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CAPITAL STOCK
 12 Months Ended
Dec. 31, 2011
CAPITAL STOCK  
CAPITAL STOCK

18. CAPITAL STOCK

        Parent Company—At December 31, 2009, the Company had authorized 100,000,000 shares of Common Stock, no par value per share, of which 12,226,107 shares were issued and outstanding. On November 24, 2010, the Company amended its Articles of Incorporation to change such authorized common stock from no par value to $0.01 per share par value, and to authorize 25,000,000 shares of Preferred Stock, par value $0.01 per share, of which 100,000 shares have been designated Series A Preferred Stock. As of December 31, 2010, the Company had 13,002,832 shares of common stock outstanding, and no shares of Preferred Stock outstanding. As of December 31, 2011, the Company had 39,384,003 shares of common stock outstanding, and no shares of Preferred Stock outstanding.

        The Company was capitalized on January 7, 2009 by issuing 12,226,107 shares of common stock to its founders for nominal consideration. During the year ended December 31, 2010, the Company sold shares of common stock pursuant to a private placement memorandum, 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 of 1933, as amended). As part of this private placement memorandum, the sale of shares of common stock was combined with a concurrent offering to exchange shares of the Company's common stock for shares of Digital Domain common stock at a ratio of two shares of Company stock for $6.00 plus the exchange of one share of Digital Domain common stock. As of December 31, 2010, 166,775 shares were sold for $1.0 million and 86,663 shares of the Company's common stock were exchanged for 86,663 shares of Digital Domain common stock. During the year ended December 31, 2011, an additional 10,000 shares were issued and 22,666 shares of the Company's common stock were exchanged for 22,666 shares of Digital Domain common stock pursuant to the private placement memorandum. The exchange of the Company's common stock for Digital Domain common stock was accounted for pursuant to the requirements of FASB ASC Paragraph 810-10-45, Other Presentation Matters, resulting in a decrease in Non-controlling interests and offsetting increase in Additional paid-in-capital of $0.3 million during the year ended December 31, 2010. The effect on Non-controlling interests and Additional paid-in capital during the year ended December 31, 2011 was negligible.

        As further discussed in Notes 16 and 19, during 2010 the Company's Chairman and Chief Executive Officer was issued a warrant to purchase 839,105 shares of the Company's Common Stock in connection with a financing transaction. During February and March 2011, this individual exercised the warrant, was issued 839,105 shares of the Company's Common Stock (see Notes 16 and 19). As the common stock was issued to the Company's Chairman and Chief Executive Officer, this transaction is deemed to be a related party transaction (see Note 22).

        On December 1, 2010, the Company issued 100,000 shares of common stock to an Advisory Board Member and former director of Digital Domain in exchange for 83,333 shares of Digital Domain common stock held by this individual. The Company recorded the excess of the fair value of the Company's common stock issued to this individual over the fair value of the Digital Domain Common Stock acquired as compensation in the amount of $0.3 million. The fair value of the Digital Domain common stock acquired was recorded as a reduction in Non-controlling interests and Additional paid-in capital pursuant to the requirements of FASB ASC Paragraph 810-10-45. See Note 22.

        During February 2011, the Company executed stock purchase agreements in a private placement to sell 2,025,001 shares of its common stock for $9.63 per share to "qualified institutional buyers" in accordance with Rule 506 of Regulation D under the Securities Act. The Company issued 2,025,001 shares of Common Stock in consideration for gross proceeds of $19.5 million at $9.63 per share, or $17.0 million net of fees and expenses. The stock purchase agreement contained provisions for escalating damages for an untimely initial public offering ("IPO") registration statement filing with the U.S. Securities and Exchange Commission ("SEC") as well as for an untimely declaration of effective status by the SEC on the Company's IPO registration statement. The holders of the Company's common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders and may not cumulate their votes for the election of directors. The holders of common stock do not have preemptive rights to subscribe for additional shares of any class that may be issued by the Company, and no share of common stock is entitled in any manner to any preference over any other share of such stock.

