has been the President of The James Group, a general business consulting firm that has advised clients across a range of high-tech industries. Prior to forming The James Group in 1988, Mr. LeVecchio was the Senior Vice President and Chief Financial Officer for VHA Southwest, Inc., a regional healthcare system. He currently serves on the Board of Directors of Microtune, Inc., a company that is listed on the Nasdaq Global Market, and serves as the Chairman of its Audit Committee. He currently serves on the Board of Directors of Ascendent Solutions, Inc., a company that is tracked on the OTC Bulletin Board and serves as the Chairman of its Audit Committee. He also serves on the Board of Directors of Viewpoint Financial Group, a Plano, Texas

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based bank holding group traded on the Nasdaq Global Select Market and is on their audit and compensation committees.

        Mr. LeVecchio's qualifications to serve on our Board of Directors include:

    extensive experience serving on public company boards and membership of board committees, resulting in familiarity with corporate and board functions;

    extensive experience with public and financial accounting matters for complex business organizations;

    service in the Chief Financial Officer role for VHA Southwest, which provides the Board a perspective of someone with all facets of a broad enterprise, including direct responsibility for financial and accounting issues; and

    even temperament and ability to communicate and encourage discussion, together with his experience as senior independent director of other boards on which he serves, make him an effective chairman of the Board's Audit Committee.

Corporate Governance

    Independence

        The Board of Directors has determined, after considering all of the relevant facts and circumstances, that each of Mr. Howe, Mr. Kantor, Mr. LeVecchio, Mr. Donner and Ms. Gallagher is independent from our management, and is an "independent director" as defined under the Nasdaq Marketplace Rules. This means that none of those directors (1) is an officer or employee of the Company or its subsidiaries or (2) has any direct or indirect relationship with the Company that would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director. As a result, the Company has a majority of independent directors as required by the Nasdaq Marketplace Rules.

    Board Leadership Structure

        The Board of Directors has the necessary flexibility to determine whether the positions of Chairman of the Board and Chief Executive Officer should be held by the same person or by separate persons based on the leadership needs of the Company at any particular time. The Board has given careful consideration to separating the roles of Chairman and Chief Executive Officer and has determined that the Company and its shareholders are best served by having Mr. Ginsburg serve as both the Chairman of the Board and Chief Executive Officer. Mr. Ginsburg's combined role as Chairman and Chief Executive Officer enhances the unified leadership and direction of the Board and executive management. Furthermore, given the size of the Company, this structure allows for a single, concise focus for the executive management to execute the Company's strategic initiatives and business plans.

        Mr. Ginsburg has served as both the Chairman of the Board and Chief Executive Officer of the Company since 2003 and Chairman of the Board since 1998. Mr. Ginsburg has been at the forefront of the media content distribution industry and his record of innovation, achievement, and leadership speaks for itself. Under Mr. Ginsburg's leadership, our Company has grown rapidly in terms of revenue, market capitalization, and customer base. The Board of Directors believes that our stockholders have been well served by having Mr. Ginsburg act as both Chairman and Chief Executive Officer.

        The Board of Directors is comprised of independent, active and engaged directors. The Board of Directors and its committees tightly oversee the effectiveness of the management policies and decisions. Each of the Board's committees is comprised entirely of independent directors. As a result,

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independent directors directly oversee such critical matters as the integrity of the Company's financial statements, the compensation of the executive management, including Mr. Ginsburg's compensation, the selection and evaluation of directors, and the development and implementation of corporate programs.

        Additionally, the Board of Directors believes the Company's Corporate Governance Guidelines, which are available on the Company's website, help ensure that strong and independent directors will continue to play the central oversight role necessary to maintain the Company's commitment to the highest quality corporate governance. We do not have a lead independent director. The Board of Directors believes the Company and its stockholders have been and continue to be well served by having Mr. Ginsburg serve as both Chairman of the Board and Chief Executive Officer.

    Risk Oversight

        Our Board of Directors oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance shareholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the company. The involvement of the full Board of Directors in setting the Company's business strategy is a key part of its assessment of management's appetite for risk and also a determination of what constitutes an appropriate level of risk for the Company. Risk is assessed throughout the business, focusing on three primary areas of risk: financial risk, legal/compliance risk and operational/strategic risk.

        While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. In particular, the Audit Committee focuses on financial risk, including internal controls, and receives an annual risk assessment report from the Company's internal auditors. In addition, in setting compensation, the Compensation Committee strives to create incentives that encourage a level of risk-taking behavior consistent with the Company's business strategy.

    Code of Business Conduct and Ethics

        The Company has adopted a Code of Business Conduct and Ethics that applies to its directors, officers and employees. A copy of the Company's Code of Business Conduct and Ethics is available on its website at www.dgfastchannel.com by clicking first on "Who We Are," then on "Careers & Ethics." The Company will also provide a copy of its Code of Business Conduct and Ethics, without charge, to any stockholder who so requests in writing.

    Communications with the Board of Directors

        Stockholders may communicate with the Board of Directors by writing to the Board in care of the Company's Secretary, DG FastChannel, Inc., 750 West John Carpenter Freeway, Suite 700, Irving, Texas 75039. The Board of Directors has delegated responsibility for initial review of stockholder communications to the Company's Secretary. In accordance with the Board's instructions, the Secretary will forward the communication to the director or directors to whom it is addressed, except for communications that are (1) advertisements or promotional communications, (2) solely related to complaints by users with respect to ordinary course of business customer service and satisfaction issues or (3) clearly unrelated to our business, industry, management or Board or committee matters. In addition, the Secretary will make all communications available to each member of the Board, at the Board's next regularly scheduled meeting.

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Board Committees

        The Board of Directors of the Company has three standing committees: the Audit Committee, the Compensation Committee and the Executive Committee. None of the directors who serve as members of the Audit Committee or the Compensation Committee are employees of the Company or any of its subsidiaries. The Company has no nominating committee or committee that recommends qualified candidates to the Board of Directors for nomination or election as directors.

    Audit Committee

        The Audit Committee operates under an Amended and Restated Charter of the Audit Committee adopted by the Company's Board of Directors, a copy of which was attached as Appendix A to the Company's 2007 Proxy Statement.

        The Audit Committee's functions include:

    engaging independent auditors and determining their compensation;

    making recommendations to the Board of Directors for reviewing the completed audit and audit report with the independent auditors, the conduct of the audit, significant accounting adjustments, recommendations for improving internal controls, and all other significant findings during the audit;

    meeting at least quarterly with the Company's management and auditors to discuss internal accounting and financial controls, as well as results of operations reviews performed by the auditors;

    determining the scope of and authorizing or approving any permitted nonaudit services provided by the independent auditors and the compensation for those services; and

    initiating and supervising any special investigation it deems necessary regarding the Company's accounting and financial policies and controls.

        The Audit Committee is composed solely of directors who are not officers or employees of the Company and who, the Company believes, have the requisite financial literacy to serve on the Audit Committee, have no relationship to the Company that might interfere with the exercise of their independent judgment, and meet the standards of independence for members of an audit committee under the rules of the Securities and Exchange Commission (the "SEC") and under the Nasdaq Marketplace Rules.

        In accordance with the rules and regulations of the SEC, the preceding paragraph regarding the independence of the members of the Audit Committee shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, notwithstanding any general incorporation by reference of this section into any other filed document.

        Messrs. LeVecchio (Chairman), Donner and Howe are the current members of the Audit Committee. The Board of Directors, after reviewing all of the relevant facts, circumstances and attributes, has determined that Mr. LeVecchio, the Chairman of the Audit Committee, is the sole "audit committee financial expert" on the Audit Committee.

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    Compensation Committee

        The Compensation Committee's functions include:

    establishing and administering the Company's compensation policies;

    determining, or recommending to the Board, the compensation of the Company's executive officers;

    administering the Company's equity compensation plans; and

    overseeing the administration of other employee benefit plans and fringe benefits paid to or provided for the Company's officers.

        See "Executive Compensation—Compensation Committee Report" below. Messrs. Howe (Chairman) and Kantor and Ms. Gallagher are the current members of the Compensation Committee. All current members of the Compensation Committee are "independent directors" as defined under the Nasdaq Marketplace Rules.

    Executive Committee

        The Executive Committee was established in January 2001. The Executive Committee has the authority, between meetings of the Board of Directors, to take all actions with respect to the management of the Company's business that require action by the Board of Directors, except with respect to certain specified matters that by law must be approved by the entire Board of Directors. Messrs. Ginsburg, Nguyen, and Choucair are the current members of the Executive Committee.

Attendance at Meetings of the Board of Directors and Committees

        During 2009, the Board of Directors held five meetings. The Audit Committee held six meetings during 2009, and the Compensation Committee held three meetings during 2009. All persons who were directors during 2009 attended at least 75% of the total of the Board meetings and the meetings of committees on which they served that were held while such person served as a director.

Nominations to the Board of Directors

        The Board of Directors does not have a nominating committee or other committee that recommends qualified candidates to the Board for nomination or election as directors. The Board of Directors believes that, because of its relatively small size, it is sufficient for the independent directors to select or recommend director nominees. The Board of Directors has adopted a nominations process that provides that the Company's independent directors (as defined under the Nasdaq Marketplace Rules), acting by a majority, are authorized to recommend individuals to the Board of Directors for the Board's selection as director nominees. Under the rules promulgated by the SEC, the independent directors are, therefore, treated as a "nominating committee" for the purpose of the disclosures in this section.

