Think you know what happened to Digital Domain? Think the problem is that the studios play hard ball and that the Digital Domain group expanded too fast into Florida? Think the obvious solution to shifting the visual effects industry is for it to ‘own’ content and be producers, not just guns for hire? Think directors and producers not appreciating the value of visual effects drove DD into the ground? Think that you know the whole story? Well John Textor would say… think again.

The main reason for the collapse of Digital Domain Media Group (DDMG) – or at least the trigger on the hand grenade that blew up last year – was Wall Street, according to its former CEO Textor. fxguide has spent days pouring through emails, reports, private eye investigations, and spent hours interviewing Textor on the record. His view of what happened may be coming from someone wanting to re-write his place in history, but as he pointed out: public policy is being formulated right now based on what people think happened. At the very least, he feels the industry will not improve if it does not examine what he thinks DDMG did wrong and who boxed them into a “death spiral” ( Palm Beach Post).

Today, John Textor continues to live in Florida, “and I still have my private holding company known as Wyndcrest, and I continue to be active in, and looking to be active in, the technology space and entertainment technologies and I have every intention of continuing with some of the goals that we set out to achieve here in Florida in the visual effects industry and in areas that I believe are well connected to the visual effects Industry.” He has no involvement with DDMG, he resigned from his position “the moment I heard of the plans to close the facility. I could have not been more bothered by that…I found it unnecessary and shameful and something that did not have to happen,” he said. Actually, today Wyndcrest is hiring again “in a small way,” he adds, “and looking to move forward.” When Textor resigned, he resigned his position and from the board. He says personally he feels very badly about what happened.

John Textor blames Wall Street, but it should be remembered that he also lead the team that did all the deals that lead to the crash from New York stock exchange listing to Chapter 11 in just 10 short months. It happened directly on his watch and under his supervision, Textor claims he was boxed in by Wall Street, but he also actively saught to take vfx to Wall Street not once but twice, first in a failed IPO 2008 and then in the actual IPO in 2011that would cost investor millions of dollars.

Some background: DD California (the VFX bit)

The break-up and sale of Digital Domain is now well documented. fxguide wrote a lengthy piece explaining the post crash break up here. In short, there is Digital Domain California and Digital Domain Media Group (DDMG) which can be thought of as the Florida arm. DDMG owned most but not all of DD in California. DDMG was the arm expanding into training, feature animated films and it is this company that can be thought of most as Textor’s, although of course it was a publicly traded company of which he was a key shareholder.

Ed Ulbrich is the head of the Californian operation, although, again, it has been sold, but to keep the narrative simple think of Ulbrich as being California and Textor as Florida. And the Florida operation DDMG as the mothership and publicly listed company. Think of LA as the visual effects company we all know and love which makes visual effects. {Now the story is not this simple since DD in California had offices elsewhere – great effects work was done in Florida for example. But as we have documented this all in other articles, we are going to simplify so as to not lose sight of the key new information}.

Ed Ulbrich is CEO, Digital Domain California and in this fxguide article we reported on what he thought happened. In that story we reported that Ulbrich was not a “director of DDMG or the executive team that made decisions for the Florida operations.” We approached DD and Ulbrich for this new story, they referred us back to our story, and declined to comment further, so let’s repeat a passage from that earlier article:

 “We were a visual effects company, we were a very good visual effects company, in 2006 the company was sold and we had some new management, some new money, an entrepreneurial spirit and we did things like opened a school, in Florida, we launched businesses around military simulation, medical simulation, an animation studio… a very big animation studio… I won’t shock anybody by saying this but – the margins in the visual effects business aren’t so good.” Ulbrich continued: “We can go back and kind of dissect each one of these initiatives, any one of them, quite honestly, perhaps had legs and made sense. But when you put them all together, it was just too much.” 

From what we have learned from Textor, this is not incorrect, but one could say that it does paint an overly simple picture of what happened, and feeds the view that had Florida not happened, everything would have been fine. Not so, says Textor, who claims not only was Florida not a drain on California, it was the other way, insofar as he contends that all of Florida was covered by grants and government programs.

At this point you might think the rest of the story is California pointing the finger at Florida and Florida pointing at California. But you’d be wrong.

Firstly, Ulbrich correctly states that the margins are not good in VFX. Secondly, Textor is offended by the notion that Florida brought down California in its over-expansion, since he maintains neither California nor Florida would have gone into Chapter 11 had it not been for a serious financial attack of near outrageous proportions. While people blame Textor, he feels the real villains are getting a free pass, and the notion of how to move forward the VFX industry is completely being sidetracked. Of course to an outsider, Textor welcomed those “villians” or investors and bankers “into the tent”. It was Textor who took DD to Wall Street.

To understand this version you have to deal with two big things. One is the notion of not being a ‘gun for hire’ – for moving the VFX industry away from just working for super low margins while the studios make VFX films that dominate the box office. The second key aspect is to understand the timeline that allowed a company to float for tens of millions of dollars only to go into Chapter 11 in just ten months, especially when you factor in they also ‘got through’ an additional $45 million placed prior to the float, a very key and controversial $35 million of additional funding and still another $5 million after that.

In fact, as you will see below, in approximately 12 months DDMG receives $45 million in private placement, $38+ million in the float, $35 million in a debt placement, $5 million in an emergency loan and yet DDMG goes out of business with $40,000 left in the bank. To add salt to the wound, Forbes magazine published that Textor’s 2011 salary was  $16 million. The DDMG company floated at $8.50 a share and DDMGQ ended up at 2c per share in under a year. Furthermore, according to a new lawsuit against Textor and others that fxguide has access to the filing of, “DDMG was incurring expenses at a rate of approximately $800,000 per day in 2012, almost half of which was attributable to businesses generating negligible revenue.”

It all seems incredible or unbelievable like a bad film script. More on this incredible mismanagement, and how much of it is actually true in Part 2 below. First, the issue of owning ‘some of the action’ or owning  ‘IP’ – being a producer not just a contractor and the story of Ender’s Game.

Part 1: Owning a piece of the action: Ender’s Game

In an earlier article we wrote: “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.” (Here, DDPI refers to Digital Domain Productions Inc).

This is true but not the whole story. A while ago, DD, many would argue rightly, decided that being just a supplier was never going to be a great path forward. Margins are low and there is no up side, if the film makes a killing you see no advantage. DD therefore decided to try and become more of a producer and not just a vendor. It tried this with two projects, according to Textor: Paradise Lost and Ender’s Game. Actually even Scott Ross the original founder of DD, had wanted to move beyond just being a work for hire company. The company actively wanted to explore ‘owning’ some of the back end of the films it helped make so successful.

The principle sounds simple enough, not just get a fee – but get a percentage of the profits. The problem is that this simplistic view skips the step of what it costs you to get a % of the profits. Think about it, in a bidding war to win work you can’t just ask for your normal fee AND a % of the profits. The path on Alex Proyas’ Paradise Lost is muddy even for Textor. He confessed to not knowing if they were a producer or not. The reason it is so muddy is that the project, while thought to be green lit, was apparently not, and as such they spent a lot of money, millions of dollars in pre-production and design and yet the film was never made. This is just therefore a loss. If you are a studio this is factored in – it is the price of business, you do development deals, you invest in scripts and some are not ever made. But for a less experienced ‘producer’ such as DD they did not have deep pockets nor did they have an ongoing business model with some huge success to offset these types of non-starters – it was just a financial loss to the company.

Next was Ender’s Game, the Gavin Hood-directed film due for release later this year. Here, Textor says, DD did not just get gifted or given a % of the profits, they gave up their profit margin to swap for it – in effect the company traded margin now for a percentage of the back-end.

