ITEM 1. BUSINESS
GENERAL
Trimark Holdings, Inc., a Delaware corporation (the "Company"), through its wholly-owned subsidiary, Trimark Pictures, Inc., a California corporation ("Trimark"), is a worldwide distributor of entertainment software, primarily engaged in the distribution of feature films in the domestic home video and theatrical markets and in the licensing of distribution rights to motion pictures for international markets. Trimark Television, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, licenses television rights to feature films, television series, music and children specials, and documentaries in both the international and domestic markets.
As an independent distribution company, the Company acquires the rights to motion pictures from a variety of sources, including studios, production companies and independent producers. Generally, the Company acquires the rights to completed motion pictures. However, in order to secure rights to motion pictures which might not otherwise be available to the Company and to acquire a wider array of distribution rights on more favorable terms, the Company also secures the rights to motion pictures prior to or during production. The Company distinguishes itself from the major motion picture studios and certain other independent video distribution companies by acquiring rights to motion pictures which may not be cost effective for many of its larger competitors to distribute.
Distribution rights which the Company may acquire include: (a) DOMESTIC - home video, - free television, pay television (including cable and pay-per-view), - theatrical and - electronic publishing (b) INTERNATIONAL - all media.
The Company was formed in August 1984 and began operations as a domestic home video distributor in early calendar year 1985 by acquiring exclusive home video distribution rights to motion pictures and other audio-visual entertainment programs which it packaged, advertised, promoted, sold, had duplicated, and shipped to home video wholesalers for resale to retailers throughout the country. The Company generally sells videocassettes to wholesale distributors for resale to the approximately 20,000 video rental stores in the United States.
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In 1987, the Company began distributing and sublicensing motion pictures for distribution in the international market. The Company considered this an opportunity to grow in an area closely related to its video business, while offering new opportunities to acquire broader distribution rights to motion pictures in all media.
On May 15, 1990, the Company was re-incorporated in Delaware. The principal assets of the Company are the capital stock of Trimark Pictures and Trimark Television; the material business of the Company is conducted through these companies. Unless noted otherwise, all references to the Company in this filing include its subsidiaries.
On June 29, 1990, the Company effected an initial public offering of 1,300,000 shares of Common Stock and an additional 200,000 shares of Common Stock were sold by selling stockholders.
On December 31, 1991, the Company acquired Trimark Television (which at the time was named International Broadcast Systems, Ltd.) a publicly traded company, for $1.6 million in cash. Trimark Television specializes in the distribution of television programming, and licenses television productions to broadcasters throughout the world.
On June 1, 1992, the Company changed its name from Vidmark, Inc. to Trimark Holdings, Inc. On June 24, 1992, Trimark changed its name from Vidmark, Inc. to Trimark Pictures, Inc. The name changes reflect the Company's diversification of its distribution streams.
In March of 1993, the Company formed Trimark Interactive to expand the core business of film production and video distribution into the emerging market for interactive entertainment software and multimedia. In March 1997, the Company sold substantially all assets (primarily intellectual properties and inventory) of Trimark Interactive to an unrelated independent entertainment and interactive music publisher. The Company is no longer engaged in the market for interactive entertainment software and multimedia.
On June 6, 2000, the Company, Lions Gate Entertainment Corp., a British Columbia corporation ("Lions Gate") and LGE Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Lions Gate ("Merger Sub"), executed an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of the Company by the form of a merger (the "Merger") of the
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Company with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of Lions Gate. In the Merger, each share of the common stock of the Company ("Common Stock") will be exchanged for (i) US$4.50 in cash and (ii) two (2) shares, without par value, of the common shares of Lions Gate (the "Lions Gate Common Shares"); provided, however, that if the average of the last reported sale price of Lions Gate Common Shares on the American Stock Exchange during the 30 consecutive trading days ending October 6, 2000 (the "Current Market Price") is less than US$2.75 per share, then the number of Lions Gate Common Shares to be issued for each share of Common Stock shall be the result obtained by dividing US$5.50 by the Current Market Price. The consummation of the Merger is subject to the approval of the Merger by holders of a majority of the Common Stock of the Company and to certain other customary closing conditions. A special meeting of the stockholders of the Company to vote on the Merger will be held on October 12, 2000. On September 26, 2000, the shareholders of Lions Gate approved the Merger.
In connection with the Merger Agreement, Mark Amin, the Company's Chairman of the Board and Chief Executive Officer, and his brother, Reza Amin, who beneficially own, in the aggregate, approximately 45% of the outstanding Common Stock, and Lions Gate entered into the Trimark Stockholders Voting Agreement, dated June 6, 2000 (the "Voting Agreement"). Pursuant to the Voting Agreement, Mark Amin and Reza Amin, solely in each of their individual capacities as a stockholder of the Company, agreed, among other things, to vote their Common Stock in favor of the Merger Agreement and the other transactions contemplated thereby, and, except as provided by the Merger Agreement, against any competing or alternative proposal.
In May 1999, the Company formed a majority owned subsidiary, CinemaNow, Inc., to engage in the business of streaming films over the internet using Trimark Pictures' library as well as acquiring the internet rights of other films or film libraries. For further information regarding CinemaNow, see "Item 13 - Certain Relationships and Related Matters - CinemaNow, Inc."
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THE UNITED STATES MOTION PICTURE INDUSTRY
The United States motion picture industry encompasses the production and theatrical exhibition of feature-length motion pictures and the subsequent distribution of such pictures in home video, television and other ancillary markets. The industry is dominated by the major studios -- some of which have divisions which are promoted as "independent" distributors of motion pictures -- including Universal Pictures, Warner Brothers (including Turner Pictures, New Line Cinema and Castle Rock Entertainment), Twentieth Century Fox, Sony Pictures Entertainment (including Columbia Pictures and Tristar Pictures), Paramount Pictures, The Walt Disney Company (including Buena Vista, Touchstone and Miramax) and MGM (including Metro Goldwyn Mayer Pictures, United Artists Pictures, Orion Pictures and Goldwyn Entertainment Company), which historically have produced and distributed the majority of theatrical motion pictures released annually in the United States. In recent years, however, "independent" motion picture production companies have played an important role in the production of motion pictures for the worldwide feature film market. There are also a large number of smaller production companies such as the Company and other entities that produce theatrical motion pictures.
The "majors" generally own their production studios and have national or worldwide distribution organizations. Major studios typically release films with direct production costs generally ranging from approximately $25 million to $100 million or more, and provide a continual source of motion pictures to the nation's theatrical exhibitors. The independents do not own production studios and, with certain exceptions, have more limited distribution capabilities than the major studios. Independents typically produce fewer motion pictures at substantially lower average production costs than major studios.
MOTION PICTURE PRODUCTION AND FINANCING. The production of a motion picture begins with the screenplay adaptation of a popular novel or other literary work acquired by the producer or the development of an original screenplay having its genesis in a story line or scenario conceived of or acquired by the producer. In the development phase, the producer typically seeks production financing and tentative commitments from a director, the principal cast members and other creative personnel. A proposed production schedule and budget also are prepared during this phase.
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Upon completing the screenplay and arranging financing commitments, pre-production of the motion picture begins. In this phase, the producer engages creative personnel to the extent not previously committed; finalizes the filming schedule and production budget; obtains insurance and secures completion guarantees, if necessary or available; establishes filming locations and secures any necessary studio facilities and stages; and prepares for the start of principal photography.
Principal photography, the actual filming of the screenplay, may extend from four to sixteen weeks or longer, depending upon such factors as budget, location, weather and complications inherent in the screenplay. Following completion of principal photography, the motion picture is edited, opticals, dialogue, music and any special effects are added, and voice, effects and music sound tracks and picture are synchronized during post-production. This results in the production of the negative from which the release prints of the motion picture are made.
The cost of a motion picture produced by an independent production company for limited distribution ranges from approximately $1 million to $12 million as compared with $25 million to $100 million or more for commercial films produced by major studios for wide release. Production costs consist of acquiring or developing the screenplay, film studio rental, cinematography, post-production costs and the compensation of creative and other production personnel. Distribution expenses, which consist primarily of the costs of advertising and release prints, are not included in direct production costs.
The major studios generally fund production costs from cash flow from their motion picture and related activities, licensing fees generated from film library holdings, and, in some cases, from unrelated businesses. Substantial overhead costs, consisting largely of salaries and related costs of the development, production, distribution and marketing staff and physical facilities maintained by the major studios, also must be funded.
Independent production companies generally avoid incurring substantial overhead costs by hiring creative and other production personnel and retaining the other elements required for pre-production, principal photography and post-production activities on a project-by-project basis. Unlike the major studios, the independents also typically finance their production activities from bank loans, "pre-sales" agreements, equity offerings and joint ventures. Independents generally attempt to complete their financing of a motion picture production prior to commencement of principal photography, at
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which point substantial production costs begin to be incurred and require payment.
"Pre-sales" are often used by independent film companies to finance all or a portion of the direct production costs of a motion picture. Pre-sales consist of license fees paid to the producer by third parties in return for the right to exhibit the completed motion picture in theaters or to distribute it in home video, television, international or other ancillary markets. Producers with distribution capabilities may retain the right to distribute the completed motion picture either domestically or in one or more foreign markets. Producers may separately license theatrical, home video, television, foreign and all other distribution rights among several licensees. The producer may also at times be able to acquire additional production funds through "gap financing," whereby a lender loans a portion of the production funds based on a distributor's estimate of the value of distribution rights. Although "gap financing" is currently available through a variety of lenders, there can be no assurance such lenders will continue to make funds available on this basis in the future.
Both major studios and independent film companies often acquire motion pictures for distribution through a customary industry arrangement known as a "negative pickup," under which the studio or independent film company agrees to acquire from an independent production company all rights to a film upon completion of production. The independent production company normally finances production of the motion picture pursuant to financing arrangements with banks or other lenders in which the lender is granted a security interest in the film and the independent production company's rights under its arrangement with the studio or independent. When the studio or independent "picks up" the completed motion picture, it assumes or pays the production financing indebtedness incurred by the production company in connection with the film. In addition, the independent production company is paid a production fee and generally is granted a participation in the net profits of the motion picture.
Both major studios and independent film companies generally incur various third-party participations in connection with the production and distribution of a motion picture. These participations are contractual rights of actors, directors, screenwriters, owners of rights and other creative and financial contributors entitling them to share in revenues or net profits (as defined in the respective agreements) from a particular motion picture. Except for the most sought-after talent,
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participations are generally payable after all distribution and marketing fees and expenses, direct production costs and financing costs are paid in full.
MOTION PICTURE DISTRIBUTION.
Motion picture distribution encompasses the distribution of motion pictures in theaters and in ancillary markets such as home video, pay-per-view, pay television, broadcast television, foreign and other markets. The distributor typically acquires rights from the producer to distribute a motion picture in one or more markets. For its distribution rights, the distributor typically agrees to advance the producer a certain minimum royalty or guarantee, which is to be recouped by the distributor out of revenues generated from the distribution of the motion picture and is generally nonrefundable. The producer also is entitled to receive a royalty equal to an agreed-upon percentage of all revenues received from distribution of the motion picture over and above the royalty advance.
THEATRICAL DISTRIBUTION. The theatrical distribution of a motion picture involves the manufacture and transportation of release prints, the promotion of the picture through advertising and publicity campaigns and the licensing of the motion picture to theatrical exhibitors. The size and success of the promotional advertising campaign can materially affect the revenues realized from the theatrical release of a motion picture. The major studios can spend in excess of $50 million to promote motion pictures, and have average combined print and advertising costs in excess of $20 million. The costs incurred in connection with the distribution of a motion picture can vary significantly, depending on the number of screens on which the motion picture is to be exhibited and the competition among distributors for theaters during certain seasons. Similarly, the ability to exhibit motion pictures in the most popular theaters can affect theatrical revenues.
The distributor and theatrical exhibitor generally enter into an arrangement providing for the exhibitor's payment to the distributor of a percentage of the box office receipts for the exhibition period, in some cases after deduction of the theater's overhead, or a flat negotiated weekly amount. The distributor's percentage of box office receipts varies widely, depending upon the success of the motion picture at the box office and other factors. Distributors carefully monitor the theaters which have licensed the picture for exhibition to ensure that the exhibitor promptly pays all amounts due the distributor. Substantial delays in collection are not unusual.
