‘Titanic’ Effects Shop Digital Domain Goes Chapter 11

Digital Domain Media Group Inc., the special-effects company behind the movies “Transformers” and James Cameron’s “Titanic,” filed for bankruptcy protection with plans to sell itself.

The company, with operations in Florida, California, Canada, India, China and Abu Dhabi, plans to hold an auction for most of its assets in which a unit of Searchlight Capital Partners LP would be the initial, or so-called stalking-horse, bidder, according to papers filed today in U.S. Bankruptcy Court in Wilmington, Delaware.

“As a result of negative working capital, the company failed to meet the liquidity covenants and was running out of cash,” Michael Katzenstein, chief restructuring officer, said in a court filing. The company defaulted on senior note payments, he said.

The company, which counted former Miami Dolphins football star Dan Marino among its investors, had assets of $205 million and debt of $214 million as of June, according to Chapter 11 papers.

Among the largest unsecured creditors listed in Digital Domain’s petition were Carl Stork, owed $5 million in a litigation settlement; Reliance Mediaworks Ltd. of Mumbai, owed $4.6 million; and Legendary Pictures of Burbank, California, owed $3 million.

DDMG asked a judge to approve as much as $20 million in financing to carry it through reorganization.

Breakup Fee

The company is also seeking approval of its agreement to make the Searchlight unit, VFX Holdings LLC, the stalking-horse bidder. VFX has offered $15 million for DDMG. Should VFX be outbid at the proposed auction, it would collect a $375,000 breakup fee, according to court papers.

The company’s debt includes $40 million in secured notes, $8 million in subordinated notes, $12.5 million in so-called trade debt owed to suppliers and other vendors and $14.9 million in other obligations.

A former worker at the company’s Port St. Lucie, Florida facility sued Digital Domain today, claiming managers shuttered the business there without first giving employees a 60-day notice, as required under federal law.

Julie Miller, a spokeswoman for Digital Domain, didn’t immediately return a call for comment about the lawsuit.

Digital Domain was co-founded by Cameron and went public in November, selling 4.92 million shares at $8.50 each. The shares plunged 84 percent today to 8.9 cents in over-the-counter trading.

In a statement today, the company said it would sell some assets and filed for Chapter 11 in an effort “to ensure the long-term future of its core business.”

The Port St. Lucie-based company, with 765 employees, said it also sought court protection in Canada.

The case is In re Digital Domain Media Group Inc., 12-12568, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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