But if margins are razor thin, then no margins are even thinner. The reason you have margins is to make some money to run the business. With literally no profit margins until the film is released AND makes money AND pays something back, DD was forcing itself to run on much less than even a normal ‘harsh’ studio deal.

“It’s easy to say it is a great model for a visual effects company to go into but two films that absolutely looked green lit – one of them was green lit and the other never really got there,” says Textor. How much exposure did DD have to Paradise Lost? Textor says, “we booked something like $6 million of work on the film, and when it got cancelled we had to eat that expense, was not paid for it and that was hugely expensive.”

But DD was not enjoying healthy profits everywhere else to be able to afford both a Paradise Lost and an Ender’s Game.

To be clear, the film makers involved in these films are not stated to have done anything wrong. The actors, the artists, the technicians none of these people are blamed.

Textor today points out that he never thought that abandoning the VFX ‘services industry’ was a good idea. While it may have been necessary to change, he says he would prefer to see a change that had the industry paid a “premium for its artistry” and would have preferred “the industry to play out such that artists were rewarded more for their creativity.” He believes the alternative is a race downwards that will almost certainly lead to work moving off shore. If DDMG had not failed he had hoped to move to a place where “one in three or five films were the kind of films where there was an investment in the film – like Ender’s Game, but it (the company) was not capitalized to do that on every film.” In fact, the company did have a successful back end participation on one of the earlier film, explained Textor.

A look at the reported gross margins on other films that went through DD holds only one slim good piece of news. For example, Variety reported that someone called John (confirmed by fxguide to be John Textor) had claimed that DD had been forced into 14% cost plus on Iron Man 3:

In the meantime, tell the people that don’t really matter to be quiet. We don’t need their excuses and we don’t need their faux pity. They are the mid-level studio folks that seem powerful as they award work, but ultimately have nothing to do with our future as an industry. When Victoria puts out the word to other studios that they should step up and support DD (or the next guy), ask her to do the same. She shoved a 14% gross margin down the throat of DD on IM-3 that is not enough to even cover the light bill…and she has the gumption to challenge other studios to step-up and help. Victoria, just send DD a bonus to cover the coffee machine in the break room, then you can get on your soap box…until then, you are no different than every other studio person that starts the bidding conversation with a dishonest story of how the third sequel of a massive property just doesn’t have the profit margin available to allow the artists to eat. (“…but, don’t worry, I’ll take care of you next time”). Really, a 14% gross margin? That’s exactly the kind of help that leaves an Oscar winning VFX house begging the bankruptcy court for a life-line. 

- Variety quoting VFX Soldier comment by ‘John’, March 2013

Textor’s point, he explained to us, today is less about pointing the finger any one person at Marvel. He acknowledges that DD “bid aggressively to get it” on Iron Man 3 at 14% GM for the majority of the work, hoping that they would get more work later, and balance things out. His point, he claims now, is that the studio knows it is going to make money on Iron Man or a film like it – the third in a series. “It is a classic example of a visual effects company financing a Hollywood film…that is an opportunity to let a visual effects company recover from some other project where maybe there really was no money. You just can’t from a studio perspective, and from a visual effects company point of view you hear the same thing every time, ‘I have this film – gee I don’t know how I am going to get it done, I only have this much money for VFX’. That conversation is happening by and large – 100% of the time.”

In the same story, David Cohen writes:

“Textor’s name is mud in the vfx world after DDMG’s bankruptcy and the recriminations that followed, but he offers a rare perspective: that of someone who’s actually had to negotiate deals with the major studios and live with the consequences. And he points the finger squarely at the majors for the problems besetting the vfx biz.”

Except Textor claims the key problem was not the studios. He believes the industry is broken and that it needs to change; he cannot believe that the industry is so polite in its negotiations and discussion. Textor seemed as tough he was particularly surprised at the lack of anger expressed to Ang Lee over not acknowledging the VFX contribution at the Oscars. But issues with the studios, Textor feels, are not the single thing that broke DDMG. “There are problems…and we have discussed those, but even with those the bankruptcy did not need to happen,” he stated.

At the time, Variety speculated it was John Textor who had posted this to VFX Soldier. Textor was unaware of why Variety did not try and check with him if he had published this, as he was happy to point out he had posted it. Not only did he confirm that posting was his, but he outlined to us many of the other deals done with studios around that time. In the industry, 32-35% gross margin is seen as acceptable. According to Textor (and we have no way to check this as DD declined to talk to us), the margins in the VFX industry around the time Textor was involved were as follows:

  • One of their best gross margins was 44% on Flags of Our Fathers, which Textor described as a dream project, with a great director “who really knew what he wanted.”
  • DD’s Transformers had a gross margin of over 40% while on the whole vfx features around that time had a gross margin on average was in the low 30′s, he explained
  • Jack the Giant Killer : directed by Bryan Singer, had next to no margin. Textor said internally “the nickname for that project was Jack the Company Killer.” He said DD bid the film aggressively, and then it was delayed and costly to make.
  • In the area of 3D conversion one film Meet the Robinsons scored a record 62% gross margin.
  • The gross margins in the Commercials division at DD were a little better than the film division (+35%) but it was a much smaller division overall as was 3D conversion division.

While we are sorting out quotes attributed to John Textor…

Textor was also quoted in the recent lawsuit against him and other publications (this quote is said to be from a December 20, 2011 conference call with investors): “Movie studios generally defer payment of up to 80% of a feature film contract until contract completion.” This is, however, according to Textor, a mis-quote. The studios pay in advance for work, with the final payment on completion. But the final payment is only a vastly smaller percentage perhaps 5-10%. There can be cashflow issues with films, but Textor did not point the finger at the studios regarding payment schedules when talking to fxguide and he wanted this corrected.

The Ender’s Game story tells an interesting tale, but clearly with such tight margins, the film having no ‘immediate’ margins placed DD cash poor. Furthermore, the California DD investment was not enough to finish or make Ender’s Game. According to Textor, DDMG also directly invested in the film (owning “some 37% or so interest in the film” by the end). Textor is not blaming DD California for investing in Ender’s Game, in fact he welcomed the chance to also invest via DDMG. As told by Textor, this means DDMG was the part of the group with cash, and it was investing in Californian projects and it was not the Florida operation draining funds from California.

Ender’s Game is yet to come out, so one can see how long and complex a process it is to take an equity position in a film. While it sounds like a good idea, to fund or partially fund a film takes deep pockets and it is therefore normally done by corporations. That is, companies with access to lines of credit and often stock market equity. If times are good, and a company is going well, once it is listed on say the New York Stock Exchange it is easy to raise additional funds. Getting listed is really complex but once you are listed you can issue more stock, borrow fairly easily, do private placements and it is all watched over by the SEC. Lucky then that DDMG listed on the stock exchange? Perhaps not. To understand the second part of this story it is best to run through a timeline. But it is worth noting a couple of terms and concepts first.

Background terms

Share price

No company immediately makes money if their stock price rises or falls. If a stock rises, it makes shareholders happy, and it may make it easier to raise more funds, but the company does not per se have any more money in the bank, and vice versa if it suddenly drops.

Shorting

You can make money buying and selling stocks, but you can also make money by offering to buy or sell a stock in the future – in effect betting on the price. Imagine the stock price is $6. You agree to sell DDMG stock in a month at $5 say. If the price falls to $1. You can, on the day that the one month finishes, buy the stock immediately for $1 and hand it over at the pre-agreed $5 and make $4 a share. Of course if the price shoots to $9, you would need to buy at $9 and sell at the agreed $5 and you would lose $4 a stock. Why do this? You don’t need to tie up money during the month. If you just bought stock you would need to have it tied up for a month. This way – you just need some money on the one day in question a month from now and that’s it…plus if you bet the right way you don’t even need that much money. This is called shorting the stock. You agree to sell the stock at a price some date in the future, and you hope by then to buy it for much less.

