S-1 1 v221001_barcap-s1.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on May 16, 2011

Registration No. 333-      

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

Form S-1

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933



 

Digital Domain Media Group, Inc.

(Exact name of registrant as specified in its charter)

   
Florida   7812   27-0449505
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code)
  (IRS Employer
Identification Number)

8881 South US Highway One
Port St. Lucie, FL 34952
(772) 345-8000

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)



 

John C. Textor
Digital Domain Media Group, Inc.
8881 South US Highway One
Port St. Lucie, FL 34952
(772) 345-8000

(Name, address, including zip code, and telephone number,
including area code, of agent for service)



 

Copies of all communications to:

 
D. Thomas Triggs, Esq.
Brian A. Sullivan, Esq.
Owen M. Lewis, Esq.
Sullivan & Triggs, LLP
1230 Montana Avenue, Suite 201
Santa Monica, California 90403-5987
(310) 451-8300
  James W. McKenzie, Jr., Esq.
Justin W. Chairman, Esq.
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103-2921
(215) 963-5000


 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the earlier offering. o

CALCULATION OF REGISTRATION FEE

   
Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee
Common Stock, par value $0.01 per share   $ 115,000,000     $ 13,352  

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) of Regulation C promulgated under the Securities Act of 1933, as amended.
(2) Including shares of Common Stock which may be purchased by the underwriters to cover over-allotments, if any. See “Underwriting”.


 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 


 
 

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The Information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated May 16, 2011

PROSPECTUS

       Shares

[GRAPHIC MISSING]

Common Stock

This is an initial public offering of common stock of Digital Domain Media Group, Inc. We are offering         shares of our common stock.

Prior to this offering, there has been no public market for shares of our common stock. We expect that the initial offering price per share will be between $      and $      . The market price of the shares after the offering may be higher or lower than the offering price.

We expect to apply to list our common stock on         under the symbol “        ”.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10 of this Prospectus.

   
  Per Share   Total
Initial public offering price   $           $        
Underwriting discount   $     $  
Proceeds, before expenses, to Digital Domain Media Group, Inc.   $     $  

We have granted the underwriters a 30-day option to purchase up to an additional         shares from us on the same terms and conditions as set forth above if the underwriters sell more than         shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Barclays Capital, on behalf of the underwriters, expects to deliver the shares on or about         , 2011.

 
Sole Book-Running Manager   Joint Lead Manager
Barclays Capital   Janney Montgomery Scott

Prospectus dated           , 2011


 
 

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Table of Contents

 
  Page
Prospectus Summary     1  
Summary Historical Consolidated and Pro Forma Financial Information     5  
Risk Factors     10  
Forward-Looking Statements     23  
Use of Proceeds     24  
Dividend Policy     24  
Capitalization     25  
Dilution     27  
Unaudited Pro Forma Financial Information     29  
Selected Historical Consolidated Financial Information     32  
Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
Business     71  
Industries     86  
Management     91  
Compensation Discussion and Analysis     94  
Certain Relationships and Related Transactions     101  
Principal Shareholders     103  
Description of Capital Stock     104  
Shares Eligible for Future Sale     110  
Material U.S. Federal Income Tax Considerations     112  
Underwriting     116  
Legal Matters     121  
Experts     121  
Where You Can Find More Information     121  
Index to Consolidated Financial Statements     F-1  

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

For investors outside the United States: neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

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Prospectus Summary

This summary highlights information included elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock. You should read the entire prospectus carefully, including “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the notes thereto and our unaudited condensed consolidated financial statements and the notes thereto, before making a decision to invest in shares of our common stock. Unless otherwise noted or the context otherwise requires, the terms “company”, “we”, “us” and “our” refer to Digital Domain Media Group, Inc., a Florida corporation, and its consolidated subsidiaries.

Our Business and Growth Strategy

We are an Academy Award® winning digital production company. Since our inception in 1993, we have been a leading provider of computer-generated (“CG”) animation and digital visual effects (“VFX”) for major motion picture studios and advertisers. Our history of innovation and creativity has been recognized with numerous entertainment industry awards and nominations, including seven awards issued by the Academy of Motion Picture Arts and Sciences — three Academy Awards® for Best Visual Effects and four awards for Scientific and Technical Achievement. Our filmography of over 80 major motion pictures includes Thor, TRON: Legacy, the Transformers trilogy, The Curious Case of Benjamin Button, Apollo 13 and Titanic. Our digital production capabilities include the creation of CG animated content, performance capture, the conversion of two-dimensional (“2D”) imagery into three-dimensional (“3D”) imagery and CG visual effects such as fluid simulation, terrain generation and photorealistic animation.

Driven by increasing consumer demand for stunning visual images and exciting virtual experiences, VFX, including 3D content, have become a more critical component of major Hollywood films and digital advertising. Movie studios and advertisers are also attracted by the economic efficiency of visual effects relative to live-action projects. As a result, VFX budgets for films and advertising campaigns have grown substantially in recent years.

Our industry-leading position, creative talent, processes and technologies, and our relationships with major motion picture studios, filmmakers and advertisers, have enabled us to achieve attractive scale and benefit from the rapid growth in the VFX market. In 2010, revenues from our VFX business were $101.9 million, an increase of 70% from 2009. We expect our growth to continue, and for our opportunities for profitability to expand as our industry continues to grow and we execute on our initiatives summarized below:

Expand Our Participation in the Production Process and Ownership of Live-Action Feature Films.  As a key partner to major film studios and leading filmmakers, we are playing an increasingly important role in the creation and development of live-action films, which presents us with attractive opportunities to selectively co-produce large scale live-action feature films. Co-production opportunities allow us to invest in the film’s overall production budget on attractive terms, while playing a lead role in the production of digital content and integrated advertising campaigns. Such opportunities enhance our overall profit potential from VFX projects through economic participation in the film’s profits, as well as the long-term value of our business due to ownership of the film’s intellectual property, including ancillary revenue streams. We recently announced a co-production deal with Oddlot Entertainment for financing and production of the film Ender’s Game based on the popular Orson Scott Card science-fiction novel, and are currently in various stages of development on other co-production projects.

Create, Develop and Produce Original CG Animated Films.  We believe that our creative and technological expertise in high-quality visual effects and CG animation favorably position us to enter a highly attractive market for animated feature films, targeting global audiences of all ages. We have established our own animated film studio and assembled an experienced creative team from leading studios such as Disney/Pixar, DreamWorks Animation and Fox/Blue Sky. We have multiple films in development that we expect to release in partnership with major film studios.

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Capitalize on the Growing Demand for 3D Content.  Increasing consumer and exhibitor appetite for 3D films and television content has resulted in growing demand for new, high quality 3D content, as well as conversion of existing film and TV libraries originally created in 2D into 3D. We expect that our patented proprietary technology for the creation and conversion of 3D images, as well as our extensive VFX expertise, will allow us to take advantage of the growth in this market. Our recent and ongoing 3D conversion projects include Transformers 3: Dark of the Moon, The Smurfs, Alice in Wonderland and G-Force.

Grow Our Education Business.  Responding to increasing demand for professionals trained in state-of-the-art CG effects, and leveraging our strong brand in VFX and digital media, we have established a partnership with The Florida State University (“FSU”) to launch the Digital Domain Institute (“DDI”), a for-profit post-secondary educational institution. We believe DDI is a first of its kind public-private educational partnership providing students with an opportunity to graduate with a fully accredited four-year Bachelor of Fine Arts degree while obtaining hands-on industry training. We expect classes at DDI to commence in the spring of 2012.

Our Competitive Strengths

We believe the following strengths provide us with substantial competitive advantages:

Leading Reputation and Track Record in the Entertainment Industry.  Our industry-leading reputation stems from our innovation in digital production and CG animation, and the key role we have played in some of the most commercially successful motion pictures and innovative television commercials. To date, we have provided visual effects for films that have grossed over $16 billion in worldwide box office revenues. Our work has been recognized with seven awards issued by the Academy of Motion Picture Arts and Sciences and three additional nominations, four British Academy of Film and Television Arts (“BAFTA”) Awards and numerous other television, music and film industry awards.

Established Relationships with Major Studios, Leading Filmmakers and Advertisers.  Since our inception in 1993, we have worked on multiple projects with each of the six major U.S. motion picture studios and with many of the entertainment industry’s leading directors and producers. We believe that these long-standing relationships will continue to provide us with early access to large-scale, VFX-driven and animated feature film projects. A significant number of our projects are with directors and producers with whom we have worked in the past. We also produce commercial advertising campaigns for many Fortune 500 companies, and through this work maintain long-standing relationships with leading advertising agencies and corporate advertisers. We believe that these relationships and our reputation within the advertising industry will lead to our continued success with our existing clients as well as provide us with new growth opportunities.

State-of-the-Art Proprietary Technologies and Patent Portfolio.  Through our VFX, animation and digital production capabilities and technologies, we create what we believe to be the most stunning digital imagery today. Our proprietary technologies and patents encompass processes for the generation of 3D imagery, performance capture, and CG animated visual effects such as fluid simulation, terrain generation and photorealistic CG animation.

Creative and Experienced Talent.  Our team includes many producers, directors, effects supervisors and digital artists considered among the most talented and experienced in the industry. Key members of our team have held leadership positions on and have received accolades for 15 of the top 20 highest grossing films of all time.

Full-Service and Cost-Effective Digital Production Infrastructure.  Our scale and network of production facilities allow us to take advantage of high-quality labor with lower operating costs and, in some cases, industry-specific tax incentives. This approach allows us to provide cost-effective digital production solutions for our motion picture and advertising clients as well as for our own animation studio, from concept to completion.

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Corporate Information

We were incorporated in the State of Florida on January 7, 2009. We own, among other things, a majority stake of the issued and outstanding capital stock of Digital Domain (formerly, Wyndcrest DD Holdings, Inc.) and its wholly-owned subsidiary Digital Domain Productions, Inc. (formerly, Digital Domain, Inc.), which has been operating since 1993. Our executive offices are located at Digital Domain Media Group, Inc., 8881 South US Highway One, Port St. Lucie, Florida 34952, and our telephone number is (772) 345-8000. Our Internet address is www.ddmg.co. Information contained on our website is not a part of this prospectus.

Digital Domain® is a registered trademark in the United States. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

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The Offering

Common stock offered by Digital Domain Media Group, Inc.    
              Shares
Common stock to be outstanding after the offering    
              Shares
Use of proceeds    
    We estimate that net proceeds to us from this offering will be approximately $    million, after deducting the underwriters’ discounts and commissions and other expenses of this offering, based on an assumed offering price of $    per share (the midpoint of the price range on the cover of this prospectus). We will use approximately $    million of the net proceeds from this offering to repay outstanding indebtedness. We intend to use the remaining proceeds to facilitate our growth strategy and for working capital and general corporate purposes. See “Use of Proceeds.”
Proposed symbol    
    “        ”
Risk factors    
    See “Risk Factors” beginning on page 10 and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in shares of our common stock.

The number of shares of our common stock that will be outstanding after this offering is based on 15,885,271 shares of common stock outstanding as of April 22, 2011 and excludes:

3,033,657 shares of our common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $2.78 per share;
3,905,644 shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share;
1,966,343 shares of our common stock reserved for issuance in connection with future grants of options and restricted stock under our 2010 Stock Plan;
1,116,344 shares of our common stock issuable upon the exercise of outstanding warrants with an exercise price of $9.63 per share;
202,500 shares of our common stock issuable upon the exercise of outstanding warrants with an exercise price of $8.03 per share;
5,389,056 shares of our common stock issuable upon the conversion of our convertible notes;
6,510,531 shares of our common stock issuable upon the conversion of our Series A Preferred Stock, which is issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share; and
21,999 shares of our common stock reserved for issuance to purchasers in a private placement conducted by us in 2010 at $6.00 per share.

