Digital Domain Media Group files for Chapter 11 bankruptcy

Financially struggling Digital Domain Media Group Inc., owner of one of the entertainment industry’s leading visual effects companies, said Tuesday that it had filed a voluntary bankruptcy petition after a series of costly projects, including a controversial new animation studio in Florida.

The Florida company said it filed a Chapter 11 petition with the U.S. Bankruptcy Court in Delaware as part of an effort to “ensure the long-term future of its core business” and trigger a “sale of assets.”

The company also announced that it had reached a deal with private investment firm Searchlight Capital Partners to sell Digital Domain Productions Inc. — the Venice subsidiary that provides core visual effects for the film, television and advertising industries — for $15 million. The sale is subject to approval by the Bankruptcy Court.

Digital Domain’s senior debt holders also have agreed, pending court approval, to provide Digital Domain up to $20 million for operating expenses, including employee pay.

“We are excited to begin this new chapter in our history and look forward to partnering with Searchlight,” said Ed Ulbrich, the newly appointed chief executive of Digital Domain Productions. “The capital commitment of Searchlight will enable us to continue to bring our expertise to feature films, advertising, games and other media experiences, with a focus on what we do best: creating amazing digital productions.”

As of June 30, Digital Domain Media Group said it had assets of $205 million and liabilities of $214 million.

Daily operations of Digital Domain’s core business won’t be affected by the Chapter 11 filing, the company said.

“We believe in the visual effects business of Digital Domain, led by Ed Ulbrich and his team, and are strongly committed to maintaining the premier product they create for customers and moviegoers,” said Eric Zinterhofer, co-founder of Searchlight. “We have committed and will continue to commit our strong financial resources and expertise to ensure that this business always remains healthy and vibrant.”

Searchlight manages more than $860 million in assets and has offices in New York, London and Toronto.

Tuesday’s bankruptcy filing comes a week after Digital Domain defaulted on a $35-million loan to a group of investors led by Tenor Capital Management Co. of New York. Last week, the company announced it was closing its animation studio in Port St. Lucie, Fla., and laying off most of its 320 employees. Chief Executive John Textor, who pursued a number of ambitious and controversial projects to expand Digital Domain’s business, also abruptly resigned.

Founded in 1993 by “Titanic” and “Avatar” director James Cameron and other partners, Digital Domain is one of the industry’s best-known visual effects houses. It has created effects on more than 90 movies, including “Titanic,” “Tron: Legacy,” “Pirates of the Caribbean: At World’s End” and the “Transformers” films.

A much-touted partnership last year with Reliance MediaWorks, a division of Indian conglomerate Reliance ADA Group, to open studios in London and Mumbai and offer a variety of postproduction services, did pay dividends for Digital Domain, people familiar with the deal said.

Despite its success, Digital Domain has incurred steep losses in recent years. It posted a loss of $14.8 million in the first quarter, compared with a loss of $39.1 million a year earlier. The company has been squeezed by rising competition in the increasingly global effects business, fewer film projects and rising expenditures from new efforts, particularly the new animation studio in Port St. Lucie. The studio opened this year with the help of large financial incentives from the city and state.

Digital Domain also has partnered with Florida State University to open an animation and digital arts institute in West Palm Beach. The company recently announced intentions to expand into the Middle East with plans to open a 150,000-square-foot production studio in Abu Dhabi in 2015. It’s not clear how the bankruptcy filing will affect those projects.

Florida Gov. Rick Scott has ordered his inspector general to investigate the process used to award incentives that brought Digital Domain to the state, including $135 million to subsidize construction of the Port. St. Lucie studio, according to the Associated Press.

The company went public in November, selling 4.92 million shares at $8.50 each. Its shares have plummeted since then, falling to 55 cents as of Monday.

On Tuesday the New York Stock Exchange said it was taking steps to delist the company’s common stock and immediately suspended trading, citing uncertainty over the outcome of the bankruptcy process.

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