<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
REGISTRATION NO. 333-35411
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
METRO-GOLDWYN-MAYER INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 6712 95-4605850
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2500 BROADWAY STREET
SANTA MONICA, CALIFORNIA 90404
(310) 449-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DAVID G. JOHNSON, ESQ.
SENIOR EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL
METRO-GOLDWYN-MAYER INC.
2500 BROADWAY STREET
SANTA MONICA, CALIFORNIA 90404
(310) 449-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
<TABLE>
<S> <C>
BRUCE D. MEYER, ESQ. KENDALL R. BISHOP, ESQ.
GIBSON, DUNN & CRUTCHER LLP O'MELVENY & MYERS LLP
333 SOUTH GRAND AVENUE 1999 AVENUE OF THE STARS, 7TH FLOOR
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90067
(213) 229-7000 (310) 553-6700
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997
PROSPECTUS
9,000,000 SHARES
[LOGO OF METRO-GOLDWYN-MAYER INC.]
METRO-GOLDWYN-MAYER INC.
COMMON STOCK
----------
All of the shares of the common stock, $.01 par value per share (the "Common
Stock"), offered hereby are being sold by Metro-Goldwyn-Mayer Inc. ("MGM" or
the "Company"). Of the 9,000,000 shares offered by the Underwriters, 7,200,000
shares will be offered initially in the United States and Canada (the "U.S.
Offering") by the U.S. Underwriters and 1,800,000 shares will be offered
initially outside the United States and Canada (the "International Offering"
and, collectively, with the U.S. Offering, the "Offering") by the International
Underwriters (collectively, with the U.S. Underwriters, the "Underwriters").
The Company has granted the U.S. Underwriters and the International
Underwriters options to purchase up to an additional 864,000 and 216,000
shares, respectively, to cover over-allotments, if any. The public offering
price and the underwriting discount per share will be identical for the U.S.
Offering and the International Offering. See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial offering price per share will be
between $20 and $23. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. All information in
this Prospectus gives effect to a recapitalization of the Company occurring
immediately prior to the closing of the Offering and consisting of (i) the
conversion of each share of the Company's Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock") into one share of the Common
Stock (the "Series A Preferred Stock Conversion") and (ii) a subsequent 41.667
for 1 stock split of the Common Stock (the "Stock Split").
Concurrently with the consummation of the Offering, Tracinda Corporation
("Tracinda") will purchase directly from the Company, at a price per share
equal to the per share price to public, less the underwriting discount,
shares of the Common Stock, for an aggregate purchase price of $75 million (the
"Tracinda Purchase"). The Underwriters will not participate in, or receive any
discount or commission on, the sale of the Common Stock to Tracinda in the
Tracinda Purchase. Based on the mid-point of the range set forth above, the
number of shares of the Common Stock to be purchased by Tracinda in the
Tracinda Purchase would be 3,691,399.
The Common Stock has been approved for listing (subject to official notice of
issuance) on the New York Stock Exchange (the "NYSE") under the symbol "MGM."
Following the Offering, Tracinda, Seven Network Limited, the directors and
officers of the Company and affiliates thereof will beneficially own
approximately 86.5% of the Common Stock (based on the mid-point of the range
set forth above) and, therefore, will be able to control all actions requiring
a vote of the stockholders, including the election of directors. The Company
does not expect to be profitable for at least several years.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- --------------------------------------------------------------------------------
Total(3)............................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at approximately $4,000,000 payable by
the Company.
(3) The Company has granted the U.S. Underwriters and the International
Underwriters options, exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional 864,000 and 216,000 shares of
Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively.
----------
Merrill Lynch & Co. is acting as book running lead manager for the Offering.
Merrill Lynch & Co. and J.P. Morgan & Co. are acting as joint lead managers.
The shares of the Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
subject to approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that the delivery of the shares will be made in New York, New York on
or about November , 1997.
----------
MERRILL LYNCH & CO. J.P. MORGAN & CO.
Joint Lead Managers
----------
BEAR, STEARNS & CO. INC. FURMAN SELZ
----------
The date of this Prospectus is November , 1997.
<PAGE>
Information in this Prospectus contains forward-looking statements which can
be identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "intend," "estimate" or "continue" or the negative thereof
or comparable terminology. The matters set forth under the caption "Risk
Factors" in the Prospectus constitute cautionary statements identifying
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING TRANSACTIONS EFFECTED ON THE NYSE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE ANY SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the historical and pro forma financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
Throughout this Prospectus, except where the context otherwise requires, the
"Company" refers collectively to Metro-Goldwyn-Mayer Inc. and its direct and
indirect subsidiaries. Unless otherwise indicated, all information in this
Prospectus gives effect to the recapitalization of the Company occurring
immediately prior to the closing of the Offering and consisting of (i) the
Series A Preferred Stock Conversion and (ii) the Stock Split. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of (i) stock
options outstanding as of September 30, 1997 to purchase 5,518,204 shares of
the Common Stock or (ii) the Underwriters' over-allotment options for 1,080,000
shares. In addition, all references in this Prospectus to the number of shares
to be purchased by Tracinda in the Tracinda Purchase are based on the mid-point
of the range set forth on the cover page hereof.
THE COMPANY
COMPANY OVERVIEW
The Company is engaged primarily in the development, production and worldwide
distribution of theatrical motion pictures and television programs. The
Company, including Metro-Goldwyn-Mayer Studios Inc. (formerly known as Metro-
Goldwyn-Mayer Inc.) ("MGM Studios"), United Artists Corporation ("UA"), Orion
Pictures Corporation ("Orion"), Goldwyn Films Inc. ("Goldwyn") and its other
subsidiaries, is one of only seven major film and television studios worldwide.
With approximately 4,000 film titles and over 8,200 episodes of television
programming, the Company's library (the "Library") constitutes the largest
collection of post-1948 feature films in the world. Motion pictures in the
Library have won over 185 Academy Awards, including Best Picture Awards for
Annie Hall, The Apartment, The Best Years of Our Lives, Dances With Wolves, The
Deer Hunter, Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon,
Rain Man, Rocky, Silence of the Lambs, Tom Jones and West Side Story. The
Library also includes 17 titles in the James Bond film franchise, five titles
in the Rocky film franchise and nine titles in the Pink Panther film franchise.
Tracinda, Seven Network Limited ("Seven") and senior management of MGM
Studios formed the Company to acquire all of the outstanding capital stock of
MGM Studios and its subsidiaries, including UA, in October 1996 for an
aggregate consideration of $1.3 billion (the "MGM Acquisition"). Tracinda is
wholly-owned by Kirk Kerkorian. Seven is one of the largest television
broadcast networks in Australia with stations in five major Australian
metropolitan areas and one regional television station. Frank G. Mancuso,
Chairman and Chief Executive Officer of MGM Studios since July 1993 and of the
Company since its formation, has approximately 35 years of entertainment
industry experience.
In July 1997 the Company acquired all of the outstanding capital stock of
Orion and its subsidiaries, including Goldwyn (the "Orion Companies"), from
Metromedia International Group, Inc. (the "Orion Acquisition"). In connection
with the Orion Acquisition, the Company obtained the film and television
libraries of the Orion Companies consisting of approximately 1,900 film titles
and 3,000 television episodes, nearly doubling the size of the Library to its
current size of approximately 4,000 film titles and over 8,200 episodes of
television programming. The Company also acquired 12 substantially completed
theatrical motion pictures and five direct-to-video features. The Goldwyn
cinema operations were excluded from the Orion Acquisition. See "Background of
the Company."
BUSINESS STRATEGY
The Company's goal is to enhance its position as a premier global
entertainment content company by maximizing the value of its assets, including
the Library and its film and television production units, under the direction
of its experienced management team. To achieve this goal, the Company intends
to:
Build and Leverage the Library. The Company believes that the Library is its
most powerful asset and that the Library will continue to generate relatively
stable cash flows through the worldwide distribution of its titles.
3
<PAGE>
Management intends to maximize the value of the Library by (i) producing new
motion pictures and television programs that will not only be successful on
their own, but will also increase the depth and breadth of the Library, (ii)
aggressively marketing and repackaging the Library's titles, (iii) developing
new distribution channels for delivering MGM branded programming, (iv)
capitalizing on developments in technology and (v) further penetrating
international markets as they grow. As opportunities arise, the Company may
pursue strategic acquisitions, including acquisitions of additional titles or
of new distribution channels for the Library. Additionally, the Company expects
to benefit as certain rights to the Library that have been previously licensed
to others revert to the Company over time. See "Business--Distribution."
Develop, Produce and Distribute Theatrical Motion Pictures. Through Metro-
Goldwyn-Mayer Pictures Inc. ("MGM Pictures") and United Artists Pictures Inc.
("UA Pictures"), the Company plans to produce or co-produce and distribute
approximately ten to 12 motion pictures annually across a variety of genres.
The Company intends to (i) actively manage its production and release schedules
to maximize overall performance of those motion pictures, (ii) tightly control
development and production expenditures while maintaining the artistic
integrity required to develop and produce successful feature films and (iii)
utilize the Library as an inexpensive source for sequels and remakes and the
expansion of certain well-tested, familiar film franchises. Additionally, the
Company plans to produce or acquire and release approximately four to six
specialty motion pictures annually through Goldwyn. The Company also plans to
distribute annually approximately four to six motion pictures produced by
others.
Develop, Produce and Distribute Television Programming. The Company intends
to focus primarily on the development and production of series for pay
television and the first-run syndication business by using its extensive
Library as a source of ideas. Under its television programming strategy, the
Company has generally been able to recover substantially all production costs
for a series shortly following completion of production by obtaining up-front
financial commitments from domestic pay television broadcasters for production
of multiple episodes of the series and concurrently licensing the series in
international markets. The Company also develops programs such as two-hour
television movies and mini-series. The Company intends to allocate a portion of
its future television production budget to producing series for network
television.
Leverage the MGM Brand Name. The Company believes that the MGM name and its
lion logo are among the most recognized in the world. The Company intends to
capitalize on the value inherent in its name and logo through the distribution
of branded programming and the selective development of high-quality consumer
products.
AMENDED CREDIT FACILITY
In October 1997 the Company and its principal lenders amended and restated
the Company's principal credit facilities into a single credit facility (the
"Amended Credit Facility"). The Amended Credit Facility consists of a $400
million six year revolving facility, increasing to $600 million upon receipt by
the Company of gross proceeds of at least $250 million from the issuance and
sale of the Common Stock, including in connection with the Offering, a
$400 million seven and one-half year term loan and a $300 million eight and
one-half year term loan. See "Financing Arrangements."
THE TRACINDA PURCHASE
Concurrently with the consummation of the Offering, Tracinda will purchase
directly from the Company, at a price of $ per share (equal to the per share
price to public, less the underwriting discount), shares of the Common
Stock, for an aggregate purchase price of $75 million (the "Tracinda
Purchase"). The Underwriters will not participate in, or receive any discount
or commission on, the sale of the Common Stock to Tracinda in the Tracinda
Purchase. Based on the mid-point ($21.50) of the range set forth on the cover
page, the number of shares of the Common Stock to be purchased by Tracinda in
the Tracinda Purchase would be 3,691,399 and the price per share is estimated
to be $20.3175.
The principal executive offices of the Company are located at 2500 Broadway
Street, Santa Monica, California 90404, and the Company's telephone number is
(310) 449-3000. Metro-Goldwyn-Mayer, MGM, United Artists, UA and Orion, among
others, are registered trademarks of the Company.
4
<PAGE>
THE OFFERING
Of the 9,000,000 shares of Common Stock being offered hereby by the Company,
7,200,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters and 1,800,000 shares are being offered initially outside
the United States and Canada by the International Underwriters. See
"Underwriting."
Common Stock offered(1):
U.S. Offering.............
7,200,000 shares
International Offering....
1,800,000 shares
Total Offering.......... 9,000,000 shares
Tracinda Purchase........... 3,691,399 shares
Common Stock to be
outstanding after the
Offering and the Tracinda
Purchase................... 65,403,320 shares (1)(2)
Use of proceeds.............