        Each subscriber has agreed to a lock-up agreement providing that he, she or it will not sell, transfer, assign, pledge or enter into any hedging transactions, with respect to any securities owned by the subscriber for a period beginning 30 days prior to any underwritten public offering until a date which is up to 180 days from the closing date of any such offering.

        Subsequent to the execution of the above agreements, the Company and the purchasers amended the February 2011 agreements to modify the triggering events and provisions for the damages and added a new provision in the agreements to issue detachable common stock warrants. The specifics of the amendments were (1) purchasers to receive from the Company, at no cost to the purchasers, one incremental share of the Company's common stock for each one share of the Company's common stock purchased as damages in the event the Company does not achieve a listed, public trading status on or before December 31, 2011; and (2) purchasers were granted warrants to purchase up to an aggregate maximum of 1,012,502 shares of the Company's Common Stock with a contractual life ranging from 2 to 5 years starting on the date of the original stock purchase agreements of February 2011 with an exercise price of $9.63 per share. The warrants shall expire if not exercised within 180 days after the date the Company achieves a listed, public status. The allocated relative fair value of the warrants of $1.4 million is recorded in Additional paid-in-capital.

        In connection with the executed stock purchase agreements during February 2011, the Company issued stock options to purchase 202,500 shares of the Company's Common Stock as compensation for professional placement services rendered. The exercise price of the options was $8.03 to $9.63 per share. The option was valued at $0.4 million and was recorded as part of a direct cost incurred for the above stock purchase agreements. As such, the Company recorded the amount as a reduction of net proceeds against Additional paid-in-capital. See Note 17 for further discussion of warrants and options issued in connection with the February 2011 stock purchase agreements.

        During the year ended December 31, 2011, five shareholders of Digital Domain's common stock exchanged 4,600,001 shares, for 2,866,045 shares of the Company's common stock. These exchanges increased the Company's contributing interest in Digital Domain. See Notes 3, 19 and 22 for further discussion.

        On November 18, 2011 and concurrently with the Company's initial public offering, Palm Beach Capital Fund 1 and Palm Beach Capital Fund 2 converted all convertible debt and certain warrants into 7,390,077 shares of the Company's common stock. Additionally warrants to purchase Series A Preferred Stock were also exercised and converted into 7,713,006 shares of the Company's common stock. For further discussion see Notes 16 and 17.

        On November 18, 2011 the Company completed its initial public offering of 4,920,000 common shares at $8.50 per share. As disclosed above, substantially all of the Company's 34.6 million shares of common stock that were issued prior to the initial public offering are subject to 180-day lock-up agreements.

        Series A Preferred Stock—During 2010, as part of the incentive for the private equity funds to enter into a loan (see Note 22), the private equity funds were granted warrants (see Note 17). These warrants allow the private equity funds to purchase shares of Series A Preferred Stock equal to the Funded Percentage of the diluted common stock deemed outstanding on the date of any exercise of the warrant at a purchase price of $0.01 per share. The rights, preferences and privileges of the holders of Series A Preferred Stock are as follows:

  • •
    Rank—Series A Preferred Stock ranks senior (subject to future issuances of Common Stock or Preferred Stock that may be designated as on parity with ("Parity Securities") or senior to the Series A Preferred Stock) to all classes of common stock and to each other class of capital stock or series of preferred stock with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of the Company.

    •
    Dividends—No dividends shall be paid on any shares of common stock or any other class or series of capital stock of the Company that, by its terms, rank on parity with or junior to the Series A Preferred Stock unless a dividend is paid with respect to all outstanding shares of Series A Preferred Stock in an amount for each such share equal to the aggregate amount of such dividend for all shares of Common Stock into which such shares of Series A Preferred Stock could be converted.

