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 quarterly period ended SEPTEMBER 30, 1999 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)
4553 GLENCOE AVE., SUITE 200
MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices) (Zip code)
(310) 314-2000
(Registrant's telephone number, including area code)
2644 30TH STREET, SANTA MONICA, CALIFORNIA 90405
(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 November 11, 1999, 4,604,677 shares of Trimark Holdings, Inc. common
stock were outstanding, excluding shares held by Trimark Holdings, Inc. as
treasury stock.
1
TRIMARK HOLDINGS, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 1999 and June 30, 1999 3
Consolidated Statements of Operations - Three months ended September 30, 4
1999 and 1998
Consolidated Statements of Cash Flows - Three months ended September 30, 5
1999 and 1998
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and 8-14
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
2
TRIMARK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
------------------------------------
(Dollars in Thousands, Except Share Data)
September 30, June 30,
ASSETS 1999 1999
--------------------- ------------
(Unaudited)
Cash and cash equivalents $ 2,039 $ 2,121
Accounts receivable, less allowances of
$9,093 and $5,352, respectively 20,036 20,231
Film costs, net (Note 2) 48,801 49,230
Deferred marketing costs 953 1,518
Inventories, net 2,335 1,552
Equity investments 1,077 6,036
Property and equipment at cost, less accumulated
depreciation of $2,986 and $2,872,respectively 525 565
Due from officers 764 792
Other assets 1,028 1,233
--------------------- ------------
$ 77,558 $ 83,278
===================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving line of credit $ 44,330 $ 48,330
Accounts payable and accrued expenses 6,398 5,710
Minimum guarantees and royalties payable 8,927 12,204
Deferred income 1,056 889
Income taxes payable 49 64
--------------------- ------------
Total liabilities 60,760 67,197
--------------------- ------------
Stockholders' equity:
Common stock, $.001 par value. Authorized
20,000,000 shares; 5,570,092 shares issued
at September 30, 1999 and June 30, 1999 6 6
Additional paid in capital 18,617 18,617
Preferred stock, $.01 par value. Authorized
2,000,000 shares; no shares issued and
Outstanding -- --
Retained earnings 2,058 (1,180)
Accumulated comprehensive income 580 3,101
Less treasury shares, at cost - 965,415 shares (4,463) (4,463)
--------------------- ------------
Stockholders' equity 16,798 16,081
--------------------- ------------
$ 77,558 $ 83,278
===================== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------
(Dollars in Thousands, Except earnings Per Share)
Three Months Ended September 30,
-------------------------------------------------
1999 1998
--------- -----------
(Unaudited)
Net revenues $ 20,562 $ 19,379
Film costs and distribution expenses 15,446 15,243
----------- -----------
Gross Profit 5,116 4,136
----------- -----------
Operating expenses:
Selling 1,688 1,883
General and administrative 1,242 1,169
Bad debt 221 (484)
----------- -----------
3,151 2,568
----------- -----------
Operating earnings 1,965 1,568
Other (income) expenses:
Interest expense 914 1,110
Interest and investment income (2,181) (15)
----------- -----------
(1,267) 1,095
----------- -----------
Earnings before income taxes 3,232 473
Income taxes (Note 5) (7) (240)
----------- -----------
Net earnings $ 3,239 $ 713
----------- -----------
Other comprehensive loss, net of tax (2,520) --
----------- -----------
Comprehensive income 719 713
=========== ===========
Weighted average number of common shares
basic and fully diluted (Note 6) 4,605 4,181
=========== ===========
Net earnings per common share basic
and fully diluted (Note 6) $ 0.70 $ 0.17
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------
(Dollars in Thousands)
Three Months Ended
September 30,
1999 1998
--------- -----------
(Unaudited)
Operating activities:
Net earnings $ 3,239 $ 713
Adjustments to reconcile net earnings to
Net cash used by operating activities:
Film amortization 9,909 9,287
Depreciation and other amortization 114 104
Provision for returns and bad debt 3,741 370
Provision for inventory obsolescence (548) --
Change in operating assets and liabilities:
Increase in accounts receivable (3,546) (1,836)
Additions to film costs (9,480) (12,588)
Decrease in deferred marketing costs 565 571
(Increase) decrease in inventories (235) 690
Increase (decrease) in notes receivable
From officers 28 (15)
Decrease in other assets 205 87
Increase (decrease) in accounts payable and
accrued expenses 688 (3,335)
(Decrease) increase in minimum guarantees and
royalties payable (3,277) 1,865
Decrease in income taxes payable (15) --
Increase (decrease) in deferred income 167 (310)
------------- -------------
Net cash provided (used) by operating activities 1,555 (4,397)
------------- -------------
Investing activities:
Acquisition of property and equipment (74) (55)
Sale of equity investments at cost 2,437 --
------------- -------------
Net cash provided (used) by investing activities 2,363 (55)
------------- -------------
Financing activities:
Net (decrease) increase in revolving line of credit (4,000) 4,200
Purchase of treasury stock -- (33)
------------- -------------
Net cash (used) provided by financing activities (4,000) 4,167
------------- -------------
Decrease in cash and cash equivalents (82) (285)
Cash and cash equivalents at beginning of period 2,121 1,159
------------- -------------
Cash and cash equivalents at end of period $ 2,039 $ 874
============= =============
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 10-K for the year ended June 30, 1999. Significant
accounting policies used by the Company are summarized in Note 2 to the June
30, 1999 financial statements.
