SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended DECEMBER 31, 1996 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission file number: 0-18613
TRIMARK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4272695
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2644 30TH STREET
SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip code)
(310) 314-2000
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of February 10, 1997, 4,273,431 shares of Trimark Holdings, Inc. common stock
were outstanding, excluding shares held by Trimark Holdings, Inc. as treasury
stock.
1
Exhibit Index: Page 17
TRIMARK HOLDINGS, INC.
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and
June 30, 1996 3
Consolidated Statements of Operations - Six months ended
December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows - Six months ended
December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
2
TRIMARK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
----------------------------------------
(Dollars in Thousands, Except Share Data)
December 31, June 30,
Assets 1996 1996
---------- ----------- -----------
(Unaudited)
Cash and cash equivalents $ 701 $ 344
Accounts receivable, less allowances of
$4,556 and $4,269, respectively 13,645 12,457
Film costs, net (Note 2) 37,872 29,853
Deferred marketing costs 1,323 1,524
Inventories, net 818 624
Property and equipment at cost, less accumulated
depreciation of $1,947 and $1,749, respectively 524 604
Other assets 4,686 2,995
----------- -----------
$ 59,569 $ 48,401
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
---------------------------------------
Debt $ 31,500 $ 15,000
Accounts payable and accrued expenses 1,758 2,191
Minimum guarantees and royalties payable 3,260 4,639
Deferred income 1,245 2,144
Income taxes payable 77 77
----------- -----------
Total liabilities 37,840 24,051
----------- -----------
Commitments and contingencies (Note 4) -- --
----------- -----------
Stockholders' equity:
Common stock, $.001 par value. Authorized
20,000,000 shares; 5,067,581 shares issued
at December 31, 1996 and 5,064,581 shares
issued at June 30, 1996 5 5
Additional paid in capital 15,398 15,385
Preferred stock, $.01 par value. Authorized
2,000,000 shares; no shares issued and
outstanding -- --
Retained earnings 10,209 12,683
Less treasury shares, at cost - 818,050 shares
and 789,850 shares (3,883) (3,723)
----------- -----------
Stockholders' equity 21,729 24,350
----------- -----------
$ 59,569 $ 48,401
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
3
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Amounts in Thousands, Except Loss Per Share)
Six Months Ended Three Months Ended
December 31, December 31,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Unaudited)
Net revenues (Note 3) $ 30,495 $ 32,911 $ 16,280 $ 16,844
Film costs and distribution expenses 26,882 33,525 15,954 20,901
----------- ----------- ----------- -----------
Gross profit (loss) 3,613 (614) 326 (4,057)
----------- ----------- ----------- -----------
Operating expenses:
Selling 3,219 3,119 1,735 1,676
General and administrative 2,127 2,926 983 1,586
Bad debt 223 (85) 122 (397)
----------- ----------- ----------- -----------
5,569 5,960 2,840 2,865
----------- ----------- ----------- -----------
Operating loss (1,956) (6,574) (2,514) (6,922)
Other (income) expenses:
Interest expense 567 548 354 277
Interest and investment income (49) (88) (37) (66)
Minority interest -- (38) -- (1)
----------- ----------- ----------- -----------
518 422 317 210
----------- ----------- ----------- -----------
Loss before income taxes (2,474) (6,996) (2,831) (7,132)
Income taxes -- (2,588) (139) (2,642)
----------- ----------- ----------- -----------
Net loss $ (2,474) $ (4,408) $ (2,692) $ (4,490)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per common share $ (0.58) $ (1.00) $ (0.63) $ (1.02)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average common and common equivalent shares
outstanding used in computation above 4,250 4,420 4,251 4,399
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements
4
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------
(Dollars in Thousands)
Six Months Ended
December 31,
------------------------
1996 1995
----------- -----------
(Unaudited)
Operating activities:
Net loss $ (2,474) $ (4,408)
Adjustments to reconcile net loss to
net cash used by operating activities:
Film amortization 18,760 22,266
Depreciation and other amortization 198 165
Provision for returns 64 3,107
Provision for bad debt 223 (89)
Provision for inventory obsolescence (398) 149
Minority interest in net loss -- (38)
Change in operating assets and liabilities:
Increase in accounts receivable (1,475) (1,508)
Additions to film costs (26,779) (18,557)
