Buyers circling; management meeting with employees en mass

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The visual effects industry woke up Monday morning to news it had been dreading: One of its most admired companies, Rhythm & Hues, had been forced into bankruptcy.

In a single week, R&H’s big release for 2012, “Life of Pi,” had won four Visual Effects Society Awards, including the org’s equivalent of Best Picture; won the BAFTA for visual effects; and the company was set to file for Chapter 11 reorganization in Los Angeles.

Prime Focus, the India-based visual effects and 3D conversion company, had hoped to buy Rhythm & Hues and negotiations were under way through last week. However Prime Focus was unable to assemble the necessary financing and its proposed deal to acquire R&H fell through. On Sunday, even as the BAFTAs were being handed out in London, R&H began calling its employees and clients to inform them of the move.

Unconfirmed reports of the Chapter 11 filing appeared on the VFX Soldier blog around 10:00 p.m. Sunday night and Variety was able to confirm them about 90 minutes later. Company has branches in Vancouver, Taiwan, Malaysia and two in India. The bankruptcy filing will be made in Los Angeles.

Numerous R&H employees were told Sunday they should not report on Monday because their jobs had been terminated.

Following a company-wide meeting on Monday, Lee Berger, president of R&H’s film division, told Variety R&H would formally file bankruptcy papers Monday night. “We hope to be in front of a bankruptcy court by Wednesday,” said Berger. “In the meantime, we’re still open on the shows that are in-house. We’ve got commitments from the studios we’re working for for financing.”

Fox and Universal are believed to have put up those funds to ensure completion on Fox’s next “Percy Jackson” pic and U’s “R.I.P.D.” Warner Bros. has three projects at R&H, “300: Battle of Artemesia,” “The Seventh Son” and “Category 6,” and will evaluate how to proceed on a case-by-case basis.

Lionsgate pulled its work for “The Hunger Games: Catching Fire” when R&H got into financial trouble, and before the company decided to declare bankruptcy.

R&H is famed for its creatures and animals and created the digital animals on “Life of Pi.” It uses proprietary software, which increases training time for artists that join the company and makes it hard for its studio clients to pull animation work in progress and hand it to another facility. To do so essentially means starting over.

When Digital Domain went through bankruptcy in September, it asked for and received an accelerated process, arguing that its clients required assurance that the company’s future was secure, and if the process dragged out, work would flow elsewhere. Berger said R&H would also ask for an accelerated process, “the faster, the better.”

Bob Baradaran, R&H’s outside general counsel and a partner at Greenberg Glusker, told Variety of R&H “Going forward, we’re going to proceed with the projects we currently have in the pipeline, completing them on time and at high quality. While that is proceeding we will be actively negotiating with potential third parties who have shown an interest in investing in or acquiring the company to assure its long term viability.

Numerous R&H artists were laid off but for those remaining, Baradaran said “I don’t expect employee compensation, either timing or amount, to be modified materially. The status quo will remain.”

R&H’s financial downward financial spiral began in 2011 when Universal cancelled part of a contract on “Snow White and the Huntsman” after staffing and R&D were under way. Company sought an equity investor but their first deal fell through when the Digital Domain bankruptcy frightened off the potential partner. By January Warner, Fox and Universal had to step in to keep work moving. Fox and U. wanted R&H to declare bankruptcy, but Warners insisted it would pull its work if that happened. The trio settled on a financial mechanism one insider described as “neither a loan nor an investment.”

Prime Focus stepped in as a potential buyer but was unable to raise the necessary funds to acquire R&H. At that point, R&H management decided bankruptcy was the best option. Warners is weighing its decision on how to proceed and negotiations with all three studios on the future of R&H’s projects are ongoing.

R&H is famed for its creatures and animals and created the digital animals on “Life of Pi.” and “Snow White and the Huntsman,” both up for the vfx Oscar. It uses proprietary software, which increases training time for artists that join the company and makes it hard for its studio clients to pull animation work in progress and hand it to another facility. To do so essentially means starting over.

Variety spoke to several current and just-released R&H artists about the events of the last several days. Co-founder John Hughes gathered employees Friday at a company-wide meeting to tell them their pay would be delayed and the company was negotiating with its creditors. But by then the Vancouver branch had already been told and word had leaked to El Segundo, so the employees were aware the news was coming.

One R&H employee who’d been on Warner’s “Category 6,” said it was clear at the time that bankruptcy was coming, and by the time he received he and others on the pic were notified Sunday evening that their jobs had been terminated, his things were already packed.

He said he’d been told employees showing up at R&H were being turned away Monday, but he’d also seen emails indicating work is continuing.

The news was met by an outpouring of sadness and sympathy by visual effects artists. R&H is known for its worker-friendly management and has enormous goodwill in the vfx community — unlike some other companies, including the previous management of Digital Domain, whose demise was widely celebrated.

“If the R&H rumors are true, I will be devastated,” wrote vfx supervisor Thad Beier on Twitter Monday morning. “Hughes and Co. built the most transparent VFX house ever, and never threw stones.”

An R&H employee told Variety many at the company were actually glad the company had not been sold to Prime Focus, even though it meant bankruptcy, because Prime Focus doesn’t have the same values as R&H management.

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