Digital Generation, Inc.

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

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

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

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

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