        With respect to the nominations process, the independent directors do not operate under a written charter, but under resolutions adopted by the Board of Directors.

        The independent directors are responsible for reviewing and interviewing qualified candidates to serve on the Board of Directors, for making recommendations to the full Board for nominations to fill vacancies on the Board, and for selecting the management nominees for the directors to be elected by the Company's stockholders at each annual meeting. The independent directors have not established specific minimum age, education, experience or skill requirements for potential directors. The independent directors have, however, been authorized by the Board of Directors to take into account all factors they consider appropriate in fulfilling their responsibilities to identify and recommend

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individuals to the Board as director nominees. Those factors may include, without limitation, the following:

    an individual's business or professional experience, accomplishments, education, judgment, understanding of the business and the industry in which the Company operates, specific skills and talents, independence, time commitments, reputation, general business acumen and personal and professional integrity or character;

    the size and composition of the Board and the interaction of its members, in each case with respect to the needs of the Company and its stockholders; and

    regarding any individual who has served as a director of the Company, his past preparation for, attendance at, and participation in meetings and other activities of the Board or its committees and his overall contributions to the Board and the Company.

        The independent directors may use multiple sources for identifying and evaluating nominees for directors, including referrals from the Company's current directors and management as well as input from third parties, including executive search firms retained by the Board. The independent directors will obtain background information about candidates, which may include information from directors' and officers' questionnaires and background and reference checks, and will then interview qualified candidates. The Company's other directors will also have an opportunity to meet and interview qualified candidates. The independent directors will then determine, based on the background information and the information obtained in the interviews, whether to recommend to the Board of Directors that a candidate be nominated to the Board.

        The independent directors will consider qualified nominees recommended by stockholders, who may submit recommendations to the independent directors in care of the Company's Board of Directors through a written notice as described under "—Corporate Governance—Communications with the Board of Directors" above. To be considered by the independent directors, a stockholder nomination for election at the 2010 annual meeting (1) must be submitted by December 4, 2009, (2) must contain a statement by the stockholder that such stockholder holds, and has continuously held for at least a year before the nomination, at least $2,000 in market value or 1% of the shares of Common Stock and that such stockholder will continue to hold at least that number of shares through the date of the annual meeting of stockholders, and (3) must be accompanied by a description of the qualifications of the proposed candidate and a written statement from the proposed candidate that he or she is willing to be nominated and desires to serve, if elected. Nominees for director who are recommended by the Company's stockholders will be evaluated in the same manner as any other nominee for director.

Section 16(a) Beneficial Ownership Reporting Compliance

        The members of the Board of Directors, the officers of the Company and persons who hold more than 10% of the Company's outstanding common stock are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, which require them to file reports with respect to their ownership of the Company's common stock and their transactions in such common stock. Based upon (i) the copies of Section 16(a) reports that the Company received from such persons for their 2009 fiscal year transactions in the common stock and their common stock holdings and (ii) the written representation received from one or more of such persons that no annual Form 5 reports were required to be filed by them for the 2009 fiscal year, the Company believes that all reporting requirements under Section 16(a) for such fiscal year were met in a timely manner by its officers, Board members and greater than 10% shareholders at all times during the 2009 fiscal year.

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Other Information

        In September 1999, a civil lawsuit was filed by the SEC in the United States District Court for the Southern District of Florida against Scott K. Ginsburg, the Chairman of the Board of the Company, his brother and his father. The lawsuit alleged that Mr. Ginsburg had violated the insider trading provisions of the federal securities laws by communicating material, non-public information to his brother in 1996 regarding the securities of EZ Communications, Inc. ("EZ") and in 1997 regarding the securities of Katz Media, Inc. ("Katz"). The lawsuit further alleged that Mr. Ginsburg's father and brother, relying upon the information allegedly furnished by Mr. Ginsburg, purchased securities in EZ and Katz, and subsequently profited from the sale of such securities.

        In April 2002, a jury found that Mr. Ginsburg did make these communications, known as "tipping," and therefore concluded that he had violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder. In July 2002, the United States District Court imposed a $1,000,000 civil penalty against Mr. Ginsburg.

        Mr. Ginsburg filed a motion asking the Court to set aside its ruling and the verdict of the jury. On December 19, 2002, the United States District Court granted Mr. Ginsburg's motion for judgment notwithstanding the verdict. The Court overturned the jury verdict in its entirety and set aside the civil penalty.

        On February 13, 2003, the SEC filed a Notice of Appeal, seeking to reverse the Court's decision and challenging the Court's earlier refusal to impose an injunction against Mr. Ginsburg. In March 19, 2004 a decision of a three-judge panel of the Eleventh Circuit U.S. Court of Appeals reversed the decision by the U.S. District Court for the Southern District of Florida on December 19, 2002. The Court of Appeals (i) reinstated the jury verdict that Mr. Ginsburg had, in matters unrelated to the Company, violated Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder, (ii) reinstated a $1 million civil penalty against Mr. Ginsburg and (iii) remanded the case to the District Court with instructions to enjoin Mr. Ginsburg from violations of the federal securities laws and regulations. The Court of Appeals did not bar Mr. Ginsburg from serving as an officer or director of a public company and the Company's Board immediately and unanimously moved to affirm Mr. Ginsburg in his capacity as Chairman of the Board of Directors.

ITEM 11.    EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Executive Officers
  Principal Position
Scott K. Ginsburg   Chairman and Chief Executive Officer
Neil H. Nguyen   President and Chief Operating Officer
Omar A. Choucair   Chief Financial Officer

    Compensation Philosophy and Objectives

        The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and which aligns executives' interests with those of the stockholders by rewarding performance at or above established goals, with the ultimate objective of improving stockholder value. The philosophy of the Compensation Committee is to evaluate both performance and compensation to ensure that we maintain our ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. Additionally, the Compensation Committee maintains flexibility, enabling management and the Board to make decisions based on the needs of the business and to recognize different levels of individual contribution and value creation. To that end, the

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Compensation Committee believes executive compensation packages should include both cash and equity-based compensation that reward performance as measured against established goals.

    Setting Executive Compensation

        The Compensation Committee reviews our compensation plans which were developed in conjunction with Company management who utilized publicly available compensation data in the media services and technology industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company.

        As the basis for its 2009 comparative review, the Compensation Committee determined the appropriate companies to include in the executive compensation peer group. The Compensation Committee believes that the Company's most direct competitors for executive talent include a broader range of large capitalization companies than those firms with which the Company might be compared for stock performance purposes. The companies included in the industry group were Avid, LodgeNet, ValueClick, Akamai, Limelight, Omniture, Cinedigm, and National Cinemedia. With respect to the Company's executive officers, because information for each position being reviewed was not available for comparable positions at each company in the industry group, the companies included in the market competitive data used by the Committee in its review varied for each position.

        Based on management's analyses and recommendations, the Compensation Committee has approved a pay-for-performance compensation philosophy, which is intended to establish base salaries and total executive compensation (taking into consideration the executive's experience and abilities) that are competitive with those companies with a similar number of employees represented in the compensation data we review.

        We work within the framework of this pay-for-performance compensation philosophy to determine each component of an executive's initial compensation package based on numerous factors, including:

    the individual's particular background, track record and circumstances, including training and prior relevant work experience;

    the individual's role with us and the compensation paid to similar persons in the companies represented in the compensation data that we review;

    the demand for individuals with the individual's specific expertise and experience;

    performance goals and other expectations for the position; and

    uniqueness of industry skills.

Employment Agreements

        We have entered into employment agreements with each of our named executive officers, the key terms of which are described in the narrative following the Summary Compensation Table. We believe that having employment agreements with our executives is often beneficial to us because it provides retentive value and generally gives us a competitive advantage in the recruiting process over a company that does not offer an employment agreement. Our employment agreements set forth the terms and conditions of employment and establish the components of an executive's compensation, which generally include the following:

    Base salary;

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    A target annual cash bonus with the actual amount determined based on whether performance criteria are met; and

    Benefits, including participation in our retirement plans and health, life insurance and disability insurance plans.

        Our employment agreements, also contain key provisions in the event of an executive's termination or resignation, setting forth the circumstances under which an executive may resign for "good reason" or that we may terminate the agreement "for cause," and formalizing restrictive covenants such as commitments not to join a competitor within a set time frame, not to solicit our employees to leave our Company, and to protect our confidential information, among others. The events that constitute a termination for "good reason" are negotiated in connection with the employment agreement and generally include such events as substantial changes in the executive's duties or reporting structure, relocation requirements, reductions in compensation and any breach by us of the agreement. There are change-in-control provisions in certain of our employment agreements.

Key Considerations in Determining Executive Compensation

        In general, the terms of our executive employment agreements are initially negotiated by our CEO and legal counsel. The agreements for our executives over whose compensation the Compensation Committee has authority are presented to the Compensation Committee for consideration. When appropriate, such as in the case of the agreements for Messrs. Ginsburg, Choucair, and Nguyen, the Compensation Committee takes an active role in the negotiation process. The Compensation Committee also establishes from time to time the general compensation principles set forth in our executive employment agreements.

        During the review and approval process for the employment agreements for executives under its purview, the Compensation Committee considers the appropriate amounts for each component of compensation and the compensation design appropriate for the individual executive. In its analysis, the Compensation Committee considers the individual's credentials, and if applicable, performance at the Company, the compensation history of the executive, data on the compensation of individuals in comparable positions at our Company and the total projected value of the compensation package to the executive.