If these options, warrants and conversion rights were to be exercised, additional shares would become available for sale upon the expiration of any applicable lock-up period.

Except as otherwise indicated, all information in this prospectus assumes:

no exercise by the underwriters of their option to purchase            shares of our common stock from us in this offering to cover over-allotments.

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Summary Historical Consolidated and Pro Forma Financial Information

The following table contains summary historical consolidated and other financial information regarding our business and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Selected Historical Consolidated Financial Information”, “Unaudited Pro Forma Financial Information”, our consolidated financial statements and related notes, and our unaudited condensed consolidated financial statements and related notes, included elsewhere in this prospectus.

On October 15, 2009, Digital Domain Media Group, Inc. acquired a majority ownership stake in the issued and outstanding capital stock of Digital Domain. We refer to ourselves as the Predecessor for all periods prior to our acquisition of such majority ownership stake in Digital Domain. We refer to ourselves as the Successor for all periods following our acquisition of such majority ownership stake in Digital Domain. As a result of Digital Domain Media Group, Inc.’s acquisition of a majority ownership stake, the transaction was accounted for as an acquisition, and Digital Domain’s condensed consolidated financial statement results have been included in Digital Domain Media Group, Inc.’s condensed consolidated financial statements as of September 30, 2009 for reporting purposes. The differences in the assets and operations at Digital Domain between September 30, 2009 and October 15, 2009 are not material.

Our consolidated statements of operations information for the year ended December 31, 2010 (Successor), the period from January 7, 2009 (the inception date) to December 31, 2009 (Successor), the nine months ended September 30, 2009 (Predecessor) and the year ended December 31, 2008 (Predecessor), and our consolidated balance sheet information as of December 31, 2010 and 2009 (Successor) are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived our consolidated balance sheet information as of September 30, 2009 (Predecessor) and December 31, 2008 (Predecessor) from our audited consolidated financial statements which are not included elsewhere in this prospectus.

The following table also presents summary pro forma statement of operations information for the year ended December 31, 2010 and assumes our acquisition of In-Three, Inc. (“In-Three”) occurred on January 1, 2010. The pro forma statement of operations information is not necessarily indicative of future results of operations or the results that might have occurred if our acquisition of In-Three had occurred on January 1, 2010. We cannot assure you that assumptions used in the preparation of the pro forma statement of operations information will prove to be correct.

The financial statements included in this prospectus may not reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

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  Predecessor   Successor   Pro Forma
(In Thousands,
Except Share and per Share Data)
  For the Year
Ended
December 31,
2008
  For the
Nine Months
Ended
September 30,
2009
  For the Period
January 7
(the inception
date) through
December 31,
2009
  For the Year
Ended
December 31,
2010
  For the Year
Ended
December 31,
2010
Consolidated Statements of Operations Data:             (1)     Unaudited(2)
Revenues:
                                            
Revenues   $ 85,140     $ 48,360     $ 15,582     $ 101,859     $ 102,735  
Grant revenues from governmental agencies                 6,800       3,340       3,340  
Total revenues     85,140       48,360       22,382       105,199       106,075  
Costs and expenses:
                                            
Cost of revenues, net of depreciation and amortization     80,335       44,554       11,964       83,894       84,735  
Depreciation expense     6,278       5,157       1,436       7,349       7,414  
Selling, general and administrative expenses     23,085       10,929       5,172       25,479       30,250  
Amortization of intangible assets                 734       2,935       3,451  
Total costs and expenses     109,698       60,640       19,306       119,657       125,850  
Operating (loss) income     (24,558 )      (12,280 )      3,076       (14,458 )      (19,775 ) 
Other income (expense):
                                            
Interest and investment income     1,102                          
Interest and financing expenses:
                                            
Changes related to fair value of warrant and other debt-related liabilities     12,824       (11,932 )      (296 )      (24,321 )      (24,321 ) 
Amortization of discount and issuance costs on notes payable     (1,062 )      (599 )      (644 )      (3,633 )      (3,633 ) 
Loss on debt extinguishment           (6,311 )                   
Interest expense on notes payable     (1,540 )      (1,971 )      (530 )      (2,790 )      (4,342 ) 
Interest expense, other     (112 )      (223 )            (245 )      (245 ) 
Adjustment of held interest in business combination                 3,528              
Other income (expense), net     424       108       122       254       (299 ) 
(Loss) income from continuing operations before income taxes     (12,922 )      (33,208 )      5,256       (45,193 )      (52,615 ) 
Income tax provision                       25       25  
(Loss) income from continuing operations     (12,922 )      (33,208 )      5,256       (45,218 )      (52,640 ) 
Loss from discontinued operations – net of tax     (2,269 )      (2,429 )                   
Gain from sale of discontinued operations
 – net of tax
          9,241                    
Net (loss) income before non-controlling interests     (15,191 )      (26,396 )      5,256       (45,218 )      (52,640 ) 
Net loss attributable to non-controlling interests                 2,703       2,747       2,747  
Net (loss) income attributable to Digital Domain Media Group, Inc.     (15,191 )      (26,396 )      7,959       (42,471 )      (49,893 ) 
Preferred stockholders accretion, deemed dividends, and income participation     (80 )      (889 )                   
Net (loss) income attributable to common stockholders   $ (15,271 )    $ (27,285 )    $ 7,959     $ (42,471 )    $ (49,893 ) 
Weighted average shares outstanding:
                                            
Basic     12,953,049       13,109,267       12,226,107       12,372,357       12,750,237  
Diluted     12,953,049       13,109,267       12,769,928       12,372,357       12,750,237  
Net (loss) income per share:
                                            
Basic   $ (1.18 )    $ (2.08 )    $ 0.65     $ (3.43 )    $ (3.91 ) 
Diluted   $ (1.18 )    $ (2.08 )    $ 0.62     $ (3.43 )    $ (3.91 ) 
Other Non-GAAP Financial Data:
                                            
Adjusted EBITDA(3)   $ (7,129 )    $ (3,125 )    $ 6,783     $ 3,322     $ (1,414 ) 
Results by Segment:
                                            
Revenues:
                                            
Feature Films   $ 62,407     $ 41,557     $ 12,973     $ 82,652     $ 83,528  
Commercials     21,537       6,803       2,609       19,207       19,207  
Animation     1,196                          
Corporate                 6,800       3,340       3,340  
Operating income (loss):
                                            
Feature Films     2,440       2,708       3,118       13,692       13,727  
Commercials     2,496       206       252       3,496       3,496  
Animation     (1,346 )      (34 )            (48 )      (48 ) 
Corporate     (28,148 )      (15,160 )      (294 )      (31,598 )      (36,950 ) 
Consolidated Balance Sheet Information
(as of period end):

                                            
Cash and cash equivalents   $ 3,298     $ 1,863     $ 5,058     $ 11,986           
Cash, held in trust                       31,219           
Working capital     (22,478 )      (20,563 )      (19,552 )      4,596           
Total assets     35,387       25,586       87,155       166,720           
Government bond obligation                       38,961           
Warrant and other debt-related liabilities     2,112       14,834       9,796       49,733           
Convertible and other notes payable, net     11,982       10,864       17,064       9,358           
Preferred stock:
                                            
Series A preferred stock     426                             
Total stockholders’ equity (deficit)     (2,268 )      (26,781 )      30,819       (3,746 )          

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(1) The company was formed on January 7, 2009 — see “Notes to the Consolidated Financial Statements included elsewhere in this prospectus.”
(2) See “Unaudited Pro Forma Financial Information” for more information regarding pro forma results.
(3) See “— Non-GAAP Financial Measure and Reconciliation” below for a reconciliation of Adjusted EBITDA to net (loss) income before non-controlling interests for each of the periods presented.

The following table presents a summary of our balance sheet as of December 31, 2010:

On an actual basis
On a pro forma basis giving effect to certain transactions occurring subsequent to the balance sheet date of December 31, 2010. These transactions include:
1) A private equity lender (“Palm Beach Capital Fund 3”) exercised its option to invest the remaining $2.0 million under the Junior Debt facility (see Note 13 to the Consolidated Financial Statements included elsewhere in this prospectus). In connection with this transaction, Palm Beach Capital Fund 3 was issued warrants to acquire shares of our Series A Preferred Stock. The fair value of these warrants aggregating $3.3 million was reflected as warrant liabilities. Of this amount, $2.0 million was reflected as additional debt discount on the convertible notes and the remaining $1.3 million was reflected as interest expense, which resulted in an increase to the accumulated deficit.
2) In 2011, we purchased property and equipment aggregating $8.5 million from a third party. We paid $2.5 million from cash held in trust and paid $4.0 million from operating cash and cash equivalents. There is $2.0 million unpaid as of the date of this prospectus.
3) We received the remaining funding under our grant from the State of Florida aggregating $4.0 million (see Note 6 to the Consolidated Financial Statements included elsewhere in this prospectus).
4) In February and March 2011, we sold 2,025,000 shares of our common stock and issued 1,318,844 warrants to a group of accredited investors. This sale generated net proceeds of $17.3 million of cash and stockholders’ equity.
5) We exercised our option to purchase the Series B Warrants for $5.0 million (see Note 14 to the Consolidated Financial Statements included elsewhere in this prospectus).
6) We paid the remaining $0.5 million of a note payable to an individual (see Note 13 to the Consolidated Financial Statements included elsewhere in this prospectus).
On a pro forma as adjusted basis, after giving effect to the pro forma adjustments and our receipt of net proceeds from the sale by us in this offering of            shares of common stock based on an assumed initial public offering price of $           per share, which is the mid-point of the price range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

     
  As of December 31, 2010
     Actual   Pro Forma   Pro Forma
As Adjusted
Balance Sheet Data:
                          
Cash and cash equivalents   $ 11,986     $ 25,961     $  
Cash, held in trust     31,219       28,719        
Working capital     4,596       16,124        
Total assets     166,720       186,695        
Notes payable – net (current portion)     1,054       500        
Convertible notes payable – net (long-term)     931       931        
Notes payable – net (long-term)     7,373       7,373        
Warrant and other debt-related liabilities     49,733       48,062        
Government bond obligation – net     38,961       38,961        
Total stockholders’ equity     (3,746 )      12,953        

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Non-GAAP Financial Measure and Reconciliation

To provide investors and others with additional information regarding our financial results, we have disclosed in the table below and within this prospectus the following non-GAAP financial measure: Adjusted EBITDA. We have provided a reconciliation of this non-GAAP financial measure to net income (loss), the most directly comparable GAAP financial measure. Our non-GAAP Adjusted EBITDA financial measure differs from GAAP in that it excludes certain expenses such as depreciation, amortization, stock-based compensation, and certain non-cash purchase accounting adjustments, as well as the financial impact of gains or losses on certain asset sales and dispositions. Adjusted EBITDA is frequently used by security analysts, investors and others as a common financial measure of operating performance.

