DISCONTINUED OPERATIONS - THE FOUNDRY

12 Months Ended

Dec. 31, 2011

DISCONTINUED OPERATIONS - THE FOUNDRY

DISCONTINUED OPERATIONS - THE FOUNDRY

23. DISCONTINUED OPERATIONS—THE FOUNDRY

        During the year ended December 31, 2008, the Predecessor committed to a plan to sell its wholly-owned subsidiary, The Foundry, a visual effects software developer, which included the net assets relating to the Predecessor's compositing software product Nuke (collectively, the "Discontinued Operations"). The Foundry was acquired in March 2007 and began selling and marketing Nuke in April 2007. In accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in effect as of January 1, 2007(now incorporated into and superseded by FASB ASC Subtopic 205-20, Discontinued Operations), the assets and liabilities of the Discontinued Operations are classified as held for sale and its operations reported as discontinued operations. In the consolidated statements of cash flows, the cash flows of discontinued operations are not separately classified or aggregated, and are reported in the respective categories with those of continuing operations.

        On June 2, 2009, the Predecessor sold all the outstanding shares in The Foundry. The buyers consisted of The Foundry's management group, a third-party private equity firm, and Falcon, Digital Domain's Senior Secured Lender. The consideration totaled $12.0 million, consisting of $6.1 million of Senior Secured Notes retired and $5.9 million of cash. The cash was used to redeem all of Digital Domain's Senior Preferred Stock for $1.3 million, repay $4.4 million of the Senior Secured Notes, and to pay transactional fees incurred by the Predecessor of $0.2 million. In addition, the Predecessor was granted a perpetual license to use of the composting software product Nuke and other plug-in software products sold by The Foundry.

Additional Significant Accounting Policies Specific to Discontinued Operations:

        Software Revenue—Digital Domain's software products consist of its compositing software product Nuke and plug-in applications that work with Nuke and various third-party software products used by visual effects professionals to solve image processing problems.

        Digital Domain's software revenue is derived from perpetual software licenses and, for Nuke, related maintenance arrangements consisting of technical support and software updated on a when-and-if available basis. Digital Domain applies the provisions of FASB ASC Topic 985-605, Software Revenue Recognition.

        Revenue is recognized when all four of the following criteria are met:

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  Evidence of an Arrangement—Digital Domain either enters into license contracts or receives written purchase orders issued by the customer as evidence of an arrangement.

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  Delivery—Delivery is considered to occur for licensed software when Digital Domain has made the software available for electronic download and the customer has been provided access codes that allow for immediate possession of the software. Maintenance revenue is considered delivered ratably over the applicable maintenance period.

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  Fixed or Determinable Fee—Digital Domain considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within its normal established practices (net 30 days).

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  Collection is Deemed Probable—Collection is deemed probable if Digital Domain has a reasonable basis to expect that the customer will pay amounts under the arrangement as payments become due.

        All of Digital Domain's licenses for Nuke are bundled with maintenance. Digital Domain applies the residual method of FASB ASC Topic 985-605, Software Revenue Recognition, to these arrangements whereby the estimated fair value of maintenance is initially deferred with the residual value of the arrangement being recognized upon delivery as long as the other recognition criteria specified above have been met. The fair value of maintenance is determined based on vendor-specific objective evidence ("VSOE"), which is established based on analysis of the price paid for maintenance when it is sold separately from the related software licenses. Digital Domain recognizes all maintenance revenue ratably over the applicable maintenance period, which is typically one year. Digital Domain does not currently enter into explicit maintenance arrangements with the customers of its plug-in applications; however, technical support and software updates are provided on a limited basis. Maintenance related to plug-in applications is recognized upon delivery, subject to the recognition criteria specified above, because the maintenance related to plug-in applications is provided over periods less than a year, has historically been and is expected to be minimal and infrequent, and the estimated costs of providing the maintenance are insignificant.

        A significant portion of Digital Domain's software licenses are sold through resellers. Selling prices are fixed and determinable upon delivery, as most resellers are not "stocking dealers." Access codes delivered electronically to the resellers allow only the ultimate end-user customer of the dealer to access the software. Accounts billed are generally due within 30 days and Digital Domain does not have arrangements that include allowances or other credits to the reseller.

        Employee Benefit Plan—The Foundry maintains a defined-contribution pension plan. The Foundry makes matching contributions between 3% and 5% and expenses related to these contributions totaled $0.1 million for the period ended June 2, 2009.

        Profit/Loss from Discontinued Operations—The following table summarizes the results of Discontinued Operations for the period ended June 2, 2009 (in thousands):

	For the Period from January 1 through June 2, 2009
Revenue	$	3,584
Costs and expenses:
Cost of revenues		123
Selling, general and administrative expenses		4,167
Total costs and expenses		4,290
Operating loss		(706	)
Other income and (expense):
Interest and investment income		3
Interest expense:
Amortization of discount and issuance costs on notes payable		(1,334	)
Interest expense on notes payable		(389	)
Interest expense—other		—
Other income		(3	)
Loss from discontinued operations before income taxes		(2,429	)
Gain on sale of discontinued operations		9,241
Income tax benefit (expense)		—
Profit (loss) from discontinued operations—net of tax	$	6,812

        In accordance with FASB ASC Subparagraph 205-20-45-6, expense incurred on the notes payable that is required to be repaid as a result of the sale has been allocated to discontinued operations for the periods presented and is included in interest expense. During the period ended June 2, 2009, including amortization of discount and issuance costs allocated to the discontinued operations, were approximately $1.7 million.