In the opinion of management, all adjustments required for a fair
presentation of the financial position as of September 30, 1999 and the
results of operations and cash flows for the periods ended September 30, 1999
and September 30, 1998 have been made and all adjustments were of a normal
and recurring nature. Operating results for the three month period 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:
September 30, 1999 June 30,
1999 1999
------------------------- ------------------------
(in thousands)
Released $ 34,990 $ 36,352
Completed not released 4,374 3,938
In process and development 9,437 8,940
------------------------- -------------------------
$ 48,801 $ 49,230
------------------------- -------------------------
6
NOTE 3 - COMMITMENTS & CONTINGENCIES:
The Company has entered into certain agreements which provide for royalty
advances and promotional and advertising commitments totaling $6.7 million. If
the conditions to these agreements are not met by the licensors, the Company may
withdraw from the arrangements. These commitments extend to March 2000.
NOTE 4 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three month period for:
September 30,
1999 1998
---------------- ------------------
(in thousands)
Interest $636 $1,245
Income taxes 60 82
NOTE 5 - INCOME TAXES
The $240,000 tax benefit represents a tax receivable from a prior year return
recognized in the fiscal year ended June 30, 1999.
NOTE 6 - NET EARNINGS PER COMMON SHARE:
Basic earnings per common share amounts are based on the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per common share amounts are based on the weighted average common
shares outstanding during the period and shares assumed issued upon conversion
of stock options when the effect of such conversions would have been dilutive to
net earnings.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET REVENUES:
Three months ended
September 30,
-----------------------------------
1999 1998
--------------- ---------------
(in thousands)
Domestic:
Home video distribution $13,690 $13,644
Theatrical distribution 840 542
Television distribution 2,619 1,271
Foreign:
All media 3,413 3,922
--------------- ---------------
$20,562 $19,379
--------------- ---------------
Net revenue for the quarter ended September 30, 1999 increased $1.2 million
or 6% compared with the same period in fiscal year 1999. The increase for the
quarter was due primarily to increases in net revenue from the television,
home video and theatrical markets of $1.3 million, $46,000 and $298,000
respectively, partially offset by decreases in international revenue of
$509,000. The increase in television revenue was primarily due to domestic
cable availability of "Meet Wally Sparks," "The Curve," "My Teacher's Wife,"
and "Cube" during the period as compared to only two films during the same
period in fiscal year 1999. The continued success of the home video release
of the NBC titles which include Saturday Night Live compilations in the sell
through market has enabled the Company to maintain its home video revenue
from the prior period without the large capital contributions required by
theatrical releases such as "Chairman of the Board" which was released in
video during the same period in fiscal 1999. The decrease in foreign
distribution revenue was primarily due to the release of one (1) film in the
foreign market for the quarter ended September 30, 1999 as compared to two
(2) films in the same period for fiscal year 1999.
The Company continues to focus its resources on producing and acquiring films
with specialized theatrical potential and the made for television market and
the home video sell through market. See "Liquidity and Capital Resources."
8
ITEM 2: (Continued)
The Company anticipates that the domestic home video market will continue to
be extremely competitive.
GROSS PROFIT: Gross profit as a percentage of net revenues for the quarter
ended September 30, 1999 and 1998 was 25% and 21%, respectively.
SELLING EXPENSES: Selling expenses as a percentage of net revenues for the
quarter ended September 30, 1999 and 1998 were 8% and 10%, respectively. For
the three months ended September 30, 1999 selling expenses decreased $195,000
or 10% compared with the same period in fiscal 1999. In November of 1998, the
Company made a concerted effort to decrease selling related expenses. The 10%
decrease in costs is a direct result of those efforts.
GENERAL AND ADMINISTRATIVE EXPENSES: For the three months ended September 30,
1999 general and administrative expenses increased $73,000 or 6% compared
with the same period in fiscal 1999. Approximately 65% of the increase is due
to the start up costs associated with Trimark's new subsidiary CinemaNow, Inc.