We use this non-GAAP financial measure to measure our consolidated operating performance, to understand and compare operating results from period to period, to analyze growth trends, to assist in internal budgeting and forecasting purposes, to develop short and long term operational plans, to calculate annual bonus payments for substantially all of our employees, and to evaluate our financial performance. Management believes this non-GAAP financial measure reflects our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. We also believe that this non-GAAP financial measure provide useful information to investors and others in understanding and evaluating our consolidated revenue and operating results in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

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The following table presents a reconciliation of Adjusted EBITDA to net (loss) income before non-controlling interests for each of the periods presented (in thousands):

         
  Predecessor   Successor   Pro Forma
     For the Year
Ended
December 31,
2008
  For the
Nine Months
Ended
September 30,
2009
  For the Period
January 7
(the inception
date) through
December 31,
2009
  For the Year
Ended
December 31,
2010
  For the Year
Ended
December 31,
2010
                         (unaudited)
Net (loss) income before
non-controlling interests
  $ (15,191 )    $ (26,396 )    $ 5,256     $ (45,218 )    $ (52,640 ) 
Add back (reverse) charges (income) pertaining to:
                                            
Gain from sale of Discontinued Operations           (9,241 )                   
Loss from Discontinued Operations – net of tax     2,269       2,429                    
Loss on Extinguishment of Debt           6,311                    
Share-based compensation     1,769       843       285       1,852       1,852  
Income tax provision                       25       25  
Interest expense, net     2,714       2,793       1,174       6,668       8,220  
Interest and investment income     (1,102 )                         
Depreciation expense     6,278       5,157       1,436       7,349       7,414  
Amortization of intangible assets     84       46       734       2,935       3,451  
Change in fair value of warrant liabilities     (12,824 )      11,932       296       24,321       24,321  
Acquisition related non-cash adjustments                 1,130       3,018       3,018  
Adjustment of held interest in business combination                 (3,528 )                                                                   
Other EBITDA Addbacks:
                                            
Direct Form S-1 expenses     3,994                          
Discontinued management compensation     452                          
Discontinued operations     2,397       928                    
Other expenses     2,031       2,073             2,372       2,925  
Adjusted EBITDA   $ (7,129 )    $ (3,125 )    $ 6,783     $ 3,322     $ (1,414 ) 

While we believe that this non-GAAP financial measure provides useful supplemental information, there are limitations associated with the use of this non-GAAP financial measure. This non-GAAP financial measure is not prepared in accordance with GAAP, does not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Items that are excluded from our non-GAAP financial measure can have a material impact on net earnings. As a result, this non-GAAP financial measure should not be considered in isolation from, or as a substitute for, net earnings, cash flow from operations or other measures of performance prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of this non-GAAP financial measure to its most comparable GAAP financial measure above.

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Risk Factors

This offering and an investment in our Common Stock involve a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before making a decision to invest in our Common Stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our business, results of operations or financial condition in the future. If any of the following risks and uncertainties develop into actual events, our business, results of operations and financial condition could be adversely affected. In those cases, the trading price of our Common Stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

The visual effects and animation industry is highly competitive and if we are unable to compete successfully, our business will be harmed.

The visual effects industry is an intensely competitive sector of the entertainment industry. Multiple entities, including visual effects companies, digital content production companies and animation studios often bid to provide visual effects services for the same feature film or cross platform advertising projects, and certain of these entities have greater financial, creative and managerial resources than we do. In addition, large major motion picture studios have developed or acquired the capability to provide such services in house. Moreover, we believe foreign competitors and competitors with operations or subcontractors in countries such as South Korea, China and India may become an increasing source of competition, due largely to their access to low-cost, high-skilled labor.

The full-length, animated feature films industry, which is another intensely competitive sector of the entertainment industry, includes Disney / Pixar, DreamWorks and a number of other studios and independent film production companies. We expect the competition from other animated films to intensify as movie studios continue to develop the capability to internally produce computer-generated (“CG”) imagery. Continuing technological advances may also significantly reduce barriers to entry and decrease the production time for animated films, resulting in further competition.

If we are unable to compete successfully against current or future competitors in the visual effects or animation industry, our revenues, margins and market share could be adversely affected, any of which could significantly harm our business.

We are seeking to take on increasingly more substantial roles in the creation, production and marketing of digital content both for feature films and advertising, and may not be able to accomplish this growth.

A key feature of our growth strategy is to grow the portion of our business in which we participate in the creation, production and marketing of feature films and advertising. Doing so presents significant challenges and subjects our business to significant risks. For example, we face substantial competition in these areas, and do not have as extensive a history of operating in these areas as some of our competitors. If we are unsuccessful in increasing the portion of our business that is devoted to the creation, production and marketing of feature films and advertising, our ability to grow our business could be significantly limited.

Our success depends on certain key personnel.

Our performance to date has been and will continue to be largely dependent on the talents, efforts and performance of our senior management and key technical personnel, particularly John C. Textor, Jonathan F. Teaford, Cliff A. Plumer and Ed J. Ulbrich, who generally have significant experience with our company and substantial relationships and reputations within the entertainment industry. Our executive officers and top production executives have entered or will enter into employment and noncompetition agreements. However, while it is customary in the entertainment industry to use employment agreements as a method of retaining the services of key personnel, these agreements do not guarantee us the continued services of such employees. In addition, we have not entered into employment agreements with most of our key creative, technical and engineering personnel. The loss of our executive officers or our other key personnel, particularly with little or no notice, could cause delays on projects and could have an adverse impact on our client and industry relationships, our business, operating results or financial condition.

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We rely on highly skilled and qualified personnel, and if we are unable to continue to attract and retain such qualified personnel it will adversely affect our businesses.

Our success depends to a significant extent on our ability to identify, attract, hire, train and retain qualified creative, technical and managerial personnel. We expect competition for personnel with the specialized creative and technical skills needed to create our products and provide our services will continue to intensify as film studios build or expand in-house visual effects and animation capabilities. We often hire individuals on a project-by-project basis, and individuals who work on one or more projects for us may not be available to work on future projects. If we have difficulty identifying, attracting, hiring, training and retaining such qualified personnel, or incur significant costs in order to do so, our business and financial results could be negatively impacted.

Our operating results may fluctuate significantly, which may cause the market price of our Common Stock to decrease significantly.

Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. As a result of these fluctuations, financial planning and forecasting may be more difficult and comparisons of our operating results on a period-to-period basis may not necessarily be meaningful. Accordingly, you should not rely on our annual and quarterly results of operations as any indication of future performance. Each of the risk factors described in this “— Risks Related to Our Business” section, and the following factors, may affect our operating results:

our ability to continue to attract clients for our services and products;
the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our businesses, operations and infrastructure;
our focus on long-term goals over short-term results;
the results of our investments in high risk projects, such as film co-production projects;
general economic conditions and those economic conditions specific to our industries;
changes in business cycles that affect the markets in which we sell our products and services; and
geopolitical events such as war, threat of war or terrorist actions.

In response to these fluctuations, the market price of our Common Stock could decrease significantly in spite of our operating performance. In addition, our business has historically been cyclical and seasonal in nature, reflecting overall economic conditions as well as client budgeting and buying patterns in the advertising and entertainment industries generally. The cyclicality and seasonality in our business could become more pronounced and may cause our operating results to fluctuate more widely.

We have a history of losses and may continue to suffer losses in the future.

We have a history of losses. We incurred a net loss before non-controlling interests for the year ended December 31, 2010 of $45.2 million. A substantial portion of the expenses in this period was due to non-cash charges for such items as depreciation and amortization, charges related to fair values of warrants and other debt-related liabilities and stock-based compensation expense. Absent these non-cash charges, we incurred a net loss of $2.8 million for the year ended December 31, 2010. If we cannot become profitable, our financial condition will deteriorate, and we may be unable to achieve our business objectives.

We intend to co-produce or invest in feature film projects, which involves substantial financial risk.

As part of our growth strategy, we may co-produce or invest in feature film projects that require a substantial capital investment. We cannot predict the financial success of any such project because the revenue derived from the distribution of a motion picture depends primarily upon its acceptance by the public, which cannot be accurately predicted. The financial success of a motion picture also depends upon the public’s acceptance of competing films, the availability of alternative forms of entertainment and leisure time activities, piracy and unauthorized copying and distribution of feature films, general economic conditions, and other tangible and intangible factors, none of which can be predicted with certainty.

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We expect to co-produce or invest in a limited number of such projects per year as part of our growth strategy. The commercial failure of just one of those projects could have a material adverse effect on our results of operations, both in the year of release and in future years.

We may not be able to implement our strategies of entering into the film production business effectively or at all.

Our growth strategy depends on our ability to successfully develop visual effects-driven and animated feature films by leveraging the talents of our key artistic personnel, their experience with visual effects and animation production and our proprietary technology. As a company, however, we have not invested capital in the production or distribution of feature films. Entry into the film production business presents significant challenges and subjects our business to significant risks, including those risks set forth below. The inability to successfully manage these challenges could adversely affect our potential success in the film production business with respect to VFX-driven films, animated films, or both. Such failures would significantly limit our ability to grow our business and could also divert significant resources from our digital production and other businesses.

Our successful entry into the film production business faces various risks and challenges, including:

the success of our film production business will be primarily dependent on audience acceptance of our films, which is extremely difficult to predict;
only a relatively few “hit” films account for a significant portion of total revenue in the film industry and any failure by us to produce “hit” films could cause revenue generated from our proposed film production business to fall below expectations;
the production and marketing of visual effects-driven and animated films is capital-intensive and our capacity to generate cash from our films may be insufficient to meet our anticipated capital requirements;
delays and increased expenditures due to creative problems, technical difficulties, talent availability, accidents, natural disasters or other events beyond the control of the production companies and distributors;
the entrance of additional film studios into the visual effects-driven and animated film market, which may result in increased competition for visual effects-driven and animated film audiences and for talented computer graphics animators and technical staff;
the costs of producing and marketing feature films have steadily increased and may increase in the future, which may make it more difficult for a film to generate a profit or compete against other films;
film production is subject to seasonal variations based on the timing of theatrical motion picture and home entertainment releases and a short-term negative impact on our business during a time of high seasonal demand (such as might result from a natural disaster or a terrorist attack during the time of one of our theatrical or home entertainment releases) could have a disproportionate effect on our results for the year;
a strike by one or more of the labor unions or similar groups that provide personnel essential to the production of feature films could delay or halt our proposed film production activities;
we have no experience producing or releasing feature films and the strain on our personnel from the effort required to produce such feature films and the time required for creative development of future feature films may hinder our ability to consistently release visual effects-driven and animated feature films; and
the profitable distribution of a motion picture depends in large part on the availability of one or more capable distributors who are able to arrange for appropriate advertising and promotion, proper release dates and bookings in first-run and other theaters and any decision by those distributors not to distribute or promote one of the motion pictures which we may produce or to promote competitors’ motion pictures to a greater extent than they promote ours, or our inability to enter into profitable distribution arrangements with such distributors, could have an adverse effect on our proposed film production business.

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A substantial part of our business relies upon the success and popularity of motion picture entertainment containing 3D imagery. If other forms of entertainment prove to be more attractive to consumers than 3D motion pictures, our growth and operating results could be harmed.

A substantial part of our business relies on the popularity of 3D motion pictures, both animated and otherwise. If other forms of motion pictures, or other entertainment with which 3D motion pictures compete for consumers’ leisure time and disposable income, such as conventional motion pictures, television, concerts, amusement parks and sporting events, become more popular than 3D motion pictures, our business and operating results could be harmed.

Acquisitions we pursue in our industry and related industries could result in operating difficulties, dilution to our shareholders and other consequences harmful to our business.

As part of our growth strategy, we may selectively pursue strategic acquisitions in our industry and related industries. We may not be able to consummate such acquisitions, which could adversely impact our growth. If we do consummate acquisitions, integrating an acquired company, business or technology may result in unforeseen operating difficulties and expenditures, including:

increased expenses due to transaction and integration costs;
potential liabilities of the acquired businesses;
potential adverse tax and accounting effects of the acquisitions;
diversion of capital and other resources from our existing businesses;
diversion of our management’s attention during the acquisition process and any transition periods;
loss of key employees of the acquired businesses following the acquisition; and
inaccurate budgets and projected financial statements due to inaccurate valuation assessments of the acquired businesses.