        The Compensation Committee does exercise the discretion to increase or decrease awards or payouts, except for base salary, which has an established minimum set forth in the respective employment agreements.

        The Compensation Committee does not use rigid guidelines in determining the mix of compensation elements (i.e., long-term versus currently paid out compensation and cash versus non-cash compensation) for each senior executive.

    2009 Executive Compensation Components

        For the fiscal year ended December 31, 2009, the principal components of compensation that our named executive officers were eligible to receive were:

    Base salary;

    Performance-based incentive compensation (annual bonus);

    Long-term equity incentive compensation;

    Participation in the Company's 401(k) Plan; and

    Perquisites and other personal benefits.

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        The Company determines the total target compensation for its executive officers based, upon (i) publicly available compensation data within the industry group selected by the Compensation Committee, set forth above (ii) experience, and (iii) internal equity. The companies included within the Company's survey for 2009 comprise an industry group which change over time for various reasons, including the acquisition by the Company of certain of such companies, and other companies of similar size entering the segment of the technology, media and telecommunications industry in which the Company competes.

        Utilizing this industry data, together with information relating to the individual executive officer's credentials, performance and compensation history at the Company, and the compensation history of that executive officer and the other executive officers at the Company, the Compensation Committee establishes a target range of total compensation that it believes is appropriate for each executive officer. The Compensation Committee then seeks to establish each element of compensation in an amount that will optimally motivate the executive officer, but keeping within the target compensation range. The Compensation Committee does not utilize formulas in establishing the amounts for each element of pay, because the Committee believes that the appropriate mix among the various elements of compensation differs for the various executive officers based on various factors, including but not limited to their need for current income as opposed to long-term compensation. The Company believes that it is better able to achieve the appropriate mix among the various elements of compensation for each executive officer through negotiations directly with that officer, rather than by applying formulas. However, the Compensation Committee believes that all executive officers should have a significant amount of their total compensation package in the form of performance-based incentive compensation (annual cash bonus) and long-term equity incentive compensation. The amounts reflected in the Summary Compensation Table and their individual employment agreements reflect this process.

    Base Salary

        Base salaries for our executives are established based on the scope of their responsibilities and their prior relevant background, track record, training and experience, taking into account competitive market compensation paid by the companies represented in the compensation data we review for similar positions and the overall market demand for such executives at the time the respective employment agreements are negotiated. As with total executive compensation, we believe that executive base salaries should be competitive with the range of salaries for executives in similar positions and with similar responsibilities in the companies of similar size to us represented in the compensation data we review. An executive's base salary is also evaluated together with components of the executive's other compensation to ensure that the executive's total compensation is consistent with our overall compensation philosophy.

        The base salaries were established in arms-length negotiations between the executive and the Company, taking into account their extensive experience, knowledge of the industry, track record, and achievements on behalf of the Company. Although the Company considered the same factors in establishing the base salaries of each of the executives, due to the different levels of satisfaction of such factors by each executive, the base salaries are, in certain cases, substantially different. Specifically, due to his extensive experience, responsibilities and significant market demand, the Company believes that it is appropriate that Mr. Ginsburg's base salary is substantially higher than the Company's other executives.

        Base salaries are adjusted annually in accordance with the terms of the executive's employment agreement.

        With respect to the Chairman and our other executive officers, the Compensation Committee believes that using the industry group provides comparative data on the companies that are most likely to compete directly with the Company for senior executive talent.

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        Consistent with the Company's financial performance expectations, its size and complexity, and each executive's position relative to similarly situated executives in the industry group noted above, the Committee generally targets total direct compensation, which is composed of base salary, target annual cash bonus, and the estimated value of stock-based awards.

    Annual Bonus

        Our compensation program includes eligibility for an annual performance-based cash bonus. The amount of the cash bonus is generally consistent with the targeted bonus established in the executive's employment contract and may be adjusted on a discretionary basis, based on performance, in accordance with the employment contract. All executives are eligible for annual performance-based cash bonuses as set forth in their employment agreements and in accordance with Company policies. As provided in their employment agreements, our Chief Executive Officer, President and Chief Operating Officer, and Chief Financial Officer were eligible for annual performance-based cash bonuses for 2009 of up to $351,000, $296,250 and $140,000 respectively (which amounts are adjusted upward during the term of the Chief Executive Officer and President and Chief Operating Officer's agreements). In its discretion, the Compensation Committee and Board of Directors may, however, award a bonus payment above or below this target amount.

        In the Compensation Committee's view, the use of annual cash bonuses that are based on performance creates a direct link between executive compensation and individual and business performance.

        The Compensation Committee establishes specific criteria to assist it in determining the annual bonuses for the Chief Executive Officer and other executives. The Compensation Committee established bonuses pursuant to the target contractual bonuses detailed in the executive's employment agreement, which represent the amount the Company would expect to pay the executive each year for satisfactory performance. Thus, if the applicable financial and individual goals are achieved, receipt of at least the target bonus amount by each executive is likely. While these goals are used as a guide by the Compensation Committee in determining the bonuses to be paid to the executives, the Compensation Committee has the discretion in making its bonus determinations and it has done so in individual bonus determinations.

        In evaluating the Company's performance and each individual executive's 2009 performance, the Compensation Committee determined that the Company and its executives generally met or exceeded the financial and individual goals that were established for 2009.

        These metrics are used because they encourage executives to achieve superior operating results using appropriate levels of capital. In its assessment of whether the goals are met, the Committee may consider the nature of unusual expenses or contributors to financial results, and authorize adjustments in its sole discretion.

        The individual goals established for Mr. Ginsburg and the other named executives at the beginning of 2009 included strategic and leadership goals tailored to the individual's position, and focused on the Company's strategic initiatives. The following is a summary of the financial and individual goals for Mr. Ginsburg, all of which were completed during 2009:

    Achieving revenue and margin improvements;

    Realization of operating cost synergies resulting from prior acquisitions; and

    Successful negotiation and closing of an increased credit facility used to replace short-term acquisition financing.

        The Committee established these goals with the objective that they would help to enhance stockholder value. The Compensation Committee did not establish specific quantitative targets for the

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financial goals described above. These accomplishments, in addition to the Company's financial performance as a whole, served as a basis for the Committee's determination of the bonus to approve for Mr. Ginsburg and the other executive officers.

        Mr. Ginsburg's Annual Bonus.    As discussed above, the Compensation Committee believes that Mr. Ginsburg's annual cash bonus should be clearly linked to the Company's financial performance and his individual performance to further the compensation philosophy regarding accountability. In determining and approving Mr. Ginsburg's bonus, the Committee evaluated the Company's financial performance against Mr. Ginsburg's individual performance covering his roles as both the Chairman of the Board and the Chief Executive Officer of the Company, which focused on major business initiatives and objectives of the Company. The Committee also retained the discretion to consider other factors in setting Mr. Ginsburg's bonus. As a result, in recognition of Mr. Ginsburg's and the Company's significant accomplishments in 2009, the Compensation Committee approved a 2009 bonus for him of $451,000 which included $351,000 for his contractual target bonus plus an additional $100,000 as a discretionary bonus.

        In considering the individual performance of Mr. Ginsburg, the Compensation Committee noted, among other things, Mr. Ginsburg's outstanding financial, strategic and leadership accomplishments. To strengthen the portfolio of businesses, Mr. Ginsburg oversaw the integration of the Vyvx and Enliven acquisitions. Mr. Ginsburg also pursued several initiatives to streamline and grow the Company's business, including the successful secondary common stock offering which generated approximately $53 million of cash proceeds to the Company. Based on these accomplishments the Compensation Committee approved the additional discretionary bonus of $100,000 because the Compensation Committee believed that Mr. Ginsburg's efforts would not be adequately rewarded with a bonus equal to his contractual target bonus.

        Annual Bonuses for Executives Other than the Chief Executive Officer.    The Compensation Committee established the 2009 cash bonuses for other executives in a similar manner as for Mr. Ginsburg. In establishing the 2009 bonuses, the Committee reviewed the Company's financial performance and the individual performance of each executive. In light of their and the Company's achievements, the Company's executives were awarded 2009 annual cash bonuses (set forth in the Summary Compensation Table).

        In determining and approving Mr. Choucair's bonus, the Committee evaluated the Company's financial performance against Mr. Choucair's individual performance covering his role as the Chief Financial Officer of the Company, which focused on major business initiatives and objectives of the Company. The Committee also retained the discretion to consider other factors in setting Mr. Choucair's bonus. Mr. Choucair was awarded a cash bonus of $190,000 which included $140,000 for his contractual target bonus plus an additional $50,000 as a discretionary bonus.

        The individual goals for Mr. Choucair, all of which were completed during 2009, were substantially the same as those goals indicated for Mr. Ginsburg. The individual accomplishments for Mr. Ginsburg and Mr. Choucair included both the completion of certain projects led by those officers (i.e., realization of cost synergies from the Vyvx Ads and Enliven transactions and the closing of the increased senior credit facility), as well as achievement by the Company of certain financial objectives under the supervision of those officers. The Company's financial objectives under the supervision of Mr. Ginsburg and Mr. Choucair included achieving revenue and margin improvements throughout the Company, achieving cost reductions through streamlined organizational structures and achieving operating cost synergies relating to the Vyvx Ads and Enliven transactions. The Compensation Committee did not establish any formula with respect to any of the foregoing financial objectives because the Compensation Committee believed that it would be in better position to evaluate the satisfaction of these financial objectives throughout the year, in light of the performance of the Company relative to the industry and the economy in general.