It is currently anticipated that substantially
all of the net proceeds to the Company from the
Offering and the Tracinda Purchase (the "Net
Proceeds") will be used to reduce indebtedness of
the Company under the revolving portion of the
Amended Credit Facility. As of October 15, 1997,
the outstanding balance under the revolving
portion of the Amended Credit Facility was
$290 million. Remaining net proceeds, if any,
will be used by the Company for general corporate
purposes, including the payment of motion picture
and television development, production and
distribution costs. Any amounts repaid under the
Amended Credit Facility out of the net proceeds
may be reborrowed by the Company. The Company is
currently considering the acquisition of a film
library consisting of approximately 1,000 titles
and, if the Company completes such acquisition,
it would likely reborrow a significant portion of
the amounts so repaid in order to initially
finance such acquisition. In such case, the
Company would expect to refinance such borrowings
with one or more other sources. See "Risk
Factors--Risks Relating to the Orion Acquisition
and Integration of Operations; Future
Acquisitions" and "--Risks Relating to Liquidity
and Financing Requirements." Although the Company
does not currently intend to use a substantial
portion of the Net Proceeds to finance such
acquisition, it reserves the right to do so,
depending on, among other things, the timing of
the acquisition. See "Use of Proceeds."
NYSE symbol................. The Common Stock has been approved for listing
(subject to official notice of issuance) on the
- -------- NYSE under the symbol "MGM."
(1) Does not include up to 864,000 and 216,000 shares subject to over-allotment
options granted by the Company to the U.S. Underwriters and International
Underwriters respectively.
(2) Excludes 5,205,702 shares of the Common Stock issuable upon exercise of
employee stock options outstanding as of September 30, 1997 (1,020,031 of
which are vested and exercisable or will vest and become exercisable within
60 days) and 2,919,363 shares issuable upon exercise of the stock options
available for future grant under the Company's stock option plans. See
"Management--Incentive and Bonus Plans." Also excludes an aggregate of
312,502 shares of the Common Stock issuable upon the exercise of currently
exercisable stock options held by Tracinda and Celsus Financial Corp.
("Celsus"). See "Ownership of Voting Securities" and "Certain
Transactions."
RISK FACTORS
See "Risk Factors" for a description of certain risks to be considered before
making an investment in the Common Stock.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
-------------------------------------- ------------- ----------- -----------
PRO FORMA PRO FORMA
YEAR ENDED FISCAL YEAR SIX MONTHS SIX MONTHS SIX MONTHS
DECEMBER 31, OCTOBER 11 TO ENDED ENDED ENDED ENDED
-------------------- JANUARY 1 TO DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
1994 1995 OCTOBER 10, 1996 1996 1996(2) 1996 1997 1997(3)
--------- --------- ---------------- ------------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues.......... $ 597,121 $ 860,971 $ 912,706 $ 228,686 $1,315,128 $595,132 $ 351,014 $ 413,131
Expenses.......... 732,706 973,331 1,589,275 215,112 1,913,870 644,942 356,873 436,698
Operating income
(loss)........... (135,585) (112,360) (676,569) 13,574 (598,742) (49,810) (5,859) (23,567)
Interest expense
and other income,
net.............. (31,790) (56,014) (68,196) (9,062) (46,768) (44,212) (19,211) (23,980)
Income (loss)
before income
taxes............ (167,375) (168,374) (744,765) 4,512 (645,510) (94,022) (25,070) (47,547)
Net income (loss). (171,252) (169,309) (745,038) 166 (654,365) (103,552) (29,005) (55,529)
Net income (loss)
per share........ $ 0.00 $ (10.03) $ (0.77) $ (0.85)
Pro forma number
of shares used in
computation of
net income (loss)
per share........ 37,567,634 65,259,153 37,643,426 65,334,945
OTHER DATA:
Cash flow from
operating
activities....... $ 216,289 $ 371,657 $ 343,137 $ 61,328 $ $328,811 $ 160,056 $
Cash flow from
investing
activities....... (464,031) (710,812) (380,142) (1,390,861) (277,904) (280,604)
Cash flow from
financing
activities....... 239,965 328,029 44,852 1,345,394 (54,988) 124,678
EBITDA(1)......... (103,499) (81,588) (87,289) 16,709 (3,536) (33,565) 1,192 (11,938)
Capital
expenditures..... 9,099 9,376 6,901 2,079 10,057 5,291 5,294 6,606
Depreciation...... 5,335 4,021 4,645 1,418 6,935 2,871 3,230 4,019
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(4) ADJUSTED(5)
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA (UNAUDITED):
Cash and cash equivalents.................................................. $ 20,255 $ 34,492 $ 200,242
Film and television costs, net............................................. 1,263,073 1,669,510 1,669,510
Total assets............................................................... 1,806,574 2,586,037 2,751,787
Bank and other debt ....................................................... 566,258 796,004 711,754
Stockholders' equity....................................................... 876,708 1,236,708 1,486,708
</TABLE>
- -------
(1) "EBITDA" is defined as earnings before interest, taxes, depreciation and
non-film amortization. While many in the financial community consider
EBITDA to be an important measure of comparative operating performance, it
should not be construed as an alternative to operating income or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles ("GAAP")). EBITDA does not reflect cash
necessary or available to fund cash requirements, and the items excluded
from EBITDA, such as depreciation and non-film amortization, are
significant components in assessing the Company's financial performance.
Other significant uses of cash flows are required before cash will be
available to the Company, including debt service, taxes and cash
expenditures for various long-term assets. The Company's calculation of
EBITDA may be different from the calculation used by other companies and,
therefore, comparability may be limited. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
(2) Reflects the effect of the MGM Acquisition Transactions, the Orion
Acquisition Transactions (as such terms are defined below--see "Background
of the Company") and the Offering and the Tracinda Purchase as if they had
occurred at the beginning of the period presented.
(3) Reflects the effect of the Orion Acquisition Transactions, the Offering and
the Tracinda Purchase as if they had occurred at the beginning of the
period presented.
(4) Reflects the effect of the Orion Acquisition Transactions and the
refinancing under the Amended Credit Facility as if they had occurred as of
June 30, 1997.
(5) Gives effect to the application of the estimated Net Proceeds of
approximately $250 million and the repayment of $84.3 million, which
represents the pro forma outstanding balance, of the revolving portion of
the Amended Credit Facility, as if the foregoing had been completed as of
June 30, 1997. The Company has incurred additional debt under the revolving
portion of its credit facilities since June 30, 1997 and, accordingly,
expects that substantially all of the Net Proceeds will be used to reduce
such debt. Does not assume exercise of the Underwriters' over-allotment
options.
6
<PAGE>
RISK FACTORS
The Common Stock offered hereby is speculative in nature and involves a high
degree of risk. In addition to the other information set forth elsewhere in
this Prospectus, prospective investors should carefully consider the following
risk factors prior to investing in the Common Stock offered hereby.
SIGNIFICANT OPERATING AND NET LOSSES; FUTURE LOSSES ANTICIPATED
The Company (including its predecessors) has not reported an operating
profit for any fiscal year since 1988, and while controlled by former
management (see "Background of the Company"), MGM Studios was the subject of
an involuntary bankruptcy petition that was filed in 1991. For 1994 and 1995
and for the period January 1, 1996 through October 10, 1996, the Company
reported an operating loss of $135.6 million, $112.4 million and
$676.6 million (including a $563.8 million provision for impairment of
intangible assets), respectively. In addition, the Company reported
significant net losses for each such period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company does
not expect to be profitable for at least several years. There can be no
assurance that there will not be significant or increasing operating and net
losses in the future or that the Company will become profitable.
CURTAILMENT OF CERTAIN OPERATIONS DUE TO SALE OF MGM STUDIOS
In October 1996 MGM Studios was acquired by the Company from Consortium de
Realisation ("CDR"), a wholly-owned subsidiary of Credit Lyonnais S.A. ("CL").
See "Background of the Company." During the ten month period from CDR's
announcement in January 1996 of its intention to sell MGM Studios to the
consummation of the sale (the "Sale Period"), the uncertainty surrounding
future management affected MGM Studio's ability to enter into new projects
with top artistic and creative talent. As a consequence, MGM Studios did not
commence production of any new motion pictures during the Sale Period and
released only nine motion pictures (most of which were produced by others)
between August 1, 1996 and August 1, 1997. This curtailment of operations has
adversely affected revenues and results of operations, and given the extended
period over which motion picture revenues are typically received, will
continue to do so for at least the next three years. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
Although the Company has established a complete release schedule for the rest
of 1997 and the first half of 1998, such schedule includes only six films
produced by MGM Pictures or UA Pictures, with the remainder having been
acquired either in the Orion Acquisition or through negative pick-up or other
distribution agreements. This slate contains a smaller number and percentage
of Company-produced motion pictures than the Company intends to release in
future years. There can be no assurance that the Company will not experience
problems or delays in its return to more normal operations. The lack of
production during the Sale Period may have adversely affected the Company's
relationship with major domestic exhibitors, as such relationships (and a
studio's negotiated share of the box office receipts) typically depend, in
part, on a studio's track record of delivering publicly appealing films.
NEW CHIEF PRODUCTION EXECUTIVES
Since the MGM Acquisition in October 1996, management has taken steps to
return operations to a higher level, and in connection therewith, the Company
has hired experienced chief production executives for MGM Pictures and UA
Pictures. The Company has not yet released any motion pictures that were
completely developed and produced under these new production executives. There
can be no assurance that such motion pictures, if and when released, will be
successful.
FLUCTUATION OF OPERATING RESULTS; EFFECT OF ENTERTAINMENT ACCOUNTING POLICIES
The Company's revenues and results of operations are significantly dependent
upon the timing of its releases and the commercial success of the motion
pictures and television programming it distributes, none of which can be
predicted with certainty. Accordingly, the Company's revenues and results of
operations may fluctuate significantly from period to period, and the results
of any one period may not be indicative of the results for any future periods.
7
<PAGE>
In accordance with generally accepted accounting principles and industry
practice, the Company amortizes film and television programming costs using
the individual-film-forecast method under which such costs are amortized for
each film or television program in the ratio that revenue earned in the
current period for such title bears to management's estimate of the total
revenues to be realized from all media and markets for such title. Management
regularly reviews, and revises when necessary, its total revenue estimates on
a title-by-title basis, which may result in a change in the rate of
amortization and/or a write-down of the film or television asset to net
realizable value. Results of operations in future years are dependent upon the
Company's amortization of its film and television costs and may be
significantly affected by periodic adjustments in amortization rates. The
likelihood of the Company's reporting of losses is increased because the
industry's accounting method requires the immediate recognition of the entire
loss in instances where it is expected that a motion picture or television
program will not recover the Company's investment. On the other hand, the
profit of a successful motion picture or television program must be deferred
and recognized over the entire revenue stream generated by the individual
picture or television program. As a result of the lack of movie production
during the Sale Period and the subsequent reduction of distribution, the
Company expects to experience lower revenues for at least the next three
years, and thus the fluctuations caused by this accounting method may have a
greater impact, than otherwise might be the case. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Motion Picture
Industry Accounting Standards."
RISKS OF MOTION PICTURE AND TELEVISION PRODUCTION
General. Motion picture production and distribution is highly speculative
and inherently risky. There can be no assurance of the economic success of any
motion picture since the revenues derived from the production and distribution
of a motion picture (which do not necessarily bear a direct correlation to the
production or distribution costs incurred) depend primarily upon its
acceptance by the public, which cannot be predicted. The commercial success of
a motion picture also depends upon the quality and acceptance of other
competing films released into the marketplace at or near the same time, the
availability of alternative forms of entertainment and leisure time
activities, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted with certainty.
Further, the theatrical success of a motion picture is generally a key factor
in generating revenues from other distribution channels. There is a
substantial risk that some or all of the Company's motion pictures will not be
commercially successful, resulting in costs not being recouped or anticipated
profits not being realized.
Television production and distribution is also highly speculative and
inherently risky. The success of the Company's television production and
distribution business is affected by some of the same factors described above
and may also be impacted by prevailing advertising rates, which are subject to
fluctuation. Thus, there is a substantial risk that some or all of the
Company's television projects will not be commercially successful, resulting
in costs not being recouped or anticipated profits not being realized. See
"The Industry" and "Business--Production," "--Distribution" and "--
Competition."
In the ordinary course of business the Company may from time to time be
subject to claims or litigation to defend against alleged infringement of the
rights of others or to determine the scope and validity of the intellectual
property rights of others. If material, such claims or litigation could be
costly and divert management's attention. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, or require the Company to seek
licenses from third parties, any one of which could have a material adverse
effect on the Company's business and results of operations. Except for the
possible effect of the matter discussed in the second paragraph of "--Risks
Associated with the James Bond Films and Third Party Relationships," the
Company does not believe that any such claims or litigation that are currently
pending or threatened will have a material adverse effect on the Company's
business or results of operations.
