| DIGITAL GENERATION SYSTEMS INC ITEM 1A RISK FACTORS In evaluating an investment in our Company, the following risk factors should be considered |
| Risks Relating to the Industry The media distribution services and products 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 achieve and maintain profitability |
| 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 markets for these new products and services will grow, if at all |
| If the markets fail to grow, or grow more slowly than anticipated, it will be difficult for any market participant to succeed |
| Even if the markets do grow, it will be necessary to quickly conform existing products and services to emerging industry standards in a timely fashion |
| Our marketing efforts to date with regard to our products and services have involved identification and characterization of specific market segments for these products and services with a view to determining the target markets that will be the most receptive to such products and services |
| We may not have correctly identified such markets and our planned products and services may not address the needs of such markets |
| Furthermore, our technologies, in their current forms, may not be suitable for specific applications and further design modifications, beyond anticipated changes to accommodate different markets, may be necessary |
| Broad commercialization of our products and services will require us to overcome significant market development hurdles, many of which we cannot predict |
| To achieve sustained growth, the market for our products must continue to develop and we must expand product offerings to include additional applications within the broadcast market |
| Potential new products and applications for existing products in new markets include distance learning and training, finance and retail |
| We believe that our products and services are among the first commercial products to serve the convergence of several industry segments, including digital networking, telecommunications, compression products and Internet services |
| In addition, it is possible that: • the convergence of several industry segments may not continue; • markets may not develop as a result of such convergence; or • if markets develop, such markets may not develop either in a direction beneficial to 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 |
| The industry is in a state of rapid technological change and we may not be able to keep up with the 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 current products, develop and introduce new products that keep pace with technological 13 _________________________________________________________________ developments and emerging industry standards and address the increasingly sophisticated needs of our customers |
| We may not succeed in developing and marketing product enhancements or new products 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 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 in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if we have pre-announced the product releases, our business, financial condition, results of operations or cash flows will be materially affected |
| The marketing and sale of media distribution services and media intelligence products each 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 solutions to provide audio, video, data and other information across a variety of media and platforms, licensing and selling products to customers typically involves a significant technical evaluation and commitment of cash and other resources |
| In addition, there are frequently delays associated with educating customers as to the productive applications of our products, complying with customers &apos internal procedures for approving large expenditures and evaluating and accepting new technologies that affect key operations |
| In addition, certain foreign customers have even longer purchasing cycles that can greatly extend the amount of time it takes to place our products with these customers |
| Because of the lengthy sales cycle and the large size of customers &apos average orders, if revenues projected from a specific customer for a particular quarter are not realized in that quarter, product revenues and operating results for that quarter could be negatively affected |
| Revenues will also vary significantly as a result of the timing of product purchases and introductions, fluctuations in the rate of development of new markets and new applications, 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 operating results are likely to be seriously harmed |
| Seasonality in buying patterns also makes forecasting difficult and can result in widely fluctuating quarterly results |
| On a historical basis 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 |
| Additionally, in any single period, service revenues and delivery costs are subject to variation based on changes in the volume and mix of deliveries performed during such period |
| We have historically operated with little or no backlog |
| The absence of backlog increases the difficulty of predicting revenues and operating results |
| Fluctuations in revenues due to seasonality may become more pronounced as revenue increases or decreases |
| In addition, service revenues are influenced by political advertising, which generally occurs every two years |
| The markets in which we operate are highly competitive, and competition may increase further as new entrants enter the market while more established companies with greater resources seek to expand their market share |
| The market for the distribution of audio and video transmissions has become increasingly concentrated in recent years as a result of acquisitions, which are likely to permit many competitors to 14 _________________________________________________________________ devote significantly greater resources to the development and marketing of new competitive products and services |
| Moreover, competition among the various dub and ship houses and production studios in the market for the distribution of audio advertising spots to radio stations and the distribution of video advertising spots to television stations is intense |
| The principal competitive factors affecting these markets include price, quality and performance of products, the timing and success of new product introductions, the emergence of new technologies and the number and nature of competitors in a given market |
| In addition, the assertion of intellectual property rights by others and general market and economic conditions factor into the ability to compete successfully |
| Although many dub and ship houses and production studios generally do not offer electronic delivery, they often 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 |
| 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, MCI WorldCom and other fiber and telecommunication companies, each of which would enjoy materially lower electronic delivery transportation costs |
| Competition is also likely to come from entities with package delivery expertise such as Federal Express, United Parcel Service, and DHL if any such companies enter the electronic data delivery market |
| Radio networks such as ABC or Westwood One could also become competitors by selling and transmitting advertisements as a complement to our content programming |
| The increasingly competitive environment is likely to result in price reductions that could result in lower profits and loss of our market share |