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Successful motion pictures may continue to play in theaters for up to four (4) months or longer following their initial release. Concurrently with their release in the United States, motion pictures generally are released in Canada and may also be released in one or more other foreign markets. Motion pictures are generally made available for distribution in markets subsequent to theatrical as follows:
HOME VIDEO. The home video distribution business involves the promotion and sale of videocassettes and videodiscs to local, regional and national video retailers (e.g., video specialty stores, convenience stores, record stores and other outlets), which then rent or sell such videocassettes and videodiscs to consumers primarily for private viewing.
Certain films are not initially released theatrically but may instead be initially released to home video. Given the increasing preference of retail video stores for successful theatrical releases, it has become increasingly difficult to secure the initial release of a film directly to home video, and the economic opportunity for such films where such a release is obtained has greatly diminished. To address the change in preference in the domestic home video market, the Company has focused its resources on distributing an increased number of specialized films theatrically as well as films premiering on pay television, and decreasing the releases of straight-to-video films. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Major feature films are usually scheduled for release in the home video market within four to six months after theatrical release to capitalize on the theatrical advertising and publicity for the film. Promotion of new releases is generally undertaken during the nine to twelve weeks before the release date. Videocassettes of feature films are generally sold to domestic wholesalers at approximately $40 to $60 per unit and generally are rented by consumers for fees ranging from $1 to $5
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per day. Wholesalers who meet certain sales and performance objectives may earn rebates, return credits and cooperative advertising allowances. Selected titles, including certain made-for-video programs, are priced significantly lower to encourage direct purchase by consumers. Direct sale to consumers is referred to as the "priced-for-sale" or "sell through" market. Many video distributors have also entered into revenue sharing arrangements with major video retail stores. Under such arrangements, videocassettes are sold at a reduced price to video rental stores and a percentage of the video rental revenue is then shared with the owners (or licensors) of the films. Home video arrangements in international territories are similar to those in domestic territories except that the wholesale prices may differ.
Overall growth in the domestic home video market has slowed as growth in the number of new outlets and new VCR homes has moderated. The growth in outlets designed to specifically serve the rental market has decreased over the past several years, while the number of outlets which offer videocassettes and digital video discs (DVD) for sale has increased. The sell through market continues to grow with strong sales in the traditional family entertainment market and a growing number of hit feature films initially released at prices generally below $30. Furthermore, technological developments which internet companies, regional telephone companies and others are developing could make competing delivery systems economically viable and could affect the home video marketplace.
PAY-PER-VIEW. Pay-per-view television allows cable and satellite television subscribers to purchase individual programs, including recently released motion pictures and live sporting, music or other events, on a "per use" basis. The subscriber fees are typically divided among the program distributor, the pay-per-view operator and the cable system operator.
PAY TELEVISION. Pay television allows subscribers to view premium channels such as HBO/Cinemax, Showtime/The Movie Channel and other pay television networks offered by cable and satellite system operators for a monthly subscription fee. The pay television networks acquire a substantial portion of their programming from motion picture distributors. New markets may develop with the maturation of newly emerging direct broadcast satellite (DBS) systems and other digital television systems.
BROADCAST AND BASIC CABLE TELEVISION. Broadcast television allows viewers to receive, without charge, programming broadcast
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over the air by affiliates of the major networks (ABC, CBS, NBC and Fox), as well as other networks (UPN and WB Network), independent television stations and cable and satellite networks and stations. In certain areas, viewers may receive the same programming via cable transmission for which subscribers pay a basic cable television fee. Broadcasters or cable systems operators pay fees to distributors for the right to air programming a specified number of times.
FOREIGN MARKETS. In addition to their domestic distribution activities, some motion picture distributors generate revenues from distribution of motion pictures in foreign theaters, home video, television and other foreign markets. There has been a dramatic increase in recent years in the worldwide demand for filmed entertainment. This growth is largely due to the privatization of television stations, introduction of direct broadcast satellite services, and increased home video and cable penetration.
OTHER MARKETS. Revenues also may be derived from the distribution of motion pictures to airlines, schools, libraries, hospitals and the military, licensing of rights to perform musical works and sound recordings embodied in a motion picture, and licensing rights to manufacture and distribute merchandise, clothing and similar commercial articles derived from characters or other elements of a motion picture.
NEW TECHNOLOGIES. New means of delivery of entertainment product are constantly being developed and offered to the consumer. The impact of emerging technologies such as direct broadcast satellites and the internet, on the Company's operations cannot be determined at this time. However, as a holder of entertainment copyrights, the Company monitors these new media possibilities.
ACQUISITION OF MOTION PICTURE DISTRIBUTION RIGHTS BY THE COMPANY
GENERAL. Distribution rights to motion pictures can encompass various media (e.g., theatrical, home video, free or pay television, electronic publishing) and various markets or territories (e.g., the United States and Canada, Great Britain, Japan). The Company prefers to acquire worldwide distribution rights to a motion picture in all media wherever feasible.
The Company uses a similar decision making process in analyzing the acquisition of a completed or an uncompleted movie. The Company collects information concerning new motion pictures being contemplated or entering the production cycle. This
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information is obtained from trade sources and from personal relationships and contacts. The acquisition process focuses on productions which seem most likely to fit the Company's requirements. Before the Company acquires distribution rights for any motion picture, the Company analyzes not only the picture's projected costs, revenues, and scheduling but also the effect of these assumptions on overall Company performance. Management bases its acquisition decisions on the results of this evaluation process and will not make offers with risks that, in management's opinion, could materially adversely affect the Company's profitability. The Company's credit facility imposes limitations on the size of minimum guarantees or production or acquisition costs the Company can incur without the lender's approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
When the Company acquires distribution rights to a motion picture prior to its production, it makes only limited commitments to advance funds before completion. After acquisition of the rights of a motion picture prior to its production, the Company typically has approval rights over key production elements and maintains a production supervisory staff to monitor the production process. The Company's current policy is to acquire distribution rights for motion pictures which will not be subject to material restrictions on release and exhibition.
DOMESTIC HOME VIDEO DISTRIBUTION RIGHTS. The Company generally acquires domestic (United States and Canadian) home video rights under exclusive licenses, for terms ranging from five years to perpetuity, in return for a minimum guarantee against future royalties based on a percentage of a videocassette's wholesale net revenues. The value of a motion picture's domestic home video rights generally increases as its domestic theatrical print and advertising budget increases. Some of the Company's licenses require the licensor or theatrical distributor to make minimum print and advertising expenditures. In other instances, the Company has agreed to release and or pay print and advertising expenses for a motion picture's theatrical distribution.
Domestic home video sales are promoted through regional direct sales personnel who contact home video wholesale distributors and large retail video stores. Substantially all of the Company's home video rental sales have been made to ten (10) wholesale video distributors and two (2) retail video stores.
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In February 1994, the Company formed a sell through unit to maximize the profit potential of its 600+ title library and acquire new products for the growing video sell through and DVD market. Currently the Company distributes or sells directly to mass merchandisers such as Wal-Mart, Costco, Target and Best Buy and others who buy large volumes of the Company's videos and DVD's to be sold directly to the consumer.
DOMESTIC THEATRICAL DISTRIBUTION RIGHTS. The Company acquires theatrical distribution rights on a selective basis and distributes motion pictures for exhibition by both major theater chains and numerous independent theaters throughout the United States.
Management of the Company considers the theatrical distribution of film important as a marketing tool which enhances video and international sales. Accordingly, the Company seeks to acquire theatrical distribution rights as part of an acquisition where possible, even if a film ultimately will not be released theatrically. The Company released six films in the theatrical market during fiscal 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company currently targets motion pictures for distribution to various demographic audiences on a specialized basis, and such pictures can be distributed less expensively on a limited or more regional basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Specialized motion pictures are characterized by underlying literary and artistic elements intended to appeal primarily to sophisticated or niche audiences and are generally substantially less expensive to produce and distribute than films produced for wide release. It is not uncommon for films to suffer theatrical losses primarily due to increased advertising expenditures, but to have increased performance in video and other ancillary media that may partially or totally offset such losses. The management of the Company believes that the theatrical market has significant upside potential should any particular film perform well. However, no assurance can be made as to results with respect to any particular release.
The Company is in various stages of post production, production, development and pre-production on a number of projects, and intends to release theatrically six (6) to eight (8) films in fiscal 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
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DOMESTIC TELEVISION DISTRIBUTION RIGHTS. The Company acquires television distribution rights as part of the overall acquisition whenever possible. In addition, television distribution rights are acquired specifically for distribution by Trimark Television.
The Company hired additional personnel in fiscal 1998 to develop and oversee the production and sales of long-form programming for initial release on broadcast or major cable networks. 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.
Television networks, independent television networks, television stations and cable system operators generally license television series, films and film packages (consisting of theatrically released feature films and made-for-television movies) pursuant to agreements with distributors or syndicators that allow a fixed number of telecasts over a prescribed period of time for a specified cash license fee or for barter of advertising time.
Pay/Cable television services usually license pictures for initial exhibition commencing approximately 10 to 18 months after initial domestic theatrical release or six months after domestic home video release. Licensing of such properties is generally accomplished pursuant to agreements which allow a fixed number of telecasts over a prescribed period of time for a specified license fee.
INTERNATIONAL DISTRIBUTION RIGHTS. International distribution rights include rights in various media (e.g., television, theatrical and home video) and to various territories (e.g., Germany, Italy, Japan and the United Kingdom). To acquire these rights, the Company is usually required to pay a minimum guarantee. The minimum guarantee, along with specific recoupable marketing and other expenses, is recovered from the motion picture's gross revenues before the producer begins to participate in the net revenues. The Company maintains a sales force to manage international sales and to promote its motion pictures at film markets, including the Cannes Film Festival in France, the American Film Market (AFM) in Los Angeles and The Milan Film Festival (MIFED) in Italy.
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MARKETING AND SELLING
The Company's marketing operations are focused on domestic home video, international licensing, theatrical distribution and television distribution. The Company designs its own promotional campaigns for each motion picture; commissions the art work for advertising, trade show displays and packaging; and arranges for the printing, production and distribution of all promotional materials.
Domestic home video sales are promoted through regional direct sales personnel who contact home video wholesale distributors and large retail video stores. The Company's largest wholesale video customer is Ingram Entertainment, which represents approximately nine percent (9%) of net revenues for the fiscal year ended June 30, 2000. The company's largest direct retail customers are Blockbuster and Hollywood Video, which represent approximately 19% of net revenues.
The Company, when appropriate, test markets its motion pictures in the domestic theatrical market. If the response is satisfactory, the Company will proceed to distribute the picture. The Company handles the sales, marketing and servicing of its theatrical releases.
International sales operations consist of promoting and sublicensing the Company's motion pictures to independent territorial distributors for release on specified media within designated territories.
The Company maintains a sales force to manage international sales and to promote its motion pictures at foreign film markets. The Company continues to expand its worldwide television distribution in order to maximize the unexploited television rights which it holds. The Company distributes product directly to broadcasters in both the international and domestic markets and licenses product for other companies and producers.
COMPETITION
The motion picture distribution business and other related entertainment businesses are highly competitive. The Company's competitors in domestic home video distribution have included the home video divisions of the major studios, such as Warner Bros., The Walt Disney Company, Universal, Paramount, Fox and Sony/Columbia; and independent distributors, including Artisan Entertainment. Many of these competitors have greater access to
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feature films and significantly greater resources than the Company.
In the international distribution market, the Company competes with a wide range of companies from small independents exclusively focused upon certain classes of motion pictures like J & M Entertainment to the major studios which have expanded distribution in international territories, such as Disney's Buena Vista International.
INTELLECTUAL PROPERTY RIGHTS
Copyright protection is a serious problem in the video cassette distribution industry because of the ease with which cassettes may be duplicated. In the past, certain countries permitted video pirating to such an extent that the Company did not consider these markets viable for distribution. Video distributors, including the Company, have initiated legal actions to enforce copyright protection and management believes the problem to be less critical at the present time.
The Company is currently using the trademark, "TRIMARK PICTURES" in connection with films distributed domestically and licensed internationally and has applied for the trademark "CinemaNow" in the United States and certain other countries. The trademark "TRIMARK PICTURES" has been registered with the Commissioner of Patents and Trademarks. The Company regards its trademarks as valuable assets and believes that its trademarks are an important factor in marketing its products.
