After weeks if not months of rumors, issues and falling stock prices, “Digital Domain Media Group, Inc. (NYSE: DDMG) today announced that as part of its previously announced strategic realignment, and to ensure the long-term future of its core business and facilitate a sale of assets, it has filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court.”
What does this mean?
The idea of Chapter 11 bankruptcy protection is to give a company time to negotiate with its creditors, since during that time the creditors cannot pursue any debts or claims. The company must file a plan of its reorganization with the bankruptcy court, and the creditors are participants in the bankruptcy proceedings, that is, they can investigate the operations of the company. The creditors must vote on the proposed plan, and the court will review it for feasibility. Then the company must carry out the plan.
If the company’s stock is publicly traded, like DDMG is on the NYSE, the stock will generally be delisted after a Chapter 11 filing has occurred. (If DDMG was listed on the NASDAQ, the letter ‘Q’ would be aded at the end of the stock symbol to indicate the company is in bankruptcy). Usually, delisted stock quickly becomes over-the-counter (OTC) or off-exchange stocks, and then after a Chapter 11 plan has been confirmed by the court the shares are terminated altogether.
To understand what happened today one has to understand the structure of what people loosely refer to as Digital Domain or DD. While DD started as a visual effects company and is known as the company behind such amazing work as The Curious Case of Benjamin Button, Titanic, Apollo 13 and True Lies, the company DD had morphed into multiple companies in recent years. The part most people think of as DD – is actually Digital Domain Productions Inc (DDPI). It is the core – started in 1993 and the primary provider of these great Oscar winning feature films. If you have visited the DD offices in Venice then this is what you visited. This bit was started by Scott Ross (who ran the company in its glory years) joined by James Cameron and Stan Winston etc, but none of these original players – are owning, running or managing DD now. There is one exception since day one: Ed Ulbrich, a respected actual visual effects expert has been with the company, and he is now central to the story moving forward, but we will return to him in a moment.
In addition to that core there is a DD commercials division. This is lead by Mothership Media Inc, and it focuses on creating advertising, branded content and it was the bit that created the virtual likeness of rapper Tupac Shakur at the Coachella Valley Music Festival.
Then there were some studios elsewhere. In no order, there is a Vancouver production company, Digital Domain Productions (Vancouver) Ltd, San Francisco and Florida.
And Florida is where the story…unravels…so to speak. Above all the companies mentioned is another Digital Domain, called Digital Domain Media Group. This is known as DDMG, and the name is confusing, but it is very much the company that owned all the other bits and wanted to expand into Florida. DDMG owned nine companies but DDMG only ever owned 86.9% of DDP. The remaining 13.1% was owned by various minority shareholders, so for example, as of earlier this year when we wrote about this, Michael Bay is an equity partner in the feature film visual effects company DDP Inc, but is not an equity partner in the broader Digital Domain Media Group.
Digital Domain, Digital Domain Productions and even D2 Software – the birth place of Nuke – are all incorporated in Delaware. But the newer companies are incorporated in Florida. So DDMG, the land holding company DDH Land Holdings I & II (owning property in West Palm Florida), DD International, Tradition Studios (which was producing an animated feature) and DD Tactical are all incorporated in Florida – as is DD Stereo group – which is the re-modelled In-Three (that also owns the patents that have been much in the news lately regarding stereo conversion).
In November of 2010, Digital Domain Media Group (parent company of Digital Domain Productions, Venice) bought the Thousand Oaks, Californian based, In-Three Inc. and announced that it was moving it to Port St. Lucie, Florida, where Digital Domain Media Group DDMG has its HQ. Finally, Mothership is incorporated in California and the Vancouver group is of course a Canadian company.
If you were to use a rule of thumb – the Florida parts and the parent company are now separate from the Delware/Calfornia/Canadian parts. In other words, the core effects ‘business’ that is the DD most people would think of as being DD, is back being the core DD of old – with offices in LA, San Fran and Vancouver. The independent film production, stereo conversion and extra bits are all dead or closing down it would seem and this leaves the last controversial piece of the puzzle – the education arm.
The education arm, the Digital Domain Institute, was a partnership with Florida State University and it appears that while it is still using the name Digital Domain in some capacity – for now – this education unit is now fully a part of FSU, and nothing to do with the effects business or DDPI in California/Vancouver.
Where to from here for DD (DDP, Inc)
Digital Domain, in the DDPI sense, is still open for business. It has great artists still working on great shots. This is important. If all the DDP staff had been let go, it would be almost impossible for the company to ‘restart’ or ‘reboot’.
Ender’s Game: a while ago DDPI took on the role of effectively investing in the film Ender’s Game, it was also the principal effects supplier. This gives DDP an actual ‘blue sky’ opportunity to make some real money if the film goes well.
Mothership (founded in 2010): the commercials division is busy and has done work such as the new Lady Gaga perfume launch, and after the success of “virtual Tupac” is working with CORE media to create and co-own the virtual likeness of Elvis Presley.
Moving? To add to the confusion, even before all this blew up, DDPI at Venice was going to have to move. DD did not own the Venice office, and the landlord leased the space to Google, so DD Venice will soon stop being located in the traditional home or site of the making of everything from Apollo13, Titanic, Star Trek, True Lies and Benjamin Button.