    •
    Liquidation Preference—In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs (collectively "liquidation") of the Company, the holders of Series A Preferred Stock shall be entitled to receive, prior to any holders of common stock or other class or series of the Company's preferred stock ranking junior to the Series A Preferred Stock, and concurrently on a ratable basis (in proportion to the respective preferential amounts payable to all subject holders) with the holders of any outstanding Parity Securities, an amount equal to the greater of (i) the aggregate amount payable to all shares of Common Stock into which the shares of Series A Preferred Stock held by such holder could then be converted; or (ii) seventy-five percent (75%) of the aggregate principal amount funded by the holder of Series A Preferred Stock and their Affiliates pursuant to the Convertible Note, which will be increased to 100% of Convertible Notes if, by the second anniversary of issuance, a public offering of common stock has not been completed with a market capitalization of not less than $200.0 million; and if trailing twelve-month EBITDA is less than $19.0 million.

    •
    Termination of Liquidation Preference—Upon a qualified public offering, the liquidation preference shall be terminated. In the event of any liquidation, the holders of the Series A Preferred Stock shall be entitled to receive an amount per share of Series A Preferred Stock into which such shares of Series A Preferred Stock could be converted.

    •
    Conversion Rights—The Series A Preferred Stock shall be convertible into fully paid and non-assessable shares of common stock equal to the Funded Percentage of the common stock deemed outstanding on that date of conversion taking into account the shares of common stock issuable upon such conversion, subject only to dilution for permitted dilution events and less the aggregate number of shares of common stock previously issued from time to time as a result of any partial conversion of the Series A Preferred Stock.

    •
    Voting Rights—The holders of Series A Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of common stock into which such shares of preferred stock could be converted pursuant to the provisions of conversion rights at the record date for the determination of the stockholder entitled to vote on such matters or, if no such record date is established, the date such vote is taken or any written consent of stockholders is solicited.

        All warrants convertible into shares of Series A Preferred Stock were converted at the IPO date (see Note 17). At December 31, 2011, there are no shares of Series A Preferred Stock outstanding.

        Digital Domain and Non-Controlling Interests—Digital Domain had reserved shares of Common Stock as of December 31, 2011 and 2010, as follows:

 
   December 31,  
 
   2011   2010   2009  

Conversion of Series C Preferred Stock into common stock(1)

     728,465     686,773     22,096,363  

Exercise of common stock options

     653,987     935,962     1,212,314  

Restricted stock awards

     —     —     182,724  

Exercise of Series B Preferred Stock warrants(2)

     4,426,995     4,142,832     3,921,506  

Exercise of common stock warrants

     4,574,458     4,968,007     2,725,806  
               

 

     10,383,905     10,733,574     30,138,713  
               
(1)
Owned 100% by the Company.

(2)
The Company had the right to purchase Falcon's Series B Preferred Stock warrants through April 2011 for $5.0 million, subject to a 5 day preemption clause. On April 15, 2011, the Company purchased Falcon's Series B Preferred Stock warrants for $5.0 million in cash. See Note 17 for further discussion.

        Under the terms of Digital Domain's notes payable, Digital Domain is restricted from paying cash dividends on its Common Stock.

        Digital Domain Preferred Stock—As of December 31, 2011, 2010 and 2009, Digital Domain is authorized to issue up to 25,000,000 shares of preferred stock ("Preferred Stock"). The par value of the Preferred Stock is $0.0001 per share. As of December 31, 2011 and 2010, 1,637,178 shares were designated Series B Convertible Preferred Stock ("Series B Preferred Stock") and 3,000,001 shares were designated Series C Convertible Preferred Stock ("Series C Preferred Stock"). As of December 31, 2009, 1,637,178 shares were designated Series B Preferred Stock and 2,333,334 shares were designated Series C Preferred Stock.

        No shares of Series B Preferred Stock and 666,667 shares of Series C Preferred Stock were issued and outstanding as of December 31, 2011 and 2010. No shares of Series B Preferred Stock and 2,333,334 shares of Series C Preferred Stock were issued and outstanding as of December 31, 2009.

