Loans to Rhythm & Hues Approved by Bankruptcy Judge

Legendary Pictures will write separate checks so Rhythm & Hues can complete work on "The Seventh Son"

Last Updated: February 16, 2013 @ 12:14 PM

Rhythm & Hues will be allowed to receive millions of dollars from two movie studios so it can continue working on several big-budget productions, a California bankruptcy court judge ruled Friday.

The visual-effects company filed for Chapter 11 protection this week after laying off more than 250 employees. Universal Pictures and 20th Century Fox have agreed to lend the company up to $17 million so it can complete its work on "R.I.P.D." and "Percy Jackson: Sea of Monsters.”

Also read: Rhythm & Hues Bankruptcy Filing: Universal and Fox Lending Up to $17M

TheWrap first reported the plan for the emergency cash infusion from Hollywood's major studios as part of a related deal to sell the company, which fell apart.   

Rhythm & Hues will not receive that money in one lump sum. Judge Neil W. Bason, who was presiding over the hearing, approved the loan on an interim basis, paving the way for the company to receive $6 million Friday and an additional $5 million on Feb. 19.

Another hearing on the remaining loan installments is scheduled for March 12. Two more payments, one $4 million installment and another $1.5 million installment, will be due in late March.

Attorneys for Rhythm & Hues stressed that it had made efforts to avert bankruptcy, and nearly found a buyer for the company before a deal fell through. It did not name the buyer, but according to several individuals with knowledge of the talks, Indian-based effects company Prime Focus had considered buying Rhythm & Hues, but was unable to secure financing.

"We want the company to survive," Lori Sinanyan, an attorney for Universal Pictures, said at the hearing. "We've gone above and beyond what a normal lender would do, sometimes to our own frustration as lawyers." 

Also read: Troubled Visual-Effects Company Rhythm & Hues Gets $20M Studio Infusion (Exclusive)

Universal and Fox are not the only major players stepping up to help Rhythm & Hues. An attorney for Legendary Pictures said it will not be part of the lending group, but will cut a separate check to ensure that Rhythm & Hues can complete its work on "The Seventh Son," a medieval adventure starring Jeff Bridges (pictured above left). Rhythm & Hues is an investor on that film, according to bankruptcy filings, and Warner Bros. is the distributor.

Lawyers for the studios insisted to the judge that granting the loan would not discourage any bidders from making a play for Rhythm & Hues. They also said that the studios were not interested in lending the money in return for an ownership stake. 

Brian Davidoff, an attorney for Rhythm & Hues, said the company had been a major player in the industry for decades, but world has changed, and studios were finding it cheaper to do visual-effects work abroad.

As Rhythm & Hues founder John Hughes looked on, Davidoff made a point not to cast blame on Universal or Fox for the company's troubles, saying that the two had been extremely helpful and cooperative.

Rather, he implied that the company's failure was a case of Rhythm & Hues moving too slowly to shake up its business model. As Davidoff noted, his client had tried to adapt to the shift, by opening up branches in places like Malaysia and Taiwan, where labor is cheaper, but it still found itself undone by a business characterized by fierce competition and low profit margins.

Also readRhythm & Hues Bankruptcy Sends Shockwaves Through Visual-Effects Industry

Rhythm & Hues reports in its bankruptcy filings that it has $27.5 million in assets and roughly  $33.8 million in liabilities. The company's filings also give a sense of its financial performance in recent years.

Revenues routinely topped $100 million annually during the past five years, with earnings before interest, taxes, depreciation and amortization (EBITDA) of 6 percent.

That figure dropped to $93.5 million in 2012, with a net loss of $22.5 million, which Rhythm & Hues attributes to a decrease in film work after Fox and Universal pared down their production slates.