Decrease in deferred marketing costs 201 655
Decrease (increase) in inventories 204 (176)
Increase in other assets (1,691) (1,356)
(Decrease) increase in accounts payable and
accrued expenses (433) 128
(Decrease) increase in minimum guarantees and
royalties payable (1,379) 126
Decrease in income taxes payable -- (1,119)
(Decrease) increase in deferred income (899) 193
----------- -----------
Net cash used by operating activities (15,878) (462)
----------- -----------
Investing activities:
Acquisition of property and equipment (118) (191)
----------- -----------
Net cash used by investing activities (118) (191)
----------- -----------
Financing activities:
Net increase in debt 16,500 1,000
Exercise of stock options 13 2
Purchase of treasury stock (160) (429)
----------- -----------
Net cash provided by financing activities 16,353 573
----------- -----------
Increase (decrease) in cash and cash equivalents 357 (80)
Cash and cash equivalents at beginning of period 344 1,735
----------- -----------
Cash and cash equivalents at end of period $ 701 $ 1,655
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
5
TRIMARK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY:
The consolidated financial statements of Trimark Holdings, Inc. and subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
financial statements should be read in conjunction with the more detailed
financial statements and related footnotes filed with the Form 10K for the year
ended June 30, 1996. Significant accounting policies used by the Company are
summarized in Note (2) to the June 30, 1996 financial statements.
In the opinion of management, all adjustments required for a fair presentation
of the financial position as of December 31, 1996 and the results of operations
and cash flows for the periods ended December 31, 1996 and December 31, 1995
have been made and all adjustments were of a normal and recurring nature.
Operating results for the quarter are not necessarily indicative of the
operating results for a full year.
NOTE 2 - FILM COSTS:
Film costs, net of amortization, consist of the following:
December 31, June 30,
1996 1996
------------- -------------
(in thousands)
Released $ 20,011 $ 17,766
Completed not released 7,907 3,065
In process and development 9,954 9,022
------------- -------------
$ 37,872 $ 29,853
------------- -------------
6
NOTE 3 - NET REVENUES:
Six months ended Three months ended
December 31, December 31
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(in thousands)
Domestic:
Home video distribution $17,730 $17,659 $ 7,359 $ 9,443
Theatrical distribution 50 178 34 178
Television distribution 3,410 1,984 2,037 999
Foreign:
All media 8,238 10,989 6,689 4,133
Interactive:
All media 1,067 2,101 161 2,091
---------- ---------- ---------- ----------
$30,495 $32,911 $16,280 $16,844
---------- ---------- ---------- ----------
NOTE 4 - COMMITMENTS & CONTINGENCIES:
The Company has entered into certain agreements which provide for royalty
advances and promotional and advertising commitments totaling $20.7 million. If
the conditions to these agreements are not met by the licensors, the Company may
withdraw from the arrangements. These commitments extend to June 1997.
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six month period for:
December 31,
1996 1995
------------- --------------
(in thousands)
Interest $ 875 $ 572
Income taxes 268 766
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET REVENUES: Net revenues for the six months and quarter ended December 31,
1996 decreased $2.4 million or 7.3% and $564,000 or 3.3%, respectively, compared
with the same periods in fiscal 1996. The decrease for the six month period was
primarily due to decreases in net revenues from foreign distribution and
interactive distribution of $2.8 million and $1.0 million, respectively,
partially offset by an increase in domestic television distribution of $1.4
million. The decrease in foreign net revenues was primarily due to the timing
of releases. In the first six months of fiscal 1997, three (3) motion pictures,
"Leprechaun 4," "Never Ever" and "Warrior of Waverly Street" were initially
released into the foreign market, whereas four (4) motion pictures were
released in the same time period in fiscal 1996. In the fiscal 1996 period
interactive revenues primarily reflect the initial release of the Windows 95
version of the interactive title "The Hive." The fiscal 1997 interactive
revenues primarily reflect the initial release of the Sony PlayStation version
of "The Hive." The increase in domestic television net revenue was primarily
due to the release of the motion picture "The Dentist" as a cable premier in the
first six months of fiscal 1997 without the release of a cable premier in the
first six months of fiscal 1996.