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        In determining and approving Mr. Nguyen's bonus, the Committee evaluated the Company's financial performance against Mr. Nguyen's individual performance covering his role as the Executive Vice President of Sales and Operations of the Company, which focused on major business initiatives and objectives of the Company. The Committee also retained the discretion to consider other factors in setting Mr. Nguyen's bonus. Mr. Nguyen was awarded a cash bonus of $190,000 which included $140,000 for his contractual target bonus plus an additional $50,000 as a discretionary bonus.

        The individual goals for Mr. Nguyen, all of which were completed during 2009, were substantially the same as those goals indicated for Mr. Ginsburg. The individual accomplishments for Mr. Ginsburg and Mr. Nguyen included both the completion of certain projects led by those officers (i.e., realization of cost synergies from the Vyvx Ads and Enliven transactions and the closing of the increased senior credit facility), as well as achievement by the Company of certain financial objectives under the supervision of those officers. The Company's financial objectives under the supervision of Mr. Ginsburg and Mr. Nguyen included achieving revenue and margin improvements throughout the Company, achieving cost reductions through streamlined organizational structures and achieving operating cost synergies relating to the Vyvx Ads and Enliven transactions. The Compensation Committee did not establish any formula with respect to any of the foregoing financial objectives because the Compensation Committee believed that it would be in better position to evaluate the satisfaction of these financial objectives throughout the year, in light of the performance of the Company relative to the industry and the economy in general.

    Long-Term Equity Incentive Compensation

        We believe that long-term performance is achieved through an ownership culture that encourages long-term participation by our executives in equity-based awards. Our 2006 Long-term Stock Incentive Plan (the "2006 Plan") allows us to grant stock options and other equity awards to employees. We currently make initial equity awards of stock options to new executive and certain non-executive employees in connection with their employment with the Company. Annual grants of options, if any, are approved by the Compensation Committee.

        All of the stock option grants to executive officers have been made with the exercise prices equal to the fair market value of our Common Stock on the dates of grant, and our officers are able to profit from their stock options only if the stock price appreciates from the value on the date the stock options were granted. In addition, from time to time, the Company grants shares of restricted stock to certain Company executives. The use of stock options and restricted stock units is intended to focus executives on the enhancement of shareholder value over the long-term, to encourage equity ownership in the Company and to retain key executive talent.

        Initial Equity Incentives.    Executives and certain non-executive employees who join us are awarded initial stock option grants. These grants have an exercise price equal to the fair market value of our common stock on the later of the grant date or the date the employee joins us, and they typically vest ratably over four years. The initial stock option awards are intended to provide the executive with incentive to build value in the organization over an extended period of time. The size of the initial stock option award is also reviewed in light of the executive's track record, base salary, other compensation and other factors to ensure that the executive's total compensation is in line with our overall compensation philosophy.

        Subsequent Equity Incentives.    We may make annual stock option awards as part of our overall annual review process. The Compensation Committee believes that stock options provide management with a strong link to long-term corporate performance and the creation of stockholder value. We expect that the annual aggregate value of these awards would be set near the competitive median levels for companies represented in the compensation data we review. As is the case when the amounts of base salary and initial equity awards are determined, a review of all components of compensation is conducted when determining equity awards to ensure that total compensation conforms to our overall philosophy and objectives.

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        Occasionally, the Compensation Committee approves a stock-based award made to an executive officer outside the annual compensation review process. The most common instances for such an award are in connection with the review of the executive compensation of an individual at the time of the individual's initial hiring or promotion to an executive position, in connection with the renewal of an employment agreement, or for other retention purposes. In those circumstances, the equity award generally would be made at the time approved by the Compensation Committee. On December 21, 2009, the Compensation Committee approved a grant of 125,000 stock options, in conjunction with Mr. Nguyen's amended and restated employment agreement, whereby he had agreed to continue to serve in a new role as President and Chief Operating Officer and entered into a new three-year employment agreement.

    Perquisites and Other Personal Benefits

        We provide named executive officers with perquisites and other personal benefits that we and the Compensation Committee believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews the levels of perquisites and other personal benefits provided to executive officers.

        We maintain benefits and perquisites that are offered to all employees, including health insurance, life and disability insurance, dental insurance and a 401(k) plan, including Company matching contributions.

    Termination Based Compensation

        Upon termination of employment, all executive officers are entitled to receive severance payments under their employment agreements. In determining whether to approve and as part of the process of setting the terms of such severance arrangements, the Compensation Committee recognizes that executives and officers often face challenges securing new employment following termination. Our Chief Executive Officer's employment agreement provides, if his employment is terminated (i) by the Company without cause, (ii) voluntarily for good reason, or (iii) voluntarily following a change in control, he is entitled to all remaining salary in lump sum payments to the end of the employment term, plus salary in lump sum payments from the end of the employment term through the end of the second anniversary of the Date of Termination. Our President and Chief Operating Officer's employment agreement provides, if his employment is terminated (i) by the Company without cause, (ii) voluntarily for good reason, or (iii) voluntarily following a change in control, he is entitled to all remaining salary in lump sum payments to the end of the employment term, plus salary in lump sum payments from the end of the employment term through the end of the first anniversary of the Date of Termination. Our Chief Financial Officer's employment agreement provides, if his employment is terminated (i) by the Company, without cause, (ii) voluntarily for good reason, or (iii) voluntarily following a change in control, he is entitled to all remaining salary in lump sum payments to the end of the employment term, plus salary in lump sum payments from the end of the employment term through the end of the second anniversary of the Date of Termination. Following the end of the employment term, upon termination for any reason other than cause, our Chief Executive Officer and Chief Financial Officer each are entitled to continuation of their salary in effect at that time for a period of six months.

Tax and Accounting Implications

    Deductibility of Executive Compensation

        As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we

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may not deduct compensation of more than $1,000,000 that is paid to certain individuals, unless the compensation is "qualified performance based compensation." In its review and establishment of compensation programs and awards, the Compensation Committee considers the anticipated deductibility or non-deductibility of the compensation as a factor in assessing whether a particular arrangement is appropriate given the goals of maintaining a competitive executive compensation system generally, motivating executives to achieve corporate performance objectives and increasing shareholder value. However, the Compensation Committee may, from time to time, make compensation awards that are non-deductible under Section 162(m) or other provisions of the Internal Revenue Code.

    Accounting for Stock-Based Compensation

        Beginning on January 1, 2006, we began accounting for stock-based payments, including awards under the 2006 Plan, in accordance with the requirements of SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R).

Compensation Committee Report

        The Compensation Committee of the Board of Directors of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors of the Company that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

    THE COMPENSATION COMMITTEE

 

 

Kevin C. Howe, Chairman
Lisa C. Gallagher
David M. Kantor

Compensation Table

        The following table shows the compensation for the three fiscal years ended December 31, 2009 earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.

Name and Principal Position
  Year   Salary
($)
  Bonus
($)
  Stock-based
Awards
($)(1)
  All Other
Compensation
($)
  Total
($)
 

Scott K. Ginsburg

    2009     457,270     451,000         30,802 (2)   939,072  
 

Chairman and Chief Executive

    2008     405,577     538,750     5,922,000 (6)   34,001 (7)   6,600,328  
 

Officer

    2007     375,000     262,500         361,965 (12)   999,465  

Omar A. Choucair

   
2009
   
334,250
   
190,000
   
   
23,921

(3)
 
548,171
 
 

Chief Financial Officer

    2008     265,769     300,500     2,023,275 (8)   26,705 (9)   2,616,249  

    2007     255,769     120,000         23,843 (13)   399,612  

Neil H. Nguyen

   
2009
   
350,570
   
190,000
   
1,990,450

(4)
 
29,766

(5)
 
2,560,786
 
 

President and Chief Operating

    2008     233,846     250,000     1,618,620 (10)   106,515 (11)   2,208,981  
 

Officer

    2007     220,000     100,000         101,105 (14)   421,105  

(1)
See Note 14 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for details as to the assumptions used to determine the fair value of stock awards. Amounts shown are based on the fair value of the entire award on the grant date, regardless of vesting requirements.

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(2)
Consists of $11,539 paid for automobile allowance, $2,501 in matching contributions to the Company's 401(K) plan and $16,762 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(3)
Consists of $5,769 paid for automobile allowance, $1,390 in matching contributions to the Company's 401(K) plan, and $16,762 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(4)
Consists of a grant of 125,000 stock options on December 21, 2009 with a fair value of $1,990,450 calculated in accordance with FASB ASC Topic 718.

(5)
Consists of $5,769 paid for automobile allowance, $1,316 in matching contributions to the Company's 401(K) plan, $5,919 for sales commissions, and $16,762 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(6)
Consists of 350,000 shares of restricted stock granted on October 9, 2008 with a fair value on that date of $5,922,000 calculated in accordance with FASB ASC Topic 718.

(7)
Consists of $11,539 paid for automobile allowance, $4,502 in matching contributions to the Company's 401(K) plan and $17,960 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(8)
Consists of 250,000 stock options granted on December 23, 2008 with a fair value on that date of $2,023,275 calculated in accordance with FASB ASC Topic 718.