        Series A Preferred Stock.    As more fully described in Note 16, on July 21, 2006 Digital Domain sold to Falcon, a third-party investor, $12.5 million of notes payable ("Notes"), 1,000,000 shares of the Series A Preferred Stock (the "Senior Preferred Stock") for $1.0 million and Put Warrants to purchase 1,220,512 shares of Digital Domain's Common Stock. The gross cash proceeds from the transaction amounted to $13.5 million, of which $0.6 million was allocated to the Senior Preferred Stock. The initial carrying value of the Senior Preferred Stock after allocating the gross proceeds and financing expenses was $0.4 million. As further discussed in Note 23, in June 2009, in connection with sale of The Foundry, all of Digital Domain's Senior Preferred Stock was redeemed for $1.3 million. Digital Domain recognized a deemed dividend of $0.8 million, which represented the excess of the amount paid over the carrying value of the Senior Preferred Stock.

        Series B Preferred Stock.    As more fully described in Note 17, in January 2009, Digital Domain issued new warrants to Falcon in exchange for all outstanding warrants previously issued by Digital Domain to Falcon, which new warrants are exercisable into shares of Series B Preferred Stock. The rights, preferences, and privileges of the holders of Series B Preferred Stock are as follows:

  • •
    Rank—Series B Preferred Stock ranks junior to the Series C Preferred Stock and senior to all classes of Common Stock and to each other class of capital stock or series of Preferred Stock with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of Digital Domain.

    •
    Dividends—The holders of the Series B Preferred Stock are entitled to receive dividends only in the event that Digital Domain shall declare a dividend or make any other distribution with respect to shares of any class of Common Stock of Digital Domain, subject to certain conditions.

    •
    Liquidation Preference—In the event of any liquidation of Digital Domain, the holders of Series B Preferred Stock are entitled to be paid a liquidation preference in cash equal to the greater of (x) the sum of the liquidation amount for each share of Series B Preferred Stock outstanding plus an amount in cash equal to declared and unpaid dividends thereon to the date fixed for such liquidation; or (y) the amount they would be entitled to receive as if all of the shares of Series B Preferred Stock had been converted into Common Stock. As of December 31, 2011and 2010, the liquidation amount of a share of Series B Preferred Stock was $4.50. The liquidation amount is subject to adjustment for each stock combination, split or recapitalization.

    •
    Change of Control—Upon the occurrence of a "change of control" of Digital Domain, Digital Domain will make an offer to purchase the outstanding shares of Series B Preferred Stock at a purchase price equal to the greater of (x) 100% of the liquidation amount thereof, plus all accumulated and unpaid dividends (including prorated dividends due) and (y) the amount payable if such shares had been converted into shares of Digital Domain's Common Stock as of the date immediately prior to the date fixed for determining the rights of holders of Common Stock in connection with such change of control.

    •
    Conversion Rights—A holder of any share of Series B Preferred Stock may at any time and from time to time convert such share into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (a) the liquidation amount of the share by (b) the conversion price then in effect. Digital Domain may convert the outstanding Series B Preferred Stock in whole but not in part, with each share of Series B Preferred Stock converting into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (a) the liquidation amount of the share by (b) the conversion price then in effect, if Digital Domain consummates an initial public offering of its Common Stock for gross cash proceeds of at least $25.0 million at a price to the public of not less than 1.25 times the conversion price then in effect. The liquidation amount was $4.50 per share as of December 31, 2011 and 2010. The liquidation amount is subject to adjustment for each stock combination, split or recapitalization.

        As discussed in Note 17, in April 2011 the Company purchased certain warrants from Falcon.

        Series C Preferred Stock.    As more fully described in Note 2, effective October 15, 2009, the Company purchased an aggregate of 2,333,334 shares of Series C Preferred Stock from Digital Domain. The purchase price for the 2,333,334 shares of Series C Preferred Stock was $7.0 million. During 2010, Digital Domain authorized an increase in Authorized Series C Preferred Stock from 2,333,334 shares to 3,000,001 shares, and the Company purchased an additional 666,667 shares of Series C Preferred Stock from Digital Domain for $2.0 million in aggregate consideration. In addition, the Company elected to convert 2,333,334 shares of Series C Preferred Stock into approximately 22,000,000 shares of Common Stock of Digital Domain.

