Cheers, fears as vfx giant realigns

Tuesday’s pre-dawn announcement that Digital Domain Media Group had declared Chapter 11 bankruptcy and then sold part of itself to Searchlight Capital Partners for $15 million touched off some celebration in Hollywood.

Digital Domain, after all, is a storied name in visual effects, and this announcement suggested it would be reborn in something close to its original form. Layoffs or salary cuts in its L.A., Vancouver or Bay Area offices were ruled out. There might be misery at the company’s Florida ventures, including 3D conversion and startup animation studio Tradition Studios, but those were severed from the new entity Digital Domain Productions, so that pain need not spread.

But as details emerged of the nature of the bidding ahead and the problems that brought down DDMG, including vfx snafus on Warner’s “Jack the Giant Killer,” it became clear those West Coast celebrations are somewhat premature.

Tuesday morning’s optimistic announcement was meant to reasure clients and staff, but Digital Domain Productions, the company split off from Digital Domain Media Group, won’t officially be acquired by Searchlight until the sale is approved by the bankruptcy court, and such approval is not certain. Searchlight is acting as the “Stalking Horse” in the bankruptcy; it has established a floor for the bidding for DD, but another buyer could come in.

Press reports Tuesday indicated Prime Focus is interested in bidding for Digital Domain.

Even in California there was a growing dark cloud inside the silver lining of the Searchlight bid. The bankruptcy announcement was met with outcries from vfx artists who have worked for DD in recent months but have not been paid. Bob Coleman of Digital Artist Agency said he alone has four clients who are owed money by DD, including Brian Begun, owed $21,160 for working on Universal’s “47 Ronin.”

A DD spokesperson conceded that payment for both independent contractors and employees had been affected by the filing. “We are seeking approval to release payment to these independent contractors as soon as possible,” said DD. “This process does have to be court-approved during bankruptcy proceedings.”

Emerging details on how DDMG wound up in bankruptcy in the first place did little to brighten the picture. The company spiraled into bankruptcy in part because it adopted some unconventional financing: A $35 million loan from Tenor Capital that was to be repaid with stock, not cash. When DDMG defaulted, that amount owed ballooned to $51 million, a structure one industry insider called “usurious.”

DDMG’s bottom line was also wrecked by a disastrous year from its visual effects business.

Almost all of DD’s visual effects capacity was devoted to two movies. One was “Ender’s Game,” for which Digital Domain is doing the effects at cost in exchange for an equity stake in the picture. This is a proven method for vfx studios to improve their return on a movie, as long as the vfx company isn’t counting on cash flow from the job to stay afloat.

Digital Domain’s other big project was “Jack the Giant Killer,” a project so catastrophic DD employees came to call it “Jack the Company Killer.”

According to several insiders, DD underestimated the complexity of the vfx on “Jack,” underbid for the work, tried new software and techniques that didn’t entirely succeed, and found itself having to re-do scenes. The re-dos were unremarkable for a studio movie but they obliterated DD’s already-low margins.

CEO Ed Ulbrich told Variety “Jack” was “a contributing factor” in the bankruptcy “but by no means is that the only reason.”

Management told employees that work and staffing will continue, and added that DD cannot honor former CEO John Textor’s pledge of $100,000 to fund a vfx trade organization while it is under bankruptcy.

Textor continues to explore options to re-open Tradition Studios, the animation studio he’d modeled after Pixar. The former CEO had an expansive vision of Digital Domain’s future, including military contracting for simulation and training. If that vision is to be realized, DDMG will have to go on without the vfx business, apparently.

The proposed new Digital Domain Prods. includes DD’s Venice, Calif. HQ; its Bay Area and Vancouver branches, its virtual producition studio in Playa del Rey and its commercials business, and Mothership Studios, also in Playa del Rey.

Ed Ulbrich is CEO of Digital Domain Prods. Jody Madden continues as chief operating officer. Darin Grant is chief technology officer. General counsel is Joe Gabriel. Digital Domain Prods. will continue to outsource work to Reliance offices in London and Mumbai.

Not included in the proposed new entity are the Digital Domain Institute in Florida; Tradition Studios; and the 3D conversion business descended from In-Three. All those remain with DDMG, along with In-Three’s patent portfolio.

Digital Domain Media Group faces a probe from the State of Florida into how it received $20 million in subsidies.

One ironic detail from the closing of DDMG’s toon shop: Some omputers for Tradition Studios were picked up at auction after Disney shuttered ImageMovers Digital. If there is such a thing as cursed computers in the animation biz, they may be it.

(Jill Goldsmith and Karen Idelson contributed to this report.)

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