Rhythm And Hues, Inc. files Chapter 11 bankruptcy

Rhythm And Hues, Inc. filed for Chapter 11 bankruptcy protection on February 13, 2013 at 10:48 p.m. (Pacific Time) in the United States Bankruptcy Court for the Central District of California under Case No. 13-13775.

Rhythm And Hues is seeking to continue its operations in an uninterrupted manner.

According to John P. Hughes, Rhythm And Hues is one of the world’s leading producers of visual effects (“VFX”) and computer-generated (“CG”) animation for the entertainment industry. Since its beginning in 1987, the Company has provided top-quality VFX and CG animation services for some of Hollywood’s highest-grossing feature films. As the largest VFX and CG animation studio in Los Angeles (and among the top eight globally), R&H has contributed to more than 150 feature films and has received numerous industry awards and accolades for its work, including Academy Awards (Best Visual Effects) for Babe and The Golden Compass, an Academy Award nomination for The Chronicles of Narnia, and Technical Achievement Academy Awards in 1994, 1998, 2008 and 2010. With its 25-year history of industry excellence, R&H is one of the top providers in the $2.2 billion VFX and CG animation industry, an industry that has continued to grow in the recent past.

According to Mr. Hughes, in addition to films, the Company is also one of the leaders in the production of commercial advertising and for cinematic game design and special venue and theme park films. It has created filmed attractions for several of Disney’s and Universal’s theme parks around the world, as well as filmed attractions installed in Las Vegas.

R&H is headquartered in El Segundo, California, where its 135,000 square foot facility is located.  R&H is a privately-held California corporation with three shareholders, Keith Goldfarb, Pauline Ts’o, and John Hughes.

According to Mr. Hughes, R&H’s three largest customers, Warner Brothers, 20th Century Fox, and Universal Studios, represent approximately 97% of the Company’s gross revenues over the past three years. R&H is one of the top two providers of VFX services for Fox and Universal, and it was a preferred provider of VFX services for WB. In addition, the Company has begun cultivating relationships with “mini major” studios like Legendary Pictures and Summit Entertainment.

Rhythm And Hues Financial Condition

According to Mr. Hughes, Rhythm And Hue’s EBITDA (cash flow) was $6.4 million in 2009 and $10.8 million in 2011, but the Company had losses of $2.6 million in 2010 and approximately $22.5 million in 2012. R&H’s ability to maintain profitability is directly related to its gross revenues. The gross revenues for 2009 to 2011 were $108.9 million, $86.7 million and $121.4 million, respectively. Revenue in 2012 was only $95.0 million, leading to the net loss of approximately $22.5 million.

According to Mr. Hughes, as of the year end 2012, Rhythm And Hues’s unaudited balance-sheet liabilities totaled approximately $33.8 million, virtually all of which were current liabilities. This amount includes about $12.2 million in accrued expenses; $19.4 million in billings in unearned revenues (as the Company’s cash balance reflects advance proceeds for work yet to be completed, the Company records the unearned revenues to offset the cash balance); and $1.2 million in accounts payable.

Rhythm And Hues 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.

In connection with Rhythm And Hues reorganization efforts, it has sought approval from the Bankruptcy Court to approved financing to the company during the bankruptcy (known as a DIP Loan because it is a loan to the company as Debtor in Possession).  The Financing Motion seeks approval of the proposed debtor in possession financing being offered by Universal City Studios LLC and Twentieth Century Fox.  Update: Approval of the DIP Financing. →

Several suitors are reportedly ready to bid on Rhythm And Hues in bankruptcy. It is possible Prime Focus could make another run at the company at a reduced price. Prime Focus, a relative newcomer to the vfx scene that hasn’t yet reached the upper tier of vfx studios, was also interested in acquiring Digital Domain when it went through bankruptcy in September. It appears to be interested in making a strategic move to leap to the upper echelon through a merger or acquisition.

The Company is represented by Greenberg Glusker Fields Claman & Machtinger, LLP (lead counsel Brian L. Davidoff) of Los Angeles.

Selected Rhythm And Hues, Inc. Bankruptcy Pleadings

The following are selected Rhythm And Hues, Inc. bankruptcy pleadings:

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Richard Grant