Rhythm & Hues bankruptcy reveals vfx biz crisis

Rumors of more trouble fly as acclaimed studio enters Ch. 11

By midday Monday, as word spread in the visual effects community of that acclaimed vfx studio Rhythm & Hues would declare Chapter 11 bankruptcy, the already-jittery artists wondered who would speak up for them — and what company would be next.

Eric Roth, executive director of the Visual Effects Society, said he hoped this incident would alert the entire industry to the crisis facing visual effects companies. “From all accounts R&H was a company that appeared, from the outside, to be well run, to take care of its employees, to take advantage of

worldwide tax incentives and have locations in other countries.”

Studio sources say the company wasn’t doomed by any financial manipulations or mismanagement, but by a simple cash flow crunch that left it unable to meet payroll.

“If a company like that can’t survive in today’s marketplace,” wondered Roth, “is this the moment in time when the industry at large takes notice and says maybe we need to take a fresh look at how we do business?”

Internet speculation turned to whether the winner of the vfx Oscar on the 24th, whoever it is, would plead the case of the vfx business before the industry and the world. But the benefit of a plea to the public are questionable.

The news hit the digital production world hard because it follows layoffs at Dreamworks Animation and last September’s bankruptcy at Digital Domain, which closed its Florida animation studio outright. The three events have left many highly skilled animators and artists scrambling for work, some relying on public assistance to feed their families. Meanwhile stories spread of other companies that either had survived recent crises — in some cases only with financial assistance from their clients — or are on the cusp of bankruptcy themselves.

While there’s a certain amount of panic in all that, a picture did emerge: Visual effects have never been as important to Hollywood, as popular with auds, or as precarious a business as they are today.

No company illustrates that better than R&H. It’s work is nominated for two Oscars, one for “Life of Pi,” which has grossed over $564 million, and “Snow White and the Huntsman,” which grossed nearly $401 million. “Life of Pi” has racked up a slew of vfx honors, including four Visual Effects Society Awards and the BAFTA for vfx just in the last week. Yet as the BAFTA was being handed out in London Sunday night, R&H was notifying employees they were laid off and preparing to file for Chapter 11 bankruptcy.

R&H’s move to reorganize came after a prospective buyer, India-based Prime Focus, failed to muster the necessary financing to purchase the vfx giant. R&H, whose HQ is in El Segundo, Calif. south of Los Angeles, has two branches in India and one each in Vancouver, Kuala Lumpur and Taiwan. It had about 1,400 employees before layoffs and bankruptcy began this past weekend. The layoffs are estimated at around 200.

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.

When publicly traded Digital Domain Media Group went throughbankruptcy 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, which is privately owned, 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 that R&H was in a stronger position than DD had been because of the projects it still has in-house. “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.

For artists still employed, said Baradaran, “I don’t expect employee compensation, either timing or amount, to be modified materially. The status quo will remain.”

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. Those laid off were told by phone Sunday they should not report the next morning because their jobs had been terminated.

R&H’s financial downward financial spiral began in 2011 when Universal cancelled part of the vfx contract on “Snow White and the Huntsman” after staffing and R&D were under way. (Daily Variety, Feb. 5, 2013) Company sought an equity investor but their first deal fell through when the Digital Domain bankruptcy frightened off the potential partner.

ByJanuary 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 character animation, especially digital animals. It uses proprietary software, which makes it hard for studio clients to pull animation work in progress and hand it to another facility. To do so essentially means starting over.

The news of R&H’s bankruptcy was met by an outpouring of sadness and sympathy by visual effects artists. R&H is known for its worker-friendly management andhas enormous goodwill in the vfx community — unlike some other companies, including the pre-bankruptcy 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.

Some in the vfx biz feel the company’s management structure is top-heavy and its overhead high. But there have been no accusations of mismanagement, even among the studio execs who were forced to ride to its rescue, albeit temporarily.

The VES’s Roth said he hoped “The understanding that something iswrong has potentially reached a critical mass.” and that the entire movie industry, including the majors, would look for a solution.”If a couple more R&Hs find themselves in trouble in the next few years,” he said, “that would make it difficult for the studios to getwhat they want.”

The irony of R&H’s troubles, said Berger, is “Creatively this was oneof our best years ever. We had ‘Snow White and the Huntsman,’ ‘Life ofPi,’ ‘Django Unchained’ and ‘Cabin in the Woods.’

“Less so financially,” he conceded.