| Risks Related to the Company 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; we reported profit again in 2004 and a loss in 2005 |
| In 2002, we were profitable only after excluding the effect of a change in accounting principle |
| We could continue 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 achieve and sustain profitability |
| We may not be able to obtain additional financing to satisfy our future capital expenditure needs |
| We intend to continue making capital expenditures to produce and install various equipment required by our customers to receive our services and to introduce additional services |
| We also expect to make capital expenditures related to mergers |
| In addition, we will continue to analyze the costs and benefits of acquiring certain additional businesses, products or technologies that we may from time to time identify, and our related ability to finance these acquisitions |
| Assuming that we do not pursue one or more additional acquisitions funded by internal cash reserves, we anticipate that upon completion of 15 _________________________________________________________________ a merger we will have funds available under new credit agreements in amounts that should be adequate to satisfy our capital requirements, including those capital requirements related to the proposed merger with FastChannel |
| We may require additional capital sooner than currently anticipated and may not be able to obtain additional funds adequate for our capital needs |
| Our capital needs depend upon numerous factors, including: • the progress of our product development activities; • the progress of product development activities related to products of any acquired companies; • the cost of increasing our sales and marketing activities; and • the amount of revenues generated from operations |
| We cannot predict any of the foregoing factors with certainty |
| In addition, we cannot predict the precise amount of future capital that we will require, particularly if we pursue one or more additional acquisitions |
| Furthermore, additional financing may not be available to us, or if it is available, it may not be available on acceptable terms |
| Our inability to obtain financing for additional acquisitions on acceptable terms may prevent us from completing advantageous acquisitions and consequently could seriously harm our prospects and future rates of growth |
| Inability to obtain additional funding for continuing operations or an acquisition would seriously harm our business, financial condition and results of operations |
| Consequently, we could be required to: • significantly reduce or suspend our operations; • seek an additional merger partner; or • sell additional securities on terms that are highly dilutive to our stockholders |
| Our business will be highly dependent on radio and television advertising |
| If demand for, or margins from, our radio and television advertising delivery services declines, our business results will 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: • 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 revenues and results of operations would decline |
| If we are not able to maintain and improve service quality, our business and results of operations will be susceptible to 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 |
| Stations may assert claims for lost air-time in these circumstances and dissatisfied advertisers may refuse to 16 _________________________________________________________________ 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 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 |
| 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 Company 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 financial estimates by securities analysts; • changes in market valuations of networking, Internet and telecommunications companies; • fluctuations in stock market prices and trading volumes, particularly fluctuations of stock prices quoted on the Nasdaq National Market; and • sale of a significant number of shares of Company common stock by us or our significant holders |
| If we are unable to maintain the current strategic relationships with broadcast and media outlets, this could adversely impact our operating results |
| Our strategy depends in part on the maintenance of ongoing relationships with broadcast and media outlets |
| We may not be able to successfully maintain such relationships, which may jeopardize our ability to generate sales of our services in those segments |
| Various factors could limit our ability to maintain such relationships, including, but not limited to, the resources available to our competitors |
| Insiders have substantial control over us which could limit others &apos ability to influence the outcome of key transactions, including changes in control |
| Our executive officers and directors and the respective affiliates own approximately 39dtta4prca 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 |
| Such concentration of ownership may have the effect of delaying or preventing a change in control of us even if a change of control is in the best interest of all stockholders |
| 17 _________________________________________________________________ Our business may be adversely affected if we are not able to protect our intellectual property rights from third-party challenges |
| We cannot assure that our intellectual property does not infringe on 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 |
| 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 have entered into a merger agreement pursuant to which FastChannel Network would become our wholly owned subsidiary |
| Our business strategy will 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; • 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 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 |
| Our personnel, systems, procedures and controls may not be adequate to support our existing as well as future operations |
| To accommodate any potential future growth and to compete effectively and manage future growth, if any, 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 will 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; 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 these 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 further 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 "e blank check "e 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 |
| Our business is highly dependent on electronic video advertising delivery service deployment |
| 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 19 _________________________________________________________________ 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 Network Operating Center, or "e NOC, "e and in populating television stations with the units necessary for the receipt of electronically delivered video advertising content |
| However, we cannot assure our stockholders 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, we believe that to more fully address the needs of potential video delivery customers we will need to develop a set of ancillary services that typically are provided by dub and ship houses |
| These ancillary services include cataloging, physical archiving, closed-captioning, modification of slates and format conversions |