The core DD business is now likely to be sold, and there is one public bid for this section of DD, for US$15M. The sale of DDPI (basically the West Coast operations LA, SF, VC) will be to the winner of an auction to be held on September 21st, baring a court changing that date. There is an offer on table from an investment group – Searchlight Partners Capital for $15 million. There are some articles suggesting Prime Focus may also bid, (but fxguide could not independently confirm this). The Searchlight bid has been called by some, (including in a tweet by former DD’er Scott Ross) a ‘Stalking-Horse Bid’. This means that an initial bid is made on a bankrupt company’s assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the ‘stalking horse’ to make the first bid. This allows the distressed company to avoid stupidly low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company’s assets. In essence, the stalking horse sets the bar so that other bidders can’t low-ball the purchase price. It is still a valid bid, but also it sets the floor.
What is really important is to resolve this sale very quickly. Major studio work is currently being done at DDPI and a long sale would run the risk of the studios pulling their work and taking it elsewhere. What needs to happen is for a very fast sale to occur and a stable new DD to emerge, focused just on doing what the rest of the world thinks DD is known for: great visual effects by talented artists. This falls in large part to Ed Ulbrich, and he is a proper visual effects industry asset. Ed Ulbrich spoke in 2009 representing a “team of filmmakers, artists and technologists who’ve been working on a significant breakthrough in visual storytelling — a startling blurring of the line between digital creation and actor”. Ulbrich was the executive VP of production at DD, for whom he’s executive-produced Academy Award-winning visual effects for Titanic, What Dreams May Come, Fight Club, Zodiac, Adaptation and other features, as well as music videos and more than 500 commercials. In 2007, he was named in the Creativity 50 – top innovators in advertising and design. And in 2009 he gave a great TED talk on “How Benjamin Button got his face”.
Ulbrich could very well be the right guy to fight the way back to DD as a leading visual effects company, without the tax credits, state grants, education deals, Florida focus of the last few years. He is bright and respected and – assuming he and the team can act quickly,- the new refocused, cut-back DD stands a chance. But will not be easy. Apart from the the obvious issues of handling the sale, DD will have to work hard to convince new productions and new films that it is stable, without discounting through the floor to win work. Furthermore, DD will have a harder time attracting new key staff.
Finally, this industry is already harsh and running on thin margins, so good companies without any bad press have struggled and failed recently. On a good day DD would still face stiff competition, razor thin margins, relocation fees and a complexity of government and state grants and subsidies – mainly aimed at moving work away from DD’s core Californian base.
The first “Hearing to Consider the First Day Motions” will be held on September 12, 2012 at 10:30 a.m. ET, in the United States Bankruptcy Court, District of Delaware.
There are likely to be law suits, in cases such as this it is almost to be expected. One interesting one is for recovering money for those who were let go. Earlier today, according to published reports, Outten & Golden filed suit against “DDMG, Inc., et al., seeking to recover 60 days wages and benefits for former employees under the Worker Adjustment and Retraining Notification (“WARN”) Act.
They contend that “DDMG ordered mass layoffs on or about September 7, 2012 at its Port St. Lucie, Florida facility without providing its employees with advance written notice.” The case is pending in the United States Bankruptcy Court for the District of Delaware. (Generally, the WARN Act in the USA requires companies to provide their employees with 60 days written notice in advance of a mass layoff or plant closing. In the absence of such notice, employers may be liable to each affected employee for 60 days wages and benefits).
Will it win? No one knows but it may well not the last Law suit in this matter, not even close.
Who to feel sorry for
There are many people to feel sorry for, and in no order here are a few:
• Employees who lost their jobs – especially those who relocated to Florida
• Students who started training at the for profit DD iInstitute thinking it might lead to a job in Florida. DDI started training formally at the start of this year, so these students have paid real money for an education that is now still valid but far less connected to any chance of employment
• Employees of In-Three who moved when the company was bought
• People including many employees who owned or bought stock in their company, they have seen their investments all but wiped out. At last look we saw the stock was trading at just 9c, from a 52 week high of $9.20. So $20,000 invested in DDMG would now be worth $195, if it was still trading and you could get that. In 10 months some $400 million of shareholder value has been wiped out, and that is before multiple Florida grants and subsidies have been applied
• Tax payers in Florida who have seen a huge amount of public money evaporate in an age of very tight state revenue. (Although some of the land given to DDMG will revert back to the city if DD cant meet its obligations by December 31st, 2012)
• Equipment, vendors and general suppliers left being owed money
• Every day artists who have faced and are facing uncertain times, questions about benefits etc and an unclear future
• Ed Ulbrich – he has his work cut out, but on behalf of DD staff who remain and those of us who enjoy their work, we wish him the best
Note, we did not put John Textor on this list.
John C. Textor has resigned, effective immediately, from his positions as Chief Executive Officer and Chairman of the Board of Directors of DDMG, as a member of the Board of Directors of DDMG, and from all positions as an officer and director with all subsidiaries of DDMG.
See our original 1996 story when Wyndcrest first bought DD.
See also our interview with John Textor earlier this year.
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