Substantial Production and Marketing Costs. The production and marketing of
theatrical motion pictures requires substantial capital. The costs of
producing and marketing motion pictures have generally increased in recent
years. According to the Motion Picture Association of America ("MPAA"), the
average direct negative
8
<PAGE>
cost (which includes all costs associated with creating a motion picture,
including pre-production, production, and post-production, but excluding
capitalized overhead and interest, marketing and distribution costs) of a
motion picture produced by one of the major studios has grown from
$19.4 million in 1989 to $34.1 million in 1996, an increase of 76 percent, and
the average domestic marketing cost per picture has grown from $9.2 million in
1989 to $19.8 million in 1996, an increase of 115 percent. These costs may
continue to increase in the future, thereby increasing the costs to the
Company of its motion pictures. Production costs and releasing costs are
rising at a faster rate than increases in either domestic admissions to movie
theaters or admission ticket prices, leaving the Company more dependent on
other media, such as home video and television, and foreign markets. The
direct negative costs of the motion pictures produced by the Company (other
than its specialty motion pictures) scheduled for release in 1997 and the
first six months of 1998 are estimated to range between $12 million and $107
million, with an average of $47 million. The direct negative costs of the
specialty motion pictures scheduled for release in 1997 and the first six
months of 1998 are estimated to range between $300,000 and $9 million, with an
average of $3 million. The Company (like most major motion picture studios)
generally does not obtain "completion bonds" from outside insurers to protect
itself against budget overruns and completion delays. There can be no
assurance that the Company will not incur cost overruns or suffer delays in
the production of its motion pictures. See "Business--Production--Motion
Picture Production."
Generally, television programs are produced under contracts that provide for
license fees which may cover only a portion of the anticipated production
costs. The "gap" or production deficit between these fees and production costs
can be substantial for series produced for the networks where production costs
are higher and the license fees for domestic first run programming are
becoming a smaller percentage of the program's costs. The recoverability of
the production deficit and the realization of profits, if any, are generally
dependent upon the ability to distribute the programs in subsequent domestic
television syndication and through foreign television licenses, additional
licenses and other uses. Therefore, the ability to recover the production
deficit and realize profits on any such network television series generally
requires the production and successful sale into syndication or to a cable
network of three to four years of new series episodes. There is increasing
competition among sellers of, and a decreasing number of independent
television stations buying, off-network programs available for syndication.
The Company intends to allocate a portion of its television production budget
to producing series for the networks. There can be no assurance that the
Company can recover the production deficit or realize profits on any
television series. See "Business--Production--Television Production."
Certain Elements of the Company's Motion Picture Production Strategy. Based
on the Company's current business plan for the next five years, its annual
release slates may be comprised of proportionately fewer large budget "event"
motion pictures than the current release slates of the other major studios.
The other major studios often pre-sell foreign rights to certain event motion
pictures to help offset production costs and mitigate box office performance
risks. The Company does not currently intend to pre-sell the foreign rights to
its event motion pictures to the same degree as it believes that certain of
its competitors have traditionally done. In addition, to improve access to top
talent and sought-after projects, the other major studios generally have a
number of "first look" or "housekeeping" agreements with successful producers
whereby the studio will have the first opportunity to acquire a motion picture
project from a producer in exchange for paying some or all of such producer's
annual overhead costs and agreeing in advance upon the production and other
fees to be paid for each project. The Company's current business strategy is
not focused on entering into a large number of such agreements. There can be
no assurance that these elements of the Company's strategic approach will
enable it to achieve its goal of producing commercially successful motion
pictures.
Possible Inability to Achieve Production Goals and Meet Production
Schedule. In August 1997 the Company announced that it had re-established a
full schedule of motion picture releases for the rest of 1997 and the first
half of 1998. See "--Curtailment of Certain Operations Due to Sale of
Company." However, no assurances can be given that the Company's production
and release goals will be met in such, or any future, period. In particular,
there can be no assurance that any of the pictures scheduled for release in
the rest of 1997 or thereafter will be completed or that completion will occur
in accordance with the anticipated schedule or budget, as the production,
completion and distribution of motion pictures are subject to numerous
uncertainties, including financing requirements, personnel availability and
the release schedule of competitive motion pictures.
9
<PAGE>
The Company's ability to meet its production and release goals will also
depend in part on its ability to identify and obtain sufficient amounts of
quality material. See "Business--Production--Motion Picture Production."
CERTAIN LIMITATIONS ON THE EXPLOITATION OF THE LIBRARY
The Company has differing types of rights to the various titles in the
Library. In some cases, the Company owns the title outright, with the right to
exploit the title in all media and territories for an unlimited time. In other
cases, the title may be owned by a third party and the Company may have
obtained the right to distribute the title in certain media and territories
for a limited term. The Company owns outright, or has been granted rights in
perpetuity to, approximately 50 percent of the titles in the Library. The
Company's rights in the other titles are limited in time and, pursuant to the
terms of the existing arrangements, the rights granted to the Company expire
with respect to approximately 15 percent of the Library over the next five
years (i.e. through the year 2002), with respect to another approximately 17
percent over the five years thereafter (from 2002 to 2007), and with respect
to another approximately 15 percent over the ten years thereafter (from 2007
to 2017). The Company has generally been able to renew such rights on
acceptable terms, however no assurances can be made that it will continue to
be able to do so in the future. In accordance with industry practice, for
purposes of calculating the size of the Library, the Company includes any
title that the Company has the right to distribute in any territory in any
media for any term. The only material exception to the foregoing practice is
that, even though the Company has home video distribution rights through 2001
with respect to approximately 2,950 titles owned by Turner Broadcasting
System, Inc. ("Turner"), the Company does not include such titles in
calculating the number of titles in the Library.
Even if a title is owned by the Company, the Company may have granted the
rights to exploit the title in certain media and territories to others. MGM
Studios and certain of its subsidiaries are parties to an agreement (as
amended, the "WHV Agreement") with Warner Home Video, Inc. ("WHV"), which was
entered into by prior management, under which WHV has been granted certain
home video distribution rights with respect to new motion pictures and the
motion picture library of MGM Studios and its affiliates, subject to certain
exceptions, throughout the world for a fee expressed as a percentage of home
video revenues (as determined under the WHV Agreement) and reimbursement of
certain distribution expenses. MGM Studios maintains direct control of all
significant elements of distribution such as the determination of release
dates, marketing, return policies and pricing for these home video releases.
The WHV Agreement expires in 2003, but WHV's rights with respect to any given
film that is subject to the WHV Agreement do not expire until five years after
the film's availability in the U.S. home video market. The WHV Agreement
expressly provides that WHV's rights do not extend to, among other things,
motion pictures owned, produced or released by another major studio in the
event MGM Studios or any of its affiliates acquires control of any such major
studio (so long as substantially the same quality and quantity of motion
pictures are produced that are covered by the WHV Agreement following the
acquisition as prior to the acquisition) and specifically names Orion as well
as others as major studios. Despite this provision, MGM Studios has received
correspondence from WHV alleging that the Orion Companies' future production
and library is subject to the WHV Agreement. MGM Studios has responded by
referring to the express Orion exclusion and is currently in discussions with
WHV about this matter. No assurance can be made as to the outcome of this
matter. To the extent that the future production and library product of the
Orion Companies, or any future affiliate of the MGM Studios, were determined
to be subject to the WHV Agreement, there would likely be a reduction in the
revenue and profits from the distribution of that product. See "Business--
Distribution--Home Video Distribution."
Prior management also entered into long-term, pre-paid licenses for domestic
and certain major international television markets with respect to substantial
portions of the Library. Approximately half of the titles in the Library are
subject to one or more of such licenses. See "Business--Distribution--Pay and
Free Television Distribution." Until these agreements expire and the rights
revert to the Company, the Company expects contributions to earnings from
these markets to continue to be below those achieved by its competitors for
similar products. There can be no assurance that sales or profitability will
increase after these agreements expire. The existence of these agreements may
make an acquisition of the Company less attractive to a potential acquiror in
the entertainment business. See "Business--Distribution."
10
<PAGE>
RISKS RELATING TO LIQUIDITY AND FINANCING REQUIREMENTS
The Company's theatrical motion picture and television production activities
require the initial expenditure of significant funds, while revenues relating
to such films and programs are typically not generated for some period after
such expenditure and may be received over an extended period of time. Since
the Company's cash requirements generally have exceeded cash flow from
operations, the Company has been required to utilize borrowings under its
principal credit facilities to fund operations. The Company will continue to
be dependent upon the availability of its principal credit facilities to fund
its production and distribution activities for the foreseeable future.
Borrowings under such principal credit facilities are subject to the Company's
continuing performance of certain covenants and continuing satisfaction of
certain conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Financing Arrangements."
In addition to its operational needs, the Company may from time to time
pursue and complete strategic acquisitions or enter into joint ventures. The
Company has recently submitted a non-binding indication of interest for the
acquisition of a film library of approximately 1,000 titles. Based on
preliminary due diligence, the Company anticipates that the purchase price for
such acquisition, if completed, would be less than $200 million. The Company
anticipates that the purchase price would be payable in cash and would be
initially financed by the Company by borrowings under the revolving portion of
the Amended Credit Facility (e.g., by reborrowing a substantial portion of the
amounts repaid with the net proceeds of the Offering). Such acquisition (or
any other acquisition) may also be financed, or some or all of any amounts
borrowed under the revolving portion of the Amended Credit Facility to
complete such acquisition may be refinanced, (i) with funds borrowed under the
"Tranche C Facility" of the Amended Credit Facility (subject to consent of the
requisite lenders--see "Financing Arrangements"), (ii) with the proceeds of an
offering by the Company of high yield debt securities pursuant to Rule 144A
promulgated under the Securities Act, (iii) with the proceeds of loans from,
or sales of equity securities to, Tracinda and Seven or (iv) with any
combination thereof. No assurance can be given that any such acquisition,
borrowings under the Tranche C Facility, offering of high yield debt
securities or receipt of funds from Tracinda and Seven will be completed.
The Company believes that amounts available under the Amended Credit
Facility and cash flow from operations will be adequate to meet the Company's
current obligations and commitments and will enable the Company to continue to
conduct its operations in accordance with its current business plan. In
addition, the Company believes that amounts available under the Amended Credit
Facility and cash flow from operations, on their own or together with the
potential new sources described in the preceding paragraph, will be sufficient
to cover the possible library acquisition discussed above. However, no
assurance can be given in either regard. Even if the Company does not
consummate any acquisitions, in order to take advantage of opportunities in
the debt markets, the Company may from time to time seek additional financing
as discussed in the prior paragraph. There can be no assurance that the
Company will be able to obtain any additional financing that may be required
or that such financing, if available, will be on terms satisfactory to the
Company.
The Amended Credit Facility contains certain covenants which restrict the
payment of dividends by the Company. The Company does not expect to pay any
cash dividends on its Common Stock for the foreseeable future. See "Dividend
Policies" and "Financing Arrangements."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts and abilities of its senior
management, particularly those of Frank G. Mancuso. Mr. Mancuso, age 64, has
substantial experience in the entertainment industry and extensive
relationships within the motion picture and television community, including
creative talent and distributors. Mr. Mancuso is involved in various aspects
of the production process, including the selection of the creative elements of
the Company's motion pictures and television programs. Virtually all decisions
concerning the conduct of the business of the Company, including the
properties and rights to be acquired by the Company and the arrangements to be
made for the development, financing, production and distribution of the
Company's motion pictures and television programs, are made or are
significantly influenced by Mr. Mancuso. The loss of
11
<PAGE>
his services for any reason could have a material adverse effect on the
Company's business and operations and its prospects for the future. See
"Management--Executive Compensation."
RISKS ASSOCIATED WITH THE JAMES BOND FILMS AND THIRD PARTY RELATIONSHIPS
The Company has a number of important relationships with third parties. The
James Bond films are produced by Danjaq LLC (together with its predecessors,
"Danjaq") pursuant to a series of agreements with the Company dating back to
1962. The Company jointly owns the copyright to such films with Danjaq and has
the right to approve all key elements of the films, such as the script, the
director and the leading actors. Certain other rights are either controlled by
Danjaq (e.g., merchandising) or jointly by Danjaq and the Company. Although
the Company does not believe that this joint nature of the ownership and
control of the James Bond franchise will have any material adverse effect on
the Company in the future, no assurance can be given. See "Business--Film
Library" and "--Production--Motion Picture Production."
On October 13, 1997, Sony Pictures Entertainment ("Sony") issued a press
release announcing plans by its Columbia Pictures division to produce a series
of new James Bond feature films based on works created by Ian Fleming, Kevin
McClory and John Whittingham. The Company believes that no party, other than
the Company and Danjaq, has the right to produce or exploit a feature film,
television program or similar program based, in whole or in part, on the
character James Bond, with the possible exception of Mr. McClory's right to
make films of the story in Mr. Fleming's novel Thunderball (i.e., a "remake"
of the film Thunderball). If Mr. McClory, Sony or others were to attempt to
produce or exploit another remake of Thunderball or to produce or exploit any
other film, television program or other similar program based, in whole or in
part, on the character James Bond that goes beyond a remake of Thunderball,
the Company would vigorously oppose any such attempt and take all actions
necessary to protect its rights in the James Bond character and all related
rights. The Company believes that another remake of Thunderball by Mr.