(9)
Consists of $6,000 paid for automobile allowance, $2,744 in matching contributions to the Company's 401(K) plan, and $17,961 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(10)
Consists of 200,000 stock options granted on December 23, 2008 with a fair value on that date of $1,618,620 calculated in accordance with FASB ASC Topic 718.

(11)
Consists of $5,769 paid for automobile allowance, $3,205 in matching contributions to the Company's 401(K) plan, $79,580 for sales commissions, and $17,961 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(12)
Consists of $12,000 paid for automobile allowance, $331,958 which represents the amount paid in 2007 for Mr. Ginsburg's personal guarantee of a portion of the Company's debt, $2,679 in matching contributions to the Company's 401(K) plan and $15,328 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(13)
Consists of $6,000 paid for automobile allowance, $2,515 in matching contributions to the Company's 401(K) plan, and $15,328 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

(14)
Consists of $6,000 paid for automobile allowance, $2,305 in matching contributions to the Company's 401(K) plan, $77,472 for sales commissions, and $15,328 which represents the costs of insurance premiums paid by the Company for participation in the health insurance program.

Grants of Plan-Based Awards

        During the fiscal year ended December 31, 2009, the following individuals named in the Summary Compensation Table received stock option awards:

 
  Grant Date   Restricted
Stock Awards
  Option
Awards
  Exercise
Price
  Fair Value of
Award at
Grant Date
 

Neil Nguyen

  12/21/2009         125,000   $ 27.27   $ 1,990,450  

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Discussion of Summary Compensation Table and Grants of Plan-Based Awards

        The terms of our executive officers' compensation are derived from our employment agreement with them and the annual performance review by our Compensation Committee or the entire Board. The terms of Mr. Ginsburg's employment agreement with us were the result of negotiations between us and Mr. Ginsburg and were approved by our Board of Directors. The terms of Mr. Choucair's and Mr. Nguyen's employment agreements with us were the result of negotiations between our Chief Executive Officer and Board of Directors and the applicable executive.

Employment Agreement with Scott K. Ginsburg

        On October 3, 2008, the Company entered into an Employment Agreement with our Chief Executive Officer, Scott K. Ginsburg. Pursuant to the Employment Agreement between Mr. Ginsburg and the Company (the "CEO Agreement"), the Company agreed to employ Mr. Ginsburg as its Chief Executive Officer from August 1, 2008 (the "Effective Date") through July 31, 2011. Under the CEO Agreement, Mr. Ginsburg is entitled to an annualized base salary of $450,000 for the twelve month period ending July 31, 2009, which amount is scheduled to increase to $468,000 for the twelve month period ending July 31, 2010 and to $486,720 for the twelve month period ending July 31, 2011. In addition, Mr. Ginsburg is eligible for an annual bonus of up to 75% of the then-applicable annual salary, with the criteria upon which any bonus would be awarded to be determined in the sole discretion of the Compensation Committee. Pursuant to the CEO Agreement, Mr. Ginsburg received a restricted stock grant of 350,000 shares of Company Common Stock, with the forfeiture provisions applicable to such shares terminating in equal annual installments on the first three anniversaries of the Effective Date. The Company retained the right to increase the base compensation and bonus, and grant additional equity incentive awards, as it deems appropriate. Mr. Ginsburg is entitled to participate in the Company's stock option plans, is entitled to four weeks of paid vacation per calendar year and is to receive a car allowance totaling $1,000 per month for the term of the Agreement. Finally, during the term of the Agreement, the Company shall pay the amount of premiums or other costs incurred for the coverage of Mr. Ginsburg and his spouse and dependent family members under the Company's health plan.

        The CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition and confidentiality obligations. Pursuant to the CEO Agreement, if Mr. Ginsburg terminates his employment for Good Reason (as described 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 described below) or death, he shall be entitled to 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 in a lump sum payment. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), he shall not be entitled to further compensation. 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 his salary as then in effect for a period of six months in a lump sum payment. 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 Company's principal office by 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.

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        The above summary of the CEO Agreement is qualified in its entirety by reference to 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.

Employment Agreement with Omar A. Choucair

        Effective as of December 31, 2008, the Company entered into an Amended and Restated Employment Agreement with our Chief Financial Officer, Omar A. Choucair. Pursuant to the Amended and Restated Employment Agreement between Mr. Choucair and the Company (the "CFO Agreement"), the Company agreed to employ Mr. Choucair as its Chief Financial Officer from the effective date of the CFO Agreement through December 31, 2011. Under the CFO Agreement, Mr. Choucair is entitled to an annualized base salary of $335,000 for the year ending December 31, 2009 (increasing to $345,000 for the year ending December 31, 2010 and $355,000 for the year ending December 31, 2011). Mr. Choucair is eligible for an annual bonus of up to $140,000 during the term of the CFO Agreement, with the criteria upon which any bonus would be awarded to be determined in the sole discretion of the Compensation Committee. Pursuant to the CFO Agreement, Mr. Choucair received a grant of 250,000 stock options, which options vest in equal annual installments on the first four anniversaries of the effective date of the grant. The Company retained the right to increase the base compensation and bonus, and grant additional equity incentive awards, as it deems appropriate. Mr. Choucair is entitled to participate in the Company's stock option plans, is entitled to four weeks of paid vacation per calendar year and is to receive a car allowance totaling $500 per month for the term of the CFO Agreement. Finally, during the term of the CFO Agreement, the Company shall pay the amount of premiums or other costs incurred for the coverage of Mr. Choucair and his spouse and dependent family members under the Company's health plan.

        The CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition and confidentiality obligations. Pursuant to the CFO Agreement, if Mr. Choucair terminates his employment for Good Reason (as described 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 described below) or death, he shall be entitled to 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 in a lump sum payment. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. 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. Choucair his salary as then in effect for a period of six months in a lump sum payment. Under the CFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company's principal office by 20 miles, the transfer to an office other than the principal office or a material breach of the CFO Agreement by the Company. Under the CFO Agreement, Cause includes conviction of or a plea of guilty or nolo contendre by Mr. Choucair 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 CFO Agreement by Mr. Choucair.

        The above summary of the CFO Agreement is qualified in its entirety by reference to the full text of the CFO Agreement, a copy of which was filed as an exhibit to the Current Report on Form 8-K filed by the Company on January 8, 2009.

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Employment Agreement with Neil H. Nguyen

        On January 11, 2010, the Company entered into an Amended and Restated Employment Agreement with Neil H. Nguyen. Pursuant to the Amended and Restated Employment Agreement between Mr. Nguyen and the Company (the "COO Agreement"), the Company agreed to employ Mr. Nguyen as its President and Chief Operating Officer from the date of the Agreement through December 31, 2012. Under the COO Agreement, Mr. Nguyen is entitled to an annualized base salary of $395,000 for the year ending December 31, 2010 (increasing to $415,000 for the year ending December 31, 2011 and $430,000 for the year ending December 31, 2012). Mr. Nguyen is eligible for an annual bonus of up to 75% of the then-applicable base salary during the term of the COO Agreement, with the criteria upon which any bonus would be awarded to be determined in the sole discretion of the Compensation Committee. Pursuant to the COO Agreement, Mr. Nguyen received stock option covering 125,000 shares of Company Common Stock, which options vest in equal annual installments on the first four anniversaries of the effective date of the grant. The Company retained the right to increase the base compensation and bonus, and grant additional equity incentive awards, as it deems appropriate. Mr. Nguyen is entitled to participate in the Company's stock option plans, is entitled to four weeks of paid vacation per calendar year and is to receive a car allowance totaling $500 per month for the term of the COO Agreement. Finally, during the term of the COO Agreement, the Company shall pay the amount of premiums or other costs incurred for the coverage of Mr. Nguyen under the Company's health plan.

        The COO Agreement also includes provisions respecting severance and confidentiality obligations. Pursuant to the COO Agreement, if Mr. Nguyen terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below), he shall be entitled to the greater of (i) all remaining salary to the end of the employment term or (ii) one year of salary. If he is terminated by the Company for Just Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the COO Agreement, Good Reason includes the assignment of duties inconsistent with his title or a material reduction in his authority, duties or responsibility, a reduction in title below "Executive Vice President," the relocation of the Company's principal office by 20 miles, the transfer to an office other than the principal office or a material breach of the COO Agreement by the Company. Under the COO Agreement, Just 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 COO Agreement by Mr. Nguyen.

        The above summary of the COO Agreement is qualified in its entirety by reference to the full text of the COO Agreement, a copy of which was filed as an exhibit to our current Report on Form 8-K filed by the Company on January 14, 2010.

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Outstanding Equity Awards at Fiscal Year-End

        The following table shows grants of stock options and grants of unvested stock awards outstanding on December 31, 2009, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table.

Name
  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)(1)
Unexercisable
  Option
Exercise
Price
($)
  Option Expiration Date   Number of
Shares of Stock
Awards That
Have Not
Vested
(#)
  Market Value
of Shares of
Stock Awards
that Have Not
Vested
($)
 

Scott K. Ginsburg

    2,500         12.90   February 20, 2012          

    85,414     14,586     5.88   July 12, 2013              

                  233,333 (2) $ 6,517,000 (3)

Omar A. Choucair

    25,000         12.90   February 20, 2012          

    2,500         26.00   May 16, 2013          

    34,166     5,834     5.88   July 12, 2013          

    62,500     187,500     14.14   December 23, 2018          

Neil H. Nguyen

    1,667     5,834     5.88   July 12, 2013          

    50,000     150,000     14.14   December 23, 2018          

        125,000     27.77   December 21, 2019          

(1)
Options will vest 25% on the first anniversary of the date of grant, and the remainder vests ratably over each of the 36 months thereafter.