The decrease in net revenues for the quarter ended December 31, 1997 was
primarily due to decreases from domestic home video and interactive distribution
of $2.1 million and $1.9 million, respectively, partially offset by increases of
$2.6 million and $1.0 million from foreign and domestic television distribution,
respectively. In the quarter ended December 31, 1996 seven (7) motion pictures
were initially released into the domestic home video marketplace compared with
nine (9) motion pictures released in the same time period in fiscal 1996. The
decrease in interactive revenues was primarily due to the initial release in the
fiscal 1996 period of the Windows 95 version of the interactive title "The Hive"
without a corresponding major title new release in the fiscal 1997 quarter.
Foreign revenue increased primarily due to the initial release of two (2) titles
to the foreign market in the fiscal 1997 period, including Trimark's highest
budgeted production to date "Warrior of Waverly Street" compared to one (1)
motion picture initially released to the
8
ITEM 2: (CONTINUED)
RESULTS OF OPERATIONS
foreign marketplace in the corresponding fiscal 1996 period. The increase in
domestic television revenue was primarily due to the release of the motion
picture "The Dentist" as a cable premier in the quarter without the release of a
cable premier in the quarter ended December 31, 1995.
Primarily as a result of continuing competition in the domestic home video
market, the Company is focusing its resources on distributing an increased
number of films with theatrical potential (both mainstream and specialized) and
decreasing the releases of straight-to-video films. The initial slate of
theatrical films began release in January 1997.
GROSS PROFIT: The Company's gross profits for the six months ended December 31,
1996 increased $4.2 million (from a loss of $614,000) compared with the same
period in fiscal 1996. The Company's gross profit for the three months ended
December 31, 1996 increased $4.4 million (from a loss of $4.1 million) compared
with the same period in fiscal 1996. The gross profit for the quarter ended
December 31, 1996 included a $3.0 million charge associated with the January
1997 theatrical release of "Meet Wally Sparks" and a reduction of the inventory
obsolescence reserve due to the salability of inventory. The prior year losses
were primarily due to write downs associated with the video releases of "Death
Machine" and "Kids", the disappointing performances of additional home video
titles released during the periods, a return reserve recorded for the Windows 95
version of the interactive title "The Hive", and write downs associated with
foreign distribution. The Company anticipates that the domestic home video
market will continue to be extremely competitive.
SELLING EXPENSES: The Company's selling expenses for the six months and quarter
ended December 31, 1996 increased $100,000 or 3.2% and $59,000 or 3.5%,
respectively, compared with the same periods in fiscal 1996. The increases
reflect the increase in theatrical operations partially offset by the decrease
in interactive operations. Management of the Company is conducting an ongoing
strategic review of Trimark Interactive and has retained a financial advisory
firm to assist it in such review. The strategic review includes discussions
with third parties
9
ITEM 2: (CONTINUED)
RESULTS OF OPERATIONS
regarding the potential merger or sale of all or part of Trimark Interactive.
There can be no assurance that any such transaction will occur or as to the
impact of such transaction on the Company's business.
This expense category is anticipated to increase in future periods in connection
with the Company's release of its upcoming domestic theatrical slate. See
"Liquidity and Capital Resources" for further discussion of the Company's
upcoming theatrical releases.
Selling expenses as a percentage of net revenues for the six month periods ended
December 31, 1996 and 1995 were 10.6% and 9.5%, respectively, and for the
quarters ended December 31, 1996 and 1995 were 10.7% and 10.0%, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for
the six months and quarter ended December 31, 1996 decreased $799,000 or 27.3%
and $603,000 or 38.0%, respectively, compared with the same periods in fiscal
1996. The decreases were primarily due to a Company reorganization undertaken
in January 1996.
BAD DEBT EXPENSE: Bad debt expense for the six months ended December 31, 1996
was $223,000. Bad debt expense for the quarter ended December 31, 1996 was
$122,000. Bad debt expenses primarily represent reserves taken against domestic
video and foreign sales.