REGULATION AFFECTING THE COMPANY
Distribution rights to motion pictures are granted legal protection under the copyright law of the United States and most foreign countries, which provide substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures. The Company endeavors to maintain copyright protection for all its films under the laws of all applicable jurisdictions.
The Code and Ratings Administration of the Motion Picture Association of America, an industry trade association, assigns ratings for age group suitability for theatrical distribution of motion pictures. The Company submits most of its films for such ratings. A substantial number of the Company's films are rated "R;" under rules enforced by theatrical exhibitors, children under certain ages may attend the applicable motion picture only if accompanied by an adult.
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In addition, United States television stations and networks as well as foreign governments impose additional restrictions on the content of motion pictures which may restrict in whole or in part exhibition on television or in a particular territory. There can be no assurance, therefore, that current or future restrictions on the content of Company films, may not limit or affect the Company's ability to exhibit certain of such motion pictures in such media or markets.
EMPLOYEES
As of June 30, 2000, the Company had 101 full-time employees, 42 of whom were engaged in sales and marketing. None of the Company's employees are covered by a collective bargaining agreement, although some of the Company's subsidiaries are subject to guild agreements. Management believes that its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company is leasing corporate office space in Marina del Rey, California for a term of ten years expiring on September 3, 2009. These premises contain approximately 27,000 square feet of office space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising from disputes over copyrights, clear title and contractual matters arising from its distribution contracts. Such proceedings are not considered material to the Company's business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. No matters were submitted to a vote by the Company's security holders during the fourth quarter of its fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the over-the-counter market on June 29, 1990 following the effectiveness of the Company's Registration Statement on Form S-1. Prior to that date, there was no public market for the Common Stock. The Common Stock is listed and reported on the National Association of Securities Dealers Automated Quotation SmallCap Market ("NASDAQ") under the symbol "TMRK." As of September 1, 2000, there were 4,760,600 shares of Common Stock outstanding, excluding shares held by the Company as treasury stock, held by approximately 40 shareholders of record. Until November 1998, the Common Stock had been listed on the NASDAQ National Market, but was moved to the SmallCap when the NASD panel determined the Common Stock did not meet applicable public float requirements.
The following table sets forth the high and low sales prices as reported on NASDAQ for fiscal 1999 and fiscal 2000.
The Company has not paid any cash dividends since its organization and has no present intention to pay cash dividends in the foreseeable future. The present policy of the Company is to retain its earnings, if any, to provide funds for the operation of its business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations which appear elsewhere in this report.
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TRIMARK HOLDINGS, INC. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET REVENUES: Net revenues for the year ended June 30, 2000 increased $3.4 million or 4% compared with the prior fiscal year. The increase was primarily attributable to increases in international, home video and theatrical revenue offset by a decrease in television revenue. Net revenues increased $12 million, or 15%, in fiscal 1999 compared to fiscal 1998. The increase was primarily attributable to increases in most revenue segments including domestic home video, television, and international distribution, partially offset by decreases in revenue generated from theatrical exhibition.
To address the continuing competition in the domestic home video rental market, in the periods presented, the Company has focused its resources on distributing an increased number of films in the specialized theatrical market, the made for television market and home video sell through and DVD market and decreasing the releases of straight-to-video rental films. See "Liquidity and Capital Resources." The production and distribution of theatrical motion pictures requires capital commitments which may not be recouped, if at all, until the picture is released in home video, international and ancillary markets.
DOMESTIC HOME VIDEO: Net revenues from domestic home video increased $2 million or 3% for the year ended June 30, 2000 compared with fiscal year 1999. There was minimal growth in the overall revenue for home video. There was, however, significant change in the revenue components associated with home video, as home video rental revenue decreased approximately 26% and the sell through and DVD components increased over 55% and 100% respectively. The decrease in home video rental revenue was due to the release of less commercially successful theatrically exhibited films in fiscal 2000 as compared to fiscal 1999. Increasing consolidation in the rental market has also contributed to the decline in the home video rental market. The declining rental market has been offset by the expansion of the sell through and DVD markets. During fiscal 2000, the Company began releasing NBC product in the sell through market which included the highly successful "Saturday Night Live" compilations. The Company also released "Natural Born Killers, The Directors Cut" into the DVD market which resulted in the Company's largest initial DVD sale to date.
Net revenues from domestic home video increased $10.2 million or 21% for the year ended June 30, 1999 compared with fiscal year 1998. The increase in fiscal 1999 revenues was primarily due to the $6 million increase in DVD sales and $4 million increase in
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video sell through sales. Fifty-five (55) DVD titles were released in fiscal 1999 as compared to only 5 in the prior fiscal year. Furthermore, the increased emphasis on the exploitation of Trimark's 600+ title library contributed to the increase in video sell through sales.
The Company anticipates that the domestic home video rental market will continue to be extremely competitive.
DOMESTIC THEATRICAL DISTRIBUTION:
Net revenues from domestic theatrical distribution increased $1.8 million or 159% for the year ended June 30, 2000, compared with the prior year. The increase was primarily attributable to the performance of "Held Up" in fiscal 2000, which had a mainstream release to go along with five specialized releases, as opposed to fiscal 1999 which had six (6) specialized releases and no mainstream release.
Net revenues from domestic theatrical distribution decreased $7.2 million or 86% for the year ended June 30, 1999 compared with the prior year. The decrease was primarily attributable to the performance of the wide theatrical release film in the prior year period, "Eve's Bayou" (the title with the largest box office receipts in Company history) with no comparable theatrical release in fiscal 1999. In fiscal 1999, the Company released six (6) motion pictures in the specialized theatrical market compared to fiscal 1998 in which the Company released six (6) motion pictures theatrically, two (2) mainstream - "Eve's Bayou" and "Star Kid," three (3) specialized - "Box of Moonlight," "Chinese Box" and "The Ugly" and one limited - "Chairman of the Board".
The Company anticipates releasing six (6) to eight (8) titles in the specialized and limited theatrical markets in fiscal 2001 (see Liquidity and Capital Resources).
TELEVISION DISTRIBUTION: Net revenues from television distribution which includes such media as network, basic cable, pay television, pay-per-view and syndication decreased $3.3 million or 23% for the year ended June 30, 2000 compared with the prior year. The decrease was primarily due to the Company's first network movie-of-the-week film, "The Simple Life of Noah Dearborn" which was released in fiscal 1999. The Company had no network releases in fiscal year 2000. The Company anticipates distributing four (4) to six (6) pictures for the made for television market in fiscal 2001 (see Liquidity and Capital Resources).
ITEM 7. (CONTINUED)
In fiscal 1999, television revenue increased $2.8 million or 24% compared with fiscal 1998. The increase was due to the release of "The Simple Life of Noah Dearborn" in fiscal 1999, with no comparable release in the prior fiscal year.
INTERNATIONAL DISTRIBUTION: Net revenues from international distribution increased $2.9 million or 16% for the year ended June 30, 2000 compared with the prior year. Trimark released eleven (11) pictures into the international market during fiscal 2000 as opposed to seven (7) during the prior year.
Net revenues from international distribution increased $6.2 million or 51% for the year ended June 30, 1999 compared with the prior year. Trimark's business plan emphasizes the production and acquisition of films with strong international commercial appeal. Thus, the fiscal 1999 international releases of "Cube," "Diplomatic Siege," and "King Cobra" were highly successful in this market without any comparable commercially successful releases in fiscal 1998.
During fiscal 2001 the Company plans to release approximately ten (10) to twelve (12) motion pictures initially into international distribution.
GROSS PROFIT: The Company's gross profit for the year ended June 30, 2000 increased $9 million or 82% compared with the prior year. The increase in gross profit was primarily the result of the $3.4 million increase in gross sales along with a $1.1 million decrease in film write downs to net realizable value from $9.7 million during fiscal 1999 to $8.6 million in fiscal 2000. Gross profits also increased as a result of the release of more profitable films in fiscal 2000 as compared to 1999. Estimated total revenues and costs are reviewed on a quarterly basis and revisions to amortization rates are made as necessary, including write downs to net realizable value.
In fiscal 1999 gross profit decreased $2.1 million or 16% compared with the prior year. The decrease in gross profit was primarily a result of the $9.7 million write down in fiscal 1999 coupled with the reduction in the estimated future value of older films offset by a $12 million increase in gross sales. These write downs primarily related to a charge associated with the lower than anticipated performance of the January 1998 domestic theatrical release of "Star Kid" and a write down associated with management's decision not to release "Chairman of the Board" with a wide theatrical release, but rather to have a selected market theatrical release.
ITEM 7. (CONTINUED)
SELLING EXPENSES: The Company's selling expenses decreased $154,000 or 2% for the year ended June 30, 2000 compared with the prior year. The decrease was primarily due to the Company's continued review of costs associated with film festivals and markets, travel and entertainment costs as well as consulting fees.
The Company's selling expenses decreased $252,000 or 3% in fiscal 1999 as compared to the prior year primarily due to the reduction in theatrical operations. The Company disbanded its regional theatrical sales operations during the fourth quarter of fiscal 1998.
Selling expenses as a percentage of net revenues for fiscal 2000, fiscal 1999 and fiscal 1998 were 7%, 8% and 9%, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses increased $1.6 million or 29% for the year ended June 30, 2000 compared with the prior year. The increase was largely due to the increase in salaries associated with bonuses and the newly formed subsidiary CinemaNow, Inc. The Company issued bonuses for the first time in five years as a result of its return to profitability. Furthermore, normal salary costs also increased as a result of a 25% increase in the salary of the Chief Executive Officer of the Company who had not received a salary increase in seven years. Also, CinemaNow, Inc. contributed $754,000 in general and administrative expenses during the year which were not incurred in the previous fiscal year.
General and administrative expenses increased $365,000 or 7% for the year ended June 30, 1999 compared with the prior year. The increase was primarily due to increases in medical benefits, consulting and accounting fees.
BAD DEBT EXPENSE: Bad debt expense for the year ended June 30, 2000 increased $631,000 or 219% compared with the same period in fiscal 1999 and decreased $1.4 million or 126% for the year ended June 30, 1999 compared with fiscal 1998. Bad debt expenses for the periods primarily represent reserves taken against domestic video and foreign sales. The increase was partially due to the $490,000 reserve for the video distributor MS Distribution which ceased doing business in April 2000. During fiscal 1999 the Company collected $388,000 on past due video sales, which reduced the reserve balance during the period. The Company took $852,000 in reserves during fiscal 1998 due to the Asian currency crisis. No comparable reserves
ITEM 7. (CONTINUED)
were taken during fiscal 1999 because of the recovering Asian economy.
INTEREST EXPENSE: Interest expense decreased $1.2 million or 31% for the year ended June 30, 2000 compared with the prior year and decreased $594,000 or 13% for the year ended June 30, 1999 compared with the year ended June 30, 1998. The decrease in interest expense during fiscal 2000 was primarily due to lower average borrowing levels as compared to fiscal 1999. The debt balance decreased $14.3 million or 30% from June 30, 1999 to June 30, 2000. The debt balance decreased $8.9 million or 15.6% from June 30,1998 to June 30,1999.
INTEREST AND INVESTMENT INCOME: Interest and investment income increased $2.9 million for the year ended June 30, 2000 compared with the prior year. The increase was primarily due to the realized gain on the sale of Yahoo,Inc. shares during fiscal 2000.
Interest and investment income decreased $93,000 for the year ended June 30,1999 compared with the prior year as all excess cash was used to reduce the Company's debt.
NET EARNINGS/LOSS: The Company's net earnings for fiscal 2000 were $5.7 million, an increase of $10.9 million or 211%. The increase was primarily due to the $9 million increase in gross profits along with the $3.0 million gain in the sale of Yahoo, Inc. shares.
The Company's net loss for fiscal 1999 was $5.2 million. The fiscal 1999 loss was primarily due to approximately $9.7 million in write downs to net realizable value of film inventory. These write downs primarily related to charges associated with the lower than anticipated video performances of the theatrically released films "Star Kid" and "Chairman of the Board". The write downs were partially offset by increased sales, lower bad debt expense and interest charges.