(2)
Mr. Ginsburg's restricted stock vests over the following periods: (i) 116,667 shares on August 1, 2010, and (ii) 116,666 shares on August 1, 2011.

(3)
Based on the trading price of our stock on December 31, 2009 of $27.93.

Option Exercises and Stock Vested

 
  Option Awards   Stock Awards  
Name
  Shares Acquired on
Exercise (#)
  Value Realized on
Exercise ($)
  Shares Acquired
on Vesting (#)
  Value Realized on
Vesting ($)
 

Scott K. Ginsburg

    43,330   $ 210,584     116,667   $ 2,448,840  

Omar A. Choucair

    17,332   $ 84,234          

Neil H. Nguyen

    35,499   $ 746,843          

Pension Benefits

        We do not have any qualified or non-qualified defined benefit plans.

Potential Payments upon Termination or Change of Control

        Generally, regardless of the manner in which a named executive officer's employment terminates, such officer is entitled to receive amounts earned during their term of employment. Such amounts include:

    the portion of the executive's base salary that has accrued prior to any termination and not yet been paid;

    unused vacation pay; and

    distribution from the Company's 401(k) plan (assuming the executive participated in the plan)

In addition, we are required to make the additional payments and/or provide additional benefits to the individuals named in the Summary Compensation Table in the event of a termination of employment or a change of control, as set forth below.

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2006 Long-Term Stock Incentive Plan

        The 2006 Plan replaced the Company's 1992 Stock Option Plan. In addition, because the Director Plan has expired, the 2006 Plan was prepared in a manner to enable stock awards to be granted to members of our Board of Directors. When the 2006 Plan was approved by our stockholders, the 1992 Plan terminated and the shares identified above as remaining for future grants under the 1992 Plan ceased to be available for grants under the 1992 Plan. The number of shares subject to the 2006 Plan is 2,200,000 shares.

Termination or Change-in-Control Payments

        Set forth below is a discussion of the payments and benefits payable to our executive officers upon their respective terminations under various circumstances. The multiples of compensation that are payable under these circumstances were determined by the Compensation Committee to be appropriate and consistent with arrangements for executives in similar positions in the industry group. The potential payments and benefits under these arrangements were considered by the Compensation Committee in connection with the other elements of compensation in order to achieve a package of benefits that is appropriate for each executive officer.

    Scott K. Ginsburg, Chairman and Chief Executive Officer

        Pursuant to terms of the 1992 Plan, under which Mr. Ginsburg's options are issued, in the event of a change of control, 50% of the unvested portion of stock options held by Mr. Ginsburg which have not previously vested shall immediately and fully vest and shall remain exercisable for at least 15 days. If Mr. Ginsburg's employment is terminated by us or by Mr. Ginsburg for any reason, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Ginsburg for a period of up to three months from the date of termination. If Mr. Ginsburg's employment is terminated as a result of his death or disability, then immediately upon the date of Mr. Ginsburg's termination, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Ginsburg for a period of six months from the date of termination.

        Pursuant to the terms of Mr. Ginsburg's Restricted Stock Agreement dated October 9, 2008, he was granted 350,000 shares of restricted stock, one third of which vested on August 1, 2009, and each of the remaining two-thirds vests on August 1, 2010 and 2011. In the event of a change in control, any remaining forfeiture provisions shall terminate.

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        The following table summarizes the potential payments to Mr. Ginsburg assuming his employment with us was terminated or a change of control occurred on December 31, 2009, the last day of our most recently completed fiscal year.

Benefits and Payments
  Change of
Control
  Termination
upon Death
or
Disability
  Termination by us
without Cause or
by Mr. Ginsburg
for Good Reason
 

Base Salary(1)

  $ 936,000   $   $ 936,000  

Bonus

  $   $   $  

Acceleration of Vesting of Options:

                   

Number of Stock Options and Value(2)

    7,293          

  $ 160,811   $   $  

Acceleration of Vesting of Restricted Stock:

                   

Number of Shares and Value(3)

    233,333          

  $ 6,517,000   $   $  
               

Total

  $ 7,613,811   $   $ 936,000  

(1)
Base salary would only be paid upon a termination of employment (including a voluntary termination of employment) following a change of control.

(2)
Value upon change of control is calculated using a value of our common stock of $27.93 per share, the closing price of our common stock on December 31, 2009, the last trading day in the fiscal year, less the exercise price of the option of $5.88 per share.

(3)
Value upon change of control is calculated using a value of our common stock of $27.93 per share, the closing price of our common stock on December 31, 2009.

    Omar A. Choucair, Chief Financial Officer

        Pursuant to terms of the 1992 Plan and 2006 Plan, under which Mr. Choucair's options are issued, in the event of a change of control, 50% of the unvested portion of stock options held by Mr. Choucair which have not previously vested shall immediately and fully vest and shall remain exercisable for at least 15 days. If Mr. Choucair's employment is terminated by us or by Mr. Choucair for any reason, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Choucair for a period of up to three months from the date of termination. If Mr. Choucair's employment is terminated as a result of his death or disability, then immediately upon the date of Mr. Choucair's termination, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Choucair for a period of six months from the date of termination.

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        The following table summarizes the potential payments to Mr. Choucair assuming his employment with us was terminated or a change of control occurred on December 31, 2009, the last day of our most recently completed fiscal year.

Benefits and Payments
  Change of
Control
  Termination
upon Death
or
Disability
  Termination by us
without Cause or
by Mr. Choucair
for Good Reason
 

Base Salary(1)

  $ 700,000   $   $ 700,000  

Bonus

  $   $   $  

Acceleration of Vesting of Options:

                   

Number of Stock Options and Value(2)

    96,667          

  $ 1,357,132   $   $  
               

Total

  $ 2,057,132   $   $ 700,000  

(1)
Base salary would only be paid upon a termination of employment (including a voluntary termination of employment) following a change of control.

(2)
Value upon change of control is calculated using a value of our common stock of $27.93 per share, the closing price of our common stock on December 31, 2009, the last trading day in the fiscal year, less the exercise price of the options

Neil H. Nguyen, President and Chief Operating Officer

        Pursuant to terms of the 1992 Plan and 2006 Plan, under which Mr. Nguyen's options are issued, in the event of a change of control, 50% of the unvested portion of stock options held by Mr. Nguyen which have not previously vested shall immediately and fully vest and shall remain exercisable for at least 15 days. If Mr. Nguyen's employment is terminated by us or by him for any reason, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Nguyen for a period of up to three months from the date of termination. If his employment is terminated as a result of his death or disability, then immediately upon the date of Mr. Nguyen's termination, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Nguyen for a period of six months from the date of termination.

        The following table summarizes the potential payments to Mr. Nguyen assuming his employment with us was terminated or a change of control occurred on December 31, 2009, the last day of our most recently completed fiscal year.

Benefits and Payments
  Change of
Control
  Termination
upon Death
or
Disability
  Termination by us
without Cause or
by Mr. Nguyen
for Good Reason
 

Base Salary(1)

  $ 1,240,000   $   $ 1,240,000  

Bonus

  $   $   $  

Acceleration of Vesting of Options:

                   

Number of Stock Options and Value(2)

    142,084          

  $ 1,144,856   $   $  
               

Total

  $ 2,384,856   $   $ 1,240,000  

(1)
Base salary would only be paid upon a termination of employment (including a voluntary termination of employment) following a change of control.

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(2)
Value upon change of control is calculated using a value of our common stock of $27.93 per share, the closing price of our common stock on December 31, 2009, the last trading day in the fiscal year, less the exercise price of the options.

Director Compensation

    Director Compensation Table

        The following table sets forth a summary of the compensation paid to certain of our Directors pursuant to the Company's compensation policies for the fiscal year ended December 31, 2009, other than Scott K. Ginsburg, our Chairman and Chief Executive Officer, and Omar A. Choucair, our Chief Financial Officer and Director.

Name
  Fees Earned ($)   Stock-based
Compensation(1)
  Total ($)  

William Donner

  $ 28,500     38,140     66,640  

Lisa Gallagher

    19,500     38,140     57,640  

Kevin C. Howe

    28,500     38,140     66,640  

David M. Kantor

    19,500     38,140     57,640  

Anthony J. LeVecchio

    41,500     38,140     79,640  

(1)
Represents the fair value of 2,000 shares of restricted stock granted to each non-employee director on May 11, 2009, which will vest of a three year period.

    Director Compensation Policy

        Messrs. Ginsburg and Choucair, our Chairman and Chief Executive Officer, and Chief Financial Officer and Director, respectively, are not paid any fees or other compensation for services as a member of our Board of Directors or of any committee of our Board of Directors.

        The non-employee members of our Board of Directors receive compensation for services provided as a director as well as reimbursement for documented reasonable expenses incurred in connection with attendance at meetings of our Board of Directors and the committees thereof. The Company pays its directors an annual cash retainer of $12,000 plus $1,500 per Board of Directors meeting attended, plus $1,500 per meeting of each committee or special assignments of the Board of Directors. Mr. LeVecchio is paid an additional $13,000 annual cash retainer as Chairman of the Audit Committee.