McClory, Sony or others would not have a material adverse effect on the
Company's business or results of operations. However, a determination that
Mr. McClory, Sony or others have broader rights to produce or exploit other
films, television programs or other programs that are based, in whole or in
part, on the James Bond character could have a material adverse effect on the
Company's business and results of operations. See "Business--Film and
Television Library."
The Company generally distributes its motion pictures in theatrical markets
outside of the United States and Canada through United International Pictures
("UIP"), a partnership owned equally by the Company, Paramount Pictures
Corporation ("Paramount") and Universal Studios, Inc. ("Universal"). If this
partnership were terminated or otherwise ceased operations, or if one of the
other partners withdrew for any reason, the Company believes that it would be
able to find or develop satisfactory alternative methods for international
distribution. There can be no assurance, however, that such alternative
methods would not result in decreased revenues or profitability. See
"Business--Theatrical Distribution" and "--Regulation."
RISKS RELATING TO THE ORION ACQUISITION AND INTEGRATION OF OPERATIONS; FUTURE
ACQUISITIONS
On July 10, 1997 the Company acquired the Orion Companies (including two
companies which had been acquired by Orion in July 1996). In addition, the
Company expects to consider other strategic acquisitions as opportunities
arise. The Company has recently submitted a non-binding indication of interest
for the acquisition of a film library of approximately 1,000 titles. If
invited by the seller of such library, the Company may make a binding offer to
purchase prior to the end of 1997. If such offer is accepted, the Company
anticipates that completion of the acquisition would be subject to, among
other things, the successful completion of due diligence and the negotiation
and preparation of a definitive agreement on terms acceptable to the Company.
There can be no assurance that any such offer will be accepted or that the
acquisition will be completed.
Acquisitions involve numerous risks, including diversion of management's
attention away from the Company's operating activities. There can be no
assurance that the Company will not encounter unanticipated problems or
liabilities with respect to the operations of the Orion Companies or any other
acquisitions that may be completed by the Company or with the integration of
their operations with those of the Company, and there can be no assurance that
the anticipated benefits of any acquisitions completed by the Company will be
achieved.
12
<PAGE>
RISKS OF INTERNATIONAL DISTRIBUTION
The Company distributes motion picture and television productions in foreign
countries, and in recent years the Company has derived approximately 40
percent of its revenues from foreign sources. As a result, the Company's
business is subject to certain risks inherent in international trade, many of
which are beyond its control, such as changes in laws and policies affecting
trade, investment and taxes (including laws and policies relating to the
repatriation of funds and to withholding taxes), differing degrees of
protection for intellectual property and the instability of foreign economies
and governments. In addition, fluctuations in foreign exchange rates can
adversely affect the Company's business and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Regulation."
COMPETITION
Motion picture and television production and distribution are highly
competitive businesses. The Company faces competition from companies within
the motion picture and television industry and alternative forms of leisure
activities. The Company competes with other film studios, independent
production companies and others for the acquisition of artistic properties,
the services of creative and technical personnel, exhibition outlets and the
public's interest in its products. Many of the Company's competitors,
particularly the other major studios, may have greater financial and other
resources than the Company, while the independent production companies may
have less overhead than the Company. Most of the other major studios are part
of large diversified corporate groups with a variety of other operations,
including television networks and cable channels which can provide both means
of distributing their products and stable sources of earnings that offset
fluctuations in the financial performance of their motion picture and
television operations. The number of films released by the Company's
competitors, particularly the other major film studios, in any given period
may create an oversupply of product in the market, and that may reduce the
Company's share of gross box office admissions and may make it more difficult
for the Company's films to succeed. In addition, television networks are now
producing more programs internally and thus may reduce such networks' demand
for programming from other parties.
The entertainment industry in general, and the motion picture industry in
particular, are continuing to undergo significant changes, primarily due to
technological developments. Due to this rapid growth of technology, shifting
consumer tastes and the popularity and availability of other forms of
entertainment, it is impossible to predict the overall effect these factors
will have on the potential revenue from and profitability of feature-length
motion pictures and television programming. See "The Industry" and "Business--
Competition."
OWNERSHIP AND CONTROL OF PRINCIPAL STOCKHOLDERS
Upon completion of the Offering and the Tracinda Purchase, Tracinda will
beneficially own approximately 61.1 percent of the outstanding Common Stock.
As a result, Tracinda will continue to be the Company's single largest
stockholder. Additionally, Seven will beneficially own approximately 24.7
percent of the outstanding Common Stock. In the aggregate, Tracinda, Seven,
the directors and officers of the Company and affiliates thereof will
beneficially own approximately 86.5 percent of the Common Stock. See
"Ownership of Voting Securities."
The Common Stock does not have cumulative voting rights and, since Tracinda
will own greater than 50 percent of the outstanding Common Stock after the
Offering, Tracinda will have the ability to elect the entire Board of
Directors of the Company, subject to the agreement discussed immediately
below. Each of Seven, Tracinda and Mr. Mancuso has agreed to vote all of the
shares of the Common Stock beneficially owned by such party and take any
necessary or desirable action within such party's control so that the Board of
Directors of the Company consists of eleven members (subject to the provision
discussed below), up to four of whom are nominated by Tracinda (depending on
the number of shares of the Common Stock beneficially owned by Tracinda), up
to two of whom are nominated by Seven (depending on the number of shares of
the Common Stock beneficially owned by Seven), two of whom are nominated by
the Chief Executive Officer of the Company (one of whom shall be Mr. Mancuso
so long as he serves as the Chief Executive Officer of the Company), and
13
<PAGE>
three "independent directors" who are nominated by the majority of the Board
of Directors of the Company (which majority, so long as Tracinda beneficially
owns at least 16,666,800 shares of the Common Stock, must include Tracinda's
nominees on the Board of Directors of the Company) and who are not affiliated
or associated with either Tracinda or Seven and otherwise meet the
requirements of the NYSE for serving as independent directors; provided,
however, that each of Tracinda and Seven is only obligated to vote for
nominees selected by the Board of Directors of the Company which are
acceptable to Tracinda or Seven, as the case may be. The Board of Directors of
the Company may determine to reduce the size of the Board of Directors to ten
persons, in which case the number of independent directors will be reduced to
two. The foregoing agreement to vote will remain in effect until the fifteenth
anniversary of the Offering. See "Ownership of Voting Securities--Investors
Shareholder Agreement." In addition to electing directors, Tracinda, on its
own or together with Seven and Mr. Mancuso, will be able to determine the
outcome of other matters submitted to the stockholders of the Company, such as
the approval of significant transactions.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is authorized, without any vote or
further action by the stockholders of the Company, to fix the rights and
preferences of and issue up to 25 million shares of preferred stock (and the
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the issuance of any such preferred stock). The
foregoing may make it more difficult for a third party to acquire control of
the Company. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering and the Tracinda Purchase, the Company
will have approximately 65,403,320 shares of the Common Stock outstanding. The
shares sold in the Offering will be freely transferable under the Securities
Act, except for shares acquired by "affiliates" as that term is defined under
the Securities Act. Of the remaining shares outstanding, approximately
56,403,320 shares (including the shares issued in the Tracinda Purchase) will
be "restricted securities" within the meaning of Rule 144 ("Rule 144")
promulgated under the Securities Act. These restricted securities may not be
sold without registration under the Securities Act unless an exemption from
registration is available. Under Rule 144, resales will be permitted as to
approximately 37,650,300 of such restricted shares after the Offering, and
will become permitted as to the remainder within one year after the completion
of the Offering, subject in each case to Rule 144's volume limitations. In
addition, each of the Company's current stockholders and certain holders of
outstanding options have been granted certain registration rights with respect
to the shares of the Common Stock owned by them or to be issued to them. See
"Ownership of Voting Securities--Shareholders Agreement." The Company has
agreed not to offer, sell, pledge, contract to sell, sell any option or
contract to purchase, purchase any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of the Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock,
for a period of 180 days from the date of this Prospectus without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). Each of the Company's current stockholders, directors,
executive officers and option holders will be bound by a similar agreement. No
predictions can be made as to the effect, if any, that public sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Common Stock in the public market, particularly by directors and officers
of the Company, or the perception that such sales could occur, could have an
adverse effect on the market price of the Common Stock. See "Shares Eligible
for Future Sale."
ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined through
negotiations between the Company and representatives of the Underwriters. See
"Underwriting" for factors to be considered in determining the initial public
offering price. There can be no assurance that a regular trading market for
the Common Stock will develop after the Offering
14
<PAGE>
or, if developed, that a public trading market can be sustained. The initial
public offering price will not necessarily reflect, and may be higher than,
the market price of the Common Stock after the Offering. In recent years, the
stock market in general, and the entertainment industry in particular, have
experienced extreme price fluctuations, sometimes without regard to the
operating performance of particular companies. Factors such as variations in
actual or anticipated operating results (which motion picture production
companies experience), changes in or failure to meet earnings estimates of
securities analysts, market conditions in the industry, regulatory actions and
general economic conditions, among others, may have a significant effect on
the market price of the Common Stock.
15
<PAGE>
BACKGROUND OF THE COMPANY
Metro-Goldwyn-Mayer ("Old MGM") was established in 1924 through the merger
of Metro Pictures, Goldwyn Pictures and Louis B. Mayer Productions. A
corporation wholly owned by Mr. Kerkorian became Old MGM's controlling
shareholder in 1969. In 1981 Old MGM acquired UA, which had been formed in
1919 when Mary Pickford, Douglas Fairbanks, D.W. Griffith and Charlie Chaplin
joined forces to release their own motion pictures, as well as motion pictures
made by independent producers. In 1986 Turner acquired the businesses of Old
MGM, and as part of that transaction, Tracinda (and certain of the former
stockholders of Old MGM) concurrently acquired UA, including the UA library,
from Old MGM. Shortly thereafter, UA reacquired the Metro-Goldwyn-Mayer name
and logo and certain other assets from Turner. UA was then renamed MGM/UA
Communications Co. ("MGM/UA"). Turner retained the film library created
through the pre-1986 operations of Old MGM (the "Old MGM Library").
In November 1990 MGM/UA was acquired by Pathe Communications Corporation
("Pathe") and was renamed MGM-Pathe Communications Co., the predecessor to MGM
Studios ("MGM-Pathe"). In May 1992 Credit Lyonnais Bank Nederland N.V.
("CLBN"), Pathe's principal lender, foreclosed on substantially all of the
stock of MGM-Pathe, following default by Pathe, and such stock was ultimately
transferred to CDR.
In July 1993 Frank G. Mancuso was appointed as Chairman and Chief Executive
Officer of MGM Studios. In January 1996 CDR announced its intention to sell
MGM Studios.
Tracinda, Seven and senior management of MGM Studios formed the Company,
then known as P&F Acquisition Corp., to acquire all of the outstanding capital
stock of MGM Studios in October 1996 for an aggregate consideration of $1.3
billion. The Company financed the MGM Acquisition through (i) the issuance of
8,333,400 shares of the Common Stock to each of Tracinda and Seven and the
issuance of 450,000 and 50,000 shares of the Series A Preferred Stock (which
will be converted into 18,750,150 and 2,083,350 shares of the Common Stock,
respectively, immediately prior to the completion of the Offering pursuant to
the Series A Preferred Stock Conversion and the Stock Split) to Tracinda and
Seven, respectively (the "First Private Placement"), for aggregate
consideration of $900 million and (ii) borrowings by MGM Studios under an
$800 million credit facility with Morgan Guaranty Trust Company of New York
("Morgan"), as agent, and certain other lenders (the "Original MGM Credit
Facility"). The MGM Acquisition and the First Private Placement are
collectively referred to as the "MGM Acquisition Transactions."
In June 1997 Seven acquired 100,000 shares of the Series A Preferred Stock
(which will be converted into 4,166,700 shares of the Common Stock immediately
prior to the completion of the Offering pursuant to the Series A Preferred
Stock Conversion and the Stock Split) from Tracinda through the exercise of an
option granted to Seven by Tracinda in October 1996.
