Rhythm & Hues Bankruptcy Could Affect Five Different Films

In its filing for Chapter 11 bankruptcy protection, visual effects house Rhythm & Hues has revealed the financial pressures under which it has been working. Although the Los Angeles-based VFX house that created the CG Bengal tiger in Life of Pi was working on at least five projects for three different studios, the fees it was being paid did not cover the cost of the work yet to be completed, it said in papers filed Wednesday in U.S. Bankruptcy Court in Los Angeles.

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Between 2009 and 2011, the company generated average revenue of $105.9 million annually. But revenue dipped to $93.5 million in 2012. While it had been profitable in 2009 and 2011, it faced losses of about $22.5 million in 2012. At the end of last year, the liabilities on R&H's balance sheet totaled about $33.8 million, the filing said.

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"The decline in revenue in 2012 was partly due to a decrease in feature film work," it explained, "driven predominantly by a slight decrease in film production at Fox and Universal," which historically are two of R&H's largest customers.

R&H's current projects consisted of work on several films for Warners as well as Universal's R.I.P.D., scheduled for release July 19, and Fox's Percy Jackson: Sea of Monsters, scheduled for Aug. 16.  

According to the filing, “R&H’s cost to complete exceeds the remaining amounts due" on the projects." It said, "Unfortunately, with respect to current projects, the company will be unable to complete them at the bid amount and therefore needs additional funding to pay the costs, mostly labor, for the projects to be completed."

Universal and Fox have agreed to provide financing to allow R&H to complete the film work, but, according to the filing, Warners “demanded return of all materials related to its three projects.” 

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The Warners projects are believed to be 300: Rise of an Empire (set for release Aug. 2), Seventh Son (Oct. 18) and Black Sky. According to the filing, Warners also claims that R&H owes the studio at least $4.9 million.

Rhythm & Hues, which operates a 135,000-square-foot facility in El Segundo, Calif., had been employing more than 700 permanent and temporary employees but said it currently employs about 460. It also carries out services in three wholly owned subsidiaries abroad. About 300 people recently were laid off, a source told The Hollywood Reporter.

The situation underscores the precarious state of the VFX industry. Digital Domain Media Group filed for bankruptcy in September, and its VFX business was acquired by India’s Reliance MediaWorks and China’s Galloping Horse for $30.2 million.

Others were not so lucky. Cafe FX and Asylum were among the California-based visual effects businesses that closed in recent years.

But one source, who requested anonymity, said there are investors who are interested in Rhythm & Hues.

Numerous VFX pros acknowledged that Rhythm & Hues seemed to be addressing the changing state of the business. It was one of the first L.A-based VFX houses to open a facility in India in order to help it control costs. It also created bases in Malaysia, Taiwan and Vancouver.

In addition to Life of Pi, Rhythm & Hues, a feature and commercial VFX studio founded in 1987, also worked on VFX Oscar-nominated Snow White and the Huntsman.