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        Members of our Board of Directors are also eligible to receive grants of equity awards both upon joining the Board of Directors and on an annual basis in line with recommendations by the Compensation Committee. Grants of restricted stock in each of 2009, 2008 and 2007 were granted to our non-employee directors under our 2006 Plan, and vest ratably over three years.

Employee Benefit Plans

        We sponsor a 401(k) plan covering employees who meet certain defined requirements. Under the terms of our 401(k) plan, participants may elect to make contributions on a pre-tax and after-tax basis, subject to certain limitations under the Internal Revenue Code and we may match a percentage of employee contributions, on a discretionary basis, as determined by our Board of Directors. The Company suspended matching contributions in April 2009. Prior to its suspension, we matched 25% of the amount contributed by employees, up to a maximum of employee contributions of 6%. We may make other discretionary contributions to the 401(k) plan pursuant to a determination by our Board of Directors, although, to date, no such other discretionary contributions have been made.

Compensation Committee Interlocks and Insider Participation

        The current members of the Compensation Committee are Messrs. Howe (Chairman) and Kantor, and Ms. Gallagher. There were no other members of the committee during 2009. All current members of the Compensation Committee are "independent directors" as defined under the Nasdaq Marketplace Rules. None of these individuals were at any time during 2009, or at any other time, an officer or employee of the Company.

        No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Directors and Executive Officers

        The following table sets forth the beneficial ownership of our common stock as of February 28, 2010, except as noted, for (a) each stockholder known by us to own beneficially more than 5% of our common stock; (b) each of our Directors; (c) each executive officer named in the Summary Compensation Table; (d) and all of our current Directors and executive officers as a group. Beneficial

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ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities.

 
  Shares Beneficially Owned
as of February 28, 2010(1)(2)
 
Beneficial Owner
  Number of Shares   Percentage of Class  

Scott K. Ginsburg(3)
Moon Doggie Family Partnership

    2,958,753     11.8 %

Omar A. Choucair(4)

   
147,851
   
*
 

Pamela Maythenyi(5)

   
2,401
   
*
 

Neil H. Nguyen(6)

   
66,831
   
*
 

David M Kantor(7)

   
29,500
   
*
 

Kevin C. Howe(8)

   
14,700
   
*
 

Anthony J. LeVecchio(9)

   
19,500
   
*
 

Lisa C. Gallagher

   
17,000
   
*
 

William Donner

   
7,079
   
*
 

William Blair & Company, L.L.C.
222 West Adam Street
Chicago, IL 60606

   
2,467,934
   
9.9

%

Next Century Growth Investors, L.L.C.
5500 Wayzata Blvd., Suite 1275
Minneapolis, MN 55416

   
2,094,309
   
8.4

%

All directors and executive officers as a group (9 persons)(10)

   
3,263,615
   
12.9

%

*
Less than 1% of the Company's common stock.

(1)
Except as indicated in the footnotes to this table and pursuant to applicable community property laws, to the Company's knowledge, the persons and entities named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the business address of each beneficial owner listed is 750 West John Carpenter Freeway, Suite 700, Irving, TX 75039.

(2)
The number of shares of common stock deemed beneficially owned as of February 28, 2009 was 24,933,019, which includes 253,338 shares of common stock from restricted grants. Restricted grants to each of the non-employee members of the Board of Directors are 667 that will vest on April 11, 2010, 1,334 that will vest one-half on May 14, 2010 and May 14, 2011 and 2,000 which will vest one-third on May 11, 2010, May 11, 2011 and May 11, 2012. Scott Ginsburg has 233,333 shares from a restricted grant which will vest one-half on August 1, 2010 and on August 1, 2011. The number of beneficially owned shares includes shares issuable pursuant to stock options and warrants that may be exercised within sixty days after February 28, 2010.

(3)
Includes 2,036,731 shares held of record by Scott K. Ginsburg, 233,333 shares of unvested restricted stock, 1,660 shares held as parent/guardian of minor and 592,865 shares held in the name of Moon Doggie Family Partnership, L.P. Scott K. Ginsburg is the sole general partner of Moon Doggie Family Partnership, L.P. Includes options exercisable into 94,164 shares of common stock.

(4)
Includes options exercisable into 142,290 shares of common stock.

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(5)
Includes options exercisable into 2,344 shares of common stock.

(6)
Includes options exercisable into 66,666 shares of common stock.

(7)
Includes options exercisable into 22,500 shares of common stock.

(8)
Includes options exercisable into 2,500 shares of common stock.

(9)
Includes options exercisable into 11,000 shares of common stock.

(10)
Includes options exercisable into 341,464 shares of common stock.

Equity Compensation Plan Information

        The following table provides certain aggregate information with respect to all of the Company's equity compensation plans in effect as of December 31, 2009.

Plan category
  Number of Securities
to be issued upon
exercise of
outstanding options,
warrants and rights
  Weighted-average
exercise price of
outstanding options,
warrants and rights
  Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in first column)
 

Common stock options approved by security holders

    1,049,110   $ 17.45     1,097,874  

Common stock warrants approved by security holders

    688,170   $ 11.68     0  
               
 

Total

    1,737,280   $ 15.16     1,097,874  

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions

        Our Audit Committee reviews and approves in advance all related party transactions in accordance with its written charter in order to determine whether or not the proposed transaction is fair to, and in the best interests of the Company. None of the Company's directors or executive officers (1) has entered into any transaction or series of similar transactions with the Company except as described below, (2) has any relationship, or has had any relationship with the Company except as described below, or (3) has outstanding indebtedness to the Company, which (in any case) requires disclosure under Item 404 of the SEC's Regulation S-K.

        Prior to its execution and delivery, the Board of Directors and the Audit Committee reviewed the Media DVX transaction in detail and determined it was in the best interest of the Company to move forward with the acquisition of the Media DVX assets.

        However, the Company did not have the borrowing capacity to fully finance the $10 million purchase price through the Company's existing credit facility in April 2005. Accordingly, the Board of Directors, Audit Committee and the Media DVX selling shareholder negotiated a $6.5 million promissory note as part of the purchase price. The Media DVX selling shareholder demanded a personal guarantee from Mr. Ginsburg as security on the three year $6.5 million promissory note.

        Consistent with its written charter, the Audit Committee and the Board of Directors approved and ratified the asset purchase agreement, the promissory note and the personal guarantor agreement in connection with the purchase of the Media DVX assets. Mr. Ginsburg's personal guarantee of the Company's debt was evaluated for the purpose of determining an amount to compensate him for such guarantee. The Company completed its valuation which determined that the improved interest rate obtained by the Company as a direct result of the personal guarantee was worth approximately

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$0.6 million over the term of the loan. The Audit Committee and the Board of Directors each determined that the compensation payable to Mr. Ginsburg was fair to, and in the best interests of the Company and its stockholders.

        In connection with the Company's acquisition of Media DVX, the $6.5 million promissory note was issued to the seller of Media DVX and was payable over three years with an interest rate of the one month LIBOR rate for the applicable period with principal and then accrued interest due as follows: $1.5 million due on April 15, 2006, $2.0 million due on April 15, 2007, and $3.0 million due on April 15, 2008. However, during the fourth quarter of 2006, the Company retired the entire remaining balance of this obligation through a combination of issuing common stock and cash. The Company paid accrued interest on the promissory note on a quarterly basis. For the years ended December 31, 2006 and 2005 respectively, the Company has recognized additional interest expense of $0.3 million and $0.1 million associated with the guarantee. Amounts paid to Mr. Ginsburg associated with this guarantee were $0.3 million and $0.2 million, for the years ended December 31, 2007 and 2006, respectively.

Director Independence

        The Board of Directors has determined, after considering all of the relevant facts and circumstances, that each of Mr. Howe, Mr. Kantor, Mr. LeVecchio, Mr. Donner and Ms. Gallagher are independent from our management, as an "independent director" as defined under the Nasdaq Marketplace Rules. This means that none of those directors (1) is an officer or employee of the Company or its subsidiaries or (2) has any direct or indirect relationship with the Company that would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director. As a result, the Company has a majority of independent directors as required by the Nasdaq Marketplace Rules.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The following is a summary of the fees billed to the Company by the principal accountant for professional services rendered for the fiscal years ended December 31, 2009 and December 31, 2008:

 
  Years Ended
December 31,
 
 
  2009   2008  

Audit Fees

  $ 1,538,561   $ 1,494,471  

Audit Related Fees

        166,499  

Tax Fees

         

All Other Fees

    1,995     1,995  
           

Total

  $ 1,540,556   $ 1,662,965  

    Audit Fees

        These are fees for professional services for the audit of the Company's annual financial statements, and for the review of the financial statements included in the Company's filings on Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements, including fees relating to compliance with the provisions of the Sarbanes-Oxley Act, Section 404, and audits of acquired entities.

    Audit-Related Fees

        We paid Ernst & Young $166,499 in 2008 for due diligence services related to 2008 acquisitions.

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Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

        Consistent with the policies of the Securities and Exchange Commission regarding auditor independence, the Audit Committee has the responsibility, pursuant to its written charter, for appointing, setting compensation and overseeing the work of our independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. The Audit Committee's policy is to approve all audit and non-audit services provided by our independent registered public accounting firm prior to the commencement of the services using a combination of pre-approvals for certain engagements up to predetermined dollar thresholds in accordance with the pre-approval policy and specific approvals for certain engagements on a case-by-case basis. The Audit Committee has delegated authority to the committee chair to pre-approve between committee meetings those services that have not already been pre-approved by the committee. The chair is required to report any such pre-approval decisions to the full committee at its next scheduled meeting


PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)   See Index to Financial Statements on page F-1 for a list of financial statements filed herewith.