In July 1997 the Company acquired all of the outstanding capital stock of
Orion and its subsidiaries, including Goldwyn (formerly known as Goldwyn
Entertainment Company) which had been acquired by Orion in July 1996, for an
aggregate consideration of $573 million. The Company financed the Orion
Acquisition through (i) the issuance of 13,375,107 and 1,625,013 shares of the
Common Stock to Tracinda and Seven, respectively (the "Second Private
Placement"), for aggregate consideration of $360 million and (ii) borrowings
by Orion under a $250 million credit facility with Morgan, as agent, and
certain other lenders (the "Original Orion Credit Facility" and, together with
the Original MGM Credit Facility, the "Original Credit Facilities"). The Orion
Acquisition and the Second Private Placement are collectively referred to as
the "Orion Acquisition Transactions." The Goldwyn cinema operations were
excluded from the Orion Acquisition.
16
<PAGE>
USE OF PROCEEDS
The aggregate net proceeds to the Company from the sale of the 9,000,000
shares offered hereby and the sale of an estimated 3,691,399 shares of the
Common Stock in the Tracinda Purchase are estimated to be approximately $250
million (approximately $272 million if the Underwriters' over-allotment
options are exercised in full), based upon an assumed offering price of $21.50
per share and after deducting estimated underwriting discounts and offering
expenses payable by the Company. It is currently anticipated that
substantially all of the Net Proceeds will be used to reduce indebtedness of
the Company under the revolving portion of the Amended Credit Facility. See
"Financing Arrangements" for a description of the Amended Credit Facility. As
of October 15, 1997, the outstanding balance under the revolving portion of
the Amended Credit Facility was $290 million. Remaining Net Proceeds, if any,
will be used by the Company for general corporate purposes, including the
payment of motion picture and television development, production and
distribution costs. See "Business--Production--Motion Picture Production" and
"--Television Production" for a discussion of the Company's current
development and production of motion pictures and television programs. Pending
their ultimate application, the Net Proceeds will be invested in interest or
non-interest bearing accounts or invested in short-term government
obligations, investment-grade securities, money market instruments or
certificates of deposit.
Any amounts repaid under the Amended Credit Facility out of the Net Proceeds
may be reborrowed by the Company. The Company is currently considering the
acquisition of a film library consisting of approximately 1,000 titles and, if
the Company completes such acquisition, it would likely reborrow a significant
portion of the amounts so repaid in order to initially finance such
acquisition. In such case, the Company would expect to refinance such
borrowings with one or more other sources. See "Risk Factors--Risks Relating
to Liquidity and Financing Requirements." Although the Company does not
currently intend to use a substantial portion of the Net Proceeds to finance
such acquisition, it reserves the right to do so, depending on, among other
things, the timing of the acquisition.
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, (i) on a historical basis, (ii) on a pro forma
basis to give effect to the Orion Acquisition Transactions and the Amended
Credit Facility as if they had occurred as of June 30, 1997, and (iii) on a
pro forma, as adjusted basis giving effect to the foregoing and as adjusted to
give effect to the Series A Preferred Stock Conversion, the Stock Split and
the consummation of the Offering (assuming no exercise of the Underwriters'
over-allotment options) and the Tracinda Purchase as if the foregoing had
occurred as of June 30, 1997 at an assumed initial offering price of $21.50
per share, and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with "Pro Forma Financial Information," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
Original Credit Facilities............... $ 564,250 $ -- $ --
Amended Credit Facility:
Term loans............................. -- 700,000 700,000
Revolving credit facility.............. -- 84,250 --
Other borrowings......................... 2,008 11,754 11,754
---------- ---------- ----------
Total debt............................. 566,258 796,004 711,754
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value per
share, 25,000,000 shares authorized;
502,588 shares issued and outstanding
and pro forma issued and outstanding;
pro forma as adjusted, no shares issued
and outstanding......................... 5 5 --
Common Stock, $.01 par value per share,
50,000,000 shares authorized
(125,000,000 shares authorized pro
forma, as
adjusted); 16,753,050 shares issued and
outstanding; pro forma 31,753,170 shares
issued and outstanding; pro forma, as
adjusted, 65,385,903 shares issued and
outstanding............................. 168 318 654
Additional paid-in capital............... 904,485 1,264,335 1,514,004
Retained earnings (deficit).............. (28,839) (28,839) (28,839)
Cumulative translation adjustment........ 889 889 889
---------- ---------- ----------
Total stockholders' equity............. 876,708 1,236,708 1,486,708
---------- ---------- ----------
Total capitalization................... $1,442,966 $2,032,712 $2,198,462
========== ========== ==========
</TABLE>
18
<PAGE>
DIVIDEND POLICY
MGM Studios paid cash dividends to its prior owner in 1995 and 1996
(approximately $19.4 million in the aggregate, to service debt of MGM Studios'
parent). As the Company currently intends to retain any earnings to provide
funds for the operation and expansion of its business and for the servicing
and repayment of indebtedness, the Company does not intend to pay cash
dividends on its Common Stock for the foreseeable future. Furthermore, as a
holding company with no independent operations, the ability of the Company to
pay cash dividends will be dependent upon the receipt of dividends or other
payments from its subsidiaries. In addition, the Company's principal credit
facilities contain certain covenants which, among other things, restrict the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital
Resources" and "Financing Arrangements." Any determination to pay cash
dividends on the Common Stock in the future will be at the sole discretion of
the Company's Board of Directors.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company (including its
predecessor) presented below as of December 31 of each of the years 1992
through 1995, the period from January 1 to October 10, 1996 and the period
from October 11 to December 31, 1996 and each of the years or periods then
ending have been derived from the audited Consolidated Financial Statements of
the Company. The audited Consolidated Financial Statements of the Company for
the period from October 11 to December 31, 1996 and the audited Consolidated
Financial Statements of MGM Studios for the period from January 1 to October
10, 1996 were audited by Arthur Andersen LLP, independent accountants. The
audited Consolidated Financial Statements of MGM Studios for the years ended
December 31, 1995 and 1994 were audited by Price Waterhouse LLP, independent
accountants. The audited Consolidated Financial Statements of MGM Studios for
the years ended December 31, 1993 and 1992 were audited by KPMG Peat Marwick
LLP, independent accountants.
The selected consolidated financial data as of and for the six month periods
ended June 30, 1996 and 1997 have been derived from unaudited consolidated
financial statements of the Company and include all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the Company's financial position at such
dates and results of operations for such periods. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of the
results for the year.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related notes
thereto for the Company included elsewhere in this Prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
----------------------------------------------------------------------------- -------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, JANUARY 1 TO ENDED OCTOBER 11 TO ENDED
------------------------------------------------ OCTOBER 10, JUNE 30, DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1996 1996(2) 1997(2)
---------- ---------- ---------- ---------- ------------ ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA
Revenues............. $ 729,450 $ 538,887 $ 597,121 $ 860,971 $ 912,706 $ 595,132 $ 228,686 $ 351,014
Expenses:
Feature films and
television
distribution...... 784,617 700,134 668,516 894,280 953,820 607,908 195,076 317,912
General corporate
administration
expenses.......... 27,577 75,745 49,314 64,175 60,056 29,597 18,319 35,140
Goodwill
amortization...... 14,876 14,876 14,876 14,876 11,570 7,437 1,717 3,821
Provision for
impairment........ -- -- -- -- 563,829(3) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
827,070 790,755 732,706 973,331 1,589,275 644,942 215,112 356,873
Operating income
(loss).............. (97,620) (251,868) (135,585) (112,360) (676,569) (49,810) 13,574 (5,859)
Interest expense, net
of amounts
capitalized......... (135,640) (87,472) (33,860) (66,386) (71,375) (45,086) (9,875) (20,599)
Interest and other
income, net......... 3,505 1,020 2,070 10,372 3,179 874 813 1,388
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) from
continuing
operations before
provision for income
taxes............... (229,755) (338,320) (167,375) (168,374) (744,765) (94,022) 4,512 (25,070)
Provision for income
taxes............... (11,677) (6,725) (3,877) (935) (273) (9,530) (4,346) (3,935)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) from
continuing
operations.......... $ (241,432) $ (345,045) $ (171,252) $ (169,309) $ (745,038) $ (103,552) $ 166 $ (29,005)
========== ========== ========== ========== ========== ========== =========== ==========
Pro forma earnings
(loss) per share
from continuing
operations.......... $ 0.00 $ (0.77)
=========== ==========
OTHER OPERATING DATA
(UNAUDITED)
Cash flow from
operating
activities.......... $ 54,668 $ 80,455 $ 216,289 $ 371,657 $ 343,137 $ 328,811 $ 61,328 $ 160,056
Cash flow from
investing
activities.......... (331,282) (253,371) (464,031) (710,812) (380,142) (277,904) (1,390,861) (280,604)
Cash flow from fi-
nancing activities.. 294,470 182,704 239,965 328,029 44,852 (54,988) 1,345,394 124,678
EBITDA(1)............ (67,335) (222,118) (103,499) (81,588) (87,289) (33,565) 16,709 1,192
Capital expenditures. 5,044 15,578 9,099 9,376 6,901 5,291 2,079 5,294
Depreciation expense. 3,534 2,999 5,335 4,021 4,645 2,871 1,418 3,230
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
--------------------------------------------------------------- -------------------------
AS OF DECEMBER 31, AS OF AS OF AS OF
------------------------------------------------ OCTOBER 10, DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1996(2) 1997(2)
---------- ---------- ---------- ---------- ------------ ------------- -----------
(UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash
equivalents......... $ 19,412 $ 36,773 $ 28,797 $ 17,128 $ 24,717 $ 16,381 $ 20,255
Film and television
costs, net.......... 1,458,680 1,343,931 1,412,607 1,565,438 1,006,402 1,099,201 1,263,073
Total assets......... 2,293,170 2,142,562 2,235,622 2,440,254 1,744,234 1,774,668 1,806,574
Bank and other debt.. 982,713 555,915 876,866 1,217,316 1,229,499 444,427 566,258
Stockholders' equity. 274,061 984,607 829,059 659,499 -- 903,122 876,708
Cash dividends....... -- -- -- 15,448 3,995 -- --
</TABLE>
- -------
(1) "EBITDA" is defined as earnings before interest, taxes, depreciation and
non-film amortization. While many in the financial community consider
EBITDA to be an important measure of comparative operating performance, it
should not be construed as an alternative to operating income or cash
flows from operating activities (as determined in accordance with
generally accepted accounting principles ("GAAP")). EBITDA does not
reflect cash necessary or available to fund cash requirements, and the
items excluded from EBITDA, such as depreciation and non-film
amortization, are significant components in assessing the Company's
financial performance. Other significant uses of cash flows are required
before cash will be available to the Company, including debt service,
taxes and cash expenditures for various long-term assets. The Company's
calculation of EBITDA may be different from the calculation used by other
companies and, therefore, comparability may be limited. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
(2) Financial data presented for periods subsequent to October 10, 1996
reflect the consolidated balance sheet and results of operations of the
combined entity resulting from the MGM Acquisition.
(3) The proceeds from the sale of MGM Studios were insufficient to recover the
net asset value of MGM Studios on the date of the disposition by CDR.
Accordingly, the Company recorded a provision for impairment of intangible
assets of $563.8 million.
21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combining statement of
operations for the year ended December 31, 1996 gives effect to (i) the MGM
Acquisition Transactions, (ii) the July 2, 1996 acquisition by Orion of
Goldwyn, (iii) the July 2, 1996 acquisition by Orion of the former Motion
Picture Corporation of America ("MPCA"), (iv) the Orion Acquisition
Transactions, (v) the Series A Preferred Stock Conversion and the Stock Split
and (vi) the consummation of the Offering (assuming no exercise of the
Underwriters' over-allotment options) and the Tracinda Purchase and the
application of the Net Proceeds therefrom as if each of the foregoing had
occurred on January 1, 1996. The unaudited pro forma condensed combining
statement of operations for the six months ended June 30, 1997 gives effect to
items (iv)-(vi), above, as if they had occurred on January 1, 1997. The
unaudited pro forma condensed combining balance sheet as of June 30, 1997
gives effect to items (iv)-(vi), above, as if they had occurred on June 30,
1997.
On October 10, 1996, the Company acquired all of the outstanding capital
stock of MGM Studios for an aggregate consideration of $1.3 billion. The
Company financed the MGM Acquisition through (i) the issuance of 8,333,400
shares of the Common Stock to each of Tracinda and Seven and the issuance of
450,000 and 50,000 shares of the Series A Preferred Stock (which will be
converted into 18,750,150 and 2,083,350 shares of the Common Stock,
respectively, immediately prior to the completion of the Offering pursuant to
the Series A Preferred Stock Conversion and the Stock Split) to Tracinda and
Seven, respectively, for an aggregate consideration of $900 million and
(ii) borrowings by MGM Studios under the Original MGM Credit Facility.