BAD DEBT EXPENSE: Bad debt expense for the three months ended September 30,
1999 increased $705,000 or 146% compared with the same period in fiscal 1999.
Bad debt expense primarily represents reserves taken against domestic video
and foreign sales. The increase was partially due to $355,000 in collections
during fiscal 1999 on past due video receipts which were previously reserved
for during the prior year. In addition, the reserve was increased due to a
number of international customers' accounts going into arbitration.
INTEREST EXPENSE: Interest expense for the quarter ended September 30, 1999
decreased $196,000 or 18% compared with the same period in fiscal 1999. The
decrease in interest expense in the first quarter of fiscal 2000 was
primarily due to a lower average borrowing level from the same period in
fiscal 1999. As of September 30, 1999, there was $44.3 million outstanding
under the credit facility. The Company expects to use excess cash flow
generated by theatrical and library product to decrease current debt levels.
See "Liquidity and Capital Resources."
INTEREST AND INVESTMENT INCOME: Interest and investment income for the three
months ended September 30, 1999 increased $2.2 million as
9
ITEM 2: (Continued)
a result of the sale of 29,411 shares of Yahoo!, Inc. for a weighted average
selling price of $156 per share.
NET EARNINGS: The Company's net earnings for the three months ended September
30, 1999 increased $2.5 million or 354% compared with the same period in
fiscal 1999. The increase was due to the sale of the Yahoo!, Inc. shares
combined with the higher gross profit for the period compared to the same
period in fiscal 1999.
OTHER COMPREHENSIVE (LOSS) INCOME: The comprehensive (loss) income reported
during the period ending September 30, 1999 is a result of the realized and
unrealized gain in Yahoo!, Inc. shares resulting from the sale of the stock
during the quarter and change in per share price at September 30, 1999.
Unrealized Holding Gains Arising During Period $ 53,000
Less: Reclassification adjustment for gains
Included in net income (2,149,000)
Reversal of unrealized gain (424,000)
------------
Other Comprehensive Income, Net of Tax (2,520,000)
Accumulated Comprehensive Income @ 6/30/99 3,101,000
------------
Accumulated Comprehensive Income @ 9/30/99 $580,000
------------
10
ITEM 2: (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated by operations and borrowings under its
credit facility to finance its operations. The Company's cash flows from
operating, investing and financing activities for the three months ended
September 30, 1999 and 1998 were as follows:
Three Months Ended
September 30,
------------------------------------------
1999 1998
--------------- ------------------
(in thousands)
Net cash provided (used) by operating activities $ 1,555 ($ 4,397)
Net cash provided (used) by investing activities 2,363 (55)
Net cash (used) provided by financing activities (4,000) 4,167
Cash provided by operations increased by $6.0 million for the three month
period ended September 30, 1999 compared to the same period in fiscal 1999
principally as the result of a $2.5 million increase in net profits coupled
with a $3.1 million decrease in film costs. The $9.9 million addition to film
costs was primarily used for the production and acquisition of new product
with approximately $1.0 million used for prints and advertising costs on the
specialized theatrical releases of "Twice Upon a Yesterday," "Better Than
Chocolate," "Romance" and "Joe the King."
Investing activities for the three months ended September 30, 1999 consisted
of the sale of Yahoo!, Inc. stock at a weighted average price $156 per share
with a base price of approximately $83 per share. Investing activities for
fiscal 1999 primarily consisted of expenditures on production equipment
improvements.
Financing activities, consisting primarily of borrowings under the Company's
credit facility, decreased $8 million in the three months ended September 30,
1999 as compared to the three months ended September 30, 1998. The decrease
was primarily the result in the increase in operating cash flows. The
Company's cash requirements vary in part with the size and timing of
production advances and minimum guarantee payments along with the timing of
its theatrical, home video, television and international releases. The
combination of steady sales growth in sell through video product along with
11
ITEM 2: (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
lower investments in prints and advertising costs has led to the continued
reduction in the overall debt balance.