(a)(2)

 

See Schedule II-Valuation and Qualifying Accounts on page S-1.

(a)(3)

 

See Exhibit Index on page 122 for a list of exhibits filed as part of this Form 10-K.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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: March 10, 2010

 

By:

 

/s/ SCOTT K. GINSBURG

Scott K. Ginsburg
Chairman of the Board of Directors and
Chief Executive Officer

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott K. Ginsburg and Omar A. Choucair, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or its or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
 
Title
 
Date

 

 

 

 

 
/s/ SCOTT K. GINSBURG

Scott K. Ginsburg
  Chairman of the Board of Directors and Chief Executive Officer   March 10, 2010

/s/ NEIL H. NGUYEN

Neil H. Nguyen

 

President and Chief Operating Officer and Director

 

March 10, 2010

/s/ OMAR A. CHOUCAIR

Omar A. Choucair

 

Chief Financial Officer and Director (Principal Financial and Accounting Officer)

 

March 10, 2010

/s/ WILLIAM DONNER

William Donner

 

Director

 

March 10, 2010

/s/ DAVID M. KANTOR

David M. Kantor

 

Director

 

March 10, 2010

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Name
 
Title
 
Date

 

 

 

 

 
/s/ LISA C. GALLAGHER

Lisa C. Gallagher
  Director   March 10, 2010

/s/ KEVIN C. HOWE

Kevin C. Howe

 

Director

 

March 10, 2010

/s/ ANTHONY J. LEVECCHIO

Anthony J. LeVecchio

 

Director

 

March 10, 2010

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INDEX TO FINANCIAL STATEMENTS

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of DG FastChannel, Inc.

        We have audited the accompanying consolidated balance sheets of DG FastChannel, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the information in the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DG FastChannel, Inc. and subsidiaries at December 31, 2009 and 2008 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the information included in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2010 expressed an unqualified opinion thereon.

    /s/ Ernst & Young LLP

Dallas, Texas

 

 
March 10, 2010    

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

 
  December 31,  
 
  2009   2008  

Assets

             

CURRENT ASSETS:

             

Cash and cash equivalents

  $ 33,870   $ 17,180  

Accounts receivable (less allowances of $2,116 in 2009 and $2,329 in 2008)

    51,309     42,971  

Deferred income taxes

    2,778     1,530  

Other current assets

    1,749     1,849  
           
 

Total current assets

    89,706     63,530  
           

Property and equipment, net

    41,520     37,980  

Goodwill

    214,777     246,734  

Deferred income taxes, net of current portion

    25,288     6,247  

Intangible assets, net

    102,411     115,035  

Other non-current assets

    4,590     4,274  
           
 

Total assets

  $ 478,292   $ 473,800  
           

Liabilities and Stockholders' Equity

             

CURRENT LIABILITIES:

             

Accounts payable

  $ 8,415   $ 13,005  

Accrued liabilities

    13,463     9,393  

Deferred revenue

    2,178     2,124  

Current portion of long-term debt

    21,500     18,152  
           
 

Total current liabilities

    45,556     42,674  

Deferred revenue, net of current portion

    28     360  

Long-term debt, net of current portion

    80,962     154,985  

Other non-current liabilities

    4,580     6,263  
           
 

Total liabilities

    131,126     204,282  
           

Commitments and contingencies (note 14)

             

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; 24,045 issued and 23,989 outstanding at December 31, 2009; 20,930 issued and 20,874 outstanding at December 31, 2008

    24     21  

Additional capital

    494,783     437,979  

Accumulated deficit

    (145,365 )   (165,866 )

Accumulated other comprehensive loss

    (1,423 )   (1,763 )

Treasury stock, at cost

    (853 )   (853 )
           
 

Total stockholders' equity

    347,166     269,518  
           
 

Total liabilities and stockholders' equity

  $ 478,292   $ 473,800  
           

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

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 
  For the Years Ended December 31,  
 
  2009   2008   2007  

Revenues:

                   
 

Video and audio content distribution

  $ 177,306   $ 148,891   $ 92,343  
 

Other

    13,580     8,190     5,344  
               
   

Total revenues

    190,886     157,081     97,687  

Cost of revenues (exclusive of depreciation and amortization shown below):

                   
 

Video and audio content distribution

    65,329     61,726     41,055  
 

Other

    6,373     2,717     534  
               
   

Total cost of revenues

    71,702     64,443     41,589  

Operating expenses:

                   
 

Sales and marketing

    12,678     8,257     7,046  
 

Research and development

    6,257     4,268     3,233  
 

General and administrative

    26,446     21,031     13,902  
 

Depreciation and amortization

    26,501     21,351     12,865  
               
   

Total operating expenses

    71,882     54,907     37,046  
               

Income from operations

    47,302     37,731     19,052  

Other (income) expense:

                   
 

Interest expense

    11,774     12,122     3,101  
 

Unrealized loss (gain) on derivative warrant investment

        1,544     (1,707 )
 

Interest income and other, net

    85     (586 )   (713 )
               

Income before income taxes from continuing operations

    35,443     24,651     18,371  

Provision for income taxes

    14,942     9,572     7,501  
               
   

Income from continuing operations

    20,501     15,079     10,870  

Discontinued operations:

                   
 

Loss from discontinued operations, net of taxes

            (225 )
 

Loss on disposal of discontinued operations, net of taxes

            (232 )
               
   

Loss from discontinued operations

            (457 )
               

Net income

  $ 20,501   $ 15,079   $ 10,413  
               

Basic earnings (loss) per share:

                   
 

Continuing operations

  $ 0.90   $ 0.81   $ 0.65  
 

Discontinued operations

            (0.02 )
               
   

Total

  $ 0.90   $ 0.81   $ 0.63  
               

Diluted earnings (loss) per share:

                   
 

Continuing operations

  $ 0.88   $ 0.79   $ 0.64  
 

Discontinued operations

            (0.03 )
               
   

Total

  $ 0.88   $ 0.79   $ 0.61  
               

Weighted average common shares outstanding:

                   
 

Basic

    22,572     18,642     16,631  
 

Diluted

    23,091     19,073     17,096  

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

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

 
  Common
Stock
  Treasury
Stock
  Additional
Capital
  Accumulated
Other
Comprehensive
Income (Loss)
  Accumulated
Deficit
  Total
Stockholders'
Equity
 

Balance at December 31, 2006

    15,900   $ 16     (56 ) $ (853 ) $ 333,821   $ 260   $ (191,358 ) $ 141,886  

Common stock issued on exercise of stock options

    60                 539             539  

Common stock issued to acquire Point.360, net of costs

    2,000     2             33,683             33,685  

Common stock issued under employee stock purchase plan

    1                 22             22  

Share-based compensation

    2                 423             423  

Comprehensive income:

                                                 
 

Currency translation adjustment

                        3         3  
 

Unrealized gain on long-term investment in Enliven (net of tax expense of $3,409)

                        5,420         5,420  
 

Reverse unrealized gain on long-term investment in Point.360 upon acquisition (net of tax benefit of $166)

                        (262 )       (262 )
 

Net income

                            10,413     10,413  
                                                 
   

Total comprehensive income

                                              15,574  
                                   

Balance at December 31, 2007

    17,963     18     (56 )   (853 )   368,488     5,421     (180,945 )   192,129  

Common stock issued on exercise of stock options

    11                 128             128  

Common stock issued to acquire Enliven, including stock options, warrants and an estimated earnout, net of costs

    2,951     3             68,099             68,102  

Common stock issued under employee stock purchase plan

    5                 87             87  

Share-based compensation

                    1,177             1,177  

Comprehensive income:

                                                 
 

Currency translation adjustment

                        5         5  
 

Unrealized loss on interest rate swaps (net of tax benefit of $1,179)

                        (1,769 )       (1,769 )
 

Reverse unrealized gain on long-term investment in Enliven upon acquisition (net of tax benefit of $3,409)

                        (5,420 )       (5,420 )
 

Net income

                            15,079     15,079  
                                                 
   

Total comprehensive income

                                              7,895  
                                   

Balance at December 31, 2008

    20,930     21     (56 )   (853 )   437,979     (1,763 )   (165,866 )   269,518  

Common stock issued in equity offering, net of costs

    2,875     3             52,484             52,487  

Common stock issued on exercise of stock options and warrants

    137                 1,479             1,479  

Common stock issued in connection with Enliven earnout

    13                              

Adjustment to Enliven earnout

                    (382 )           (382 )

Common stock issued under employee stock purchase plan

    9                 130             130  

Common stock issued on vesting of restricted stock

    7                              

Common stock issued pursuant to restricted stock agreement, net of shares tendered to satisfy required tax withholding

    74                 (890 )           (890 )

Share-based compensation

                    3,983             3,983  

Comprehensive income:

                                                 
 

Currency translation adjustment

                        (67 )       (67 )
 

Unrealized gain on interest rate swaps (net of tax expense of $276)

                        407         407  
 

Net income

                            20,501     20,501  
                                                 
   

Total comprehensive income

                                              20,841  
                                   

Balance at December 31, 2009

    24,045   $ 24     (56 ) $ (853 ) $ 494,783   $ (1,423 ) $ (145,365 ) $ 347,166  
                                   

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

90