OTHER COMPREHENSIVE INCOME: The other comprehensive income reported during the twelve month period ending June 30, 2000 is a result of the realized and unrealized gain in Yahoo!, Inc. shares resulting from the sale of the stock and change in stock price during the period. The accumulated comprehensive income reported at June 30, 2000 and June 30, 1999 resulted from the change in per share price of Yahoo!, Inc. at June 30, 2000 and June 30, 1999.
ITEM 7. (CONTINUED)
INFLATION:
Generally, costs in connection with the acquisition and distribution of motion pictures for release have increased in recent years. Such cost increases may affect results of operations in the future; however, the Company believes that the effect of such factors has not been material to date.
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 years ended June 30, 2000, 1999 and 1998 were as follows:
Cash provided by operations decreased by $1.8 million for the fiscal year ended June 30, 2000. The decrease was caused by a number of factors. Film amortization costs decreased $5.8 million as the Company released more profitable films and film write downs to net realizable value decreased from the prior year. In addition, accounts receivable increased $4.1 million due to a number of films being released late in the fiscal year to domestic television and international markets as opposed to the prior fiscal year. Additions to film costs also increased from the prior year by $3.5 million primarily as a result of prints and advertising costs associated with the mainstream release of the
ITEM 7. (CONTINUED)
film "Held Up." The Company did not have any mainstream theatrical releases in the prior year. The change in inventory also increased by $1.2 million as a result of the increase in sell through and DVD product due to the production of over 300,000 units of the film "Jesus." The change in minimum guarantees and royalties payable decreased by $4.9 million as the majority of films in production were almost completed by fiscal year end as opposed to the prior year when Turbulence II was in the middle of production. Finally, the Company recognized $2.3 million on the sale of Yahoo!, Inc. shares, whereas there was no comparable sale in the previous fiscal year. These decreases were partially offset by a $10.9 million increase in net earnings from the prior year and an increase of accounts payable of $6.7 million due to the production of the "Jesus" units.
Investing activities for the year ended June 30, 2000, primarily consisted of expenditures associated with the development of the CinemaNow website and income from the sale of Yahoo, Inc. shares. Investing activities for 1999 and 1998 have primarily consisted of expenditures on production equipment and computer hardware and software.
Financing activities, consisting primarily of activity under the Company's credit facility, decreased $3.0 million in fiscal year 2000 as compared to fiscal year 1999. The decrease was primarily the result of the reduction in the outstanding debt balance using proceeds obtained from operating cash flows along with proceeds received from the sale of Yahoo, Inc. shares. This allowed the Company to reduce its outstanding debt balance by $14.3 million or 30% from the June 30, 1999 year end balance. Borrowings under the credit facility in fiscal 1999 and 1998 also decreased primarily as the result of the increase in operating cash flow. The Company reduced its focus on theatrical distribution, thereby reducing expenditures associated with prints and advertising costs.
On June 6, 2000, the Company, Lions Gate Entertainment Corp., a British Columbia corporation ("Lions Gate") and LGE Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Lions Gate ("Merger Sub"), executed an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of the Company by the form of a merger (the "Merger") of the Company with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of Lions Gate. In the Merger, each share of the common stock of the Company ("Common Stock") will be exchanged for (i) US$4.50 in cash and (ii) two (2) shares, without par value, of the common shares of Lions Gate (the "Lions Gate Common Shares"); provided, however, that if the average of the last reported sale price of Lions Gate Common Shares on the American Stock Exchange during the 30 consecutive trading days ending October 6, 2000 (the "Current Market Price")
ITEM 7. (CONTINUED)
is less than US$2.75 per share, then the number of Lions Gate Common Shares to be issued for each share of Common Stock shall be the result obtained by dividing US$5.50 by the Current Market Price. The consummation of the Merger is subject to the approval of the Merger by holders of a majority of the Common Stock of the Company and to certain other customary closing conditions. A special meeting of the stockholders of the Company to vote on the Merger will be held on October 12, 2000. On September 26, 2000, the shareholders of Lions Gate approved the Merger.
In connection with the Merger Agreement, Mark Amin, the Company's Chairman of the Board and Chief Executive Officer, and his brother, Reza Amin, who beneficially own, in the aggregate, approximately 45% of the outstanding Common Stock, and Lions Gate entered into the Trimark Stockholders Voting Agreement, dated June 6, 2000 (the "Voting Agreement"). Pursuant to the Voting Agreement, Mark Amin and Reza Amin, solely in each of their individual capacities as a stockholder of the Company, agreed, among other things, to vote their Common Stock in favor of the Merger Agreement and the other transactions contemplated thereby, and, except as provided by the Merger Agreement, against any competing or alternative proposal.
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 20, 2000. Under the credit agreement, the Company may borrow for various corporate purposes provided that the aggregate borrowings do not exceed the borrowing base, as defined in the Credit Agreement, 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 the London Interbank Offered Rate 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 0.3725% per annum. As of June 30, 2000 there was $34 million outstanding under the credit facility.
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
ITEM 7. (CONTINUED)
quarterly basis and include limitations on additional indebtedness, liens, investments, disposition of assets, guarantees, affiliate transactions and the use of proceeds. In relation to management's strategic review and release schedule described below, the Company amended the current credit agreement as of September 27,1999, December 20,1999, March 29, 2000, and June 16, 2000. The amended agreement provides for less stringent minimum net worth ratios and minimum equity requirement. 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 borrowing limit was $60 million. By January 31, 2000, the borrowing limit was reduced to $50 million and by June 30, 2000 was reduced to $45 million. The amendments to the debt covenants and 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 June 30, 2000.
It is expected that the Company's current credit facility will terminate upon the Merger with Lions Gate, and that the Company will become party to Lions Gate's credit facility. In the absence of the Merger, the Company would need to extend its existing credit facility or arrange alternative financing, as the current credit facility expires in December 2000.
In the domestic specialized theatrical market the Company plans to release six (6) to eight (8) motion pictures during fiscal 2001. Furthermore, the Company plans to release approximately thirty-six (36) motion pictures into the domestic home video rental market 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 2001 the Company plans to release approximately ten (10) to twelve (12) motion pictures initially into the international distribution market.
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.
The Company was authorized to spend up to $50,000 in fiscal 2000 to purchase shares of its outstanding common stock in the open market or otherwise. The amended debt covenant at March 27, 2000 increased the limit to the purchase of outstanding common stock to
ITEM 7. (CONTINUED)
$750,000 per fiscal year. During fiscal year 2000, the Company purchased 8,100 shares at an average price of $5.6473 per share.
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", "Business", and "Market for the Registrants Common Equity and Related Stockholder Matters" 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 theatrical releases of only specialized films and production and acquisition of made for television product is successful; new methods of distributing motion pictures; the timing or benefits of the Merger; and other factors referenced in this Form 10-K and the Company's other filings with the Securities and Exchange Commission, including the September 8, 2000 proxy statement/prospectus relating to the Merger.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not consider the potential loss of future earnings caused by interest rate volatility to have a material impact on its financial position.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF TRIMARK HOLDINGS, INC.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) on page 76 present fairly, in all material respects, the financial position of Trimark Holdings, Inc. and its subsidiaries at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a) on page 76 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP Century City, California September 21, 2000
TRIMARK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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TRIMARK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRIMARK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
Trimark Holdings, Inc., a Delaware corporation (the "Company"), is a broad-based entertainment company which distributes and licenses motion pictures in the international and domestic arena through its wholly owned subsidiaries Trimark Pictures, Inc. and Trimark Television, Inc. The significant business activities of the Company constitute one business segment, filmed entertainment. The Company is primarily engaged in the distribution of feature films for the domestic home video market, domestic theatrical and television markets, and in the licensing of distribution rights to motion pictures for foreign markets. As an independent distribution company, the Company acquires distribution rights from a wide variety of studios, production companies and independent producers.
NOTE 1. (CONTINUED)
Purple Tree Productions, Inc., Cheap Date, Inc., Loving Gun Productions, Inc. and Writers on the Wave are wholly-owned subsidiaries of the Company, which were formed for the sole purpose of producing motion pictures. Trimark Music, a wholly-owned subsidiary of the Company, was formed for the purpose of exploiting revenues from music rights owned by the Company.
CinemaNow, Inc., a majority owned subsidiary of the Company, was formed for the purpose of streaming films over the internet using Trimark Pictures' library as well as acquiring the internet rights of other films or film libraries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
UNCLASSIFIED CONSOLIDATED BALANCE SHEET
In accordance with the provisions of Statement of Financial Accounting Standards No. 53 ("SFAS 53"), the Company has elected to present an unclassified consolidated balance sheet.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.
NET REVENUES
Home video revenues are recognized, net of allowances for estimated returns, as products are shipped to customers. Revenues from licenses of films to foreign territories and domestic television are recognized when the films are made available to sub-distributors and other terms of the license
NOTE 1. (CONTINUED)
agreements are satisfied. Revenues from theatrical distribution of films are recognized when films are exhibited.
FILM COSTS
Film costs primarily represent capitalized theatrical print and advertising expenditures and the acquisition of film rights from producers for a guaranteed minimum payment, with the producer retaining a participation in the profits of the property. The producer's share of the profits is retained by the Company until it equals the amount of the guarantee, after which the excess is paid to the producer. In these instances, the Company records as participation expense an amount equal to the producer's share of the profits. The print and advertising expenditures and guaranteed minimum payments are capitalized and amortized using the individual-film-forecast-computation method in accordance with SFAS 53.
FILM ACCOUNTING
In June 2000, The AcSEC issued SOP 00-2, Accounting by Producers or Distributors of Films. The SOP supersedes current film accounting standards related to the recognition of revenues, costs and film cost valuation and must be adopted by companies for fiscal years beginning after December 15, 2000. The SOP requires that advertising costs for theatrical and television product be expensed as incurred. Furthermore, revenue associated with the home video market must be recognized upon availability to customers (street date) and not the date the product is shipped. If the Company elects to adopt SOP 00-2 as of July 1, 2000, the Company expects to incur a non-cash charge of approximately $6.0 million on a pre-tax basis to reduce the carrying value of film inventory, which would be reported as a cumulative effect of a change in accounting principle.
CASH
Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying value of the Company's cash equivalents approximate fair value due to their short nature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts was increased by $342,000 for fiscal 2000, decreased by $293,000 for 1999, and increased by $1.1 million for 1998.
NOTE 2. (CONTINUED)
INVENTORIES
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market using a first-in/first-out (FIFO) method of accounting.
INVESTMENTS
Investments represent equity shares, which are available for sale and reported at the market price as of June 30, 2000.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of depreciation. Depreciation of property and equipment is computed using the straight-line method, based on estimated useful lives of three to seven years. Web design costs included in property and equipment are capitalized in accordance with SOP 98-1.
ROYALTIES PAYABLE
Payable to producers represents an accrual on a film-by-film basis of the producers' share of revenues recognized by the Company net of the recoupable costs incurred by the Company. The producers' share of revenue is expensed in conjunction with the amortization of film costs.
INTEREST
Costs associated with the maintenance of debt are charged to expense and or capitalized to the extent debt is used for productions.
NET INCOME/LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share," ("SFAS 128") which is effective for periods ended after December 15, 1997. The Company adopted SFAS 128 in fiscal year 1997. SFAS 128 replaces the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings and loss per common share amounts are based on the weighted average number of common shares outstanding during the respective periods. Dilutive earnings and loss 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
NOTE 2. (CONTINUED)
would have been dilutive to net earnings and loss. There is no assumed conversion of stock options for fiscal 1999 and fiscal 1998 as the effect would be anti-dilutive.
The table below presents a reconciliation of weighted average shares used in the calculation of basic and diluted net earnings and loss per common share:
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" ("SFAS 130") effective for fiscal years beginning after December 15, 1997. The new rules establish standards for the reporting of comprehensive income and its components in financial statements. Comprehensive income consists of net income and other gains and losses affecting stockholder's equity that, under generally accepted accounting principles, are excluded from net income, such as unrealized gains and losses on investments available for sale. The Company adopted SFAS 130 in fiscal 1999. The other comprehensive income reported during the twelve month period ending June 30, 2000 is a result of the realized and unrealized gain in Yahoo!, Inc. shares resulting from the sale of the stock during the period. The other comprehensive income reported at June 30, 2000 and June 30, 1999 resulted from the change in per share price of Yahoo!, Inc. net of taxes of $10,000 and $63,000 at June 30, 2000 and June 30, 1999, respectively.