On July 10, 1997, the Company acquired all of the outstanding capital stock
of Orion and certain of its subsidiaries, for an aggregate consideration of
$573 million. The Company financed the Orion Acquisition through (i) the
issuance of 13,375,107 and 1,625,013 shares of the Common Stock to Tracinda
and Seven, respectively, for aggregate consideration of $360 million and (ii)
borrowings by Orion under the Original Orion Credit Facility.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management of the Company believes are
reasonable. The Orion Acquisition will be recorded based upon the estimated
fair market value of the net assets acquired at the date of acquisition. The
adjustments included in the unaudited pro forma condensed combining financial
statements represent the Company's preliminary estimates based upon available
information. Although MGM does not believe that such preliminary estimates
will differ significantly from the actual adjustments, no assurance can be
given.
The unaudited pro forma condensed combining financial statements are based
on the historical financial statements of each of the Company and Orion and
the assumptions and adjustments described in the accompanying notes. The
Company believes that the assumptions on which the unaudited pro forma
financial statements are based are reasonable. The unaudited pro forma
consolidated financial statements are provided for informational purposes only
and do not purport to represent what the Company's financial position or
results of operations actually would have been if the foregoing transactions
occurred as of the dates indicated or what such results will be for any future
periods. The unaudited pro forma financial statements should be read in
conjunction with the Consolidated Financial Statements and the related notes
thereto for each of the Company and Orion, included elsewhere in this
Prospectus.
22
<PAGE>
METRO-GOLDWYN-MAYER INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORION ADJUSTMENTS MGM
MGM ORION ASSETS NOT PRO FORMA FOR OFFERING AND PRO FORMA
HISTORICAL HISTORICAL ACQUIRED(10) ADJUSTMENTS TRACINDA PURCHASE COMBINED
---------- ---------- ------------ ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ 20,255 $ 1,252 $ (1,050) $ 14,035 (/1/) $165,750 (/9/) $ 200,242
Accounts and contracts receivable,
net............................... 150,920 45,878 (259) -- -- 196,539
Film and television costs, net..... 1,263,073 237,558 -- 168,879 (/2/) -- 1,669,510
Property and equipment, net........ 29,411 39,287 (35,645) (1,000)(/3/) -- 32,053
Excess of cost over net assets of
acquired businesses, net.......... 298,920 129,439 (22,619) 195,744 (/7/) -- 601,484
Other assets....................... 43,995 12,901 (888) (4,049)(/3/) -- 51,959
---------- --------- -------- --------- -------- ----------
TOTAL ASSETS....................... $1,806,574 $ 466,315 $(60,461) $ 373,609 $165,750 $2,751,787
========== ========= ======== ========= ======== ==========
LIABILITIES
Bank and other debt................ $ 566,258 $ 292,434 $ (6,529) $(276,159)(/4/) $(84,250)(/9/) $ 711,754
220,000 (/4/)
Accounts payable and accrued
expenses.......................... 63,006 28,828 (4,011) 34,169 (/5/) -- 121,992
Accrued participants' share........ 150,035 56,657 -- -- -- 206,692
Income taxes payable............... 37,749 9,254 (9) -- -- 46,994
Advances and deferred revenues..... 83,548 64,829 -- -- -- 148,377
Due to parent...................... -- 85,168 -- (85,168)(/6/) -- --
Other liabilities.................. 29,270 -- -- -- -- 29,270
---------- --------- -------- --------- -------- ----------
Total liabilities................ 929,866 537,170 (10,549) (107,158) (84,250) 1,265,079
---------- --------- -------- --------- -------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock.................... 5 -- -- -- (5)(/8/) --
Common Stock....................... 168 -- -- 150 (/7/) 336 (/8/) 654
Additional paid-in capital......... 904,485 350,774 (47,595) 56,671 (/7/) 249,669 (/9/) 1,514,004
Retained earnings.................. (28,839) (421,629) (2,317) 423,946 (/7/) -- (28,839)
Cumulative translation adjustment.. 889 -- -- -- -- 889
---------- --------- -------- --------- -------- ----------
Total stockholders' equity....... 876,708 (70,855) (49,912) 480,767 250,000 1,486,708
---------- --------- -------- --------- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY........................... $1,806,574 $ 466,315 $(60,461) $ 373,609 $165,750 $2,751,787
========== ========= ======== ========= ======== ==========
</TABLE>
23
<PAGE>
METRO-GOLDWYN-MAYER INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDING JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ORION ADJUSTMENTS MGM
MGM ORION OPERATIONS NOT PRO FORMA FOR OFFERING AND PRO FORMA
HISTORICAL HISTORICAL ACQUIRED(10) ADJUSTMENTS TRACINDA PURCHASE COMBINED
---------- ---------- -------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 351,014 $ 90,910 $(28,793) $ -- $ -- $ 413,131
Operating expenses
Film and television
production and
distribution........... 317,912 99,181 (22,804) (17,518)(/1//2/) -- 376,771
General corporate
administration expense. 35,140 22,046 (4,869) -- -- 52,317
Goodwill amortization... 3,821 2,240 -- 1,549 (/1//4/) -- 7,610
---------- -------- -------- -------- ------ ----------
Total operating
expenses.............. 356,873 123,467 (27,673) (15,969) -- 436,698
---------- -------- -------- -------- ------ ----------
Operating income (loss). (5,859) (32,557) (1,120) 15,969 -- (23,567)
Non-operating income and
expense
Interest expense, net of
amounts capitalized ... (20,599) (10,822) 412 (1,741)(/1//5/) 3,706(/9/) (29,044)
Interest and other
income, net............ 1,388 -- -- -- 3,676(/9/) 5,064
---------- -------- -------- -------- ------ ----------
Total non-operating
income (expense)...... (19,211) (10,822) 412 (1,741) 7,382 (23,980)
---------- -------- -------- -------- ------ ----------
Income (loss) before
taxes.................. (25,070) (43,379) (708) 14,228 7,382 (47,547)
(Provision) benefit for
income taxes........... (3,935) (400) 9 (3,656)(/1//7/) -- (7,982)
---------- -------- -------- -------- ------ ----------
Net income (loss)....... $ (29,005) $(43,779) $ (699) $ 10,572 $7,382 $ (55,529)
========== ======== ======== ======== ====== ==========
Pro forma loss per
share(18).............. $ (0.77) $ (0.85)
========== ==========
Pro forma weighted
average number of
common stock and common
equivalent shares
outstanding(18)........ 37,643,426 65,334,945
========== ==========
</TABLE>
24
<PAGE>
METRO-GOLDWYN-MAYER INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MGM
MGM STUDIOS
HISTORICAL HISTORICAL ORION
(10/11 TO (1/1 TO ORION OPERATIONS NOT GOLDWYN MPCA PRO FORMA
12/31/96) 10/10/96) HISTORICAL ACQUIRED(10) (11) (11) SUBTOTAL ADJUSTMENTS
---------- ---------- ---------- -------------- -------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $ 228,686 $ 912,706 $165,164 $(56,501) $ 54,112 $10,961 $1,315,128 $ --
OPERATING
EXPENSES
Film and
television
production and
distribution.... 195,076 953,820 139,307 (45,411) 53,617 11,769 1,308,178 (97,071)(/1//2/)
General corporate
administration
expense......... 18,319 60,056 27,356 (9,089) 12,527 3,801 112,970 10,758 (/1//3/)
Goodwill
amortization.... 1,717 11,570 2,908 -- -- -- 16,195 (989)(/1//4/)
Provision for
impairment...... -- 563,829 -- -- -- -- 563,829 --
---------- ---------- -------- -------- -------- ------- ---------- --------
Total operating
expenses....... 215,112 1,589,275 169,571 (54,500) 66,144 15,570 2,001,172 (87,302)
---------- ---------- -------- -------- -------- ------- ---------- --------
Operating income
(loss).......... 13,574 (676,569) (4,407) (2,001) (12,032) (4,609) (686,044) 87,302
NON-OPERATING
INCOME AND
EXPENSE
Interest expense,
net of amounts
capitalized .... (9,875) (71,375) (17,166) 1,024 (5,823) (300) (103,515) 36,843 (/1//5/)
Interest and
other income,
net............. 813 3,179 286 -- -- -- 4,278 740 (/1//6/)
---------- ---------- -------- -------- -------- ------- ---------- --------
Total non-
operating
income
(expense)...... (9,062) (68,196) (16,880) 1,024 (5,823) (300) (99,237) 37,583
---------- ---------- -------- -------- -------- ------- ---------- --------
Income (loss)
before taxes.... 4,512 (744,765) (21,287) (977) (17,855) (4,909) (785,281) 124,885
(Provision)
benefit for
income taxes.... (4,346) (273) (1,000) 463 (779) -- (5,935) (2,920)(/1//7/)
---------- ---------- -------- -------- -------- ------- ---------- --------
Income (loss)
from continuing
operations $ 166 $( 745,038) $(22,287) $ (514) $(18,634) $(4,909) $ (791,216) $121,965
========== ========== ======== ======== ======== ======= ========== ========
Pro forma
earnings (loss)
per share(18)... $ 0.00
==========
Pro forma
weighted average
number of common
stock and common
equivalent
shares
outstanding(18). 37,567,634
==========
<CAPTION>
ADJUSTMENTS MGM
FOR OFFERING AND PRO FORMA
TRACINDA PURCHASE COMBINED
----------------- -----------
<S> <C> <C>
REVENUES......... $ -- $1,315,128
OPERATING
EXPENSES
Film and
television
production and
distribution.... -- 1,211,107
General corporate
administration
expense......... -- 123,728
Goodwill
amortization.... -- 15,206
Provision for
impairment...... -- 563,829
----------------- -----------
Total operating
expenses....... -- 1,913,870
----------------- -----------
Operating income
(loss).......... -- (598,742)
NON-OPERATING
INCOME AND
EXPENSE
Interest expense,
net of amounts
capitalized .... 7,473(/7/) (59,199)
Interest and
other income,
net............. 7,413(/7/) 12,431
----------------- -----------
Total non-
operating
income
(expense)...... 14,886 (46,768)
----------------- -----------
Income (loss)
before taxes.... 14,886 (645,510)
(Provision)
benefit for
income taxes.... -- (8,855)
----------------- -----------
Income (loss)
from continuing
operations $14,886 $ (654,365)
================= ===========
Pro forma
earnings (loss)
per share(18)... $ (10.03)
===========
Pro forma
weighted average
number of common
stock and common
equivalent
shares
outstanding(18). 65,259,153
===========
</TABLE>
25
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) To record net cash remaining after drawdown on the Original Orion Credit
Facility at the date of the Orion Acquisition, net of closing payments.
(2) To increase the basis of the Orion film library in purchase accounting to
preliminary estimated fair market value of $406.4 million.
(3) To reflect new deferred loan fees of $4.5 million, eliminate unamortized
loan fees of $6.0 million on the retired Orion credit facility, and
reduce leasehold improvements and other equipment of $1.0 million and
other assets of $2.5 million acquired in the Orion Acquisition.
(4) To reflect repayment of borrowing under the retired Orion credit facility
of $276.2 million and drawdown under the Original Orion Credit Facility
of $220.0 million.
(5) To record the accrual of Orion's estimated employment termination
payments, lease termination costs and other non-recurring acquisition
costs.
(6) To reflect the termination of Orion's debt to its parent company.
(7) To reflect the issuance of 15,000,120 shares of the Common Stock for
$360.0 million, the elimination of the Orion pre-acquisition equity
accounts and the preliminary allocation of the fair value of Orion's net
assets acquired allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT
SHARE DATA)
--------------
<S> <C>
Pro forma debt retired at closing (including accrued interest
of $1,291)................................................... $277,450
Closing costs paid............................................ 4,567
Pro forma cash paid to former Orion shareholder............... 283,948
--------
Cash Purchase Price........................................... $565,965
========
The preliminary allocation of the Cash Purchase Price is as follows:
Cash.......................................................... $ 202
Accounts and contracts receivable, net........................ 45,619
Film and television costs, net................................ 406,437
Property and equipment, net................................... 2,642
Other assets.................................................. 7,964
Bank and other debts assumed.................................. (9,746)
Accounts payable and accrued liabilities...................... (58,986)
Accrued participants' share................................... (56,657)
Income taxes payable.......................................... (9,245)
Advances and deferred revenues................................ (64,829)
--------
Fair value of net tangible assets acquired.................... 263,401
Excess of cost over fair value of net assets acquired......... 302,564
--------
Cash Purchase Price........................................... $565,965
========
</TABLE>
The foregoing purchase price allocation is based upon management's
preliminary estimates. The Company is in the process of working with
independent consultants to obtain valuations of individual assets and the
excess purchase price will be allocated accordingly.