Foreign acquisitions also involve unique risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

Our evaluations of potential acquisitions may not accurately assess the value or prospects of acquisition candidates and the anticipated benefits from our future acquisitions may not materialize. In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our Common Stock, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.

Interruption or failure of our information technology systems could impair our ability to effectively and timely provide our services and products, which could damage our reputation and have an adverse impact on our operating results.

Our future success is significantly dependent on our ability to provide visual effects services that consistently meet our client’s product development schedules. We rely on our software applications, hardware and other information technology and communications systems for the development and provision of our visual effects services and will depend on such technologies for production of our animated feature films. Our systems are vulnerable to damage or interruption from earthquakes, hurricanes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events. Our facilities are located in areas with a high risk of major earthquakes and hurricanes and are also subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster or other unanticipated problems at our Venice or Playa Vista, California facilities, our Vancouver, British Columbia facilities, or our Port St. Lucie, Florida facilities could result in lengthy interruptions in our projects and our ability to deliver services. An error or defect in the software, a failure in the hardware, and a failure of our backup facilities could delay our delivery of products and services and could result in significantly increased production costs, hinder our ability to retain and attract clients and damage our brand if clients

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believe we are unreliable. Given our reliance on our industry relationships, it could also result in a decrease in our revenues and otherwise adversely affect our business and operating results.

We cannot predict the effect that rapid technological change may have on our business or industry.

The entertainment industry in general, and the visual effects and animation segments thereof in particular, are rapidly evolving, primarily due to technological developments. The rapid growth of technology and shifting consumer tastes prevent us from being able to accurately predict the overall effect that technological growth may have on our potential revenue and profitability. Furthermore, because we are required to provide advanced digital imagery products to continue to win business we must ensure that our production environment integrates the latest tools and techniques developed in the industry. This requires us to either develop these capabilities by upgrading our own proprietary software, which can result in substantial research and development costs and substantial capital expenditures for new equipment, or to purchase third-party licenses, which can result in significant expenditures. In the event we seek to obtain third-party licenses, we cannot guarantee that they will be available or, once obtained, will continue to be available on commercially reasonable terms, or at all. If we are unable to develop and effectively market new technologies that adequately or competitively address the needs of these changing industries, it could have an adverse effect on our business and growth prospects.

Our revenue may be adversely affected if we fail to protect our proprietary technology or fail to enhance or develop new technology.

We depend on our proprietary technology to develop and produce certain of our products and provide certain of our services. With respect to our proprietary technology, we own six patents registered with the USPTO, have filed eight current applications for patents with the USPTO, and plan to file additional applications in the future. We also rely on a combination of copyright and trade secret protection and non-disclosure agreements to establish and protect our proprietary rights. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete.

We generally enter into non-disclosure or license agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, technology and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our software, technology and other proprietary information, without authorization, or to develop similar or superior technology independently. The steps we take may not prevent misappropriation of our technology, and our non-disclosure and license agreements may not be enforceable.

In addition, we may be required to litigate in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have an adverse effect on our business and/or our operating results.

Third-party technology licenses may not continue to be available to us in the future.

We also rely on certain technology that we license from third parties, including software that is integrated and used with internally developed software. These third-party technology licenses may not in the future be available to us on commercially reasonable terms, or at all. The loss of any of these technology licenses could result in delays in performance of work until we identify, license and integrate equivalent technology, and we may not be able to identify, license or integrate any such equivalent technology in a timely manner or at all. Any resulting delays in our performance could damage our reputation and result in a decrease in our revenues during the period of delay, either of which could materially adversely affect our business, operating results and/or financial condition.

Others may assert intellectual property infringement claims against us.

Companies in the visual effects and animation segment of the entertainment industry are subject to the possibility of claims that their products, services or techniques misappropriate or infringe the intellectual property rights of third parties. Infringement or misappropriation claims (or claims for indemnification resulting from such claims) against us may be asserted or prosecuted, regardless of their merit, and any such

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assertions or prosecutions may adversely affect our business and/or our operating results. Irrespective of the validity or the successful assertion of such claims, we would incur significant costs and diversion of resources relating to the defense of such claims, which could have an adverse effect on our business and/or our operating results. If any claims or actions are asserted against us, we may seek to obtain a license of a third-party’s intellectual property rights; however, under such circumstances such a license may not be available on reasonable terms or at all.

Motion picture piracy may affect our ability to maximize our revenues.

Motion picture piracy is extensive in many parts of the world, including South America, Asia (including South Korea, China and Taiwan), the countries of the former Soviet Union and other former Eastern bloc countries. The Motion Picture Export Association, the American Motion Picture Marketing Association and the American Motion Picture Export Association monitor the progress and efforts made by various countries to limit or prevent piracy. In the past, these various trade associations have enacted voluntary embargoes on motion picture exports to certain countries in order to pressure the governments of those countries to become more aggressive in preventing motion picture piracy. In addition, the U.S. government has publicly considered implementing trade sanctions against specific countries which, in the opinion of the U.S. government, do not prevent copyright infringement of U.S.-produced motion pictures; however, future voluntary industry embargoes or U.S. government trade sanctions may not be enacted. If enacted, such trade sanctions could impact the amount of revenue that we realize from the international exploitation of feature films, depending upon the countries subject to such action and the duration of such action. If embargoes or sanctions are not enacted or if other measures are not taken, we may lose an indeterminate amount of additional revenue as a result of motion picture piracy.

We could be adversely affected by strikes or other union job actions.

Our visual effects and animation projects generally utilize actors, directors, and writers who are members of the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, respectively, pursuant to industry-wide collective bargaining agreements. Many projects also employ members of a number of other unions, including, among others, the International Alliance of Theatrical and Stage Employees. A strike by one or more of the unions or guilds that provide personnel essential to the production of our projects could delay or halt our ongoing production activities, which could materially adversely affect our business, operating results and/or financial condition.

Our feature films segment depends on revenues from certain significant relationships, and harm to or loss of these relationships could harm our business.

Historically, we have derived a significant portion of our revenues from a limited number of customers to whom we have provided digital production services on large feature film projects. These customers generally have been major U.S. motion picture studios and such large projects usually extend from six to 18 months. For each of at least the past three years, greater than 10 percent of our consolidated revenues from this segment has been attributed to a single motion picture studio. During the year ended December 31, 2009 and 2010, contracts with three major studios for work in connection with feature films accounted for approximately 58% and 88%, respectively, of our revenues for that period. Significant customers over the last few years have included Walt Disney Pictures, Columbia Pictures, Paramount Pictures, 20th Century Fox, Universal Pictures, New Regency Productions and Warner Bros. Pictures. We expect that in the future we will continue to enter into contracts with customers who have historically represented a significant concentration of our revenues from this segment. If such contracts were terminated, our revenues from this segment and net income could significantly decline. Our future success depends on our ability to maintain and further existing relationships with significant customers, as well as develop relationships potential new customers.

Any adverse change in our relationship with any of the major motion picture studios or other of our principal customers could have an adverse effect on our business. Although we are attempting to expand our customer base, we expect that our customer concentration will not change significantly in the near future. The markets for visual effects services are dominated by a relatively small number of customers. We may not be able to retain our largest customers or attract additional customers, and our customers may not require or purchase services in the same quantities as in prior years. The loss of one or more of our largest customers, a

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significant reduction in revenues from these customers or our inability to successfully develop relationships with additional customers each could significantly harm our business.

Film production incentives and subsidies offered by foreign countries and states where we do not have operations, or our failure to continue to enjoy such incentives and subsidies offered by foreign countries and states where we do have operations, could affect our ability to secure work on visual effects and animation projects.

Production incentives and subsidies for feature film production are widely used throughout the industry and are important in helping film studios and production companies to offset production costs. Many countries and states have programs designed to attract feature film production. Incentives and subsidies are used to reduce feature film production costs and such incentives and subsidies take different forms, including direct government rebates, sale and leaseback transactions or transferable tax credits As a result, film studios and production companies may send their visual effects and animation work to companies in foreign countries and states where we do not have operations in order to take advantage of the incentives and subsidies offered in such places. In addition, we may enjoy film production incentives and subsidies offered by foreign countries (e.g., Canada) or states where we do have operations which may not be available in the future. Any diminution in our ability to secure work on visual effects and animation projects due to such incentives and subsidies could have a material adverse effect on our business, operating results or financial condition.

If we do not continue to receive governmental grant funding, primarily from the State of Florida and the Cities of West Palm Beach and Port St. Lucie, Florida, or otherwise fail to meet the target thresholds for continued grant funding, it may adversely affect our operations.

Grants from third parties, primarily the State of Florida and the Cities of West Palm Beach and Port St. Lucie, Florida, have been and will continue to be an important source of funding for the construction and establishment of our digital studio in Florida. These grants are generally structured to be funded over a three- to five-year period and require that we meet specified target thresholds with respect to business initiation, capital investment and job creation in order to receive the scheduled disbursements. If the applicable agencies or authorities controlling the disbursements of such grants determine that we have not met such thresholds or are otherwise no longer qualified to received continued grant funding, the loss of this funding or any subsequent obligation to repay any such funding could adversely impact the growth of our business, which may, in turn, adversely affect our operating results or financial condition.

The inability to successfully manage the growth of our business may have an adverse effect on our operating results.

We expect to experience growth in the number of employees and the scope of our operations. Such growth will result in increased responsibilities for our management. If our management is unable to successfully manage expenses in a manner that allows us to both improve operations and at the same time pursue potential market opportunities, the growth of our business could be adversely impacted, which may, in turn, negatively affect our operating results or financial condition. In addition, we believe that a critical contributor to our success has been our creative culture. As we attempt to grow and alter our business to focus increasingly on the creation, production and marketing of visual imagery, and as we experience change in response to the requirements of being a public company, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our future success.

If we fail to comply with the extensive regulatory requirements for our proposed education business, we could face significant monetary liabilities, fines and penalties, including loss of access to federal student loans and grants for our students.

As a provider of higher education, Digital Domain Institute (“DDI”) will be subject to extensive regulation on both the federal and state levels. In particular, the Higher Education Act of 1965, as amended (the “Higher Education Act”), and related regulations subject higher education institutions that participate in the various federal student financial aid programs under Title IV of the Higher Education Act (“Title IV programs”) to significant regulatory scrutiny.

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The Higher Education Act mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the U.S. Department of Education (the “Department of Education”); (2) the accrediting agencies recognized by the U.S. Secretary of Education (“Secretary of Education”) and (3) state education regulatory bodies.

The regulations, standards and policies of these regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations, standards or policies could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs or costs of doing business.

Because DDI will be operating in a highly regulated industry, we will be subject to compliance reviews and claims of non-compliance and related lawsuits by government agencies, accrediting agencies and third parties. For example, the Department of Education regularly conducts program reviews of educational institutions that are participating in Title IV programs and the Office of Inspector General of the Department of Education regularly conducts audits and investigations of such institutions.

If we are found to be in noncompliance with any of these laws, regulations, standards or policies, we could lose our access to Title IV program funds, which could have a material adverse effect on our business. Findings of noncompliance also could result in our being required to pay monetary damages, or being subjected to fines, penalties, injunctions, restrictions on our access to Title IV program funds or other censure that could have a material adverse effect on our business.

If we fail to obtain or maintain accreditation for DDI, we would lose our ability to participate in Title IV programs.

Institutional accreditation by an accrediting agency recognized by the Secretary of Education is required in order for an institution to become and remain eligible to participate in Title IV programs. Increased scrutiny of accreditors by the Secretary of Education in connection with the Department of Education’s recognition process may result in increased scrutiny of institutions by accreditors. Our failure to obtain accreditation or the loss of accreditation would, among other things, render DDI ineligible to participate in Title IV programs and would have a material adverse effect on our education business.

