(Reuters) - Digital Domain Media's filing for bankruptcy protection on Tuesday is the latest twist in a Hollywood saga that started when James Cameron launched the special effects powerhouse for his film "Titanic" and ended with its outgoing chief executive firing off a letter that called the board's decision-making "not only unwise but without compassion."
The company, which created special effects for this summer's blockbuster "The Avengers" and the "Transformers" movies filed for Chapter 11 with $14 million in debt but $50.7 million in losses through June 30 after a two-year spree in which it agreed to finance a Hollywood film, open an animation studio, help run studios in Abu Dhabi and China, and to create a college in Florida to award four-year animation degrees.
"Special effects is a low-margin investment so they tried to leverage their expertise," said Tony Wible, an analyst with Janney. "The problem is that the investments were costing more than they were able to bring in."
Wible dropped coverage of the company on September 7, saying the company's new investments "have impaired profitability and have triggered a liquidity crisis."
Some of the investments put the company's board at odds with Chief Executive John Textor, a tech company investor and one-time chairman of an online baby products company, who led a buyer group in 2006 that included former football star Dan Marino and Hollywood director Michael Bay. Textor owns 23.9 percent of the company, according to his latest filing.
On August 22, the board created a special committee and brought in turnaround expert Michael Katzenstein, who reports to the committee. Textor quit, saying in a filing that he would "likely engage legal and financial advisors" and could put together a group to buy the part of the company he didn't already own.
The breaking point was the company's plan to close down its animation studio for which the state of Florida and the city of Port St. Lucie had provided $135 million in tax credits, grants and funds from a $30.7 million city bond offering. Digital Domain laid off more than 200 people.
Textor, who had negotiated the deal and promised to bring new jobs to south Florida, quit and sent a blistering letter to the board, saying "the people of Florida welcomed us with open arms and we certainly owe them greater consideration."
"I think the outcome was not only unwise, but also without compassion," he added in his resignation letter. "It is never a bad time to reverse a bad decision."
A lawyer for Textor would not comment.
Textor hasn't said if he intends to make an offer, said Katzenstein, Digital Domain's chief restructuring officer. The company said it will sell most of the company's assets to Starlight Capital Partners for $15 million and that Hudson Bay Master Fund would provide $20 million in debtor-in-possession financing.
"This is still a highly pedigreed company and at the upper echelon of what it does," said Katzenstein, who said he can't speak for the new owners but expects them to revisit the company's decision to jointly run special effects studios in Abu Dhabi and China. The company's Digital Domain Institute animation school at Florida State University is not part of Starlight's acquisition.
Textor's noisy departure from the company is strangely similar to the 1998 departure by Cameron, who battled with the board over its insistence of bringing in outside investors IBM and Cox Communications. His departure killed a planned IPO and Cameron did not use Digital Domain for his hit, "Avatar."
Digital Domain is likely to stay in the film business, says Katzenstein. The company is on the hook for some of the costs of the $100 million film Harrison Ford futuristic film "Ender's Game" that Lions Gate is scheduled to release next year. As of June 30, it had paid $17.2 million toward the production, the company says.
Digital Domain will share in the profits, if any, and also pay itself a fee for the special effects, said Katzenstein. And making films, he adds, is "a mature business compared to the venture financed efforts this company had elsewhere."
(Reporting By Ronald Grover; Editing by Kenneth Barry)