26
<PAGE>
(8) To reflect the conversion of 502,588 shares of the Series A Preferred
Stock into 20,941,334 shares of the Common Stock concurrent with the
closing of the Offering.
(9) To reflect the issuance of 9,000,000 shares of the Common Stock offered
in connection with the Offering at an assumed offering price of $21.50
per share and the sale of an estimated 3,691,399 shares in the Tracinda
Purchase and the application of the $250 million estimated Net Proceeds
therefrom to reflect the repayment of the revolving portion of the
Amended Credit Facility, with the remaining proceeds representing net
cash.
(10) To eliminate the Goldwyn cinema operations not acquired in the Orion
Acquisition.
(11) To consolidate operating results for the period from January 1, 1996 to
June 30, 1996 of Goldwyn and MPCA, wholly-owned subsidiaries acquired by
Orion on July 2, 1996.
(12) To adjust film cost amortization for new basis in revalued MGM Studios
(for the period January 1, 1996 to October 10, 1996) and the Orion
library. The revaluation of the Library was based upon projected future
discounted net cash flows from the underlying assets, in accordance with
GAAP. In addition, the ultimate revenue projections for the Library were
revised accordingly, resulting in an amortization period not to exceed 20
years.
(13) To record long-term incentive management compensation plan accrual, which
was implemented concurrent with the closing of the MGM Acquisition in
October 1996.
(14) To adjust the goodwill amortization from the historical amortization
period of 25 years to the pro forma amortization period of 40 years.
(15) To adjust interest expense to reflect the application of the $360 million
equity contribution made as part of the Orion Acquisition and the pro
forma indebtedness.
(16) To record other miscellaneous pro forma adjustments.
(17) To adjust the tax provision to reflect pro forma pre-tax income,
including adjustments for non-tax deductible goodwill amortization and
other required items.
(18) Computes earnings (loss) per share as if all transactions occurred as of
the beginning of the periods presented computed as follows:
<TABLE>
<CAPTION>
6 MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Weighted Average number of Common Shares
and Equivalents outstanding, including
Series A Preferred Stock (as converted)
........................................ 37,643,426 37,567,634
Shares issued in connection with the
Orion Acquisition....................... 15,000,120 15,000,120
Shares issued in the Offering and the
Tracinda Purchase....................... 12,691,399 12,691,399
---------- ----------
65,334,945 65,259,153
========== ==========
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and the related notes thereto and other financial information
contained elsewhere in this Prospectus.
GENERAL
The Company is engaged primarily in the development, production and
worldwide distribution of theatrical motion pictures and television
programming.
SOURCES OF REVENUE
The principal sources of motion picture industry revenue are the domestic
and international distribution of motion pictures, including theatrical
exhibition, home video and television (network, syndication, basic cable, pay
and pay-per-view). Over the last decade, the relative contributions of these
components of revenues have changed dramatically. Although revenues from
domestic theatrical distribution have increased, growth in total motion
picture industry revenues has resulted predominantly from increased revenues
derived from the distribution of motion pictures internationally as well as
from other media and distribution channels.
The Company's feature films are exploited through a series of sequential
domestic and international distribution channels, typically beginning with
theatrical exhibition. Thereafter, feature films are first made available for
home video generally six months after theatrical release; for pay television,
one year after theatrical release; and for syndication, approximately three to
five years after theatrical release. The Company's television programming is
produced for initial broadcast on either pay, syndicated or network television
in the United States, followed by international territories and, in some
cases, worldwide video markets.
The Company distributes its motion picture and television productions in
foreign countries and, in recent years, has derived approximately 40 percent
of its revenues from foreign sources. Approximately 25 percent of the
Company's revenues are denominated in foreign currencies. In addition, the
Company incurs certain operating and production costs in foreign currencies.
As a result, fluctuations in foreign currency exchange rates can adversely
affect the Company's business. The Company, in certain instances, enters into
foreign currency exchange contracts in order to reduce exposure to changes in
foreign currency exchange rates that affect the value of its firm commitments
and certain anticipated foreign currency cash flows. These contracts generally
mature within one year. The Company does not enter into foreign currency
contracts for speculative purposes. Realized gains and losses on contracts
that hedge anticipated future cash flows were not material in each of the
periods presented herein. Deferred gains and losses on foreign exchange
contracts as of June 30, 1997 were not material. See "Risks Factors--Risks of
International Distribution."
COST STRUCTURE
General. In the motion picture industry, the largest component of the cost
of producing a motion picture generally is the negative cost, which includes
the "above-the-line" and "below-the-line" costs of producing the film. Above-
the-line costs are costs related to the acquisition of picture rights and the
costs associated with the producer, the director, the writer and the principal
cast. Below-the-line costs are the remaining costs involved in producing the
picture, such as film studio rental, principal photography, sound and editing.
Distribution expenses consist primarily of the costs of advertising and
preparing release prints. The costs of advertising associated with a major
domestic theatrical motion picture release are significant and typically
involve national and target market media campaigns, as well as public
appearances of a film's stars. These advertising costs are separate from the
advertising costs associated with other domestic distribution channels and the
international market.
28
<PAGE>
The major studios generally fund production costs from cash flow generated
by motion picture and related distribution activities or bank and other
financing methods. Over the past decade, expenses in the motion picture
industry have increased rapidly as a result of increased production costs and
distribution expenses.
Additionally, each of the major studios must fund substantial overhead
costs, consisting primarily of salaries and related costs of the production,
distribution and administrative staffs, as well as facilities costs and other
recurring overhead.
Participations and Residuals. In connection with the production and
distribution of a motion picture, major studios generally grant contractual
rights to actors, directors, screenwriters, producers and other creative and
financial contributors to share in the gross receipts or contractually defined
net profits from a particular motion picture. Except for the most sought-after
talent, these third-party participations are generally payable after all
distribution fees, marketing expenses, direct production costs and financing
costs are recouped in full.
Major studios also typically incur obligations to pay residuals to various
guilds and unions including the Screen Actors Guild ("SAG"), the Directors
Guild of America (the "DGA") and the Writers Guild of America (the "WGA"). The
residual payments are made on a picture-by-picture basis with respect to the
exploitation of a motion picture in markets other than the primary intended
markets for such picture and are calculated as a percentage of the gross
revenues derived from the exploitation of the picture in these ancillary
markets.
The Company's cost structure for motion pictures generally follows the
industry structure described above. For a discussion of television programming
cost structure see "The Industry--The Television Industry."
In recent years the Company has experienced significant fluctuations in the
level of its production activities. In July 1993 a new management team was
brought into MGM Studios with a mandate to increase its production and
distribution activities in anticipation of the eventual sale of MGM Studios.
As a result, production and distribution expenditures increased substantially
in 1994 and 1995. Starting in January 1996 and continuing throughout the Sale
Period, no new production was approved, and accordingly, production
expenditures on new films decreased significantly during 1996. Following the
MGM Acquisition in October 1996, production activity increased as the Company
resumed a normalized production and distribution level. These fluctuations in
production and distribution expenditures had a material impact on operating
results and cash flows during the related periods and will continue to do so
for at least the next three years.
INDUSTRY ACCOUNTING PRACTICES
Revenue Recognition. Revenues from theatrical distribution of feature motion
pictures are recognized on the dates of exhibition. Revenues from home video
distribution, together with related costs, are recognized in the period in
which the product is available (assuming it has been shipped) for sale at the
retail level. Revenues from television distribution are recognized when the
motion picture or television program is available to the licensee for
broadcast.
Accounting for Motion Picture and Television Costs. In accordance with GAAP
and industry practice, the Company amortizes film and television programming
costs using the individual-film-forecast method under which such costs are
amortized for each film or television program in the ratio that revenue earned
in the current period for such title bears to management's estimate of the
total revenues to be realized from all media and markets for such title.
Management regularly reviews, and revises when necessary, its total revenue
estimates on a title-by-title basis, which may result in a change in the rate
of amortization and/or a write-down of the film or television asset to net
realizable value. A typical motion picture generates 80 to 85 percent of its
ultimate revenues within the first two years of release. By then, the picture
has been exploited in the domestic and international theatrical markets and
the domestic and international home video markets, as well as the domestic and
international pay television and pay-per-view markets. A similar percentage of
the picture's capitalized costs should be expected to be amortized
accordingly, assuming the picture is profitable.
29
<PAGE>
The commercial potential of individual motion pictures and television
programming varies dramatically, and is not directly correlated with
production or acquisition costs. Therefore, it is difficult to predict or
project a trend of the Company's income or loss. However, the likelihood of
the Company reporting losses, particularly in the year of a motion picture's
release, is increased by the industry's method of accounting which requires
the immediate recognition of the entire loss (through increased amortization)
in instances where it is estimated the ultimate revenues of a motion picture
or television program will not recover the Company's costs. On the other hand,
the profit of a profitable motion picture or television program must be
deferred and recognized over the entire revenue stream generated by that
motion picture or television program. This method of accounting may also
result in significant fluctuations in reported income or loss, particularly on
a quarterly basis, depending on the Company's release schedule and the
relative performance of individual motion pictures or television programs. For
films released by the Company since January 1994 which resulted in feature
film write-downs in the period of initial release, subsequent performance as
it relates to this group of films has not resulted in additional material
write-downs. As a result of the lack of movie production and distribution
during the Sale Period, the Company expects to experience lower revenues for
at least the next three years, and thus the fluctuations caused by this
accounting method may have a greater impact, than otherwise might be the case.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
In connection with the MGM Acquisition, all of the assets and liabilities of
MGM Studios, including the Library, were revalued as of October 10, 1996 under
purchase accounting. The revaluation of the Library was based upon projected
future discounted net cash flows from the underlying assets, in accordance
with GAAP. In addition, the ultimate revenue projections for the Library were
revised accordingly, resulting in an amortization period not to exceed 20
years. The combined effect of the Library revaluation and the revision of the
ultimate revenue projections resulted in a reduction in the amortization rate
in the periods following the MGM Acquisition. Consequently, operating results
for the six months ended June 30, 1997 are not comparable to the corresponding
1996 period.
30
<PAGE>
The following table sets forth the Company's operating results for the six
months ended June 30, 1997 as compared to the corresponding 1996 period,
presented on both an actual and a pro forma basis. The pro forma results
assume that the MGM Acquisition occurred at the beginning of the 1996 period
presented and do not give effect to the Orion Acquisition, which was
consummated on July 10, 1997.
<TABLE>
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
-------------------- -----------
SIX MONTHS ENDED JUNE 30,
---------------------------------
1996 1996
ACTUAL PRO FORMA 1997 ACTUAL
--------- --------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Feature films............................... $ 542,658 $542,658 $303,100
Television programs......................... 52,474 52,474 47,914
--------- -------- --------
Total revenues............................ 595,132 595,132 351,014
Operating income (loss):
Feature films............................... (25,267) 6,834 31,633
Television programs......................... 12,491 13,958 1,469
General corporate administrative expenses... (29,597) (36,480) (35,140)
Goodwill amortization....................... (7,437) (3,821) (3,821)
--------- -------- --------
Total operating income (loss)............. (49,810) (19,509) (5,859)
Interest expense, net of amounts capitalized.. (45,086) (20,787) (20,599)
Interest and other income, net................ 874 1,282 1,388
--------- -------- --------
Income (loss) before provision for income
taxes........................................ (94,022) (39,014) (25,070)
Provision for income taxes.................... (9,530) ( 2,543) (3,935)
--------- -------- --------
Net income (loss) ............................ $(103,552) $(41,557) $(29,005)
========= ======== ========
</TABLE>
Feature Films. Feature film revenues decreased by $239.6 million, or 44
percent, to $303.1 million in the six months ended June 30, 1997 (the "1997
Period") compared to the six months ended June 30, 1996 (the "1996 Period").
Explanations for the decrease in revenues are discussed in the following
paragraphs.
Worldwide theatrical revenues decreased by $193.0 million, or 93 percent, to
$13.5 million in the 1997 Period, due to relatively limited worldwide
theatrical distribution activity following the Sale Period. See "Risk
Factors--Curtailment of Certain Operations Due to Sale of the Company." In the
1997 Period, the Company released only three new feature films domestically as
compared to 12 films released in the 1996 Period, which included significant
revenues from The Birdcage and Leaving Las Vegas. There were no such
comparably performing releases in the 1997 Period. In the 1997 Period, the
Company released only one new feature film in the international marketplace as
compared to six feature films released in the 1996 Period, which included
significant revenue from GoldenEye, The Birdcage and Get Shorty.