Changes in U.S., regional or global economic conditions could adversely affect our profitability.

A decline in economic conditions in the United States or in other regions of the world could lead to a decrease in discretionary consumer spending, which in turn could adversely affect demand for feature films and box office revenue. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a shift in consumer demand away from entertainment products such as feature films. Such events could cause a decrease in the demand for both the visual effects and animation services we offer as well as for the feature films we propose to produce, either of which would have an adverse effect on our profitability and operating results.

The success of our education business depends on our ability to develop new programs in a cost-effective manner on a timely basis, develop awareness among potential students and enroll and retain students.

The success of our education business depends in part on our ability to create the content of our academic programs and develop these new programs in a cost-effective manner that meets the needs of prospective students in a timely manner. Building awareness of DDI and the programs we plan to offer is critical to our ability to attract prospective students. If we are unable to successfully market and advertise DDI’s educational programs, our ability to attract and enroll prospective students in such programs could be adversely affected. It is also critical to DDI’s success that we attract and enroll our students in a cost-effective manner and that enrolled students remain active in our programs.

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Risks Related to this Offering and Ownership of Our Common Stock

Our common stock has not been publicly traded, and we expect that the price of our Common Stock will fluctuate substantially.

Before this offering, there has been no public market for shares of our Common Stock. An active public trading market may not develop after the consummation of this offering or, if developed, may not be sustained. The price of the shares of Common Stock sold in this offering will not necessarily reflect the market price of the common stock after this offering. The market price for the Common Stock after this offering will be affected by a number of factors, some of which are beyond our control, including those described above under “— Risk Related to Our Business” and the following:

announcements by us or our competitors of significant contracts, productions, acquisitions or capital commitments;
changes in financial estimates by analysts;
variations in quarterly operating results;
general economic conditions;
terrorist acts;
litigation involving our company or investigations or audits by regulators into the operations of our company or our competitors;
future sales of our Common Stock; and
investor perception of us and the industries in which we operate.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of companies in our industries. These broad market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance.

Securities analysts may not initiate coverage of our Common Stock or may issue negative reports, and this may have a negative impact on the market price of our Common Stock.

Securities analysts may elect not to provide research coverage of our Common Stock after the consummation of this offering. If securities analysts do not cover our Common Stock after the consummation of this offering, the lack of research coverage may adversely affect the market price of our Common Stock. The trading market for our Common Stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our Common Stock. This could have a negative effect on the market price of our stock.

A limited number of our shareholders will continue to own a large percentage of our stock after this offering, which will allow them to exercise significant influence over matters subject to shareholder approval.

After this offering, our executive officers, directors and their affiliated entities will beneficially own or control approximately         % of the outstanding shares of our Common Stock         % if the underwriters exercise their over-allotment option in full. Accordingly, these executive officers, directors and their affiliated entities, acting as a group, will have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These shareholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control

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of us, even if such a change of control would benefit our other shareholders. This significant concentration of stock ownership may adversely affect the trading price of our Common Stock due to investors’ perception that conflicts of interest may exist or arise.

We do not intend to pay dividends on our Common Stock in the foreseeable future.

We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general corporate purposes. Any payment of future cash dividends will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Investors must rely on sales of their shares of our Common Stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase shares of our Common Stock.

Some provisions of our charter documents and Florida law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders.

Prior to the consummation of the offering, we will file amended and restated articles of incorporation with the Secretary of State of the State of Florida and adopt amended and restated bylaws. Provisions in such amended and restated articles of incorporation and amended and restated bylaws, as well as provisions of Florida law, could make it more difficult for a third-party to acquire us, even if doing so would benefit our shareholders. These provisions of our amended and restated articles of incorporation and amended and restated bylaws will:

permit our board of directors to issue up to 24,900,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;
provide that all vacancies on our board of directors, including those resulting from newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; and
provide that special meetings of our shareholders may, except as otherwise required by law, be called only by the chairman of our board, our board of directors or one or more shareholders holding shares of our Common Stock representing at least 50% of the combined voting power of our Common Stock.

In addition, as a Florida corporation, we are subject to the Florida Business Corporation Act, which provides that a person who acquires shares in an “issuing public corporation,” as defined in the statute, in excess of certain specified thresholds generally will not have any voting rights with respect to such shares unless such voting rights are approved by the holders of a majority of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person. The Florida Business Corporation Act also contains a statute which provides that an affiliated transaction with an interested shareholder generally must be approved by (i) the affirmative vote of the holders of two-thirds of our voting shares, other than the shares beneficially owned by the interested shareholder, or (ii) a majority of the disinterested directors.

Future sales of shares of our Common Stock by existing shareholders could depress the market price of our Common Stock.

Upon completion of this offering, there will be          shares of our Common Stock outstanding assuming no exercise of the over-allotment option by the underwriters (or          shares of our Common Stock if the underwriters exercise their over-allotment option in full). The          shares being sold in this offering (or          shares, if the underwriters exercise their over-allotment option in full) will be freely tradable immediately after this offering (except for shares purchased by our affiliates). Of the remaining                  shares not sold in this offering,          shares are held by our directors, officers and certain of our shareholders who have entered into 180-day lock-up period agreements with respect to such shares. The holders of these shares will be able to sell their respective shares in the public market upon

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termination of the lock-up period, subject to the applicable volume, manner of sale, holding period and other requirements of Rule 144 under the Securities Act of 1933, as amended. In addition, as of April 22, 2011, there were outstanding:

3,033,657 shares of our Common Stock issuable upon the exercise of outstanding options with a weighted average exercise price of $2.78 per share;
3,905,644 shares of our Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share;
1.966,343 shares of our Common Stock reserved for issuance in connection with future grants of options and restricted stock under our 2010 Stock Plan;
1,116,344 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $9.63 per share;
202,500 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $8.03 per share;
5,389,056 shares of our Common Stock issuable upon the conversion of our convertible notes;
6,510,531 shares of our Common Stock issuable upon the conversion of our Series A Preferred Stock, which is issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share; and
21,999 shares of our Common Stock reserved for issuance to purchasers in a private placement conducted by us in 2010 at $6.00 per share.

If these options, warrants and conversion rights were to be exercised, additional shares would become available for sale upon expiration of any applicable lock-up period. The lapse of the forfeiture restrictions applicable to any restricted shares of our Common Stock will also result in additional shares of our Common Stock becoming available for sale. Barclays Capital Inc. may consent to the release of some or all of the shares subject to the lock-up restrictions for sale prior to the expiration of the lock-up period. A large portion of the shares subject to lock-up agreements are held by a small number of persons and investment funds. Sales by these shareholders of a substantial number of shares after this offering could significantly reduce the market price of our Common Stock. Moreover, after this offering, certain holders of shares of our Common Stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other shareholders.

We also intend to register the 5,000,000 shares of our Common Stock reserved for issuance under our 2010 Stock Plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the Rule 144 volume limitations and other requirements applicable to our affiliates and the applicable lock-up restrictions referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our Common Stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

If you purchase shares of our Common Stock in this offering, the per share purchase price you will pay for your shares will be substantially greater than the tangible book value per share of our outstanding Common Stock after giving effect to this offering. As a result, as of December 31, 2010, based on an aggregate of                  shares of our Common Stock outstanding after this offering, you will incur immediate and substantial dilution of $       per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $      , the mid-point of the price range on the cover page of this prospectus. Investors purchasing shares of our Common Stock in this offering will contribute approximately       % of the total amount we have raised to fund our company, but will own only approximately       % of the shares

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outstanding immediately following the consummation of this offering. In the past, we issued certain options to acquire our Common Stock at prices significantly below the assumed initial public offering price. As of April 22, 2011, there were outstanding:

3,033,657 shares of our Common Stock issuable upon the exercise of outstanding options with a weighted average exercise price of $2.78 per share;
3,905,644 shares of our Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share;
1,966,343 shares of our Common Stock reserved for issuance in connection with future grants of options and restricted stock under our 2010 Stock Plan;
1,116,344 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $9.63 per share;
202,500 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $8.03 per share;
5,389,056 shares of our Common Stock issuable upon the conversion of our convertible notes;
6,510,531 shares of our Common Stock issuable upon the conversion of Series A Preferred Stock, which is issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share; and
21,999 shares of our Common Stock reserved for issuance to purchasers in a private placement conducted by us in 2010 at $6.00 per share.

To the extent the holders exercise those outstanding options and/or warrants, or we issue additional options that are then exercised or restricted stock under our 2010 Stock Plan, or forfeiture restrictions to which outstanding restricted shares are subject lapse, you will sustain further dilution. If we raise additional funding by issuing equity securities or convertible debt, or if we acquire other companies or technologies or finance strategic alliances by issuing equity, the newly issued or issuable shares will further dilute your percentage ownership and may also reduce the value of your investment.

Our credit agreements require us to satisfy specific covenants and limit our ability to take various actions.

We are party to several credit agreements, which limit our ability to take various actions, including paying dividends, repurchasing shares and acquiring and disposing of assets or businesses. Accordingly, we may be restricted from taking actions that management believes would be desirable and in the best interests of us and our shareholders. Our principal credit agreement also requires us to satisfy specified covenants. A breach of any covenants contained in our credit agreement would result in an event of default under the agreement and allow the lenders to pursue various remedies, including accelerating the repayment of any indebtedness outstanding under the agreement, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and various stock exchanges, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

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The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. As a result of our required compliance with Section 404 of the Sarbanes-Oxley Act, we will incur substantial accounting expense and expend significant management efforts and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure such compliance. Furthermore, if we identify any issues in complying with the requirements of the Sarbanes-Oxley Act (for example, if we or our independent registered public accounting firm identify a material weakness or significant deficiency in our internal controls over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation, investor perceptions of us and the trading price of our common stock.

We have broad discretion in the use of the net proceeds from this offering, and we may not use these proceeds effectively.

We have not determined the specific allocation for the majority of the net proceeds of this offering. Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our results of operations or enhance the value of our Common Stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business or financial condition, cause the price of our Common Stock to decline and delay product development.

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Forward-Looking Statements

This prospectus contains forward-looking statements that involve risks and uncertainties relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to:

the anticipated benefits and risks associated with our business and growth strategies;
our ability to expand into the visual effects-driven and animated feature film production business and the for-profit education business;
our ability to enter into co-production arrangements with film studios;
our future operating results and the future value of our Common Stock;
the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets;
our ability to attract customers in a cost-efficient manner;
our ability to attract and retain qualified management and technical personnel;
potential government regulation;
our future capital requirements and our ability to satisfy our capital needs;
the anticipated use of the proceeds realized from this offering;
the potential for additional issuances of our securities;
our ability to meet the thresholds attached to the government grants that we have received;
the possibility of future acquisitions of businesses or assets; and
possible expansion into international markets.

Furthermore, in some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the “Risk Factors” section above. These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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Use of Proceeds

At an assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we will receive approximately $    million from our sale of     shares of common stock in this offering, after deducting estimated offering expenses of approximately $    and the underwriting discounts and commissions payable to the underwriters. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $    million.

A $1.00 increase (decrease) in the assumed initial public offering price of $    per share would increase (decrease) the net proceeds to us from this offering by approximately $    million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately $     million of the net proceeds from this offering to prepay in full outstanding indebtedness in an aggregate amount of $       , which bears an interest rate of     % and matures on                  . We intend to use the remaining net proceeds from this offering to facilitate our growth strategy by, among other things, advancing our development and production of animated and VFX driven feature films and building our for-profit education business through development of DDI, as well as for working capital and other general corporate purposes.