Stagging

One final concept. We have personally been involved (prior to fxguide) with listing companies and it is very normal that people will Stag the stock. ie. they will buy it in the float – hoping that the price will immediately rise on the day it is listed (most stock set their price a bit low so it immediately goes up and everyone is happy and profitable). These people however only buy the stock to sell it immediately, they Stag the stock so no matter what they will dump it in the opening period and hopefully make a profit. But they have no intention of being a long term investor.

Selling debt

It is very normal for most companies to have some debt. Like a family with a credit card and a house repayment, it is not bad business to have some debt. You don’t want it to be to much, but a serviceable debt is expected. This debt can be sold. After the US housing crisis, most people now know your debt can be sold by those who you lent from and there is little you can do about it.

Gross margin and EBIT

People discuss gross margin somewhat loosely and this is really the difference between revenue and cost of making it – before including certain other costs. Generally, it is calculated as the selling price of an item, less the cost of producing it. It does not allow for other general costs a company has, unrelated to say the production of that film…this could be things like rent, general R&D, electricity, general hiring and company overheads like that. It is not a precise accounting number but it is a great management tool, since it is the effective profit on the individual job.

A related key concept is “Earnings before Interest and Taxes” or EBIT. For most people, EBIT is a good ‘sensible’ look at profitability and an excellent point in the financials as taxes, losses brought forward, restructuring costs, loss on sale of property, plant and equipment, etc can all make bottom line numbers less indicative of a companies underlying performance. This is a formal accounting term but it is now company wide not project specific. EBIT would reflect the health of the gross margins of the various films you might be working on this financial year plus ‘running the company’ costs but not most importantly depreciation (the cost of replacing or using capital gear like renderfarms or workstations).

Part 2: The Amazing DDMG Timeline

This is the timeline reconstructed from court documents, SEC filings, published articles from magazines such as Forbes and direct information and interviews with John Textor and others. We have tried to fact check as best we are able given we were not given access to DD California.

There is one point at the outset. Textor and the fellow board members made decisions, did deals with financiers and oversaw a huge financial collapse. Textor does express regret, but this article does not pivot on who is to blame so much as asking just why Digital Domain Media Group failed, and can we, as an industry, learn from the lesson it gives. You may make your own judgements but to hear Textor tell it, the VFX industry is a babe in the woods compared to Wall Street, even the Hollywood studios are wrongly accused of leading to DD’s collapse. From our perspective if a VFX house decides to swim in the shark infested waters – you better watch out or be a darn good swimmer.

Textor claims this “is a company that really died four times”, referring to “2006, 2008, 2009, 2012.”

2006

The company had been started by Scott Ross, in 1993. James Cameron was partially involved, but left in 1998 from being involved with any of the day to day decisions or board decisions. Ross is very proud of the company, work the team did, he commented to fxguide that “some years we were profitable and some years we weren’t, .. which is typical for any well run visual effects company”.. but in the period (after Titanic) when James Cameron was no longer involved in making films at DD, “we had more profitable years than not”.

When Scott Ross left Digital Domain it had $18 million in the bank, but in 2006 the company needed more finance due to equity/finance arrangements with Cox (Atlanta). A private investor group led by John Textor acquired DDPI.  Textor previously served as the Chairman and CEO of Baby Universe, Inc., an e-retailer of baby products which failed, and as Chairman of Sims Snowboards.

“Scott had a lender problem, actually he had a preferred stock investor who was entitled to recover all their money, it was due much like the way debt would be due,” explains Textor. This is in the Spring of 2006.  At that time, Cox (Atlanta) was that company and was the biggest creditor. IBM was also involved, and Textor negotiated with all the parties. Cox is a company that Textor speaks extremely highly of – for the way it sold out of Digital Domain and how ethically it behaved especially in relationship to the other owners/investors such as IBM, James Cameron and Stan Winston. “It was one of the most moral and ethical things I have ever seen a corporation do” to avoid unseemly and lengthy litigation. Cox was actually entitled to all of the payout but shared it with the other involved parties”.

The team that acquired DD at this time did not just all pay for the investment with money from their ‘own pockets’. They borrowed money, one of the companies that came on board at this time was Falcon Investments. It is normal to buy a company and use some debt to do it…it is a form of a leveraged purchase..and after all DD already owed money via finance/equity deals to companies like Cox.

This deal also brought in Michael Bay as part of that team. Bay had worked with Textor before and by all counts Bay was a key player in the turnaround at DD. He helped the image and name of DD as a high end effects company, a position it had slipped from perhaps since the earlier creative success of Apollo 13 and Titanic. In researching for this story, Bay, who will exit from the stage well before the financial crash, was an extremely positive force in the studio, and almost every source we spoke to backed this up.

 

2008: DD fails to do a share float. At this time fxguide values the company (Dec 2007).

DD was discussing floating for about $100M. In our article, we pointed out that:

In 2006, DD had sales of approximately $68 million and an operating loss of around $1 million EBIT. In the nine month period until Sept 30th of 2007, DD sales were $56.5 Million, and running at a $7.57 million loss before EBIT. The numbers after EBIT are affected greatly by changes with Warrant liability, taking the loss to closer to $15 million.

In the four years prior to 2005, revenues have been approximately similar, ranging from about $33M in 2002 to $60M – $61M in 2003 and 2004 respectively. 2005 was about $49.5 Million in gross revenue.

That translated to a bottom line (EBIT) of approximately:

2002 – $4.3M (loss)
2003  +$3.9M (profit)
2004  + $7.1M (profit)
2005  – $4.2M (loss)

After Textor took control of DD the company did become more healthy. When they bought it, the company was billing around $49 million. They grew from the mid $40 million to the mid $60 million “fairly quickly, off the strength of a few projects and I was very proud of the total team effort…suddenly Digital Domain was in the discussion on the big tent pole films and the big visual effects films. The last couple of films delivered at the time we were buying the company was Zoom, and My Super Ex Girlfriend, Flags of our Fathers was delivered after we bought the company but underway when we made the acquisition. It was a very high quality film but not a big Transformers or Pirates type of effects film. By and large DD had settled into – in its last few years – a second tier position as a visual effects company.”

Most of DD business was feature films (70%). The Commercials division were doing $15 million to $20 million, Textor recalls.

The float does not of course happen and the company continues. Only a couple of companies did go public in this time. It was a failed public offering, it was never priced or finished. The float is important in that it did cost DD not just in preparing for something that did not happen, but the management team invested a lot of their attention in this failed endeavor and so it paid in focus as much as dollars.

In 2008 one of the debt investors called “Falcon required a minimum cash levels,” says Textor. This meant they were having “technical default issues.” The minimum levels were very hard for a VFX company to honor, says Textor, and so this issue dragged on into 2009. Note Textor calls this a ‘technical default’ – from what fxguide understands it was a very real default, it was ‘technically’ a default, because it very much was a ‘real default’ on the terms of their loan. It was not some minor paper work error of no importance.

In 2008 the company wanted to move into games and game engines, and they developed a film project Futuropolis that lacked funds after the non-IPO and this was sold off. Also, without the money from the IPO, DD was hurting especially given that margins were starting to be squeezed in 2008.

2009

Wyndcrest had also invested in The Foundry which, of course, had taken over the development and sales of NUKE. The Foundry had what Textor calls a ‘fairly controversial buyout’ – “the guys are good guys, I am sure they still are, the software was very special to us, but the company had a second issue,” referring to the ongoing issue with Falcon. By mid 2009, Textor says that Falcon ‘forced the company to sell the software division’ – it was sold.

