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

The two studios are lending up to $17 million so Rhythm & Hues can keep working on their movies

Last Updated: February 15, 2013 @ 11:48 AM

Universal Pictures and 20th Century Fox will lend Rhythm & Hues up to $17 million to continue working on two big-budget film releases while the visual-effects company is in Chapter 11 protection, according to court filings.

The El Segundo, Calif.-based visual- effects company was forced to file for bankruptcy this week, after it could not find a buyer. The move came as it is contending for two visual-effects Oscars for its work on "Life of Pi" and "Snow White and the Huntsman."

Also read: At Rhythm & Hues All-Staff Meeting: Blunt Talk About Layoffs, Foreign Subsidies

Universal is allowing Rhythm & Hues to continue working on "R.I.P.D.," and Fox wants it to finish working on “Percy Jackson: Sea of Monsters.”

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Prime Focus, an Indian-based effects company, considered acquiring the company, but according to an individual with knowledge of the negotiations, it could not secure financing in time. As part of that pact, three studios, including Warner Bros. had agreed to a $20 million bridge loan, which would have allowed Rhythm & Hues to continue working on their movies.

Warner Bros. however has "demanded" the return of all of the materials related to movies it had at the visual-effects house, according to filings.

Also read: Rhythm & Hues Bankruptcy Sends Shockwaves Through Visual-Effects Industry

That studio is owed $4.9 million for work Rhythm & Hues did not complete on three films: "300: Rise of an Empire," "Seventh Son" and "Black Sky," previously known as "Category 6," according to the filings.

Rhythm & Hues' situation, however, may not be quite so dire. Two individuals with knowledge of the situation told TheWrap that Warner's will evaluate the projects on a case-by-case basis and there is a possibility they will remain at the effects company which disclosed in filings that it is an investor on "Seventh Son."

Spokespeople for Warner Bros., Universal and Fox declined to comment. Rhythm & Hues did not respond to requests for comment.

Rhythm & Hues reports in its filing 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.

With 1,400 employees and branches in India, Canada and Malaysia, its 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.

Other creditors include the city of El Segundo, which is owed $115,796; GGX Productions, the production company on "The Hunger Games: Catching Fire," which is owed $780,000; and Bell Technologies, which is owed $136,231. The company also owes roughly $15 million to current and former employees in wages and paid time-off.

The visual-effects business is a notoriously low-margin one, with companies engaged in fierce competition to under-bid one another on projects. It has also been upended in recent years, several special effects executives tell TheWrap, by studios' thirst for state and foreign subsidies. This has put many California-based companies at a disadvantage when compared to companies in countries that offer more generous incentives, like Canada and the United Kingdom.

To that end, Rhythm & Hues opened up a branch in Vancouver in 2011 and tried to attract cheaper labor in places like Asia. But the company said that it did not establish a foothold in Canada in enough time to qualify for subsidies on the projects it worked on in 2012 and 2013. It also claimed that it was hurt by the strong U.S. dollar and the fact that employees in the United Kingdom do not get paid overtime.

"If the Company had established its facility in Vancouver earlier, R&H could have had much higher revenues for the current projects," the company explained in its filings.

Rhythm & Hues disclosed that its Canadian, Indian and Taiwanese branches are owned by separate foreign entities that the company controls. A sister company, comprising Rhythm & Hues shareholders, controls the Malaysian entity.

Rhythm & Hues said it has no plans to shutter any of its foreign branches, explaining in the filing that "Because of the lower wage levels paid by the Foreign Affiliates and various local governmental tax incentives, using their services is very cost-effective for the Company."

Rhythm & Hues had roughly 700 employees working in California, but according to filings it has laid off 264 people.

The company will appear in Bankruptcy Court on Friday morning where its lawyers will ask the judge to approve financing from Universal Pictures and Fox allowing it to pay its employees. The loan will be paid in four installments over the next two months, beginning with a $6 million advance.

Pamela Chelin contributed to this report.