NOTE 2. (CONTINUED)
NOTE 3 - FILM COSTS:
Film costs, net of amortization, consist of the following:
Based on the Company's estimate of future revenues as of June 30, 2000, approximately 95% of unamortized released film costs will be amortized during the next three years.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
NOTE 5 - DEBT:
The Company's principal operating subsidiaries, Trimark Pictures, Inc. and Trimark Television, Inc., have a $75 million revolving credit facility with a consortium of banks agented and arranged by The Chase Manhattan Bank expiring on December 20,
NOTE 5. (CONTINUED)
2000. Under the credit agreement, the Company may borrow for various corporate purposes provided that the aggregate borrowings do not exceed the borrowing base, as defined in the Credit Agreement, which is derived from specified percentages of approved accounts receivable and film library. The credit agreement is guaranteed by the Company and 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 (9.5% and 8% at June 30, 2000 and June 30, 1999, respectively) or 2.5% above the London Interbank offered 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 0.3725% per annum. As of June 30, 2000 there were $34 million outstanding under the bank facility.
The Credit Facility is collateralized by an interest in substantially all of the Company's assets and contains various covenants including, among other provisions, the maintenance of a minimum consolidated tangible net worth and certain financial ratios. For the quarter ended December 31, 1997 the Company was in violation of certain of these covenants, however the Banks granted a waiver of these violations and amended the net worth covenant for the duration of the Credit Facility. The Company also amended the Credit Facility in December 1998, June 1999, March 2000, and June 2000 which provided for less stringent minimum net worth ratios and reduced the minimum equity requirement. In consideration for the amendments, the borrowing limits were reduced to $60 million at March 31, 1999, $50 million at January 31, 2000, and $45 million at June 30, 2000.
It is expected that the Company's current credit facility will terminate upon the Merger with Lions Gate, and that the Company will become party to Lions Gate's credit facility. In the absence of the Merger, the Company would need to extend its existing credit facility or arrange alternative financing, as the current credit facility expires in December 2000.
In connection with the credit facility, the Company has capitalized debt issuance costs as other assets which are being amortized on a straight line basis over the term of the agreement.
NOTE 6 - INCOME TAXES:
Consolidated income/(loss) before income taxes consists of the following:
The provision for income taxes is summarized as follows:
NOTE 6. (CONTINUED)
The components of the deferred tax assets and liabilities are summarized as follows:
A reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
As of June 30, 2000 and June 30, 1999, the Company has a net deferred tax asset balance of $309,000 and $0, an income taxes payable balance of $591,000 and $64,000, and a taxes receivable balance of $240,000 and $240,000, respectively. The utilization of net operating loss carryforwards in the current year has generated a federal Alternative Minimum Tax ("AMT") liability of
NOTE 6. (CONTINUED)
approximately $309,000 that has been included in the current year income taxes payable balance.
The net decrease of approximately $1.6 million in the valuation allowance is primarily attributable to the reversal of reserves against the net operating loss carryforwards ("NOL") that were utilized against current year book income.
As a result of the acquisition of Trimark Television (formerly IBS) by the Company, approximately $5.5 million in federal income tax NOL's were acquired. The NOL's expire in the years 2004-2006. The Internal Revenue Code of 1986, as amended, imposes substantial limitations on the use of NOL carryforwards acquired in such an acquisition. Accordingly, a valuation allowance has been established in prior years and the related balance at June 30, 2000 is approximately $2.1 million. For federal income tax purposes, NOL's may be carried forward twenty (20) years, or until such time as they are fully utilized. For California purposes, NOL's may be carried forward for five (5) years or until such time as they are fully utilized.
NOTE 7 - MINORITY INTEREST:
In the first quarter of calendar year 2000, pursuant to the terms of a Securities Purchase Agreement dated as of January 6, 2000, as amended, the Company's majority-owned subsidiary, CinemaNow, Inc. ("CinemaNow"), completed a private placement financing to accredited investors of 3,385,182 shares of CinemaNow Series A Convertible Preferred Stock, yielding approximately $2,285,000. In the event of a liquidation of CinemaNow, the holders of Series A Preferred Stock shall be entitled to receive an amount per share equal to the original Series A issue price plus any accrued but unpaid dividends on such shares if the assets and funds of CinemaNow are sufficient to permit such payment. At June 30, 2000, the minority interest balance attributable to CinemaNow, net of the minority interest share of CinemaNow's losses was $2,027,000.
NOTE 8 - STOCK OPTIONS:
Under the Company's stock option plans, employees and directors may be granted nonqualified stock options ("options"). Generally, options are exercisable contingent upon the grantee's continued employment with the Company and generally have been granted with an exercise price equal to the fair market value of the underlying Common Stock on the date of grant. Each option is granted subject to various terms and conditions established on the date of grant, including vesting periods and expiration dates. The options typically become exercisable at the rate of 33.3% annually, beginning one year after the date of grant. Options generally expire 10 years after the date of grant. As of June 30, 2000 and 1999, a total of 945,092 and 979,369 options, respectively had been approved for issue under employee option plans and other arrangements. As of June 30, 2000 and 1999, a total of 106,000 and 40,000 options, respectively had been approved for issue under the director option plan. Stock option data follows:
During fiscal 2000, the Board authorized the purchase of 11,000 shares from a former employee at a negotiated price.
During fiscal 1998, the Board authorized the purchase of 20,000 shares from a former employee at a negotiated price.
NOTE 8. (CONTINUED)
The following table summarizes information concerning outstanding and exercisable stock options at June 30, 2000:
The Company has adopted SFAS No. 123, "Accounting of Stock-Based Compensation," which establishes a fair value based method of accounting for compensation cost related to stock option plans and other forms of stock-based compensation plans, by providing the pro forma disclosures as if the fair value based method had been applied for the current period and prior comparable period. In accordance with SFAS No. 123, the Company applies the intrinsic value based method of accounting defined under Accounting Principles Board Opinion No. 25 and accordingly, does not recognize compensation expense for its plans.
Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's pretax and after tax income would decrease by $151,000 or $0.03 per share, $548,000 or $0.12 per share and $457,000 or $0.11 per share in fiscal 2000, fiscal 1999 and fiscal 1998, respectively. These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.
The weighted average fair value of each option as of the grant date was $2.12, $4.44 and $2.97 for fiscal 2000, fiscal 1999 and fiscal 1998, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
NOTE 8. (CONTINUED)
(a) During fiscal 2000, 1999 and 1998, the Company did not declare any cash dividends on its common stock. The Company does not have any present intention to declare a dividend on its common stock in the foreseeable future.
NOTE 9 - TREASURY STOCK:
On February 21, 1997, the Company announced a stock repurchase program pursuant to which it could spend up to $1,500,000, $750,000 per fiscal year, to purchase shares of its outstanding common stock in the open market through June 30, 1998. The Company was authorized to spend $50,000 in fiscal 2000 which was increased to $750,000 under the amended debt agreement. During fiscal 2000, the Company spent $45,000 to purchase 8,100 shares and in fiscal 1999, the Company spent $33,000 to purchase 13,215 shares under the repurchase program.
At June 30, 2000, the Company held 973,515 shares of treasury stock.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company has entered into certain agreements which provide for guaranteed royalty advances and promotional and advertising payments totaling $16.2 million. If the provisions of these agreements are not met by the licensors, the Company may withdraw from the arrangements. These commitments extend to December 2001.
As of September 3, 1999 the Company entered into a 10 year operating lease. Rent expense was $395,000,$479,000 and $433,000 for the years ended June 30, 2000 and June 30,1999 and June 30,1998 respectively.
NOTE 10. (CONTINUED)
The future minimum rental commitments as of June 30, 2000 are as follows (in thousands):
NOTE 11 - MAJOR CUSTOMERS:
For the years ended June 30, 2000, 1999, and 1998, Ingram and Blockbuster, are the Company's major customers, accounted for 9%, 11% and 15% of net revenues and 15%, 12% and 11% of net revenues, respectively. With regard to foreign distribution net revenues, there are no individual geographic areas that account for more than 10% of total net revenues.
In carrying out its film distribution activities, the Company grants credit to customers, primarily all of whom are in the film distribution segment of the entertainment industry. This customer base is sufficiently diversified by number of customers, channels of distribution (theatrical exhibition, video distribution, pay television, cable television and other) and geographic location to prevent any undue risk related to concentration of credit.
NOTE 12 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest costs capitalized as film costs in fiscal 2000, fiscal 1999 and fiscal 1998 were $1,433,254, $1,203,224 and $1,031,000 respectively.
NOTE 13 - DUE FROM OFFICERS:
Notes receivable from officers are secured by Trimark Holdings stock which equaled at least 200% of the outstanding loan amounts at the time the original notes were executed. The loans bear interest at the Company's weighted average cost of capital and interest is due quarterly. One loan was outstanding as of June 30, 2000.
NOTE 14 - SUBSEQUENT EVENTS:
On June 6, 2000, the Company, Lions Gate Entertainment Corp., a British Columbia corporation ("Lions Gate") and LGE Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Lions Gate ("Merger Sub"), executed an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of the Company by the form of a merger (the "Merger") of the Company with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of Lions Gate. In the Merger, each share of the common stock of the Company ("Common Stock") will be exchanged for (i) US$4.50 in cash and (ii) two (2) shares, without par value, of the common shares of Lions Gate (the "Lions Gate Common Shares"); provided, however, that if the average of the last reported sale price of Lions Gate Common Shares on the American Stock Exchange during the 30 consecutive trading days ending October 6, 2000 (the "Current Market Price") is less than US$2.75 per share, then the number of Lions Gate Common Shares to be issued for each share of Common Stock shall be the result obtained by dividing US$5.50 by the Current Market Price. The consummation of the Merger is subject to the approval of the Merger by holders of a majority of the Common Stock of the Company and to certain other customary closing conditions. A special meeting of the stockholders of the Company to vote on the Merger will be held on October 12, 2000. On September 26, 2000, the shareholders of Lions Gate approved the Merger.
SCHEDULE II
TRIMARK HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands)
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(1) Returns are reflected in net revenues and bad debt expense is recorded separately in the statement of operations.
(2) Doubtful receivables written-off, net of recoveries.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, as of September 1, 2000, with respect to each person who is a member of the Board of Directors of the Company:
(1) Includes service both with the Company and Trimark Pictures, Inc., a California corporation ("Trimark") and a wholly-owned subsidiary of the Company.
All directors are elected annually and serve until the next annual meeting of stockholders or until their successors are elected and qualified or until their earlier resignation or removal. Directors of the Company who are not executive officers are entitled to receive a fee of $10,000 per year for serving on the Board of Directors, options to purchase 2,000 shares of Common Stock per year under the 1999 Directors' Option Plan and $1,000 for attendance at each committee meeting.
The following table sets forth the names, ages and all positions with the Company currently held by each person who may be deemed an executive officer of the Company. Executive officers serve at the discretion of the Board of Directors. Except as otherwise indicated, each of the executive officers serves in similar positions for both the Company and Trimark. Unless otherwise noted, all references to the Company include Trimark:
ITEM 10. (CONTINUED)
MARK AMIN is a founder of the Company and has served as its Chairman of the Board since November 1988 and Chief Executive Officer since January 1994. Mr. Amin served as a Director, President and Chief Executive Officer of the Company from its incorporation in 1984 until December 1989. In 1981, Mr. Amin co-founded 20/20 Video, a video specialty store in Los Angeles, California, and served as a director of 20/20 Video from 1981 until 1988. Mr. Amin sold his entire stock interest in 20/20 Video in 1987. Mr. Amin graduated from the Graduate School of Management at the University of California, Los Angeles with an MBA in marketing in 1975, and was previously awarded a BA degree in economics by the University of Kansas.
CAMI WINIKOFF joined Trimark in August 1990, in November 1991 was appointed Director of Production, in January 1995 was appointed Vice President of Production, in January 1997 was appointed Senior Vice President, in September 1997 was appointed Executive Vice President, Chief Administrative Officer and in April 2000 was appointed Chief Operating Officer. Before joining Trimark Ms. Winikoff was an independent producer.