The Foundry was one bright spot financially for DD at this time. In 2008-2009 the USA was at the start of the Global Economic Crisis. Getting money from anywhere was difficult. Selling off a unit like the Foundry enabled the company to get much needed funds, and it made sense for the Foundry as they needed independence to sell Nuke, – it was hard to sell buy software from one of your competitors, hence Nuke was likely to grow more if sold by the Foundry separated from DD, and that is exactly what happened.

“That was too bad as we had affection for the Foundry and Nuke as a product,” he says, going on to add they sold the company for “what proved to be a very low price about $12 million dollars.”  It was an asset DD had to sell to cover problems they had with Falcon but it only represented about half what it owed Falcon. Until Falcon was paid off, Textor said they controlled most meaningful decisions at the company. It is unclear but it seems that Falcon wanted the DD books squared up and at this time it was Falcon not Wyndcrest who was directly helping with additional investments to cover payroll etc,. Something needed to give and after months and months of issues, it became clear that either Falcon would need to be all in, or exit. Falcon Investments exited, and DDMG invested and owned the controlling stake in DD.

In September 2009 that DDMG would first own a share of DD California (51%). The first payment of under $10 million thus values DD California at about $20 million. Either this was a great deal for DDMG or – DD Californian was not worth much. This period is very complex, as shares and investments moved and John Textor now runs DD via DDMG, which he previously had not. Law suits were filed over this whole restructuring.  Textor feels if DDMG had not invested in Digital Domain California then it would have been owned by Falcon Investments back in 2009. And if that had happened, the story may have been very different.

2010: DDMG puts more into DD California.

DDMG continues during 2010 and 2011 to invest in DD California, says Textor. In total, by the time DDMG fails, Textor says the inter-company ‘note’ or loans or payments between DDMG to DD was “approximately $25 million.” This increased DDMG’s ownership of DD California, but it never owns the company 100%.

Why did DD California need this cash?

Textor points to the fact that DD California had the issue with Paradise Lost  (around $4 million in cash) and delayed profits on Ender’s Game. It was also at this time DDMG invested $17 million separately in Ender’s Game.

DD California was doing great work this time but it had no free cash.

The company reported operating losses of $2.8 million in 2010 and $5.7 million in the first half of 2011. “After including non-cash charges for depreciation and amortization and stock warrants to employees, the losses ballooned to $45.2 million in 2010 and $112 million in the first half of 2011. While its reporting losses, the company’s revenue rose sharply, from $44 million in the first half of 2010 to $61 million in the first half of 2011,” reported the Palm Beach Post in 2011.

During 2010, DDMG raised capital by selling common stock in a private placement for gross capital injection of $1.1 million (According to documents released to fxguide by Textor).

 

November 2011: DDMG floats on the stock exchange.

The float is not a smooth one. Unfortunately the world at that time was dealing with Euro zone / Greece issues. To sell shares the management team once takes to the road to pitch the company to Wall Street investors. According to Textor, the share roadshow looked good, so good they did not even do the last day of investor pitches.

From Textor’s point of view and he says many others, it was then very surprising that the share price was set at the level it was. When a company is floated, the underwriter along with the management team sets the initial float price. There is normally consultation, but the price that the stock is first offered at is part art and part science. Set it too high and the underwriter is left with stock unsold and as they are underwriting the sale – they pay. Set it too low and it can leave potential money ‘on the table’ and worse sometimes spook the market who wonders why did they go so low, is there something someone is not telling the market? It is this last case that Textor believed happened. The market already nervous over Europe got spooked when DDGM listed for $8.50.

This is even more surprising when Textor explains that 82% of people who were approached about buying stock in that initial placement wanted to buy. “On the morning of pricing,” says Textor, “and we never heard a valuation challenged so we thought we were going really well, the folks at our investment bank called and said they are rioting on Wall Street” – this was part of the Occupy Wall Street movement – “and we should price as a discount to the $10.”

This was much less than the company had been expecting. Textor says one investor who called him said he was prepared to pay over $11, so he wanted to know what was going on? From Textor’s point of view “we spooked our own book, we made a pricing mistake, it turned a good IPO into problem,” but they thought that they should take the $40 million and the stock price will recover.

The company that floated was not Digital Domain California, it was a company (DDMG) formed in Jan 2009. When it was formed it did not own any DD California – but it would go on to own a lot of Digital Domain California. The DDMG or Florida company would list on the stock exchange with the expectation of making new films and expanding in new markets while owning most of DD California, and of course cashing in on the DD name. But DD California had other owners, its own board of directors and in a sense its own path forward. This is perhaps why when everything failed, DD California was able to re-group and be the success it is today, and DDMG did not.

Interestingly, according to Textor, prior to the float the company placed privately a section of ownership in a private placement worth $45~$46 million. This was placed with private investors in Asia and the Middle East. In February 2011 the Company sold more than 2 million shares at $9.63 per share for gross proceeds of $19.5 million. Later that year in August 2011 (a few months before the November IPO), DDI conducted a private placement at $8 per share for gross proceeds of $26 million. The investors in each of these private placements were “accredited investors” and “qualified institutional buyers”. Thus, prior to the IPO, investors committed over $46 million to the Company.

DDMG was also successful in obtaining several rounds of debt financing prior to the IPO. In 2009, DDMG obtained a $16 million loan from Lydian Bank this would become hugely significant just a couple of years later when In June 2011, DDMG refinanced the Lydian Bank and PBC loans by borrowing $27.4 million from Comvest Capital, a private investment firm.  (NB:  In 2010, the Company also borrowed $7 million from Palm Beach Capital).

When Digital Domain floated on the NY stock market it sold 4.9 million shares to investors at $8.50 each. Shares closed at $7.15.

It raised $39 million from investors, (perhaps $38 million) after fees. In May, Digital Domain had asked regulators for permission to raise up to $115 million in an IPO. One month before the float the company had said it aimed to raise just $55 million by selling 5.5 million shares at $10 to $12 each. The private placement was at $9.63 a share. Thus, if they were aiming for $110 million they ended up with around $84 million ($39M + $45M).

 

December 20, 2011: DDMG announces a $10 million share buy back. Yes – a buy back one month later!

We asked Textor about this. The timing seems extremely odd. Why float a company, get less than you expected and then pass a motion to buy back the stock? If the company did not make enough from the float why decrease its cash in the bank by buying back stock?

Textor explained the thinking as such. The float had happened at a bad time, as discussed above. People who had stagged the stock were causing the price to fall. What the board needed to do was buy back stock from people who were either unhappy or stagging and this would stablize the share price. This would reduce the company’s cash reserves but this was only part of the answer. The company expected to re-issue more stock in 2012, once the price was healthy.

Buying back the stock should sure up the share price and then they could in a few months return to the market and either issue a stock option program or do a private placement. Don’t forget issuing new stock is easier once you are listed. Plus Textor claims they never needed to spend the full $10 million – only a few million was spent buying back stock, and he says “it worked”. The stock price rose to above $9 a share in the spring and so long as they could return to the ‘ATM’ machine of the stock exchange and get more funds – which should be easier with a healthy stock price – everything was good in his eyes and one assumes in the eyes of the board given their statement a couple of days later.

December 22, 2011: DDMG says everything is good.

DDMG filed its Q3 2011 10-Q, which states apparently the future is bright:

“Management’s Discussion and Analysis of Financial Condition and Results of Operations concerning the Company’s liquidity and capital resources: We believe, based on our current operating plan, that our existing cash and cash equivalents and available borrowings under our credit facility will be sufficient to meet our anticipated cash needs for at least the next 12 months.”

 

April 2011: Textor is interviewed by fxguide regarding the Florida Studio using student labor.

