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VFX House Behind 'Life of Pi' to File for Bankruptcy

FOX:

UPDATED: Privately-owned Rhythm & Hues’ troubles have been widely known in the industry.

Rhythm & Hues—the lead VFX house on Life of Pi -- won the BAFTA award for visual effects on Sunday, but the good news was dampened quickly by spreading word that employees had been contacted and told not to come into the El Segundo studio Monday.

The company has been having cash flow problems and is now taking aggressive action. Beyond laying off some of its 1,400 employees, Rhythm & Hues also will be seeking protection against some of its creditors.

"Tonight we are going to be filing for Chapter 11 bankruptcy," says Lee Berger, president of the company's film division.

Berger tells The Hollywood Reporter that Rhythm & Hues aims to be in front of a bankruptcy judge Wednesday with a plan to recover its financial footing.

Rhythm & Hues had hoped to close the sale of the company, reportedly to Indian-based Prime Focus. But that didn't work out.

"It was obvious that when that the financier fell out, the cleanest solution would be Chapter 11," says Berger.

Despite the inability to close the deal with the financier, Berger says there remains other interested investors -- both domestically and internationally. One of the features of the upcoming bankruptcy process will be an orderly process to pick a new financing partner.

PHOTOS: The Making of 'Life of Pi'

In addition, Hollywood studios have pledged millions of dollars in credit facilities to keep Rhythm & Hues afloat to continue working on ongoing projects.

Rhythm & Hues, which was founded in 1987 and has remained private ever since, has been working on, among other films, Percy Jackson and the Sea of Monsters, R.I.P.D., The Seventh Son and Black Sky.

Delays of certain projects contributed to a dire cash situation. Although Hollywood studios were willing to put up money, sources tell THR that being in a poor financial position was taking a toll on some of its contract work. Going the bankruptcy route (which is being handled by the law firm of Greenberg Glusker) is meant to give Hollywood studios more confidence that loans will proceed in a more secure way, under the purview of a bankruptcy judge.

Rhythm & Hues’ troubles have been known widely in the industry, and were very much present at last week’s Visual Effects Society Awards, where Life of Pi won the top prize.

In opening remarks at the VES Awards, executive director Eric Roth said, “There’s a lot of change going on in our industry and many of you are worried about your jobs or which county you need to live in to have a job. News in the last 24 hours tells us that another VFX house’s future is uncertain,” an obvious reference to Rhythm & Hues.

“We need to face it that globalization is here and there are hard financial realities,” Roth added.

Large amounts of VFX work has already moved to cities and countries where producers receive tax credits and where labor is less expensive than in Los Angeles.

The VFX community has responded with sadness to Rhythm & Hues' troubles.

STORY: VES Awards 2013: 'Life of Pi' Wins Top Prize

Some pros are even considering finding a new profession.

“People that have been around a long time are not necessary getting picked up,” VFX vet Colin Ritchie—owner of technology supplier Aarmadillo—told THR at last week’s VES Awards. “It’s great if they are in Vancouver or Shanghai or Chennai. But [jobs] are shrinking here at a rapid rate. … When are the studios going to say enough’s enough? When will they be satisfied that they are getting value and good product?”

Rhythm & Hues' troubles follow more bad news in recent months that have rocked the VFX community. Most notably, last year Digital Domain Media Group (then publically traded) filed for bankruptcy, but the VFX business was acquired by India’s Reliance MediaWorks and China’s Galloping Horse.

Sources say that Rhythm & Hues didn't have a tremendous amount of bank debt, but Berger says that its private investors put a lot of money into the business, and added, "Any debt is a lot of debt when you don't have money."

As to the question of what is bedeviling the VFX industry so that two prominent firms have declared bankruptcy in the past six months, Berger comments, "Yes, there's an answer to that, but I need to find that person who has it. The technology is changing. The film industry is changing. We're continually looking for a way to take the business to the next level."