This anticipated use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including, among other things, the anticipated benefits and risks associated with our business and growth strategies; our ability to expand into the visual effects-driven and animated feature film production business and the for-profit education business; the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets; our ability to attract customers and to attract and retain qualified management and technical personnel; and our future capital requirements. Accordingly, our management will have broad discretion in using the net proceeds of this offering.

Following this offering, we believe that our available funds will be sufficient to allow us to advance our growth strategy. However, it is possible that we will not achieve the progress that we expect because the actual costs, timing of development and effects of competition are difficult to predict and are subject to substantial risks and delays. We have no committed external sources of funds. To the extent that the net proceeds from this offering and our other capital resources are insufficient to serve the purposes stated herein, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives.

Pending use of the net proceeds of this offering, we intend to invest the funds in cash, cash equivalents (which may include Treasury Bills, certificates of deposit, money market accounts, money market mutual funds, and other liquid investments), or short-term investment grade securities.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends on such stock in the foreseeable future.

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Capitalization

The following table sets forth our capitalization as of December 31, 2010:

on an actual basis;
on a pro forma basis to reflect the following:
1) In April 2011, a private equity lender (“Palm Beach Capital Fund 3”) exercised its option to invest the remaining $2.0 million under the Junior Debt facility (see Note 13 to the Consolidated Financial Statements included elsewhere in this prospectus). In connection with this transaction, Palm Beach Capital Fund 3 was issued warrants to acquire shares of our Series A Preferred Stock. The fair value of these warrants aggregating $3.3 million was reflected in the table below as warrant liabilities. Of this amount, $2.0 million was reflected as additional debt discount on the convertible notes and the remaining $1.3 million was reflected as interest expense, which resulted in an increase to the accumulated deficit.
2) The $0.5 million repayment of a note payable in January 2011.
3) The exercise of our option to purchase the Series B Warrants for $5.0 million in April 2011 (see Note 14 to the Consolidated Financial Statements included elsewhere in this prospectus).
4) In February and March 2011, we sold 2,025,000 shares of our common stock to a group of accredited investors. This sale generated net proceeds of $17.3 million of cash and stockholders’ equity.
5) The additional interest expense from the issuance of the warrants to Palm Beach Capital Fund 3 discussed above. This was partially offset by $0.8 million of grant revenue recognized upon receipt of the remaining funding under our grant from the State of Florida aggregating $4.0 million (see Note 6 to the Consolidated Financial Statements included elsewhere in this prospectus).
on a pro forma as adjusted basis to give effect to the sale of      shares of common stock by us in this offering at the offering price of $    per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions payable to the underwriters and the other estimated offering expenses payable by us.

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You should read this table in conjunction with our consolidated financial statements and the related notes as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

     
  As of December 31, 2010
(In Thousands)   Actual   Pro Forma   Pro Forma
As Adjusted
Private Equity convertible notes payable(1)   $ 17,915     $ 19,915           
Less discounts     (16,984 )      (18,984 )          
Net Private Equity convertible notes payable     931       931        
Commercial Lender note payable     12,000       12,000           
Less discount     (4,627 )      (4,627 )          
Net Commercial Lender note payable     7,373       7,373        
Other notes payable(2)     1,054       500           
Net other notes payable     8,427       7,873        
Net debt (current and long term)     9,358       8,804        
Capital lease obligations (current and long term)     2,355       2,355        
Government bond obligation (current and long term)     38,961       38,961        
Warrant and other debt-related liabilities
                          
Private Equity(1)     40,493       43,822        
Bank(3)     9,240       4,240           
Total warrant liabilities     49,733       48,062        
Stockholders’ equity
                          
Successor – common stock(4)     130       150           
Additional paid-in capital(4)     27,516       44,745           
Accumulated other comprehensive income     (66 )      (66 )          
Accumulated deficit(5)     (43,100 )      (43,650 )          
Non-controlling interests     11,774       11,774           
Total stockholders’ equity     (3,746 )      12,953        
Total capitalization   $ 96,661     $ 111,135     $  

The number of shares shown as outstanding as of December 31, 2010 above excludes:

3,033,657 shares of our Common Stock issuable upon the exercise of outstanding options with a weighted average exercise price of $2.78 per share;
3,905,644 shares of our Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share;
1,966,343 shares of our Common Stock reserved for issuance in connection with future grants of options and restricted stock under our 2010 Stock Plan;
1,116,344 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $9.63 per share;
202,500 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $8.03 per share;
5,389,056 shares of our Common Stock issuable upon the conversion of our convertible notes;
6,510,531 shares of our Common Stock issuable upon the conversion of our Series A Preferred Stock, which is issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share; and
21,999 shares of our Common Stock reserved for issuance to purchasers in a private placement conducted by us in 2010 at $6.00 per share.

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Dilution

Purchasers of shares of our Common Stock in this offering will experience an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the initial public offering price paid by purchasers of shares of our Common Stock in this offering exceeds the net tangible book value per share immediately following the consummation of this offering. Net tangible book value represents our total tangible assets reduced by our total liabilities. Net tangible book value per share represents our net tangible book value divided by the number of shares of common stock outstanding.

As of December 31, 2010 our net tangible book value was $       million and our net tangible book value per share was $      . As of December 31, 2010, after giving effect to                         , the pro forma net tangible book value would have been $       million and the pro forma net tangible book value per share would have been $      . As of              , 2011 after giving effect to the sale of the shares of our Common Stock offered by this prospectus at an assumed initial public offering price of $    per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions, the non-accountable expense allowance for the underwriters and other estimated offering expenses payable by us, the pro forma as adjusted net tangible book value per share of our Common Stock would have been $    per share. Therefore, new investors in our Common Stock would have been diluted by approximately $    per share. At the same time, our existing shareholders would have realized an increase in pro forma as adjusted net tangible book value of $    per share after this offering. The following table illustrates this per share dilution:

   
Assumed initial public offering price per share                $         
Net tangible book value per share as of December 31, 2010                  
Increase per share attributable to                                       
Pro forma net tangible book value per share before this offering                  
Increase in pro forma net tangible book value per share attributable to this offering                      
Pro forma as adjusted net tangible book value per share                      
Dilution per share to new investors            $       

A $1.00 increase (decrease) in the assumed initial public offering price of $    per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value as of            , 2011 by approximately $    million, the pro forma as adjusted net tangible book value per share after this offering by $    and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $    per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance for the underwriters and estimated offering expenses payable by us.

The following table summarizes, as of December 31, 2010 as described above, the number of shares of our common stock purchased by our existing shareholders and in this offering, and the total consideration paid and the average price per share paid by existing and new shareholders:

         
  Shares Purchased   Total Consideration   Average Price
Per Share
     Number   %   Amount   %
Existing shareholders                  %     $              %     $         
New investors                                                    
Total              %                %        

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A $1.00 increase (decrease) in the assumed initial public offering price of $    per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid to us by investors participating in this offering by approximately $    million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option to purchase additional shares in this offering in full, our existing shareholders would own    % and our new investors would own    % of the total number of shares of our Common Stock outstanding after this offering.

The number of shares shown as outstanding as of December 31, 2010 above excludes:

3,033,657 shares of our Common Stock issuable upon the exercise of outstanding options with a weighted average exercise price of $2.78 per share;
3,905,644 shares of our Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share;
1,966,343 shares of our Common Stock reserved for issuance in connection with future grants of options and restricted stock under our 2010 Stock Plan;
1,116,344 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $9.63 per share;
202,500 shares of our Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $8.03 per share;
5,389,056 shares of our Common Stock issuable upon the conversion of our convertible notes;
6,510,531 shares of our Common Stock issuable upon the conversion of our Series A Preferred Stock, which is issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.01 per share; and
21,999 shares of our Common Stock reserved for issuance to purchasers in a private placement conducted by us in 2010 at $6.00 per share.

Because we expect the exercise prices of the outstanding options and warrants to be significantly below the initial public offering price of $    per share, the midpoint of the price range set forth on the cover page of this prospectus, investors purchasing common stock in this offering will suffer additional dilution when and if these options or warrants are exercised, or if we issue additional options that are then exercised or restricted stock under our 2010 Stock Plan.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

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Unaudited Pro Forma Financial Information

Acquisition of In-Three by the Company

On November 22, 2010, we acquired substantially all of the tangible and intangible assets of In-Three, Inc., a California-based company (“In-Three”). The results of operations of In-Three have been included in our consolidated financial statements since that date. In-Three is a provider of proprietary Dimensionalization® solutions for the conversion of 2D content into high-quality 3D stereo imagery, including a software product, known as Intrigue, that converts entertainment media from two-dimensional to 3D. In-Three’s product offerings enable us to offer a digital production and stereo conversion solution to studios and filmmakers. By integrating In-Three’s technology and team into our digital production capabilities, we plan to use, and offer our clients the use of, an expanded set of creative and development capabilities.

In-Three was purchased for 423,287 shares of our Common Stock, plus contingent consideration in the form of royalty payments as follows: payment of the contingent consideration will continue until the earlier to occur of the fifth anniversary of the closing date of the acquisition or the date on which the sum of the contingent consideration paid and the value of such shares exceeds $22.0 million. If on the fifth anniversary of the closing date of the acquisition, the sum of the contingent consideration paid and the value of such shares does not exceed $22.0 million, then the contingent consideration will continue until such time as we have paid $12.0 million in royalties. In addition, we paid $0.9 million for certain assets of In-Three.

In accordance with the acquisition method of accounting as specified in FASB ASC Topic 805, this transaction was accounted for under the purchase method of accounting whereby the total acquisition consideration is allocated to the assets acquired, net of liabilities assumed, based on their estimated fair values as of the date of the transaction. We recognized the fair value of the acquired assets of $0.5 million as of the date of acquisition. We allocated $2.6 million to the fair value of intangible assets, which included trade names, patents and software. We recognized contingent consideration liabilities aggregating $3.1 million. We also recognized equity of $1.9 million for the fair value of our common stock issued. The remaining portion of the purchase price, or $2.3 million, was allocated to goodwill representing the amount of the purchase price in excess of the fair value of the assets, net of liabilities acquired, subject to possible adjustment during the allocation period, which will not exceed one year. We used techniques such as discounted cash flow models and multiples of revenue models in valuing the various elements of the acquired business.

Unaudited Pro Forma

The unaudited pro forma condensed consolidated statement of operations is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition and related transactions for which we are giving pro forma effect actually occurred on the date indicated as described above and in the accompanying notes, nor is such unaudited pro forma condensed consolidated statement of operations necessarily indicative of the results to be expected for the full year or any future period.

The pro forma adjustments are based on currently available information and assumptions that our management believes are reasonable. The notes to the unaudited pro forma condensed consolidated statement of operations provides a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma condensed consolidated statement of operations. The unaudited pro forma condensed consolidated statement of operations should be read in conjunction with “Selected Historical Consolidated Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

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The following unaudited pro forma statement of operations for the year ended December 31, 2010 has been derived by the application of pro forma adjustments to our historical consolidated financial statements and gives effect to the acquisition of substantially all of the assets, tangible and intangible, of In-Three on November 22, 2010 as if it had occurred on January 1, 2010, enabling the Company to provide 3D Dimensionalization® for, among other things, live-action and animated films.