What we did not know then and what no one in the press seemed to have understood is that in the middle of the global economic crisis the Lydian bank (Lydian Trust Company) in Florida would fail. According to a Private Investigator Lemieux & Associates and a report seemingly done for City of West Palm Beach, after September 10, 2010:

John Textor was a founding director of 1st Virtual, Inc, and appears in the company’s first annual report, filed 04/24/2000. His name does not appear in any documents after this time, although Textor’s companies (Wyndcrest/1st Virtual Holdings II, Ltd.) continued to file annual reports, most recently in 2008. Today, 1st Virtual, Inc. is known as Lydian Trust Company.

We asked Textor about Lydian. He explained he had been involved when the community bank started but he had resigned from it years before its closure. But he did continue to use it professionally. For example, we noted that some of John Textor’s various businesses (ie Baby Universe), had secured a $2 million loan from Lydian.

Perhaps far greater than any earlier connect to the failed bank is that when the bank failed it owned some debt (and share options) from DDMG. It sold this debt. The new owners of the debt wanted the debt repaid immediately or they declared they would say DDMG was in default.

“The reason we failed is that we had a bank in the middle of 2011, and they went bankrupt, a bank called Lydian,” explains Textor. “In the middle of 2011 they started seeking a buyer of their notes (loans) they were owed a certain amount of money by us, and they also owned stock options which had become hamile sex izle quite valuable and they viewed selling their loan and ownership position in Digital Domain as a way to raise emergency cash. They sold their position to a group lead by Florida power and light, an investment fund, and a group called Comvest, opportunistic investors, they bought this as a discount, and not by our choice, our bank went bankrupt, they sold their position and now we have a hedge fund as a lender.”

Immediately after the DDMG IPO, the bank started demanding their payment even though this was not due until much later in September 2012.

Now, alone, this might have been a business dispute that could be settled or mediated, but don’t forget DDMG wanted to go back to the ‘ATM’ of the stock market and get more funds. Such a messy dispute would look bad. DDMG had noises from various companies wanting to once again do business, especially as the stock price had recovered.

In a deal that would prove to be extremely critical, the board decided to raise some new money via new debt deal – $35 million, pay out the old Lydian debt and start a fresh. On paper swapping one load of debt for another seemed reasonable to Textor. While they would increase their overall debt a little, in other words they would raise a bit more cash than they needed, this seemed to only be good and it would buy them even more time to get a favorable stock exchange share deal.

It was just a few weeks before we spoke to Textor at DD’s Venice office in March 2012, that DDMG began discussions with its banker, Cowen & Co., about refinancing the Company’s existing $27 million debt with Comvest Capital.  Within days of Cowen & Co. making a proposal to potential participants, the Company received several term sheets for a proposed debt deal.  Cowen & Co. advised the Company to pursue a debt deal because it would be faster.  The proposal was to purchase $35 million in notes that could, at the lenders’ option, be converted into DDMG common stock.

In hindsight, Textor feels this is the point the whole company is doomed. From May 15th onwards, not that they knew it then, the company was doomed. With hindsight, this was the greatest error Textor believes the management made.

As mentioned above – this deal was offered “within just two days” of first asking about the need for finance. It was the $35 million ‘Tenor Capital’ deal – it would a few months to close but March was when the Tenor Capital first appears. The company would be broke a little over 8 weeks after finally signing this deal, Game Over.

“We had this emergency situation to get rid of this toxic lender,” says Textor. “We went to an investment bank, we asked for help, within two days they had a $35 million term sheet in front of us – it felt too good to be true.”

It is often said that if a deal is too good to be true…it is.

 

May 15, 2012: The $35 million placement is described by Textor to fxguide as the financial device that the  that will finish the company.

According the the Florida Tech Journal from around that time:

Digital Domain Media Group has completed a $35 million senior convertible note offering to a group of institutional investors led by Tenor Capital and issued an $8 million subordinated convertible note to Comvest Capital to refinance existing debt held by Comvest Capital. These transactions retired existing senior notes that would otherwise have been due in 2012.
“We are obviously pleased to complete this transaction, which represents an attractive refinancing and reduction of our near-term debt obligations, and importantly also comes with a group of high-quality institutional investors,” said John Textor, chairman and CEO of Digital Domain Media Group. “It also provides us with capital to pursue additional feature film co-production opportunities as we continue move our business to a model driven by ownership of the content that we create.”

Of the gross proceeds received by the company in the senior convertible note offering, $19.4 million will be used to retire the balance of other loans held by Comvest Capital that were also due later this year and $2.5 million will be used to retire existing warrants owned by Comvest Capital.

The remaining $13 million will be available for general corporate purposes. The new senior convertible notes will amortize monthly over their five-year term, with payments made in the form of common stock of the company. A summary of the some of the material terms of the transaction documents can be found in the Current Report on Form 8-K filed by the company with the Securities and Exchange Commission.

One might think that the company would still have the cash left from the float/IPO to pay out the $19 million. Textor says they did not, buying capital equipment – thinking that they needed capacity for projects like Paradise Lost – doing all the things they were doing, they needed to borrow for the $19 million that had been Lydian and a bit more to cover the 2.5 million in stock options.

Why is this one $35 million debt so painful? So important?

First, to pay off the ‘toxic loan’ the company still could have raised more money at this point, via the share market, but it was thought that this would take too long with the SEC – so they went for this complex debt deal.

To understand why they even needed to – we must circle back on Part 1. As DDMG was the only part of the group generating actual free cash (from grants from Florida and from investors), it needed to continue to do so. Florida was spending money quickly but it was spending money on things covered by grants and government incentives. DD California was doing good work but it was on tight margins made even tighter by Ender’s Game delaying its profit margin and the loss on Paradise Lost. The only part of the company producing free cash in quantity was the company DDMG raising money.

Of course this is unsustainable, no company can raise money forever. But according to Textor, it did not need to. It only needed to raise funds to keep funding things until the various investments in film’s like Ender’s Game and longer term films from the animated division paid off. It is true that they bought some other companies such as the stereo conversion group, but as seen above that had great gross margins on some films. So long as the group could get closer to the original stock offering targets of a $100 million, the easier it would be to ride out expenses until the various businesses transformed into cash positive, higher margin operations. At this time Wells Fargo expressed an interest in taking more shares of providing that extra money according to Textor. Except that would never happen.

It appears according to documents given to fxguide by Textor and certainly from Textor’s recount of the story that the Tenor Capital group that lent the $35 million to DDMG never needed the company to succeed and never needed it to raise any more money.

The stock price is trading above the IPO price, things are looking good, but unfortunately the day after the deal was done “the group started shorting the stock aggressive,” says Textor. The stock starts dropping very quickly.

According to documents Textor provided, the finance ‘Wall Street” team Tenor Capital (based it seemed at JP Morgan, according to Textor) swapped their $35 million for the chance to play with and then break up DDMG. The plan outlined by Textor – the so called “Death Spiral Plan” – and the documents he provided claim that this was done some dozen times before to dozen other companies. Including to “the guys that made the electric car batteries for the Teslar” car.