        The rights, preferences and privileges of the holders of Series C Preferred Stock are as follows:

  • •
    Rank—Series C Preferred Stock ranks senior (subject to future issuances of Common Stock or Preferred Stock that may be designated as on parity with or senior to the Series C Preferred Stock) to all classes of Common Stock and to each other class of capital stock or series of Preferred Stock with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of Digital Domain.

    •
    Dividends—The holders of Series C Preferred Stock are entitled to receive dividends, when, as and if declared by the Board of Directors of Digital Domain, at a rate of the higher of prime rate plus 2.0% or 6.5% of the liquidation amount of each share, and in the event that Digital Domain shall declare a dividend or make any other distribution with respect to shares of any class of Common Stock of Digital Domain, the holders shall be entitled to receive a dividend in an amount equal to the amount of such dividend received by a holder of the number of shares of Common Stock into which such shares of Convertible Preferred Stock are convertible on the date of the payment of such dividend to holders of Common Stock. Dividends are cumulative, whether or not earned or declared, accruing on a daily basis from issuance of the shares of Series C Preferred Stock.

    •
    Liquidation Preference—In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs (collectively, "liquidation") of Digital Domain, the holders of Series C Preferred Stock are entitled to be paid an amount ("liquidation preference") in cash equal to the greater of (x) the sum of the liquidation amount for each share of Series C Preferred Stock outstanding plus an amount in cash equal to accumulated and unpaid dividends thereon to the date fixed for such liquidation (including an amount equal to a prorated dividend for the period from the last dividend payment date to such date) or (y) the amount they would be entitled to receive as if all of the shares of Series C Preferred Stock had been converted into Common Stock as of the date immediately prior to the date fixed for determination of stockholders entitled to receive a distribution in such liquidation event, before any cash distribution shall be made or any other assets distributed in respect of junior securities, including, without limitation, Series A Preferred Stock, Series B Preferred Stock and Common Stock (subject to future issuances of Common Stock or Preferred Stock that may be designated as on parity with or senior to the Series C Preferred Stock). As of December 31, 2011 and 2010, the liquidation preference was $3.42 per share and $3.18 per share, respectively ($3.0 million and $2.1 million in the aggregate, respectively), which is based on the liquidation amount of $3.00 per share plus accrued but unpaid dividends as of each respective date. As of December 31, 2011 and 2010, the liquidation amount per share of Series C Preferred Stock was $3.00. The liquidation amount is subject to adjustment for each stock combination, split or recapitalization.

    •
    Change of Control—Upon the occurrence of a "change of control" of Digital Domain, Digital Domain will make an offer to purchase the outstanding shares of Series C Preferred Stock at a purchase price equal to the greater of (x) 100% of the liquidation amount thereof, plus all accumulated and unpaid dividends (including prorated dividends due) and (y) the amount payable if such shares had been converted into shares of Digital Domain's Common Stock as of the date immediately prior to the date fixed for determining the rights of holders of Common Stock in connection with such change of control. Digital Domain shall not make any payments with respect to the change of control provisions of the Series B Warrants (see Note 17) prior to satisfying such obligations with respect to the Series C Preferred Stock provisions. In the financial statements of one of the Company's consolidated subsidiaries, specifically Digital Domain, which are not included separately herein, the Series C Preferred Stock has been classified as mezzanine equity due to the change of control provision. Digital Domain's equity and mezzanine equity have been eliminated in the accompanying consolidated balance sheets of the Company.

