Weird things are happening at the James Cameron-founded company that’s responsible for special effects and 3D conversion on many Hollywood productions including Lionsgate’s Ender’s Game. Digital Domain‘s stock is down nearly 34% today to a piddling 65 cents a share and it announced in an SEC filing that CEO and chairman John Textor resigned “effective immediately” with no exit agreement or arrangement. Textor’s Wyndcrest Holdings led an investor group that bought Digital Domain in 2006. He told the board that he left because he’s “in profound disagreement” with the company’s decision to close its animation and visual effects studio in Port St. Lucie, Fla. “Our incredibly talented artists and filmmakers were building something truly special in Port St. Lucie, not just our favorite first film, The Legend Of Tembo, but also our first home, Tradition Studios.” By leaving he says he should have “greater flexibility to independently consider other strategic alternatives for the Company, the Port St. Lucie studio and the people affected.” Digital Domain says the cutbacks in Florida are part of “a strategic realignment that will enable it to focus its resources on its core business.” Studios in California and Vancouuver “intend to operate without interruption.” The board gave COO Ed Ulbrich the additional title of CEO of Digitial Domain Productions while Michael Katzenstein runs day-to-day operations. Katzenstein is is a senior managing director of FTI Consulting, and on August 29 was also named Digital Domain’s interim COO.

The company is widely believed to have overexpanded in recent months. But the turmoil began in mid-August after the company disclosed that its available cash fell short of the levels required by a covenant in an agreement with holders of a $35M Senior Note. On August 21 the debt holders told Digital Domain that it was in default — and that they wanted their money back, plus $16M in interest. The company doesn’t have the cash, and began to negotiate with them to hold off a foreclosure. On August 22 the company board created a special committee to review all options. When the board brought Katzenstein in to set things straight, Textor said he might make a “strategic alternative transaction” with the company.  Digital Domain has lost about 90% of its market value since the beginning of this year. Janney Capital Markets analyst Tony Wible just dropped coverage of the company after downgrading to “Sell” saying that “the elimination of staff, review of strategic alternatives, departure of management, and debt negotiations all cloud growth prospects. We also do not know the motivation of the debt holders, which may be seeking to take over the equity or are merely looking for more favorable terms on the debt.”

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