This is how it works according to Textor:

  • The contract with Tenor Capital requires should they convert their debt to shares, these shares would be freely tradeable. The problem is that no other shares could be issued until this was done. This is not uncommon but their particular version had teeth. Their conversion option needed to be executed before any other shares could be placed or raised (the road block device on any new money coming in from say Wells Fargo) and secondly their conditions were so complex and unfair according to Textor that the SEC would not immediately approve them. In short the door would be blocked on getting more money until they could be sorted out via the stock exchange.
  • The next big move was to short the stock. According to Textor they did this very well (“$28 million”). He says they made a huge amount of money from shorting DDMG’s stock recovering a majority of the $35 million they would have outlaid. We do not have details as to how they ’caused the stock to fall’.
  • As the group was actively trading in the stock they refused to meet and discuss the inner workings of DDMG and the possible paths forward with bridging finance. As to do so would open them to insider trading allegations they stated to Textor, he recalls.
  • They demanded their money be repaid, if a minimum cash positions or other key targets were not met. DDMG missed this and Tenor Capital invoked a penalty – “Make Whole” provision clause, explained to us, to involve most of the rest of the interest – until the end of the deal – to be paid in the short term. The interest was brought forward.
  • Finally if the documents provided by Textor are 100% real, Tenor Capital valued the break up value of DDMG at a low, medium and high level. Any one of these valuations Textor points out sent the message – it was worth more to break up the company than keep it.

When we asserted to Textor that it is really harsh that DDMG fails in just 10 months from IPO, Textor replied that it was worse than that. The Tenor Capital took just 8 weeks to go from good to bad, he explains.

It is not illegal to lend money and require equity if the lender defaults. It is known as ‘Loan to Own’. There is nothing illegal with shorting a stock or deciding a company is worth more in pieces than as a whole. These are things that Wall Street Bankers and financiers do. One may or may not like them but they are known Wall Street business strategies. Anyone in finance should know this, it is widely known.

August 16, 2012 The clock is running out.

The burn rate meant that DDMG will need more funds, but it now has no way to raise them.

Unable to solve the $35 million problem, DDMG has no way of raising money, nor loaning it, plus its share price has now tanked. DDMG was forced to seek a $5 million loan from Palm Beach Capital to fund payroll, an obligation for which the company could not negotiate an extension and which had to be wired within hours to avoid a default in meeting payroll. Palm Beach Capital were a major investor in DDMG owning up to 40% of the company at one point.

September 11, 2012. Game Over.

DDMG filed for bankruptcy. At the time, DDMG had only $40,000 in its bank account and, again, could not meet its payroll.

It might be surprising to know that there was a lot of interest in helping Digital Domain at the end.

Galloping Horse for example apparently made many approaches near the end, but the $35 million investors just did not want to deal according to Textor. They “made offer after offer to save the company…they just didn’t want to listen.” fxguide has an email pertaining to be written just before DD literally stopped –  written by Textor pleading to not close the company as he outlines numerous funding options that are close at hand. He explains that at this point the $35 million investors just did not want to listen – they valued the company worth more broken up, and the email was ignored, he says.

Finally, there is the issue of the huge pay packet Forbes reported was Textor’s compensation package. The $16 million figure comes from an accounting of what would have been Textor’s if all the options and awards had been paid. Most of that figure – the vast majority of it – was the almost $15 million assigned to options. Options that Textor told fxguide he did not excise nor made a cent from. He was paid over a million in salary and bonuses in 2011, but he was paid two years of bonuses in one year (having deferred a bonus from an earlier year when cash was tight). But he pointed out that while working at DD he was not each year always the highest paid member of the team. Says Textor: “I did not get a dollar out of the stock options.”

There are many conclusions one can draw from this version of events.

First, no matter what, DDMG’s board made the bed it had to lie in. If DDMG was at fault in this account of events, it is by screwing up the handling of the sold Lydian debt. It was not forced to take the $35 million deal, at that stage it was not being forced into the arms of that group of bankers. It is true that it was being made to act by the sold Lydian Debt, but from Textor’s account, had that loan been by people who wanted the company to succeed – then they would have succeeded.

In this version of the events, the effects industry players led by people who were meant to be non-industry financial types got cleaned up, like a freshman arriving at the poker table and joining a friendly card game run by professionals who clean them out in one night. Only in this version the one night was just 8 weeks.

If Textor is right then the $35 million investment group ‘saw them coming’ and played out a “Death Spiral trick” they had used many times before.

Sources we spoke to off the record suggested that surely, if the management team has a job at this level – it is to handle doing just these sorts of deals properly and with full due diligence. Textor was not responsible for Lydian bank failing but he and the team were responsible for dealing with first the ‘toxic debt’ Lydian sold to and then the $35 million refinancing. He admits this openly.

But more importantly at this multi-million dollar level, skills in other areas count for little. This is a kill or be killed world of investment bankers who it appears to Textor are far worse than the studios. The Hollywood studios are in business to make films after all. They have no profit model that works only if the VFX actually fails mid film, but if DDMG’s story is true and it is still being sued and fought over right now, then the “Wall Street” stood to make the most amount of money by seeing DDMG’s stock price fall and the company broken up.

Textor admits “it was his job to make sure everyone in the tent was there for the right reason.” It appears some the investors were not. He sees this as one of his greatest problems in this whole financial side of what happened.

Textor himself thinks the lesson from this whole DDMG situation is that the industry needs to have a more frank discussion with its clients and customers. He doesn’t think he is accurately represented in the popular press, he feels he worked hard to make jobs, American jobs, while he thinks others were downsizing and shipping offshore. Further, he feels painting the problem as one of ‘Florida took down the company’ is wrong and the wrong decisions will be made if people think that is what happens.

He certainly is not supportive of an industry body that would be lead by the former DD founder Scott Ross whom Textor expressed to fxguide should not be an Industry leader or an industry body leader – although he had previously agreed to donate to Ross’s attempt to set up just such a body. Textor phoned Ross the night before he was to speak at last years 2012 SIGGRAPH Business Symposium and asked Ross about the Trade Association idea that Ross had been quoted discussing in a magazine article. This is on the weekend of the 4th of August. When asked by Textor how he might help, Ross suggested two things, committing $100,000 to help start funding and secondly to say so publicly the next day at the SIGGRAPH meeting.  “Consider it done, was what he said”, recalls Ross. The next day Textor did publicly commit the funds, but before even a press release could be issued, the deal seem to die and no funds were ever paid to the project by Digital Domain or DDMG.

What is needed in Textor’s opinion, is honest discussion but that is not happening right now. He thinks that leaders of our industry, say 5 VFX leaders of VFX studios should meet with 5 leading directors and 5 leading studio executives and these 15 people should sit down and openly discuss one question: is it of value to have a VFX industry in North America? He feels these 15 people could then from bluntly talking through the issues reset the direction of the industry. He thinks they need to agree to more fairly pay VFX houses, and this, not an industry association or a union, is the only future for American VFX. Furthermore, he says,  this is was exactly the notion he has pushed at the private heads of industry meeting at that same SIGGRAPH Business Symposium. “Of course this wont happen” he points out, (and some would point out an actual meeting like this would most likely be illegal under US anti-trust laws).

 

The greatest tragedy is the hard working people who lost their jobs, followed by the normal investors, some of whom were also staff who invested their hard earned money in a company they believed in. This story does not focus on their hardship, but their loss is the greatest fault of this whole long story.

The future

People point to Pixar as a company that moved from a service model to an ownership model, but let’s not forget Pixar had Steve Jobs driving that business push. A man who had already been – some would say – unfairly stripped of his company. One would have to believe after the millions of dollars Jobs had put into Pixar he really had his guard up, and there is no doubting Jobs could go toe to toe with anyone including Wall Street.

Textor and his team spent months educating Wall Street types about our industry in the lead up to this horrendous final 10 months.  If other VFX companies want to move to new business models and fund expansion on Wall Street, we may need to learn a lot more about them – than they about us.

Right now many companies are seeking this option. We have no reason to believe that they are not extremely well informed and well advised. Some are already in stable positions with Weta attached to Peter Jackson, ILM now a part of Disney, SPI a part of Sony, but for those braving the transition – especially in London – good luck and watch your backs.


DD California declined to be interviewed on the record for this story after some debate. We did not get comment from Tenor Capital, nor Comvest Capital.