| We will need to provide these services on a localized basis in each of the major cities in which we provide services directly to agencies and advertisers |
| We currently provide certain of such services to a portion of our customers through our facilities in New York, Los Angeles, 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 United States 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 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 achieve and maintain profitability |
| We are at risk of being delisted from the Nasdaq National Market |
| In the event that this cannot be avoided, the market price of our common stock could decline as certain institutional investors would need to sell our shares to comply with our contractual obligations, the liquidity of the stock would likely decline and our ability to obtain research coverage would be further impaired |
| Nasdaq rules require, among other things, that a registrantapstas common stock trade at dlra1dtta00 per share or more on a consistent basis |
| On August 9, 2005, we received notice from The Nasdaq Stock Market ( "e Nasdaq "e ) that for 30 consecutive business days, the bid price of our common stock closed below dlra1dtta00 per share |
| We were given until February 6, 2006, to regain compliance with Nasdaq Marketplace Rule 4450(a)(5), which required that the bid price of our common stock close at dlra1dtta00 per share or more for a minimum of ten consecutive business days |
| On February 7, 2006 we received a staff determination letter from Nasdaq stating that our common stock is subject to delisting from the Nasdaq National Market because we did not regain compliance with the dlra1dtta00 minimum closing bid price requirement as set forth in the Rule |
| We were provided 180 calendar days from the initial notice of non-compliance, or until February 6, 2006, to regain compliance with the Rule |
| We appealed the Nasdaq staff determination and requested a hearing with a Nasdaq Listings Qualification Panel, which hearing occurred on March 9, 2006 |
| At the hearing, we presented a plan for our continued listing on 20 _________________________________________________________________ the Nasdaq National Market, which plan includes a proposed one-for-ten share reverse stock split |
| On March 15, 2006, we were notified that Nasdaq granted our request for an extension, provided that: • on or before May 31, 2006 the reverse stock split is approved and the closing bid price of the common stock is at least dlra1dtta00 per share; and • on or before June 14, 2006, the closing bid price of the common stock is at least dlra1dtta00 for at least ten prior consecutive trading days |
| If those requirements are not satisfied, the common stock may be delisted from Nasdaq or transferred to The Nasdaq Capital Market |
| Our board of directors has approved a proposal to amend the Companyapstas certificate of incorporation to affect a one-for-ten share reverse stock split of the issued and outstanding common stock in order to attempt to continue to keep the common stock quoted on The Nasdaq National Market |
| If this proposal is not approved or is not effective in order to enable us to achieve and maintain compliance with Nasdaq Marketplace Rule 4450(a)(5), management will continue to review other alternatives to continue to keep the common stock quoted on The Nasdaq National Market or a similar securities exchange |
| These alternatives could include but would not be limited to applying to transfer the inclusion of the common stock to The Nasdaq Capital Market |
| We depend upon a number of single or limited-source suppliers, and our ability to produce audio and video distribution equipment could be adversely impacted 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, namely the Bradbury Group and SVT Electronics |
| Although these suppliers are generally large, well-financed organizations, in the event that a supplier were to experience financial or operational difficulties that resulted in a reduction or interruption in component supply to 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 was 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 |
| If we were no longer able to rely on our existing providers of transmissions services, our business and results of operations could be materially and adversely affected |
| We obtain our local access transmission services and long distance telephone access through contracts with Sprint and MCI that expire in 2007 and 2006, respectively |
| These agreements with Sprint and MCI provide for reduced pricing on various services provided in exchange for minimum purchases under the contracts of dlra1dtta0 million for each year of the Sprint contract and dlra0dtta5 million for 2006 for MCI The agreements provide for certain achievement credits once specified purchase levels are met |
| Any material interruption in the supply or a material 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 |
| 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 to customers, they may not be successful at estimating anticipated revenues, and actual revenues from sales of products may fall below expenditures for satellite capacity |
| In addition, the 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 financial condition and results of operations |
| If the existing relationship with Clear Channel Satellite Services is terminated, or if Clear Channel Satellite Services 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 satellite system |
| However, the Clear Channel satellite system 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 |
| The agreement provides for fixed pricing on dedicated bandwidth and gives us access to satellite capacity for electronic delivery of digital audio and video transmissions by satellite |
| Clear Channel is required to meet performance specifications as outlined in the agreement, and we are given a credit allowance for future fees if Clear Channel does not meet these requirements |
| The agreement states that Clear Channel can terminate the agreement if we do not make timely payments or become insolvent |
| 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 its 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 |
| 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 |
| We determined our disclosure controls and procedures were not effective as of December 31, 2004 |
| In the event a material weakness occurs again in the future, our financial statements and results of operations could be materially impacted |
| 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 |
| Specifically, we concluded that our review of the reversal of valuation allowances with respect to deferred tax assets was inadequate |
| To remediate the material weakness, we engaged an outside accounting services firm to be directly involved in the review and accounting evaluation of the calculation of our provision for income taxes |
| As of April 30, 2005, we concluded that our internal control over financial reporting was effective and that the disclosure 22 _________________________________________________________________ controls and procedures were effective at the reasonable assurance level |
| Since April 30, 2005, we continue to believe that our controls and procedures remain effective |
| In the event that this or any other material weakness occurs in the future, our financial statements and results of operations could be materially impacted, either of which could result in a decrease in our stock price |