PETER BLOCK joined Trimark in September 1993 and in February 1999 was appointed Executive Vice President of Acquisitions, Distribution and New Media for Trimark. Prior to joining Trimark, Mr. Block represented writers and producers, worked for the WGA, and worked in the marketing and studio operations departments at the Walt Disney Company. Mr. Block received his J.D. from USC, MBA from the University of California, Los Angeles and B.A. from Duke University.
SERGEI YERSHOV joined Trimark in January 1995 as Director of International Sales, in January 1996 was appointed Vice President of International Distribution and has served as Senior Vice President, International since August 1998. From November 1991 to June 1992 Mr. Yershov was Director of International Sales for West Side Studios located in Los Angeles, California, and from July 1992 to December 1994 served as Vice President of International Distribution for the same organization. Mr. Yershov graduated in 1988 from Military Aerospace Academy, St. Petersburg with a major in Computer Science and Telecommunications.
JEFF GONZALEZ joined the Company in September 1998 as Chief Financial Officer and Secretary. From 1994 until 1998, Mr. Gonzalez was Controller of Morgan Creek Productions, Inc., a motion picture production company based in Burbank, California. From 1991 until 1994, Mr. Gonzalez was a Senior Auditor at
ITEM 10. (CONTINUED)
PricewaterhouseCoopers LLP, a worldwide public accounting firm. Mr. Gonzalez graduated in 1990 from the University of California, Los Angeles with a BA in economics and is a certified public accountant (non-active).
ANDREW REIMER joined Trimark in April 1995 as the Vice President of Domestic Television. In July 1997 he was appointed Senior Vice President of Worldwide Television. Prior to joining Trimark, Mr. Reimer was one of the founders of, as well as the senior programming executive at, Action Pay-Per-View. Mr. Reimer also spent 6 1/2 years at Warner Bros. in various capacities, including Business Affairs, Film Acquisition, and Strategic Planning. Mr. Reimer graduated from the Graduate School of Management at the University of California, Los Angeles with an MBA in marketing, and was previously awarded a BA degree in Music from the State University of New York at Binghamton.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors, its executive (and certain other) officers, and any persons holding more than ten percent of the Common Stock are required to report their ownership of the Common Stock and any changes in that ownership to the Securities and Exchange Commission ("Commission"). Specific due dates for these reports have been established and the Company is required to report any failure to file by these dates during the fiscal year July 1, 1999 through June 30, 2000. All of these filing requirements were satisfied by its directors, officers and ten percent holders, except that (i) Tofigh Shirazi, a director of the Company, filed late one report on Form 4 relating to one transaction involving a purchase of Common Stock; (ii) Andrew Reimer, a Senior Vice President of Trimark, filed late his initial ownership report on Form 3; and (iii) Peter J. Dekom, a director of the Company, filed late one report on Form 4 relating to a grant of stock options. In making these statements, the Company has relied on the written representations of its directors, officers and its ten percent holders and copies of the reports that they have filed with the Commission.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation (including cash bonuses) paid by the Company for its fiscal years ended June 30, 2000, 1999 and 1998 to its Chief Executive Officer and
ITEM 11. (CONTINUED)
its four most highly compensated executive officers other than the Chief Executive Officer at June 30, 2000.
SUMMARY COMPENSATION TABLE
ITEM 11. (CONTINUED)
(1) The compensation described in this table does not include medical, group life insurance or other benefits received by the named executive officers which are available generally to all employees of the Company and certain perquisites and other personal benefits received by the named executive officers of the Company, the value of which did not exceed the lesser of $50,000 or ten percent of the executive officer's cash compensation in the table.
(2) Mr. Amin has been Chairman of the Board of the Company since November 1988 and Chief Executive Officer of the Company since January 15, 1994. Mr. Amin is not operating under an employment agreement with the Company, but see Item 13, Certain Relationships and Related Matters - Agreements Relating to the Lions Gate Merger - Employment Agreement. Effective December 1, 1999, Mr. Amin is being paid a salary at an annual rate of $480,000.
(3) Trimark entered into a two-year employment agreement with Andrew Reimer effective August 6, 1998. Mr. Reimer is entitled to receive an annual base salary of $165,000 during the first year and $175,000 during the second year of the agreement. The agreement provides that Mr. Reimer will be eligible for a year-end bonus, for each year of the employment term in which Trimark's "Video Revenue" and "Theatrical Revenue" (as defined in the agreement) exceed certain levels. The agreement generally provides that the aggregate of any bonus payments relating to any applicable year will not exceed $90,000. If Mr. Reimer's employment is terminated other than for reasons of cause, he will be entitled to be paid the remaining balance of his salary and receive employee benefits in accordance with their terms until such time as he shall become employed in a job of equal or greater compensation.
(4) Trimark entered into a two-year employment agreement (which may be extended by Trimark for an additional six-month period) with Sergei Yershov effective January 16, 1999. Mr. Yershov is entitled to receive an annual base salary of $125,000 during the first year and $135,000 during the second year of the agreement and $160,000 during the option period. Mr. Yershov also received a one-time $10,000 signing bonus. The agreement provides that Mr. Yershov will be eligible for a bonus for the period of September 14, 1998 through the employment term in which Trimark's "Foreign Revenue" (as defined in the agreement) exceeds certain levels. The agreement provides that Mr. Yershov also will be eligible for a post-employment bonus, for the
ITEM 11. (CONTINUED)
six month period following conclusion of his employment, if Trimark's "Foreign Revenue" during such period exceeds certain levels. The agreement provides that the aggregate of any bonus payments relating to any applicable year will not exceed $60,000. If Mr. Yershov's employment is terminated other than for reasons of cause, he will be entitled to be paid 50% (75% in the event of a change of control of the Company) of the remaining balance of his salary.
(5) Effective February 1, 1999, Trimark entered into an employment agreement with Cami Winikoff for a two-year term commencing January 13, 2000. Ms. Winikoff was paid a signing bonus of $40,000 and is entitled to an annual salary thereunder of $175,000. Effective March 23, 2000, the term of the agreement was extended to January 13, 2003, and Ms. Winikoff was paid a signing bonus of $32,000. If her employment is terminated other than for breach, she will be entitled to be paid the greater of (i) 50% of the remaining balance of her contract (100% in the event of a change of control of the Company), plus vesting of all unvested stock options to purchase 36,000 shares, or (ii) the difference between $500,000 less the aggregate of the value of such stock options plus the value of all other Company stock options held by her at the date of the contract plus 50% (100% in the event of a change of control of the Company) of the remaining balance of her salary under the contract. In certain circumstances following a change of control, Ms. Winikoff's base salary will increase to $250,000 and the foregoing stock options shall vest.
(6) Trimark entered into a two-year employment agreement with Peter Block effective February 1, 1999. Mr. Block is entitled to receive an annual base salary of approximately $175,000 during the agreement, plus a one-time $20,000 signing bonus and $40,000 in reimbursable expenses during the term of the agreement. If his employment is terminated other than for breach, he will be entitled to be paid the greater of (i) 50% of the remaining balance of his contract (100% in the event of a change of control of the Company), plus vesting of all unvested stock options to purchase 70,000 shares that are scheduled to vest by June 1, 2001; or (ii) the difference between $500,000 less the aggregate of the value of such stock options plus the value of certain other Company stock options held by him at the date of the contract plus 50% (100% in the event of a change of control of the Company) of the remaining balance of his salary under the contract. In certain circumstances
ITEM 11. (CONTINUED)
following a change of control, Mr. Block's base salary will increase to $250,000 and the foregoing stock options to purchase 70,000 shares shall vest.
(7) Represents cash contributions by the Company to its 401(k) Plan for the account of the named individuals.
STOCK OPTIONS
The following table sets forth information with respect to grants of options ("Options") to purchase Common Stock under the Company's Stock Option and Stock Appreciation Rights Plan to the executive officers named in the Summary Compensation Table during the fiscal year ended June 30, 2000. The Company did not grant any stock appreciation rights during such fiscal year.
OPTION GRANTS IN THE FISCAL YEAR ENDED JUNE 30, 2000
ITEM 11. (CONTINUED)
The following table sets forth information with respect to the exercise of Options, ownership of Options and Option values as of June 30, 2000. The Company has no outstanding stock appreciation rights, either freestanding or in tandem with Options.
AGGREGATED OPTION EXERCISES DURING FISCAL 2000 AND FISCAL YEAR END OPTION VALUES
* Represents the difference between the closing price of the Common Stock on June 30, 2000 ($7.94) and the exercise price of the Options, multiplied by the applicable number of Options.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
Since May 1990, the Company has maintained a Stock Option and Stock Appreciation Rights Plan (the "1990 Plan"). The 1990 Plan provided for the grant of options to purchase up to 820,000 shares of the Company's Common Stock to officers, directors, key employees and consultants of the Company, and its subsidiaries. As of May 21, 2000, no further options could be granted under the 1990 Plan. As of June 30, 2000, 405,048 options were outstanding under the 1990 Plan. The 1990 Plan has terms substantially similar to the 1999 Stock Option Plan described below.
Certain of the options granted under the 1990 Plan provide that such options shall become fully exercisable upon a "change of control" of the Company. A "change of control" is generally deemed to have occurred (i) upon approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which persons who were the
ITEM 11. (CONTINUED)
stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated corporation's then outstanding voting securities; or (ii) upon the acquisition (other than from the Company) by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 51% or more of either the then outstanding shares or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors, but excluding, for this purpose, any such acquisition by the Company or any of its subsidiaries, or any employee benefit plan (or related trust) of the Company or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners of the voting securities of the Company immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors. If the stockholders of the Company approve the Merger with Lions Gate, this will constitute a "change of control" under such option agreements. In addition, as permitted under the Merger Agreement, all other options outstanding under the 1990 Plan will be accelerated in such event.
1999 STOCK OPTION PLAN
In October 1999, the Board of Directors of the Company adopted, subject to stockholder approval which occurred on November 17, 1999, the 1999 Stock Option Plan of Trimark Holdings, Inc. (the "1999 Plan"), and reserved 250,000 shares for issuance under the 1999 Plan. The essential features of the 1999 Plan are outlined below:
The 1999 Plan provides for the grant of options to officers, directors, key employees and consultants of the Company and its subsidiaries. Approximately 90 of the Company's employees, directors and consultants (if any) are eligible to participate in the 1999 Plan. The 1999 Plan is administered by an option committee of the Board of Directors (the "Option Committee") comprised of Messrs. Saver and Shirazi. The Board or Option
ITEM 11. (CONTINUED)
Committee has the authority to determine to whom, and the time or times at which options will be granted, the number of shares of Common Stock that comprise each option, whether to amend or reduce the exercise price of outstanding options, and the time or times at which each option granted under the 1999 Plan may be exercised; provided, however, that no option may be exercised later than 10 years after the date of grant. The maximum number of shares subject to options that may be granted annually to any participant is 200,000. As of September 1, 2000, no options have been granted under the 1999 Plan.
The 1999 Plan provides for the grant of both "incentive stock options" or "ISO's" and "non-qualified stock options" to acquire the Company's Common Stock. ISO's may only be issued to the Company's employees and non-qualified stock options may be issued to the Company's regular employees as well as its consultants and certain of its executive officers and directors. ISO's must be granted with an exercise price of no less than the fair market value of Common Stock at the time of grant, but if granted to stockholders owning at least 10% of the Common Stock outstanding, such options will be granted at a price of at least 110% of the fair market value of such Common Stock at the time of grant. The exercise price for non-qualified stock options is determined by the Option Committee. The shares purchased upon the exercise of an option granted under the 1999 Plan are to be paid for: (i) in cash or by certified or cashier's check payable to the order of the Company, (ii) by cancellation of indebtedness, (iii) through the delivery of other shares of Common Stock having an aggregate fair market value equal to the total exercise price of the option being exercised, (iv) with the approval of the Option Committee, by a promissory note made by the optionee in favor of the Company upon terms and conditions to be determined by the Option Committee and secured by the shares issuable upon exercise of such option, or (v) any combination thereof. Options granted by the Board or Option Committee may provide that such options shall become fully exercisable upon a "change of control" of the Company in circumstances to be delineated by the Board or Option Committee.