 

Post Article Note:

Since this was published we have had a lot of emails, from John Textor, and many others. One point that John Textor asked that we note is that fxguide not John Textor used the turn of phase about Textor taking DD to ‘Wall Street’. Textor feels this paints an incorrect light, since finance deals or ‘Wall Street’ type deals are part of everyday life at this level and DD had deals in place before he arrived. He also expressed that, “I would not intend to say that ‘Wall Street’ brought down the company. This expression makes it too easy for the artist crowd to see everything about Wall Street as bad.  There are great things about Wall Street…it depends on who your partners are…but our industry is fueled by Wall Street at every level…it’s just a reality…Disney/ILM, Sony, MPC/Technicolor, others.”

He also asked it be noted that re the 2009 deal: “The Board preferred my deal which was much more fair to existing shareholders.” While we have not absolute proof, this seems to be backed up by other sources we have interviewed. 


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8 Responses to John Textor and what really happened inside Digital Domain Media Group?

  1. Fascinating coverage Mike!
    Probably the best business case study I’ve read about our industry.

    The irony of project names like “Ender’s Game” and “Paradise Lost” only emphasis the signs that were overlooked by the management.
    It is always easy to analyze in retrospect, but my general belief is that industries do not make companies fail. Managment decisions do that.

    Posted by Vico Sharabani on
  2. Great article, however, relying on Textor to tell the story has created some interesting spins to the story.

    For example, I see no mention on the $10 million Textor purchased in the IPO. This money was loaned to him by Palm Beach Capital. Basically, this meant that 25% of the IPO was funded by their largest shareholder. In itself this might not been a problem, but Textor and PBC neglected to disclose this fact until the company imploded.

    Also, Textor seems to be blaming Comvest for wanting to be taken out. The SEC documents implied the Comvest replaced Lydian, with the intent on being taken out from the proceeds from the IPO (assuming the valuation was over ~$200+million and they raised $75 million), which never happened.

    Or what about the fact that the company was burning through $2.0 million of cash in the first quarter.

    Are you telling me that Textor is now claiming he was so naive that Tenor Capital pulled a fast one on him? They had a cash balance requirement that they needed $5.0 million of cash in the bank on June 30, 2012, which they could not meet and needed an extension (which they got and were not in default). Does he not know enough about his cash to ensure he has enough for the first reporting period?

    The palm beach post (www.pbpost.com) did an expose on this on Sunday (Part 1), and will follow up next week (Part 2).

    Bottom line company lost money and did not have a sustainable business model.

    This was called by many the day they went public.

    Posted by Steven Friedman on
  3. Mr. Textor once said that while Scott Ross may know a great deal about the VFX industry, that he, John Textor, knew a great deal about high finance.

    Given the outcome… it sure looks like John Textor didn’t know much about either.

    Posted by Scott Ross on
  4. I wonder about the Tenor Capital deal… they lent DDMG $35M… I wonder how much they received from BK? I believe that DD went for $30.2M, so that leaves $4.8M plus attorneys fees that they needed to recoup just to break even…. did they recoup that and more? Maybe Tenor Capital looked at DDMG’s balance sheet and felt BK was the only option to recoup any of their money?

    So, it was Wall Street that tanked DDMG?

    It wasn’t bad management decisions? It wasn’t the Paradise Lost/Enders Game deals? It wasn’t opening up an animation studio in FLA and funding outrageous buildings/furniture and fixtures? It wasn’t Mr. Textors and upper managements considerable salaries and perks? It wasn’t getting into businesses that had no revenue streams yet had considerable costs and overhead? It wasn’t bad business decisions on Mr Textor’s part to enter into financial deals that were onerous? It wasn’t buying out Mr. Bay and Mr. Plumer’s contracts? It wasn’t the decision by the courts that Mr. Call was awarded the $2M settlement for unlawful discharge by Mr. Textor? No….

    It was beauty that killed the beast!

    Posted by Scott Ross on
  5. fantasy – this might be the makings of another B movie. As a former wall street investment banking partner ( Drexel Burnham Lambert) and Senior Vice President/CIO of a $2bn NYSE company this article reminds me of one Lamar Copeland Dupont who may even be related to John,

    Wall street did not have a thing to do with DD’s collapse. This is a common refrain from bad and/or shifty management Underwritten by Roth Capital and Morgan Joseph is not much of a coup, Freddy Joseph and I were partners at Drexel and if he had been alive I rather doubt they would have done the deal.

    Deal pricing is a bit of an art and the syndicate dept is key but no one is in the game to screw their investment clients, the firm or the company they expect to support in the aftermarket. John is just telling stories here. ..and then the 30 day buy back giving up a scarce resource – cash – to support the price is ridiculous- either your ” banker” or market makers are working on this, not the issuer.

    Then he thinks after all those cockamamie deals that the SEC is going to clear the next filing?…. good luck with that. A death spiral what else can John make up at this point – I hope you and your readers do not believe this dribble – run it by some Goldman bankers and see what they think of this story for fun… and then you will get a better perspective of who may be to blame….

    BTW, did you also interview John’s secretary? ….. and you may want to note that the “float” is one thing and flotation or issuance or underwriting of securities is quite another … Yes, I know John but do not have any dealings with him.

    Posted by anthony parkinson on
  6. Anthony thanks for your post. We welcome hearing from all sides. In answer to your question (which may well have been rhetorical… ), we interviewed John Textor directly. We also did many other interviews – several of which could not be on the record, especially from the Banking finance side of this story due to law suits. Frankly, I welcome hearing from someone from the Banking side of the discussion. If you would like to discuss this area further I welcome an email.
    Mike Seymour (mikes at fxguide dotcom)

    Posted by Mike Seymour on
  7. Mr. Textor is a great story teller, and every now and again can back it up with facts. And in my opinion, in his interview with fxguide, he desperately tries to convince the interviewer and the readers that he had very little to do with the rape and pillage of the taxpayers of the State of FLA, the public investors, the private investors or the hundreds of digital artists whose lives were ravaged by his negligence and breach of fiduciary responsibilities.

    Mr. Textor in this interview states the following:

    “Scott had a lender problem, actually he had a preferred stock investor who was entitled to recover all their money, it was due much like the way debt would be due,” explains Textor. This is in the Spring of 2006. At that time, Cox (Atlanta) was that company and was the biggest creditor. IBM was also involved, and Textor negotiated with all the parties. Cox is a company that Textor speaks extremely highly of – for the way it sold out of Digital Domain and how ethically it behaved especially in relationship to the other owners/investors such as IBM, James Cameron and Stan Winston. “It was one of the most moral and ethical things I have ever seen a corporation do” to avoid unseemly and lengthy litigation. Cox was actually entitled to all of the payout but shared it with the other involved parties.”

    The facts:

    A few years before the sale to Wyndcrest, the DD Board wanted me to start investigating the possibility of a sale of DD to outside parties. IBM was an owner for more than a decade and had seen some ROI (return on investment) after Cox had bought in, back in ’96. Cox, on the other hand, was an owner since ’96 and had not seen any ROI whatsoever. While the Company was at times profitable, the management felt, and the board agreed to not pay any dividends and to pour any profit back into the Company.

    By 2003 or so, the board was interested in a sale of the Company to any party that would pay a price that would be valuable enough to its shareholders. Unfortunately there was a slight problem. It seemed that the Company could not be sold unless all the preferred shareholders ( Cox, IBM and JSS ( JimStanScott)) unanimously agreed upon a sale. Given the animosity between the Company and Jim Cameron, the terrible relationship between Jim and myself and the close relationship between Jim and Stan, the Company could not be sold if Jim decided to block the sale.