INTEREST EXPENSE: Interest expense for the six months and quarter ended
December 31, 1996 increased $19,000 or 3.5% and $77,000 or 27.8%, respectively,
compared with the same periods in fiscal 1996. The increase in interest expense
was due to higher levels of borrowing under the Company's credit facility for
purposes of funding the costs associated with the acquisition and distribution
of theatrical motion pictures. As of December 31, 1996, there was $31.5 million
outstanding under the credit facility. See "Liquidity and Capital Resources."
10
ITEM 2: (CONTINUED)
RESULTS OF OPERATIONS
INTEREST AND INVESTMENT INCOME: Interest and investment income for the six
months and quarter ended December 31, 1996 decreased $39,000 or 44.3% and
$29,000 or 43.9%, respectively, compared with the same periods in fiscal 1996.
The decreases were due to interest income from federal tax returns received in
the fiscal 1996 periods without any comparable interest income in the fiscal
1997 periods.
NET LOSS: The Company's net loss for the six months ended December 31, 1996 was
$2.5 million. The Company's net loss for the three months ended December 31,
1996 was $2.7 million. The fiscal 1997 losses were primarily due to a $3.0
million write down associated with the January 1997 theatrical release of "Meet
Wally Sparks." The prior year losses were associated with the Company's
performance in the domestic home video and interactive markets.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended December 31, 1996, the Company increased film inventory
expenditures which were incurred to build up its theatrical film slate which
contributed significantly to the negative cash flow from operations. To fund
these film costs the Company increased its bank borrowings by $16.5 million for
the six months ended December 31, 1996. The Company's cash requirements vary
with the size and timing of delivery and minimum guarantee payments along with
the timing of its home video, theatrical, television, international and
interactive releases. In the six months ended December 31, 1996 the principal
sources of funds have been provided by availability of the Company's credit
line.
The Company's principal operating subsidiaries, Trimark Pictures, Inc. and
Trimark Television, Inc., on December 20, 1996 entered into a $75 million
revolving credit facility with a consortium of banks agented and arranged by The
Chase Manhattan Bank which replaced a $25 million revolving credit facility with
Bank of America NT & SA and Westdeustche Landesbank. The credit facility
expires December 19, 2000. Under the credit agreement, the Company may borrow
for various corporate purposes provided that the aggregate borrowings do not
exceed the Borrowing Base which
11
ITEM 2: (Continued)
LIQUIDITY AND CAPITAL RESOURCES
is derived from specified percentages of approved accounts receivable and film
library. The credit agreement is guaranteed by the Company and certain of its
subsidiaries and is secured by substantially all of the assets of the Company
and its significant subsidiaries. Loans outstanding under the credit facility
bear interest at the rate of 1.25% above Chase Manhattan's prime rate or 2.25%
above Chase Manhattan's London Interbank Market for Eurodollars rate for the
loan term specified. An unused commitment fee is payable on the average unused
availability under the credit facility, at the rate of 0.375% per annum. As of
December 31, 1996 there was $31.5 million outstanding under the bank facility.
The Company believes that its present sources of working capital will be
sufficient to maintain and expand its level of operations in accordance with the
anticipated release schedule, as described below.
During fiscal 1997, the Company plans to distribute approximately six (6) films
in the domestic theatrical market, to release approximately 30 motion pictures
into the domestic home video market, and to expand distribution in the
sell-through market.
The Company has entered into certain contingent contractual obligations which
provide for guaranteed royalty advances and print and advertising commitments of
approximately $20.7 million at December 31, 1996. The Company's new credit
facility is designed to fund certain motion picture acquisitions and related
costs previously recognized only as contingent obligations. Accordingly, the
Company anticipates borrowing approximately $7.1 million under its credit
facility to convert a portion of these contingent liabilities to debt in the
quarter ended March 31, 1997.
Technicolor Videocassette, Inc. currently serves as the Company's video cassette
duplicator and fulfillment contractor. Technicolor Videocassette, Inc. has a
general lien on all of the Company's materials and products in its possession.