The table below sets for the results for the period ending December 31, 2010 as if we had acquired In-Three as of the beginning of the fiscal year:

         
  Successor   In-Three     Pro Forma
(In Thousands,
Except Share and Per Share Data)
  For the Year
Ended
December 31,
2010
  January 1,
2010 through
September 30,
2010
  October 1 through December 31, 2010   Adjustments   For the Year
Ended
December 31,
2010
Consolidated Statements of Operations Data:        (unaudited)
  
  (unaudited)
  
  (unaudited)
  
  (unaudited)
  
Revenues:
                                            
Revenues   $ 101,859     $ 846     $ 30     $     $ 102,735  
Grant revenues from governmental agencies     3,340                            3,340  
Total revenues     105,199       846       30             106,075  
Costs and expenses:
                                            
Cost of revenues, excluding depreciation and amortization     83,894       841                   84,735  
Depreciation expense     7,349       128       45       (108 )(1)      7,414  
Selling, general and administrative expenses     25,479       4,249       522             30,250  
Amortization of intangible assets     2,935       14       3       499 (2)      3,451  
Total costs and expenses     119,657       5,232       570       391       125,850  
Operating loss     (14,458 )      (4,386 )      (540 )      (391 )      (19,775 ) 
Other income (loss):
                                            
Interest and financing expenses:
                                            
Changes related to fair value of warrant and other debt-related liabilities     (24,321 )                        (24,321 ) 
Amortization of discount and issuance costs on notes payable     (3,633 )                        (3,633 ) 
Interest expense on notes payable     (2,790 )      (1,151 )      (401 )            (4,342 ) 
Interest expense on capital lease obligations     (245 )                        (245 ) 
Other income (expense), net     254       (553 )                  (299 ) 
Loss from continuing operations before income taxes     (45,193 )      (6,090 )      (941 )      (391 )      (52,615 ) 
Income tax provision     25                         25  
Net loss before non-controlling interest     (45,218 )      (6,090 )      (941 )      (391 )      (52,640 ) 
Net loss attributable to non-controlling interests     2,747                         2,747  
Net loss attributable to Digital Domain Media Group, Inc.     (42,471 )      (6,090 )      (941 )      (391 )      (49,893 ) 
Preferred stockholders accretion, deemed dividends and income participation                              
Net loss attributable to common stockholders   $ (42,471 )    $ (6,090 )    $ (941 )    $ (391 )    $ (49,893 ) 
Weighted average shares outstanding:
                                            
Basic     12,372,357                377,880                12,750,237  
Diluted     12,372,357                377,880          (3)      12,750,237  
Net loss per share attributable to Digital Domain Media Group, Inc.:
                                            
Basic   $ (3.43 )                      $ (3.91 ) 
Diluted   $ (3.43 )                      $ (3.91 ) 
Other Financial Data:
                                            
Adjusted EBITDA   $ 3,322     $ (4,244 )    $ (492 )          $ (1,414 ) 

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(1) Depreciation of fixed assets acquired in the acquisition of In-Three on November 22, 2010 as if the acquisition had been consummated on January 1, 2010.
(2) Amortization of intangible assets with finite lives acquired in the acquisition of In-Three on November 22, 2010 as if the acquisition had been consummated on January 1, 2010.
(3) Basic and diluted weighted average share count is adjusted to reflect the impact of the issuance of 0.4 million shares of Common Stock issued in connection with the acquisition of In-Three.

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Selected Historical Consolidated Financial Information

The following table contains summary historical consolidated financial and other information regarding our business and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Selected Historical Consolidated Financial Information”, “Unaudited Pro Forma Financial Information”, our consolidated financial statements and related notes, and our unaudited condensed consolidated financial statements and related notes, included elsewhere in this prospectus.

On October 15, 2009, Digital Domain Media Group, Inc. acquired a majority ownership stake in the issued and outstanding capital stock of Digital Domain. We refer to ourselves as the Predecessor for all periods prior to our acquisition of such majority ownership stake in Digital Domain. We refer to ourselves as the Successor for all periods following our acquisition of such majority ownership stake in Digital Domain.

Our consolidated statements of operations information for the year ended December 31, 2010, the period from January 7, 2009 to December 31, 2009 (Successor), the nine months ended September 30, 2009 (Predecessor) and the year ended December 31, 2008 (Predecessor) are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived our consolidated statements of operations information for the period from January 1, 2006 to May 12, 2006 (Predecessor), the period from May 13, 2006 to December 31, 2006 (Predecessor), and the year ended December 31, 2007 (Predecessor) from our audited consolidated financial statements which are not included in this prospectus.

The financial statements included in this prospectus may not reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

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  Predecessor   Successor
(In Thousands, Except Share
and per Share Data)
  For the Period
January 1,
2006 to
May 12, 2006
  For the Period
May 13,
2006 to
December 31,
2006
  For the Year
Ended
December 31,
2007
  For the Year
Ended
December 31,
2008
  For the Nine
Months
Ended
September 30,
2009
  For the Period
January 7
(the inception
date) through
December 31,
2009
(1)
  For the Year
Ended
December 31,
2010
Consolidated Statements of Operations Data:
                                                              
Revenues:
                                                              
Revenues   $ 25,381     $ 41,652     $ 73,693     $ 85,140     $ 48,360     $ 15,582     $ 101,859  
Grant revenues from governmental agencies                                   6,800       3,340  
Total revenues     25,381       41,652       73,693       85,140       48,360       22,382       105,199  
Costs and expenses:
                                                              
Cost of revenues, excluding depreciation and amortization     18,831       31,180       59,108       80,335       44,554       11,964       83,894  
Depreciation expense     1,444       2,859       3,977       6,278       5,157       1,436       7,349  
Selling, general and administrative expenses     5,523       8,278       16,428       23,085       10,929       5,172       25,479  
Amortization of intangible assets                                   734       2,935  
Total costs and expenses     25,798       42,317       79,513       109,698       60,640       19,306       119,657  
Operating (loss) income     (417 )      (665 )      (5,820 )      (24,558 )      (12,280 )      3,076       (14,458 ) 
Other income (expense):
                                                              
Interest and investment income     289       423       710       1,102                    
Interest and financing expenses:
                                                              
Changes related to fair value of warrant and other debt-related liabilities                 (4,906 )      12,824       (11,932 )      (296 )      (24,321 ) 
Amortization of discount and issuance costs on notes payable           (371 )      (706 )      (1,062 )      (599 )      (644 )      (3,633 ) 
Loss on debt extinguishment                             (6,311 )             
Interest expense on notes payable           (836 )      (1,269 )      (1,540 )      (1,971 )      (530 )      (2,790 ) 
Interest expense, other     (2 )      (4 )      (92 )      (112 )      (223 )            (245 ) 
Adjustment of held interest in business combination                                   3,528        
Other income (expense)     8       (87 )      (89 )      424       108       122       254  
(Loss) income from continuing operations before income taxes     (122 )      (1,540 )      (12,172 )      (12,922 )      (33,208 )      5,256       (45,193 ) 
Income tax provision     10       6       10                         25  
(Loss) income from continuing operations     (132 )      (1,546 )      (12,182 )      (12,922 )      (33,208 )      5,256       (45,218 ) 
Loss from discontinued operations – net of tax                 (7,729 )      (2,269 )      (2,429 )             
Gain from sale of discontinued operations – net of tax                             9,241              
Net (loss) income before non-controlling interests     (132 )      (1,546 )      (19,911 )      (15,191 )      (26,396 )      5,256       (45,218 ) 
Net loss attributable to non-controlling interests                                   2,703       2,747  
Net (loss) income attributable to Digital Domain Media Group, Inc.     (132 )      (1,546 )      (19,911 )      (15,191 )      (26,396 )      7,959       (42,471 ) 
Preferred stockholders accretion, deemed dividends and income participation           (247 )      (80 )      (80 )      (889 )             
Net (loss) income attributable to common stockholders   $ (132 )    $ (1,793 )    $ (19,991 )    $ (15,271 )    $ (27,285 )    $ 7,959     $ (42,471 ) 
Weighted average shares outstanding:
                                                              
Basic     2,304,350       11,149,721       12,100,502       12,953,049       13,109,267       12,226,107       12,372,357  
Diluted     2,304,350       11,149,721       12,100,502       12,953,049       13,109,267       12,769,928       12,372,357  
Net (loss) income per share:
                                                              
Basic   $ (0.06 )    $ (0.16 )    $ (1.65 )    $ (1.18 )    $ (2.08 )    $ 0.65     $ (3.43 ) 
Diluted   $ (0.06 )    $ (0.16 )    $ (1.65 )    $ (1.18 )    $ (2.08 )    $ 0.62     $ (3.43 ) 

(1) Digital Domain Media Group, Inc. was formed on January 7, 2009.

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Management’s Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the headings “Forward-Looking Statements” and “Risk Factors.”

Overview

We are an Academy Award® winning digital production company. Since our inception in 1993, we have been a leading provider of CG animation and VFX for major motion picture studios and advertisers. Our history of innovation and creativity has been recognized with numerous entertainment industry awards and nominations, including seven awards issued by the Academy of Motion Picture Arts and Sciences (the “Academy”) — three Academy Awards® for Best Visual Effects and four awards for Scientific and Technical Achievement. Our filmography of over 80 major motion pictures includes Thor, TRON: Legacy , the Transformers trilogy, The Curious Case of Benjamin Button, Apollo 13 and Titanic. Capabilities include the production of 3D content, performance capture, and CG visual effects such as fluid simulation, terrain generation and photorealistic CG animation.

Our Business

Digital Production

We are one of the leading digital production companies. We offer our clients innovative, end-to-end solutions across multiple media platforms spanning the entire content production process from idea generation and pre-production to design, directing, live-action production and post-production. We have three key digital production business units: Digital Domain Productions — VFX for feature films and advertising; Mothership  — digital advertising and marketing solutions; and In-Three — creation and conversion of 3D content. Our digital production business generated $101.9 million in revenue for the year ended December 31, 2010, representing growth of 70% over the pro forma revenue for the year ended December 31, 2009.

Animation Studio

Our animation feature film business focuses on the development of our original full-length, family-oriented CG animated feature films. Our business is led by a creative storytelling team of accomplished directors, producers, story artists and animators who joined us from leading companies in the family animation film industry. To house this business, we are currently leasing a 65,000 square foot building while we complete the construction of a 130,000 square foot facility. Since establishing our animation studio in 2009, we have executed Grant Agreements with the State of Florida and the City of Port Saint Lucie, Florida to provide grant packages consisting of $80.0 million in cash, land and low interest financing to help us establish this studio. We have also received $21 million in tax credits from the State of Florida to offset the expenses of producing our first several projects. Grant receipts that are recognized as revenue are recorded in our corporate segment.

Education

We recently founded DDI, a for-profit post-secondary educational institution in partnership with FSU. In April 2011, we entered into agreements with FSU establishing what we believe is a first-of-its-kind public-private education partnership whereby DDI graduates will receive fully-accredited four-year Bachelor degrees from FSU. Working closely with FSU’s College of Motion Picture Arts and the Florida Department of Education, we have designed a curriculum for DDI that will produce workforce-ready graduates possessing both traditional motion picture arts and state-of-the-art technical animation and visual effects CG skills. We expect to also provide our graduates with the skills to compete in the broader digital economy, which includes commercial applications such as military simulation, medical simulation, architecture, engineering, software development and related technologies. We believe this partnership between DDI and FSU represents a cutting-edge collaboration between an industry-leading technology and entertainment company and one of the nation’s top film schools.

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We have also entered into a Grant Agreement with the City of West Palm Beach, Florida that provides for approximately $35 million in cash, land and low-interest financing to assist in funding the launch of this business, discussed in more detail below. As of the date of this prospectus, this business unit has not generated revenue for us.

Recent Developments

As part of these initiatives discussed above, we are the recipient of Grant Awards and other incentives totaling $135 million in the form of cash, future donations of land, building and equipment financing, and tax incentives.

Grants and Other Incentives from Governmental Entities

Over the past two years, we have worked closely with state and local government authorities in Florida to execute economic stimulus contracts designed to create jobs and stimulate the State’s economy. As of the date of this prospectus, we have contracted to receive a total of $135 million in such government stimulus financing, including cash, donations of land, building and equipment financing and tax incentives. All of these incentives have been structured over a three- to five-year period, with portions of these grants funded as we meet target thresholds of business initiation, capital expenditures and/or job creation.