Consideration for the options to be granted under the Plan is provided by the recipient's past, present and expected future contributions to the Company. No monetary consideration is provided by the recipient with respect to the grant of options.
Except as otherwise provided by the Board or Option Committee as to non-qualified options, no option granted under the 1999 Plan is transferable, except in the event of a recipient's death or permanent disability. ISO's may be exercised by the holder (a) while he is an employee of the Company or (b) at such time as
ITEM 11. (CONTINUED)
designated in the individual option agreement but in no event later than three months after termination of his employment, other than owing to death or permanent disability. In the event of a recipient's death or permanent disability, the recipient's ISO's may be exercised at any time prior to expiration of the ISO's, but in any event no later than one year after the date of his death or permanent disability. In the event of the recipient's death, the ISO's may be exercised by the person entitled to do so under the recipient's will or by the recipient's legal representative. Termination of employment or other relationship with the Company by a holder of non-qualified stock options will have the effect specified in the individual option agreement. The 1999 Plan is not subject to the Employee Retirement Income Security Act of 1974. The 1999 Plan is not qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.
The Board of Directors or the Option Committee may at any time suspend or terminate the 1999 Plan except that (i) no such action may impair the rights of optionees under any option previously granted pursuant to the 1999 Plan and (ii) shareholder approval is required to effect any amendment to or change in the 1999 Plan that would: (a) increase the maximum number of shares which may be acquired pursuant to options granted under the 1999 Plan (except as to adjustments for stock splits through a reorganization, recapitalization, stock dividend, stock split, reverse stock split or other similar transaction as provided in the 1999 Plan); (b) change the minimum exercise price of an option; (c) increase the maximum number of options issuable under the 1999 Plan; or (d) change the designation of persons eligible to receive options under the 1999 Plan.
1999 DIRECTORS' OPTION PLAN
In January 1999, the Board of Directors of the Company adopted, subject to stockholder approval which occurred on November 17, 1999, the Company's 1999 Directors' Option Plan (the "1999 Directors' Plan") which authorizes the issuance of up to 106,000 shares of Common Stock to non-employee directors of the Company (currently four persons). The essential features of the 1999 Directors' Plan are outlined below:
The purposes of the 1999 Directors' Plan are to enable the Company to attract and retain the services of non-employee members of the Board and to provide them with increased motivation and incentive to exert their best efforts on behalf of the Company by enlarging their personal stake in the Company. The 1999 Directors' Plan covers an aggregate of 106,000 shares
ITEM 11. (CONTINUED)
of Common Stock and no options may be granted after January 8, 2008.
The 1999 Directors' Plan provides that each non-employee director as of January 8, 1999 ("Effective Date") would receive an option to purchase 2,000 shares of Common Stock at an exercise price equal to the fair market value as of such date ($3.00). Furthermore, on the Effective Date, Messrs. Stulberg, Saver and Shirazi received a one-time grant to purchase 10,000, 8,000 and 8,000 shares of Common Stock, respectively, at an exercise price of $3.00. In addition, any person who is a non-employee director on an annual anniversary date of the Effective Date (including and terminating with the anniversary date in the year 2008) will receive an option to purchase 2,000 shares at the fair market value on that date, subject to the overall limit of the number of shares issuable under the 1999 Directors' Plan. The maximum term of each such option is ten years from the date the option is granted. Each option vests fully upon the date of grant. The options are nontransferable, except by will or the laws of descent and distribution and must be exercised by the optionee during the optionee's lifetime only by such optionee except that the optionee's estate may exercise the option immediately within one year of the optionee's death. Any outstanding option may be exercised within one year by an optionee who ceases to be a director by reason of disability. In the event an optionee ceases to be a director otherwise than by reason of death or disability, any outstanding option held by such optionee will terminate. The Board of Directors may suspend, discontinue, modify or amend the 1999 Directors' Plan in any respect except that the Board may not suspend, discontinue, modify or amend the 1999 Directors' Plan so as to adversely affect the rights of a participant with respect to any grants that have previously been made to such participant without such participant's approval. In addition, no amendment to or modification of the 1999 Directors' Plan which: (i) materially increases the benefits accruing to participants; (ii) except for certain changes in capital stock as a result of stock splits or other comparable transactions as set forth in the 1999 Directors' Plan, increases the number of shares that may be issued under the 1999 Directors' Plan; or (iii) modifies the requirements as to eligibility for participation under the 1999 Directors' Plan, will be effective without stockholder approval.
On January 8, 2000, each of Messrs. Stulberg, Saver, Shirazi and Dekom received a grant to purchase 2,000 shares at $3.5625 per
ITEM 11. (CONTINUED)
share. The 1999 Directors' Plan is not subject to ERISA and is not qualified under Section 401(a) of the Code.
401(k) PLAN
Effective as of January 1, 1990, the Company adopted its 401(k) Plan (the "Plan"), which includes a cash-or-deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan, which has been amended and restated as of July 1, 1997, was established to provide retirement and other benefits to employees of the Company. Employees who have completed at least 6 months of service qualify for the Plan. Participants may designate up to 15% of their compensation to be contributed to the Plan on a pre-tax basis ("Employee Elective Contributions"). Participants will be 100% vested in their Employee Elective Contributions (including earnings) at all times.
The Company does not make matching contributions to the Plan. The Company may determine each plan year to make discretionary profit sharing contributions on behalf of participants who meet certain eligibility requirements (i.e. employed on the last day of the plan year or completion of at least 500 hours of service during such year). Participants will generally vest in the Company's contributions (including earnings) at the rate of 40% after the first year of service, 60% after the second year of service, 80% after the third year of service and 100% after the fourth year of service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Gordon Stulberg, Matthew H. Saver and Tofigh Shirazi. The members of the Stock Option and Stock Appreciation Rights Plan Committee are Matthew H. Saver and Tofigh Shirazi. Messrs. Stulberg, Saver and Shirazi are directors of the Company. No member of the Compensation Committee or Stock Option and Stock Appreciation Rights Plan Committee has any interlocking relationship with any other corporation that requires disclosure under this heading.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 31, 2000, information relating to beneficial ownership (within the meaning of SEC Rule 13d-3) of Common Stock by the Company's directors and executive officers and owners of more than 5% of any class of the Company's voting securities who are known to the Company. Except as otherwise specified, the named beneficial owner claims sole investment power and voting power as to the securities reflected in the table. The options held by the individuals identified below are either currently exercisable or will become exercisable upon approval of the Merger by the Company's stockholders.
* Represents less than 1% of the 4,764,300 shares of Common Stock outstanding on August 31, 2000.
ITEM 12. (CONTINUED)
(1) Mark Amin and Reza Amin are brothers.
(2) Mark Amin disclaims beneficial ownership of 66,390 of these shares, which he holds as trustee of a trust for the benefit of certain family members. Includes options to purchase 200,000 shares.
(3) Includes options to purchase 18,000 shares.
(4) Includes options to purchase 12,000 shares.
(5) Includes 32,000 shares held by a family limited partnership and options to purchase 12,000 shares.
(6) Includes options to purchase 2,000 shares.
(7) Includes options to purchase 10,000 shares.
(8) Includes options to purchase 12,500 shares.
(9) Includes options to purchase 18,000 shares.
(10) Includes options to purchase 91,000 shares.
(11) Includes options to purchase 5,000 shares.
(12) The address of Reza Amin is c/o the Company, 4553 Glencoe Avenue, Suite 200, Marina del Rey, California, 90292.
(13) Reza Amin disclaims beneficial ownership of 132,780 of these shares which he holds as trustee of a trust for the benefit of certain family members.
(14) The address of Yahoo! Broadcast Services (formerly known as broadcast.com.inc.) is 2914 Taylor Street, Dallas, Texas 75226.
(15) As of March 29, 1999, as reported in Schedule 13G.
(16) Includes options to purchase 380,500 shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED MATTERS
LOANS
During the fiscal year ended June 30, 1997, Trimark made a loan of $400,000 to Mark Amin, the Chairman of the Board and Chief Executive Officer of the Company. In July 1997, Trimark loaned an additional $350,000 to Mr. Amin. Mr. Amin's loan is evidenced by a promissory note, is secured by shares of the Company's Common Stock and bears interest at Trimark's weighted average cost of funds under its credit facility with its bank (which averaged 8.24% during the fiscal year ended June 30, 2000), but in no event less than the applicable federal rate set forth in Section 1274(d) of the Internal Revenue Code. Interest payments were due quarterly until June 30, 2000, at which time the entire loan balance was to be due. The largest aggregate amount of indebtedness outstanding during the fiscal year ended June 30, 2000 was $811,892. As of September 1, 2000, the aggregate amount outstanding was $ 823,709. In connection with Mr. Amin's employment agreement with Lions Gate dated as of June 6, 2000, as a bonus in respect of entering into such agreement and Mr. Amin's efforts on behalf of CinemaNow, Inc., upon closing of the Merger, the loan, together with all accrued but unpaid interest, will be forgiven.
YAHOO! BROADCAST SERVICES
On March 29, 1999, pursuant to the terms of a February 22, 1999 agreement between the Company and broadcast.com inc. (now known as Yahoo! Broadcast Services) ("BCST")to jointly market certain of the Company's movies by streaming them on the BCST web site, the Company issued and sold to BCST 412,363 shares of the Company's Common Stock (or 9% of its outstanding shares) in exchange for 45,858 shares of common stock of BCST. As a result of this business venture, the Company and BCST will work together to distribute movies on the internet under a variety of new revenue models including pay-per-view, electronic commerce, integrated advertising, personalized marketing and user interactive content. Under this agreement, which terminates on January 31, 2001 unless extended, the Company will use its best efforts on future titles to give BCST streaming rights or in certain circumstances rights of first refusal in connection therewith.
ITEM 13. (CONTINUED)
EMPLOYMENT AGREEMENTS
Reference is made to the "Summary Compensation Table" for a description of employment arrangements and other arrangements between the Company and certain of its directors and officers.
CINEMANOW, INC.
In the first quarter of calendar year 2000, pursuant to the terms of a Securities Purchase Agreement dated as of January 6, 2000, as amended, the Company's majority-owned subsidiary, CinemaNow, Inc. ("CinemaNow"), completed a private placement financing to accredited investors of 3,385,182 shares of CinemaNow Series A Convertible Preferred Stock, yielding proceeds of approximately $2,285,000. The investors, CinemaNow and the Company are parties to an Investors Rights Agreement and to a Co-Sale Agreement pursuant to which the investors are granted certain registration rights, board representation rights and rights of first opportunity relating to CinemaNow and future equity offerings by it, and the founders of CinemaNow (who include the Company) grant the investors, subject to certain exceptions, the right to participate in sales by the founders and the right of first opportunity with respect to future sales of CinemaNow stock held by the founders. In connection with the foregoing transactions, CinemaNow has issued to Trimark a $215,000 convertible subordinated debenture due June 30, 2001 relating to debt CinemaNow owes Trimark. CinemaNow and Trimark are also parties to a five-year exclusive output agreement (except with respect to an existing agreement between Trimark and a third party) with respect to the Internet rights to all of Trimark's motion pictures in the U.S. and Canada to the extent Trimark controls such rights.
Under CinemaNow's stock option plan, Mark Amin, Chairman of the Board and Chief Executive Officer of the Company and Chairman of the Board of CinemaNow, was granted stock options at varying exercise prices (each in excess of the fair market value on the grant date) and vesting over a three-year term, to acquire up to 2,100,000 shares of CinemaNow common stock, or approximately 9% of such common stock on a fully-diluted basis. Cami Winikoff, Chief Operating Officer of Trimark and a director of CinemaNow, was granted stock options at the fair market value on the grant date and vesting over a three-year term to acquire 15,000 shares of CinemaNow common stock. Jon Feltheimer, Vice Chairman and Chief Executive Officer of Lions Gate, and Michael Burns, Vice Chairman of Lions Gate, each hold convertible preferred stock and options to purchase common stock of CinemaNow and have served on its board of directors since February 2000. Each of
ITEM 13. (CONTINUED)
Mr. Feltheimer and Mr. Burns owns approximately 2% of the outstanding convertible preferred stock, and the options they own, which vest over three years commencing March 1 2000, are exercisable for less than 1% of the common stock of CinemaNow.