As of December 31, 1996, the Company had expended a total of $5.6 million
(approximately $400,000 expended in fiscal 1997) in Trimark Interactive, its 90%
owned subsidiary.
12
ITEM 2: (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Management of the Company is conducting an ongoing strategic review of Trimark
Interactive and has retained a financial advisory firm to assist it in such
review. The strategic review includes discussions with third parties regarding
the potential merger or sale of all or part of Trimark Interactive. There can
be no assurance that any such transaction will occur or as to the impact of such
transaction on the Company's business.
On December 6, 1994, the Company announced a stock repurchase program pursuant
to which it could buy up to $1,250,000 of its outstanding Common Stock in the
open market. During the six months ended December 31, 1996, the Company
purchased 28,200 shares for approximately $159,000 under the repurchase program.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievement of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: General economic and business
conditions, which will, among other things, impact demand for the Company's
products; changes in public tastes, industry trends and demographic changes,
which may influence the distribution and exhibition of films in certain areas;
public reaction to and acceptance of the Company's video, theatrical and
television product, which will impact the Company's revenues; competition,
including competition from major motion picture studios, which may affect the
Company's ability to generate revenues; reliance on management and key
personnel; consolidation in the retail video industry; new methods of
distributing motion pictures; and other factors referenced in this Form 10-Q and
the Form 10K filed for the year ended June 30, 1996.
13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The 1996 annual meeting of stockholders of the Registrant occurred on November
22, 1996. The following matters were voted upon at the meeting: the election
as directors of the Registrant of each of Mark Amin, Johan A. Wassenaar, Gordon
Stulberg, Matthew H. Saver and Tofigh Shirazi; and the ratification of the
appointment of Price Waterhouse LLP as independent accountants of the
Registrant. The results of the voting were as follows:
VOTES BROKER
----- ------
MATTER VOTED VOTES FOR AGAINST ABSTAINED NON-VOTES
- ------------- --------- ------- --------- ---------
Election of 3,925,302 -- -- --
Mark Amin
Election of 3,925,302 -- -- --
Johan A. Wassenaar
Election of 3,925,302 -- -- --
Gordon Stulberg
Election of 3,925,302 -- -- --
Matthew H. Saver
Election of 3,925,302 -- -- --
Tofigh Shirazi
Ratification of 3,924,572 4,000 880 --
Price Waterhouse
LLP
14
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO DESCRIPTION
- ---------- -------------------------------------------------------------------
10.63 Employment Agreement, dated August 30, 1995, by and between
Trimark Pictures, Inc., a California corporation and Sergio
Aguero, as amended to date.
10.64 Amendment No. 3 to credit agreement, dated October 31, 1996.
10.65 Credit, Security, Guaranty and Pledge Agreement, dated December
20, 1996, by and between the Registrant's principal operating
subsidiaries, Trimark Pictures, Inc. and Trimark Television,
Inc., and The Chase Manhattan Bank, as Administrative Agent and
Fronting Bank.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
On October 21, 1996, Trimark Holdings, Inc. filed a report dated
October 9, 1996 under Item 5, announcing that it has entered
into a commitment with The Chase Manhattan Bank to agent and
arrange a $75 million syndicated revolving credit agreement.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRIMARK HOLDINGS, INC.
By: /s/ James E. Keegan
-------------------------------
James E. Keegan
Senior Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer
and authorized to sign on
behalf of the Registrant)
Date: February 12, 1997
-----------------
16
INDEX TO EXHIBITS
EXHIBIT NO DESCRIPTION METHOD OF FILING
10.63 Employment Agreement, dated August 30, 1995, by filed herewith
and between Trimark Pictures, Inc., a California electronically
corporation and Sergio Aguero, as amended to date.
10.64 Amendment No. 3 to credit agreement, dated filed herewith
October 31, 1996. electronically
10.65 Credit, Security, Guaranty and Pledge Agreement, filed herewith
dated December 20, 1996, by and between the electronically
Registrant's principal operating subsidiaries,
Trimark Pictures, Inc. and Trimark Television,
Inc., and The Chase Manhattan Bank, as
Administrative Agent and Fronting Bank.
27 Financial Data Schedule. filed herewith
electronically
17