The first stimulus package, signed in June 2009, provides for $20 million in cash grants from the State of Florida. The second stimulus package was awarded to us by the City of Port St. Lucie, Florida in December 2009 and January 2010, providing for us to receive an additional $10 million in cash grants, 15 acres of land appraised at $10 million and $40 million in low-interest building and equipment lease financing. We are deploying these incentives to construct our 500-person animated features film studio in Port St. Lucie, Florida.

The third stimulus package, signed in November 2010 with the City of West Palm Beach, Florida Community Redevelopment Agency, provides for grants of $10 million in cash, title to 2.4 acres of land appraised at $10 million and $15 million in low-interest financing. These grants are designed to incentivize us to build our educational facility at a marquee site in the City of West Palm Beach. The cash grant will be released as DDI achieves various benchmarks including the commencement of construction and other business progress targets.

Each of these grant packages are discussed in greater detail in “Liquidity and Capital Resources”.

Business Combinations

Acquisition of Controlling Interest in Digital Domain

During 2009, we acquired a controlling interest in Digital Domain. On October 1, 2009 and on October 15, 2009 (the “Second Closing” or “Acquisition Date”), we acquired 0.7 million shares and 1.6 million shares, respectively, for an aggregate total of 2.3 million shares of the Series C 8% Cumulative Convertible Preferred Stock (the “Series C Preferred Stock”) of Digital Domain. Simultaneously with the purchase of the Series C Preferred Stock for an aggregate purchase price of $7.0 million, we purchased Digital Domain’s ongoing rights to participate in the profits of the movie Titanic (the “Titanic Participation Rights”) for an additional $1.0 million, bringing the aggregate purchase price to $8.0 million (see Note 2 to our Consolidated Financial Statements included elsewhere in this prospectus).

On May 24, 2010, we elected to convert our shares of the Series C Preferred Stock into approximately 21 million shares of the Common Stock of Digital Domain, representing 51% of the fully diluted shares of Common Stock of Digital Domain.

During 2010, we purchased an additional 0.7 million shares of the Series C Preferred Stock of Digital Domain for $2.0 million, on terms similar to those applicable to the Series C Preferred Stock purchased in 2009, except that the conversion rate applicable to the shares purchased in 2010 results in less dilution to Digital Domain stockholders than the prior Series C transaction.

At various times during 2009 and 2010, we purchased an additional 1.7 million and 4.9 million shares, respectively, for a cumulative total of 6.6 million shares of the Common Stock of Digital Domain from various investors, some of whom were related parties. The shares of the Common Stock of Digital Domain we purchased prior to the Acquisition Date were re-measured to fair value as of the Acquisition Date, resulting in

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a gain of $3.5 million, which is reflected as an adjustment of held interest in business combination in the accompanying consolidated statement of operations for the period from January 7, 2009 (the inception date) through December 31, 2009.

As a result of the purchase on October 15, 2009 of the Series C Preferred Stock from Digital Domain pursuant to which we acquired a majority voting interest in Digital Domain, we have accounted for the transaction as an acquisition, and have included Digital Domain’s consolidated financial statement results in our consolidated financial statements from the Acquisition Date.

The acquisition of Digital Domain resulted in goodwill of $15.3 million, none of which is deductible for tax purposes. Such goodwill resulting from the acquisition of Digital Domain reflects the $8.0 million paid for the Series C Preferred Stock and the Titanic Participation Rights, the $27.3 million fair value of the non-controlling interests, and the $3.6 million fair value of the previously held equity interests in Digital Domain, over the $23.6 million fair value of the other assets acquired.

In accordance with guidance provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, this transaction was accounted for under the purchase method of accounting. Accordingly, we were required to record the fair value of the assets acquired and liabilities assumed in the acquisition. We used techniques such as discounted cash flow models and multiples of revenue models in making this determination.

In-Three Acquisition

On November 22, 2010, we acquired substantially all of the tangible and intangible assets of In-Three, a California-based domestic private company. In-Three’s results of operations have been included in our consolidated financial statements since that date. In-Three was purchased for 423,287 shares of our Common Stock valued at $1.9 million and contingent consideration based on future revenues, and cash consideration of $0.9 million. Additionally, we entered into a consulting contract with a selling principal of In-Three to provide transitional advisory services for a three year period commencing on the acquisition date.

In accordance with the acquisition method of accounting as specified in FASB ASC Topic 805, this transaction was accounted for under the purchase method of accounting whereby the total acquisition consideration is allocated to the assets acquired, net of liabilities assumed, based on their estimated fair values as of the date of the transaction. We recognized the fair value of the acquired assets of $0.5 million as of the date of the acquisition. We allocated $2.6 million to the fair value of intangible assets, which included trade names, patents and software. We recognized contingent consideration liabilities aggregating $3.1 million. We also recognized equity of $1.9 million for the fair value of our Common Stock issued. The remaining portion of the purchase price, or $2.8 million, was allocated to goodwill representing the amount of the purchase price in excess of the fair value of the assets, net of liabilities acquired, subject to possible adjustment during the allocation period, which will not exceed one year. We used techniques such as discounted cash flow models and multiples of revenue models in valuing the various elements of the acquired business.

Private Placement

During the year ended December 31, 2010, we sold shares of our Common Stock in a private placement at a purchase price of $6.00 per share, solely to “accredited investors” (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act (“Regulation D”)). This private placement of shares of our Common Stock was combined with a concurrent offering to exchange shares of our Common Stock for shares of Digital Domain’s common stock. In 2010, we sold 166,775 shares of our Common Stock for approximately $1.0 million and exchanged 186,663 shares of our Common Stock for 169,996 shares of Digital Domain’s common stock.

In February and March 2011, we conducted a private placement of our Common Stock to “accredited investors” who also met the definition of “qualified institutional buyers” (as set forth in Rule 144A promulgated under the Securities Act), in accordance with Rule 506 of Regulation D. We sold 2,025,001 shares of Common Stock for gross proceeds of $19.5 million at $9.63 per share, or $17.3 million net of fees and expenses, including placement fees of $2.2 million. In addition, we issued warrants to purchase 1,012,502 shares of our Common Stock, with an exercise price of $9.63 per share. As additional compensation for placement services, we issued options to purchase an aggregate of 202,500 shares of our Common Stock,

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exercisable at $8.03 per share, to the placement agent. In the event that we do not achieve a listed, public trading status on or before December 31, 2011, the investors in this private placement will receive an additional 2,025,001 shares of our Common Stock, at no cost, as liquidated damages.

Operating Segments

FASB ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments. This standard requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Our three operating segments are Feature Films, Commercials and Animation. These segments are presented in the way we internally manage and monitor our performance. Our reporting systems present various data used by management to operate the business. However, certain expenses are not allocated to the various segments (primarily consisting of support staff salaries and benefits, fees for outside professional services, insurance costs, and utilities costs, all of which are included in selling, general and administrative expenses), and thus a reconciliation is provided between the consolidated financial statements and the data related to the combined segments. Interest and other income are not allocated to the various segments, as the chief operating decision maker does not evaluate segment operations beyond the income (loss) from operations level.

Our digital production business (containing the segments of Feature Films and Commercials) has historically dominated our operations. The revenue for each of the segments is derived from external customers. A majority of all revenues have been generated in the United States from customers located in the United States.

Key Metrics

We rely on certain key performance indicators to manage and assess our business activities. The key indicator described below assists us in evaluating growth trends, establishing budgets, recruiting and hiring employees, and assessing our overall operational efficiencies. We discuss revenue and cash flow from operating activities, respectively, under “Results of Operations” and “Liquidity and Capital Resources” below. An important measure of our quarterly and annual performance, Adjusted EBITDA, is discussed below.

Adjusted EBITDA

Adjusted EBITDA represents net income (loss) adjusted for (1) interest expense, net of interest income, (2) income tax provision (benefit), (3) depreciation and amortization, (4) amortization of intangible assets, (5) stock-based compensation expense, (6) amortization of debt and equity issuance costs and (7) other (income) expense. Items (1) through (7) are excluded from net income (loss) internally when evaluating our operating performance. Management believes Adjusted EBITDA allows investors to make a more meaningful comparison between our operating results over different periods of time, as well as with those of other companies in our industry, because it excludes items such as interest expense and other adjustments related to financing activities that we believe are not representative of our operating performance. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

We believe that Adjusted EBITDA, which is a non-GAAP financial measure, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides useful information about our operating performance and period-over-period growth, and provides additional information that is useful for evaluating our operating performance. Additionally, we believe that Adjusted EBITDA provides a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-to-period basis, because this measure excludes items that are not representative of our operating performance, such as the fair value adjustments associated with our historical financings as a private company. We believe that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable amortization costs related to intangible assets. However, Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to net income (loss) as an indicator of operating performance.

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TABLE OF CONTENTS

A reconciliation of net income, a U.S. GAAP measure, to Adjusted EBITDA, is provided in “Results of Operations” presented below.

Results of Operations

The following table sets forth certain information regarding the successor consolidated results of operations for the year ended December 31, 2010, the period January 7 (the inception date) through December 31, 2009, and the predecessor results of operations for the nine months ended September 30, 2009 and the year ended December 31, 2008 (in thousands). Also presented are the pro forma results of operations for the year ended December 31, 2010, assuming the acquisition of In-Three occurred on January 1, 2010, and the pro forma results of operations for the year ended December 31, 2009, assuming the acquisition of Digital Domain occurred on January 1, 2009 (in thousands):

           
           
  Successor   Predecessor   Pro Forma
     For the Year
Ended
December 31,
2010
  For the Period
from January 7
(the inception
date) through
December 31,
2009
  For the Nine
Months
Ended
September 30,
2009
  For the Year
Ended
December 31,
2008
  For the Year
Ended
December 31,
2010
  For the Year
Ended
December 31,
2009
                         (unaudited)   (unaudited)
Revenues:
                                                     
Revenues   $ 101,859     $ 15,582     $ 48,360     $ 85,140     $ 102,735     $ 60,000  
Grant revenues from governmental agencies     3,340       6,800                   3,340       6,800  
Total revenues     105,199       22,382       48,360       85,140       106,075       66,800  
Costs and expenses:
                                                     
Cost of revenues, excluding depreciation and amortization     83,894       11,964       44,554       80,335       84,735       53,846  
Depreciation expense     7,349       1,436       5,157       6,278       7,414       6,593  
Selling, general and administrative expenses     25,479       5,172       10,929       23,085       30,250       16,101  
Amortization of intangible assets     2,935       734                   3,451       2,929  
Total costs and expenses     119,657       19,306       60,640       109,698       125,850       79,469  
Operating (loss) income     (14,458 )      3,076       (12,280 )      (24,558 )      (19,775 )      (12,669 ) 
Other income (expenses):
                                                     
Interest and investment income                       1,102              
Interest and finance expense:
                                                     
Changes in fair value of warrant and other debt-related liabilities     (24,321 )      (296 )      (11,932 )      12,824       (24,321 )      (4,006 ) 
Amortization of discount and issuance costs on notes payable     (3,633 )      (644 )      (599 )      (1,062 )      (3,633 )      (3,236 ) 
Loss on debt extinguishment                 (6,311 )                  (6,311 ) 
Interest expense on notes payable     (2,790 )      (530 )      (1,971 )      (1,540 )      (4,342 )      (2,090 ) 
Interest expense on capital lease obligations     (245 )            (223 )      (112 )      (245 )      (223 ) 
Adjustment of held interest in business combination           3,528