AGREEMENTS RELATING TO THE LIONS GATE MERGER
The following agreements relate to the Merger:
TRIMARK STOCKHOLDERS VOTING AGREEMENT
As an inducement and condition to Lions Gate's entering the Merger Agreement, Mark Amin, Chairman and Chief Executive Officer of the Company, Reza Amin, and Lions Gate entered the Trimark Stockholders Voting Agreement, dated June 6, 2000. Mark Amin and Reza Amin beneficially own or hold of record, in the aggregate, approximately 45% of the outstanding Common Stock. Mr. Amin entered the agreement solely in his capacity as a Company stockholder and not in the capacity as director of the Company.
Under the agreement, Mark Amin and Reza Amin agreed to vote at the Company stockholders' meeting their Common Stock beneficially owned or held of record by them in favor of the Merger Agreement and the transactions contemplated by the Merger Agreement, and against, except as permitted by the Merger Agreement, any competing or alternative proposal. Mark Amin and Reza Amin further agreed not to enter any written agreement with any third party the effect of which would be inconsistent with the Merger Agreement.
Subject to certain permitted exceptions as set forth in the agreement, Mark Amin and Reza Amin agreed that they will NOT:
- Solicit, or facilitate any inquiries or the making of any proposal that is, or may reasonably be expected to lead to, an alternative acquisition proposal, nor will they permit any of their agents to do so;
- Offer for sale, sell, encumber, or otherwise dispose of, their Common Stock;
- Grant any proxy or power of attorney with respect to the matters in the agreement;
- Deposit any of their Common Stock in a voting trust or enter a voting agreement with respect to the matters in the agreement.
ITEM 13. (CONTINUED)
The agreement will terminate upon the earliest to occur of:
- The effective time of the Merger;
- The exercise of the rights of Trimark's board and Trimark with respect to receipt of an offer from a third party
- The termination of the Merger Agreement in accordance with its terms.
REGISTRATION RIGHTS AGREEMENT
Simultaneously with the execution of the Merger Agreement, Mark Amin and Reza Amin entered a registration rights agreement with Lions Gate that will take effect upon the completion of the Merger. The agreement provides for demand rights and "piggyback" rights with respect to the registration under the Securities Act of 1933 of the shares of Lions Gate common stock to be received by each of them in the Merger and with respect to the shares of Lions Gate common stock issuable upon the exercise of options granted by Lions Gate to Mark Amin under his employment agreement with Lions Gate.
The demand rights entitle Mark Amin and Reza Amin to require, on two occasions any time after 180 days from the effective time of the Merger, that Lions Gate use its commercially reasonable best efforts to register the shares of Lions Gate common stock then owned by them, for public resale, so long as Mark Amin and Reza Amin are demanding registration of at least 25% of the shares of Lions Gate common stock received by Mark Amin in connection with the Merger.
The piggyback rights entitle Mark Amin and Reza Amin to require, at any time after the effective time of the Merger, that Lions Gate include their shares of Lions Gate common stock in other registration statements filed by Lions Gate for shares that Lions Gate wishes to sell.
Mark Amin's and Reza Amin's demand rights and piggyback rights are subject to the ability of the underwriters, if any, to limit the number of shares included in the registration statement, and other customary conditions.
Lions Gate will bear all expenses of these registration statements, except for fees and expenses of counsel for Mark Amin and Reza Amin, stock transfer fees and underwriters' discounts, commissions and fees, if any.
ITEM 13. (CONTINUED)
Lions Gate has agreed not to enter into any agreement with respect to its securities that is inconsistent with or violates the rights granted to Mark Amin and Reza Amin under the agreement, and further agreed to grant to Mark Amin and Reza Amin any more favorable rights that Lions Gate may grant to others in the future with respect to registration of its securities.
Mark Amin agreed, subject to specified conditions during the six-month period beginning upon the effective time of the Merger, to neither sell the shares of Lions Gate common stock that he acquires in the Merger nor exercise his piggyback rights.
The agreement also contains other customary provisions, such as indemnification undertakings by Lions Gate, Mark Amin and Reza Amin in connection with registration statements filed under the agreement.
The demand rights and piggyback rights of Mark Amin and Reza Amin under the agreement may expire as early as two years after the effective time of the Merger, if the shares of Lions Gate common stock then owned by them are eligible for sale pursuant to Rule 144 under the Securities Act of 1933, but will terminate in any event five years after the effective date of the Merger.
EMPLOYMENT AGREEMENT
Mark Amin has entered a three-year employment agreement with Lions Gate. Under the agreement, which is contingent upon the completion of the Merger, Mr. Amin will provide high-level advisory and consulting services to the home video operations of Lions Gate and the Company. Mr. Amin will hold the title of Vice Chairman and will also have the right to serve as a director of Lions Gate. In addition, he will remain Chairman of CinemaNow, Inc., a majority-owned subsidiary of the Company, for so long as CinemaNow remains under Lions Gate's control. Mr. Amin will not, however, be an officer of Lions Gate.
As compensation, Mr. Amin will receive an annual salary of no less than U.S.$500,000, fully vested options to purchase one million shares of Lions Gate common stock at a price of U.S.$2.55 per share and an additional 400,000 shares at a price of U.S.$4.00 per share and forgiveness of indebtedness to the Company in the amount of approximately U.S.$795,000. Of the total options granted to Mr. Amin, options to purchase 125,000 shares of Lions Gate common stock shall be immediately exercisable on the date of consummation of the Merger; one-third
ITEM 13. (CONTINUED)
of the balance shall become vested in equal installments on each of the first, second and third anniversaries of the employment agreement provided that options to acquire 637,500 shares shall not become exercisable unless the average closing price of the Lions Gate common stock for a period of 20 consecutive trading days is not less than U.S. $4.00 and the remaining options will not become exercisable until the average stock price is not less than U.S. $6.00. Mr. Amin is entitled to allocate some of the options to Company employees. In the event any payments to Mr. Amin become subject to the "golden parachute" excise tax provisions of the Internal Revenue Code, Mr. Amin will also be entitled to an excise tax "gross-up" in an amount sufficient to offset fully the effects of the excise tax.
In general, during the four year period following the effective time of the Merger, Mr. Amin will not be permitted to engage in enterprises that compete with Lions Gate in the business of United States and/or foreign theatrical or home video distribution of theatrical or home video motion pictures, in each case for so long as Lions Gate remains materially engaged in these businesses. However, Mr. Amin will be permitted to engage in the development, pre-production, financing, production or distribution of motion pictures. In addition, if Mr. Amin is no longer serving on Lions Gate's board, he will be permitted to serve in an executive or other capacity with competitors of Lions Gate, so long as his duties do not directly involve the areas of theatrical and home video distribution of theatrical or home video motion pictures. To the extent consistent with his non-compete obligations, Mr. Amin will be permitted to engage in outside employment, consulting, business, charitable and/or investment activities, and he will not be required to dedicate such number of hours to the performance of his duties to Lions Gate as would materially interfere with his taking on substantial daily responsibilities unrelated to his employment with Lions Gate.
In general, while Mr. Amin is employed by Lions Gate, Lions Gate will have a right of first refusal with respect to worldwide distribution rights in any motion picture produced by Mr. Amin (other than as a producer for hire) to the extent Mr. Amin controls the licensing of the distribution rights. Exceptions to the right of first refusal apply to motion pictures whose distribution rights Mr. Amin does not control, and six projects which Mr. Amin brought to the Company prior to the Merger and as to which he will reimburse the Company for its sunk development costs, upon completion of the Merger or commencement of principal photography of each project, as provided in the employment agreement.
ITEM 13. (CONTINUED)
If Lions Gate terminates Mr. Amin's employment without cause or materially breaches the employment agreement, Mr. Amin will be entitled to receive a lump sum equal to the balance of the compensation due under the employment agreement, with a minimum of 12 months compensation. In such event, Mr. Amin's obligations under the non-competition and right of first refusal provisions of the employment agreement will immediately terminate, as well as his obligations under the "stand-off" provisions of the registration rights agreement.
To enforce his rights to serve on Lions Gate's board, Lions Gate is required to issue to Mr. Amin all of the issued and outstanding shares of a new class of preferred stock to be issued by Lions Gate, subject to approval of its stockholders. Such approval has been obtained.
10 shares will be authorized and issued to Mr. Amin at a price of U.S.$10 per share, and the terms of the Series B Preferred Shares will be as follows:
Holders of the Series B Preferred Shares, exclusively and separately as a class, will be entitled to elect one director of Lions Gate, who will be Mark Amin.
The Series B Preferred Shares will bear no dividend rights.
In the event of the liquidation, dissolution or winding up of Lions Gate, whether voluntary or involuntary, or any other distribution of the assets of Lions Gate among its members for the purposes of winding up its affairs, holders of the Series B Preferred Shares will have a liquidation preference of U.S.$10 per share.
Lions Gate may redeem all of the Series B Preferred Shares at a price of US$10.00 per share,
- If, at any time after the third anniversary of the first issuance of any Series B Preferred Shares, the holders of Series B Preferred Shares and their controlled affiliates, family members, and trusts over which such persons maintain sole voting power own, as a group, fewer than 2,000,000 shares of Lions Gate common stock; or
- If at any time Lions Gate or its stockholders shall be a party to any transaction, including without limitation, any amalgamation, arrangement, takeover bid, issuer bid, consolidation or merger that results in the holders of Lions Gate common stock immediately prior to the effective date of such transaction (calculated on a pro
ITEM 13. (CONTINUED)
forma basis, including the common stock issuable upon the conversion of all outstanding Series A Preferred Shares) holding, in the aggregate, less than 50% of the corporation or entity surviving the transaction, or any sale of all or substantially all of Lions Gate's assets.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements included in Part II of this report:
All other schedules have been omitted either as inapplicable or not required under the instructions contained in Regulation S-X or because the information is included in the financial statements or the notes thereto.
(b) Reports on Form 8-K:
On June 16, 2000 the Company filed a Current Report on Form 8-K, dated June 6, 2000, under Item 1, regarding the Merger with Lions Gate.
(c) Exhibits:
(i) Except as noted, all Exhibits, numbered as they were numbered for filing as Exhibits to the Company's Form S-1 Registration Statement, No. 33-35053, effective June 26, 1990, are incorporated herein by this reference to such Registration Statements. All filings were made at the Commission's office in Washington D.C. The registrant's SEC file number is 0-18613:
ITEM 14. (CONTINUED)
ITEM 14. (CONTINUED)
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1 Filed herewith. 2 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. 3 Intentionally omitted. 4 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. 5 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 6 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993. 7 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. 8 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. 9 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 11 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 12 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 13 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 14 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. 15 Incorporated by reference to the identical exhibit number in Registrant's Current Report on Form 8-K dated February 21, 1997. 16 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 17 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997
ITEM 14. (CONTINUED)
18 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 19 Incorporated by reference to the identical exhibit number in Registrant's Current Report on Form 8-K dated May 15, 1998 (filed May 26, 1998). 20 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 21 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998. 22 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. 23 Incorporated by reference to the identical exhibit number in Registrant's Current Report on Form 8-K dated June 6, 2000 (filed June 16, 2000). 24 Incorporated by reference to the identical exhibit number in Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. 25 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 26 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999. 27 Incorporated by reference to the identical exhibit number in Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. 28 Incorporated by reference to Annex A to the Registrant's proxy statement dated October 15, 1999.
+ This is a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Mohammed Mark Amin ---------------------- Mohammed Mark Amin Chairman of the Board
Date: September 28, 2000 -------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Mohammed Mark Amin Chairman of the Board 09/28/00 - --------------------------- and Chief Executive Mohammed Mark Amin Officer [Principal Executive Officer]
/s/ Peter Dekom Director 09/28/00 - --------------------------- Peter Dekom
/s/ Gordon Stulberg Director 09/28/00 - --------------------------- Gordon Stulberg
/s/ Tofigh Shirazi Director 09/28/00 - --------------------------- Tofigh Shirazi
/s/ Matthew Saver Director 09/28/00 - --------------------------- Matthew Saver
/s/ Jeff Gonzalez Chief Financial 09/28/00 - --------------------------- Officer, and Secretary Jeff Gonzalez [Principal Financial and Accounting Officer]
INDEX TO EXHIBITS