    •
    Conversion Rights—A holder of any share of Series C Preferred Stock may at any time and from time to time convert such share into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (a) the liquidation amount of the share by (b) the conversion price then in effect. Digital Domain may convert the outstanding Series C Preferred Stock in whole but not in part, with each share of Series C Preferred Stock converting into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (a) the liquidation amount of the share by (b) the conversion price then in effect, if Digital Domain consummates an initial public offering of its Common Stock for gross cash proceeds of at least $25.0 million at a price to the public of not less than 1.25 times the conversion price then in effect. The liquidation amount was $3.00 per share as of December 31, 2011 and 2010. The liquidation amount is subject to adjustment for each stock combination, split or recapitalization. The conversion price for the additional 666,667 shares of Series C Preferred Stock issued in 2010 was $3.00 per share as of December 31, 2011 and 2010. The conversion price for the initial 2,333,334 shares of Series C Preferred Stock issued in 2009 was, as of December 31, 2009, determined to be such that the 2,333,334 shares of Series C Preferred Stock then outstanding would be convertible, in the aggregate, into such number of shares of Common Stock as would be equal to 51% of the fully diluted shares of Common Stock of Digital Domain as of the close of business on October 16, 2009. As of December 31, 2009, such conversion price for the 2,333,334 shares of Series C Preferred Stock was approximately $0.32 per share. The conversion price is also subject to adjustment in certain circumstances, including if Digital Domain issues Common Stock or securities convertible into Common Stock, at a price per share less than the conversion price in effect at the time of issuance of such Common Stock.

    •
    Voting Rights—The holders of Series C Preferred Stock have the right to vote on any matter submitted to a vote of the holders of Common Stock or Series C Preferred Stock. The number of votes to which holders of Series C Preferred Stock shall be entitled equals the number of shares of Common Stock into which such shares of Series C Preferred Stock is then convertible. For as long as at least 662/3% of the shares of Series C Preferred Stock remain outstanding, Digital Domain may not effect, without the consent and approval of a majority of the holders of the Series C Preferred Stock, the authorization or issuance of any class of any equity securities on parity with or senior to the Series C Preferred Stock, or effect certain other special matters (as defined).

        DDI Common Stock—As of December 31, 2010, DDI had authorized 100 shares of no par value common stock, all of which were outstanding ("DDI Common Stock"). On July 14, 2011, DDI amended its Articles of Incorporation to authorize 100,000,000 shares of DDI Common Stock.

        From July 29, 2011 through August 19, 2011, DDI sold 3,250,000 shares of DDI Common Stock in a private placement, at a purchase price of $8.00 per share, or $23.3 million net of fees and expenses, solely to accredited investors satisfying at least one of the financial tests applicable to "qualified institutional buyers" (as defined in Rule 144A promulgated under the Securities Act of 1933, as amended) in accordance with Rule 506 of Regulation D. As part of this private placement, the sale of shares of DDI Common Stock was combined with a concurrent offering to exchange shares of DDI Common Stock for shares of the Company's Common Stock at a ratio of 0.8307 shares of the Company's Common Stock for the exchange of one share of DDI Common Stock, for a total of 2,699,776 shares of the Company's common stock. In connection with the private placement, warrants to purchase 269,978 shares of the Company's common stock were issued to placement agents as compensation. The exercise prices of the warrants ranged from $8.03 to $9.63 per share. The warrants were valued at $2.3 million and were recorded as a component of the direct costs incurred for the above private placement. As such, the Company recorded the amount as a reduction of proceeds against Additional paid-in-capital. See Note 17 for further discussion of warrants issued in connection with the DDI private placement. See Notes 22 and 24 for further disclosure of related party transactions and subsequent events. The exchange of the Company's Common Stock for DDI Common Stock will be accounted for pursuant to the requirements of FASB ASC Paragraph 810-10-45, Other Presentation Matters.

        The holders of DDI common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders of DDI. The holders of DDI Common Stock do not have preemptive rights to subscribe for additional shares of any class that may be issued by DDI, and no share of DDI common stock is entitled in any manner to any preference over any other share of such stock.

        Subsequent to December 31, 2011, certain holders of DDI common stock exchanged 2,500,000 shares of DDI common stock in exchange for 2,076,751 share of the Company's common stock under the terms of DDI's common stock private placement.