    At the time, there were three classes of Preferred Stock ( Preferred A – JSS; Preferred B- IBM; and Preferred C- Cox). Each class of stock was slightly different than the other classes, especially as it related to a sale. Cox’s Preferred C was such that if there was a sale, they would receive all of the monies until they were paid in full, then and only after Series C was paid out in full would the other Preferred Shareholders receive any portion of the sale price.

    The amount that the sale needed to be to pay Cox in full was considerably more than what DD was worth at the time. So, after appeals from DD management, Cox decided to forego their sale preference, allow all shareholders to be para passu with Cox IF Jim and Stan would agree to waive their right to block a sale. Jim and Stan did. This was well before anyone ever heard of Wyndcrest.

    Additionally, in 2005, Cameron and Winston were pressing DD hard to find a buyer. Cameron and Winston had walked out of a board meeting back in 1998, quitting as directors but continuing to hold on to their DD stock. Cameron and Winston had not had any involvement with DD from that day in 1998, in fact Cameron and Winston had not had much involvement with DD at all, ever.

    In 2005, Cameron had threatened litigation, saying that I was the cause of the Company not being sold as I had a personal interest in not selling. He went so far as to ask his lawyer, Bert Fields, to send threatening letters to me and the board. Stan Winston too had called me on several occasions and screamed at me that he wanted the Company sold, and that he didn’t care how I did it and to whom I sold it to. It was very uncharacteristic of Stan to act that way, yelling at me that he didn’t give a damn about the employees, just “Sell the damn Company, NOW”!
    It was later that I found out why Stan was so desperate. It was only a short time later that he passed away.

    With all of that going on, DD had yet another group of execs sitting on its board. The Cox folks that made the DD deal ten years prior were no longer at Cox. Additionally, Cox had the right, after ten years of their investment to call their shares. That meant that they had the right to ask for their money back. But because we had negotiated a new dollar amount for their sale preference, it also reflected a new dollar amount for their call.

    The new Cox board members were not aware of this ability to call their shares, but as 2006 approached, I knew full well, that I needed to make them aware of their rights. Once the new Cox Execs were made aware that they could call their shares and cash out, they approached DD management and asked if the Company had the where with all to pay them out.

    At the time, DD had about $18 million in the bank. I full well understood the ups and downs of the VFX business, having been at the helm of ILM and DD for about 2 decades. I knew that a VFX facility needed cash reserves to weather the storm. I also felt at the time, that DD would be able to pay out Cox and remain in business. I felt that we could carry on though it would put the Company in a more tenuous position if Cox was paid. IBM felt that if DD paid Cox, the Company would be in jeopardy. IBM and Cox went at it. Armonk vs Atlanta. Cox wanted out ( and considering the voluntary haircut that they took, felt righteous about their call). IBM wanted Cox in, as they felt that DD could be in trouble if we paid out the Cox demand. Additionally, Cameron’s lawyers were stirring the pot as well.

    It was then that we were approached by John Textor and his investment group Wyndcrest Holdings. They had inquired through their lawyers, who happen to be friends with our general consul Molly Hansen, if we were interested in selling the Company. Were we interested? Considering the turmoil with all of my partners and board members, yes we were willing, in fact we were ecstatic. The question was: Was the buyer qualified and will the price be right? We had been approached by other buyers in the last several months and the answer to those questions had been “NO”. The other suitors were neither qualified buyers nor were they willing to offer what we thought the Company was worth.

    We started to do some research on Textor. It turned out that the only delinquent receivable DD had ever had was from a John Textor! Textor was, several years prior, the CEO of a company called Jester and he wanted to have a CG logo done. Now, normally, we wouldn’t have even considered this work but a high level IBM exec had made the request and had introduced us to Mr Textor. We did the work, and he never paid us.

    Textor came on like a well oiled sales man. He said all of the right things. He was willing to pay our asking price, in fact, he said he didn’t need to raise any money to buy DD, he had the cash on hand, and he was personally wealthy enough to do the deal himself, after all he was an heir to the DuPont fortune.

    Textor set up meetings at DD, interviewed all of the Execs, did his due diligence except that he never met with me. Textor was discussing the purchase of DD with DD’s board, but not its Chairman, Founder and CEO.

    The deal that was supposed to happen quickly, lingered. It turned out that Textor didn’t actually have the money and couldn’t meet the schedule that he himself had laid out. In fact, Textor and Wyndcrest turned to a private equity firm, Falcon, to come up with the necessary cash to make the deal happen. As far as I know, John Textor did not use any of his cash to buy DD… he used Falcon and the DD cash left in treasury to buy the Company.

    It also turned out that Textor was having side bar conversations with Cameron and Winston. At one point, Textor had tried to get controlling interest of DD by offering to buy Jim and Stan’s shares (22% of the Company) and then buy Cox’s shares ( 33%) giving Textor controlling interest of DD (55%) and not buying my shares nor IBM’s. Effectively that would give Textor the ability to restructure the Company, hire new management and make IBM and me minority shareholders.

    Unfortunately for Textor he chose to make his side deal with the wrong partner. Maybe he figured that he was from FLA and Cox was from GA, and that they could do a Southern Gentleman’s deal… (nod, nod, wink, wink). But Textor had not considered that the folks at Cox were ACTUAL Southern Gentlemen. Cox would have no part in screwing their other partners. In fact, Cox and I had a very close relationship and they insured me that I would be treated fairly, which I was.

    In the final days of the deal, though I still hadn’t had any significant conversations with Textor and I didn’t know whether I had a job or not if the deal was ever done, I was approached by my counsel, and asked to sign a Confidentiality Statement. Textor wanted to make sure that I would not compete with DD after the sale.

    Textor called me (one of the very rare times that he did) and he was livid… he screamed at me ” Sign the damn Confidentiality Agreement. You’re going to blow this deal apart”.

    I told John that I had no intention of signing.

    He bellowed ” Cameron and Winston have signed it, you better sign it as well”.

    I explained to John that Cameron and Winston did not make their living running VFX companies and their signing it was meaningless.

    John was not interested in what I had to say but he immediately fought back in the only way he could.
    “Ok, what do you want to sign a non compete”?, he calmly said.

    ” You could hire me as a consultant to help you through what will be a difficult transition”, I answered.

    “How much do you want, I know you Hollywood types” he started to raise his voice again.

    ” I’m interested in helping my Company, you don’t know anything about this business and I could truly be an asset”, I said.

    “OK, OK, so how much?”, Textor said.

    ” I think $10k per month for a year seems fair”, I answered.

    “$10K, is that all? That’s outrageous, you won’t keep your word for just $10k, how about $15k?” Textor said.

    I couldn’t believe my ears… I thought to myself, “…he doesn’t really care how he spends other people’s money”.

    “OK, $15 grand per month, let me know when we can meet”, I said.

    Textor responded, ” Great, I’ll call you”.

    He never did. I tried “consulting” and called Textor a bunch during that year. He never returned my call. Fed up, I contacted a DD board member, who in turn contacted Textor. My phone rang several days later, on the other end was a boiling mad Textor.

    “WTF, how dare you call my board”, Textor raged.

    “Hey John, I tried calling you and emailing you. You never responded”, I answered.

    After a few more minutes of Textor rage, I had set a meeting with John at Michael Bay’s offices in Santa Monica. At the meeting John gave me his DD road presentation to investors, never let me have a word edgewise, and concluded the meeting with ” So, as you can see DD is in great shape and has a bright future ahead of it”.

    After all the phone calls I had received from disgruntled DD employees, I wasn’t quite as sure about DD’s future as Textor was.

    Posted by Scott Ross on
    • Absolutely fasinating reading….. like I said before, kids – interview John’s secretary…… and determine what exactly he was doing…..or what she was doing.

      Posted by anthony parkinson on

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