On December 20, 1996, the Company's principal operating subsidiaries, Trimark
Pictures, Inc. and Trimark Television, Inc., 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 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 1.5% above Chase Manhattan's prime rate or 2.5% above Chase
Manhattan's London Interbank Market for Eurodollars 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 September 30, 1999 there was $44.3 million outstanding under the credit
facility. The Company expects to use excess cash flow generated by theatrical
and library product to decrease current borrowing levels. The credit
agreement contains various financial and other covenants to which the Company
must adhere. These covenants, among other things, require the maintenance of
minimum net worth and various financial ratios which are reported to the bank
on a quarterly basis and include limitations on additional indebtedness,
liens, investments, disposition of assets, guarantees, affiliate transactions
and the use of proceeds. In relation to the release schedule described below,
the Company amended the current credit agreement as of December 31, 1998 and
September 27, 1999. The amended agreement provides for less stringent minimum
net worth ratios and minimum equity requirements. In consideration for the
adjustment of these ratios and minimum equity requirement, the amended credit
facility reduces the borrowing limits over the remaining life of the credit
facility. For the year ended June 30, 1999, the amended borrowing limit was
reduced to $60 million. By January 31, 2000, the borrowing limit is reduced
to $50 million and by June 30, 2000 is reduced to $40 million. The amendments
to the debt covenants and
12
ITEM 2: (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
borrowing limits were structured to incorporate the Company's overall
strategy and presently planned productions, acquisitions, distribution and
overhead expenditures. The Company is in compliance with all debt covenants
as of September 30, 1999.
The Company's ability to maintain availability under its Credit Facility is
primarily dependent upon the timing of collections on existing sales during
the next twelve months and the amount and timing of collection on anticipated
sales of the Company's current library and films which the Company plans to
release or make available over the next twelve months. Management believes
the existing capital, cash flow from operations and availability under the
Company's amended Credit Facility will be sufficient to enable the Company to
fund its planned productions, acquisitions, distribution and overhead
expenditures for the next twelve months.
In the domestic specialized theatrical market the Company plans to release
six (6) to eight (8) motion pictures in fiscal 2000 (of which two were
released in the first three months of fiscal 2000). Furthermore, the Company
plans to release approximately thirty-five (35) motion pictures into the
domestic home video rental market (of which eight (8) were released in the
first three months of fiscal 2000) and to continue to expand distribution in
the sell through market. The Company intends to sell four (4) to six (6)
films and "movies of the week" which will premier on major cable networks or
broadcast stations. Also in fiscal 2000 the Company plans to release
approximately eight (8) to ten (10) motion pictures initially into
international distribution (of which one (1) was released in the first three
months of the fiscal year).
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.
IMPACT OF YEAR 2000. The Company is currently working to resolve the
potential impact of the year 2000 on the processing of time-sensitive
information by computerized information systems. Year 2000 issues may arise
if computer programs have been written using two digits (rather than four) to
define the applicable year. In such case, programs that have time-sensitive
logic may recognize a
13
ITEM 2: (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
date using "00" as the year 1900 rather than the year 2000, which could
result in miscalculations or system failures. Management completed a review
of significant software and equipment used in the Company's operations and,
to the extent practicable, in the operations of its key business partners, in
order to determine if any year 2000 risks exist that may be material to the
Company as a whole. The Company estimates that repairing all time sensitive
hardware and software will cost the Company approximately $250,000. As of
September 30, 1999 the Company has purchased approximately $220,000 in new
computer hardware and software through its normal upgrading of old computer
hardware and software as well as a direct result of year 2000 issues. The
Company also entered into a licensing agreement on February 6, 1999 for the
implementation of a new general ledger software system. The new G/L system
became fully operational on July 1, 1999. If customers or vendors are unable
to resolve the year 2000 processing issues in a timely manner, it could
result in a material financial risk.
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: 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; whether the
Company's current strategy which includes
14
ITEM 2: (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
theatrical releases of only specialized films and production and acquisition
of made for television product is successful; new methods of distributing
motion pictures; the costs and risks associated with the year 2000 issue; and
other factors referenced in this Form 10-Q and the Company's other filings
with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company does not consider that the potential loss of future earnings
which could be caused by interest rate volatility would have a material
impact on its financial position.
15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No Description
- ---------- -------------------------------------------------------------------------------------------
10.108 Amendment No. 4 to the Credit, Security, Guaranty and Pledge Agreement, dated September 27,
1999, 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.
10.109 1999 Stock Option Plan of the Registrant (incorporated by reference to Annex A to the
Registrant's Proxy Statement dated October 15, 1999).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
16
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/ JEFF GONZALEZ
-------------------------------
Jeff Gonzalez
Chief Financial Officer
(Principal Financial
Officer and authorized to sign
on behalf of the Registrant)
Date: November 15, 1999
-----------------
17
INDEX TO EXHIBITS
Exhibit No Description Method of Filing
- ---------- ----------- ----------------
10.108 Amendment No. 4 to the Credit, Security, Guaranty and filed herewith electronically
Pledge Agreement, dated September 27, 1999, 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.
10.109 1999 Stock Option Plan of the Registrant, (incorporated
by reference to Annex A to the Registrant's Proxy
Statement dated October 15, 1999).
27 Financial Data Schedule. filed herewith electronically
18