Worldwide home video revenues decreased by $77.1 million, or 30 percent, to
$179.3 million in the 1997 Period, which included the domestic releases of
Kingpin and Fled in the rental market, as well as the releases of Larger Than
Life and The Birdcage in the sell-through market. The 1996 Period included
significant home video revenues from the releases of GoldenEye, Get Shorty,
Leaving Las Vegas and Showgirls in the rental market, and promotions of the
James Bond and Rocky film series in the sell-through market.
Worldwide pay television revenues increased by $21.6 million, or 77 percent,
to $49.7 million in the 1997 Period, primarily due to the availability of The
Birdcage, Biodome, Mulholland Falls and A Family Thing in the domestic pay
television market, as compared to the availability of Rob Roy in the 1996
Period. Network revenues increased $10.7 million to $12.2 million in the 1997
Period, which included license fees recognized on the films Stargate, Blown
Away, Getting Even With Dad and Clean Slate. The Company recognized network
license fees only on Undercover Blues in the 1996 Period. Worldwide
syndication revenues increased $3.0 million, or 7 percent, to $41.5 million in
the 1997 Period, principally due to the availability of Blown Away and Getting
Even With Dad in international markets.
31
<PAGE>
The remaining $4.8 million decrease in feature film revenues in the 1997
Period principally related to lower merchandising and other revenues.
Feature film operating profit was $31.6 million in the 1997 Period as
compared to an operating loss of $25.3 million in the 1996 Period. The 1997
Period results reflect a higher operating margin on the Library, which was
revalued pursuant to purchase accounting in connection with the MGM
Acquisition and yielded lower amortization rates than in the 1996 Period.
Additionally, there were no feature film write-downs in the 1997 Period with
respect to the theatrical releases in that period. This compares to $52.2
million in write-downs on certain theatrical releases in the 1996 Period.
Feature film operating profit increased by $24.8 million, or 363 percent, in
the 1997 Period when compared to pro forma operating results in the 1996
Period, principally due to the aforementioned feature film write-downs in the
1996 Period.
Other operating expenses in the 1997 Period include interactive product and
development costs of $7.3 million and start-up losses of $5.6 million on the
Company's investment in MGM Gold (Asia), a satellite and cable delivery
channel based in Asia in which the Company holds a 50 percent equity interest.
The 1996 Period results did not include comparable activity in these new
businesses.
Television Programming. Television programming revenues decreased by $4.6
million, or 9 percent, to $47.9 million in the 1997 Period as compared to the
1996 Period. Worldwide pay television revenues decreased by $5.5 million, or
27 percent, to $14.9 million in the 1997 Period due to a reduction in the
license fees earned on the third season of The Outer Limits, as well as the
timing of delivery of current season episodes. Additionally, the Company
delivered only one new television movie in the 1997 Period as compared to four
movies in the 1996 Period. Worldwide syndication revenues increased by $1.3
million, or 5 percent, to $26.8 million in the 1997 Period due to the addition
of the series Poltergeist: The Legacy in domestic syndication, partially
offset by lower ratings on the Outer Limits series. The remaining revenue
decrease of $0.4 million in the 1997 Period principally related to lower home
video revenues earned on the aforementioned television movies.
Television programming operating profit was $1.5 million in the 1997 Period
as compared to an operating profit of $12.5 million in the 1996 Period.
Amortization expense on current series increased in the 1997 Period due to
reduced profitability estimates, as well as loss reserves recognized on
certain television series, including The Bradshaw Difference which has been
canceled.
Television programming operating profit decreased by $12.5 million, or 89
percent, in the 1997 Period when compared to pro forma operating results in
the 1996 Period for the reasons discussed above.
General Corporate Administration Expenses. General corporate administration
expenses increased by $5.5 million, or 19 percent, to $35.1 million in the
1997 Period as compared to the 1996 Period primarily due to the accrual of
long-term management incentive bonuses of $6.5 million established in
connection with the MGM Acquisition, partially offset by a net decrease in
various other items of $1.0 million.
General corporate administration expense decreased by $1.3 million, or 4
percent, in the 1997 Period when compared to 1996 pro forma results, which
include the aforementioned long-term management incentive bonuses.
Goodwill Amortization. Goodwill amortization decreased by $3.6 million, or
49 percent, to $3.8 million in the 1997 Period due to the revaluation pursuant
to purchase accounting of the Company's balance sheet as of October 10, 1996,
which resulted in lower goodwill than previously reflected in the pre-MGM
Acquisition balance sheet.
Interest Expense, Net of Amounts Capitalized. Net interest expense was $20.6
million in the 1997 Period as compared to $45.1 million in the 1996 Period.
Net interest expense decreased in the 1997 Period due to the
32
<PAGE>
substantial equity investment received by the Company in connection with the
MGM Acquisition (see "--Liquidity and Capital Resources"). On a pro forma
basis after giving effect to such equity investment, net interest expense in
the 1996 Period would have been $20.8 million. The Company expects net
interest expense to be higher in subsequent periods as the Company's
indebtedness has increased since the end of the 1997 Period.
Provisions For Income Taxes. The income tax provision of $3.9 million in the
1997 Period and $9.5 million in the 1996 Period reflects foreign remittance
taxes on international distribution revenues, which decreased substantially in
the 1997 Period.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
In connection with the MGM Acquisition, all of the assets and liabilities of
MGM Studios, including the Library, were revalued as of October 10, 1996 under
purchase accounting, resulting in lower amortization rates in periods after
the MGM Acquisition than in the prior periods. For purposes of presentation
and for management's discussion and analysis of the changes in financial
condition and results of operations for the above periods, the following table
combines the January 1, 1996 to October 10, 1996 pre-MGM Acquisition period
with the October 11, 1996 to December 31, 1996 post-MGM Acquisition period for
comparison to the year ended December 31, 1995.
<TABLE>
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
--------------------------- ------------- COMBINED JAN.
YEAR ENDED JAN. 1 TO OCT. 11 TO 1 TO
DEC. 31, 1995 OCT. 10, 1996 DEC. 31, 1996 DEC. 31, 1996
------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Feature films......... $ 770,740 $ 830,391 $214,273 $1,044,664
Television programs... 90,231 82,315 14,413 96,728
--------- --------- -------- ----------
Total revenues...... 860,971 912,706 228,686 1,141,392
Operating income (loss):
Feature films......... (61,560) (58,798) 35,655 (23,143)
Television programs... 28,251 17,684 (2,045) 15,639
General corporate
administration
expenses............. (64,175) (60,056) (18,319) (78,375)
Goodwill amortization. (14,876) (11,570) (1,717) (13,287)
Provision for
impairment........... -- (563,829) -- (563,829)
--------- --------- -------- ----------
Total operating
income (loss)...... (112,360) (676,569) 13,574 (662,995)
Interest expense, net of
amounts capitalized.... (66,386) (71,375) (9,875) (81,250)
Interest and other
income, net............ 10,372 3,179 813 3,992
--------- --------- -------- ----------
Income (loss) before
provision for income
taxes.................. (168,374) (744,765) 4,512 (740,253)
Provision for income
taxes.................. (935) (273) (4,346) (4,619)
--------- --------- -------- ----------
Net income (loss)....... $(169,309) $(745,038) $ 166 $ (744,872)
========= ========= ======== ==========
</TABLE>
Feature Films. Feature film revenues increased by $273.9 million, or 36
percent, to $1.0 billion in the year ended December 31, 1996 compared to the
year ended December 31, 1995. Explanations for the increase in revenues are
discussed in the following paragraphs.
Worldwide theatrical revenues increased by $21.9 million, or 10 percent, to
$252.4 million in 1996. Theatrical revenues increased in 1996 principally due
to international theatrical revenues earned by GoldenEye, a substantial
portion of which were earned in 1996 although the film was initially released
in December 1995. The Company released 13 new feature films in each year in
the domestic marketplace, and eight new feature films in each year in the
international marketplace. In 1996 the Company earned significant revenues
from the domestic theatrical releases of The Birdcage and Leaving Las Vegas as
compared to GoldenEye, Get Shorty and Species in 1995. Internationally, the
Company earned significant revenues from GoldenEye, Get Shorty and The
Birdcage as compared to GoldenEye, Species and Rob Roy in 1995.
33
<PAGE>
Worldwide home video revenues increased by $262.3 million, or 79 percent, to
$595.1 million in 1996. In 1996, home video revenues included the domestic
rental releases of GoldenEye, The Birdcage, Get Shorty and Leaving Las Vegas
as well as the sell-through release of All Dogs Go To Heaven 2. In 1995 the
Company released Species, Rob Roy and Speechless in the domestic rental
marketplace, as well as Pebble and the Penguin in the domestic sell-through
market. The increase in home video revenue in 1996 reflected the strong
performance of titles released in the period, as well as the substantial
increase in the number of titles released as compared to 1995. The Company
released 15 new feature films in the home video market in 1996 as compared to
nine new feature films in 1995. Additionally, revenues earned under the
Company's distribution agreement with Turner increased substantially in 1996,
primarily as a result of a sell-through promotion of The Wizard of Oz. The
Company also earned significant revenues in 1996 from sell-through promotions
of the James Bond and Rocky film series. In 1996 significant international
home video revenues were contributed by GoldenEye, Species and Get Shorty as
compared to Blown Away and Getting Even With Dad in 1995.
Worldwide pay television revenues increased by $30.4 million, or 48 percent,
to $94.1 million in 1996, which included significant license fees earned on
the availability of GoldenEye, Get Shorty and Species, among others, as
compared to Stargate, Blown Away and Getting Even With Dad in 1995. Network
revenues decreased by $2.2 million, or 59 percent, to $1.5 million in 1996 due
to the availability of only one feature film, Undercover Blues, in 1996 as
compared to Benny & Joon and Untamed Heart in 1995. Worldwide syndication
revenues decreased by $23.7 million, or 22 percent, to $81.8 million in 1996,
primarily as a result of domestic license fees earned for Rain Man, License to
Kill, A Fish Called Wanda, Rocky IV and Rocky V in 1995. The Company
recognized relatively lower license fees for Rocky III and The Russia House,
among others, in 1996. Additionally, international syndication revenues were
higher in 1995 due to license fees recognized under a new agreement covering
free television in Germany.
Other operating revenues decreased by $14.8 million, or 43 percent, to $19.8
million in 1996 as compared to 1995. Other revenues in 1995 included non-
recurring payments received in connection with an Australian pay television
joint venture and an audit settlement with a major distributor.
The Company recognized an operating loss from feature films of $23.1 million
in 1996 as compared to an operating loss of $61.6 million in 1995. The
improvement in the operating loss in 1996 reflects the aforementioned
substantial increase in revenues and a higher operating margin in the 1996
post-MGM Acquisition period (October 11 to December 31), which benefited from
the lower amortization rates due to the revaluation of the Library under
purchase accounting as a result of the MGM Acquisition. Additionally, feature
film write-downs were $82.5 million in 1996, as compared to feature film
write-downs of $134.0 million in 1995.
Television Programming. Television programming revenues increased by $6.5
million, or 7 percent, to $96.7 million in 1996 as compared to 1995. Worldwide
pay television revenues increased by $11.6 million, or 81 percent, to $25.9
million in 1996, primarily due to the licensing of a new series, Poltergeist:
The Legacy. Network revenues decreased $2.7 million, or 95 percent, to $0.1
million in 1996 as a result of the broadcast in 1995 of one new television
movie. There was no comparable network programming broadcast in 1996.
Worldwide home video revenues increased by $9.4 million, or 348 percent, to
$12.1 million in 1996, primarily as a result of international sales of made-
for-television movies and The Outer Limits series. Worldwide television
syndication revenues decreased by $13.0 million, or 19 percent, to $56.9
million due to substantial domestic license fees earned in 1995 on the In The
Heat Of The Night series. Other operating revenues increased $1.2 million in
1996 primarily due to merchandising income earned on current series.
Television programming operating profit decreased by $12.6 million, or 45
percent, to $15.6 million in 1996 due to higher amortization rates on the
Company's new series, which generated a higher proportion of 1996 revenues, as
compared to relatively lower amortization on revenues from the television
library of older series in 1995.
General Corporate Administration Expenses. General corporate administration
expenses increased by $14.2 million, or 22 percent, to $78.4 million in 1996
compared to 1995 primarily due to increased executive
34
<PAGE>
compensation of $5.4 million, increased accrual of long-term management
incentive bonuses of $2.6 million, higher legal and professional fees of $2.0
million, and a net increase in various other items of $4.2 million.
Goodwill Amortization. The decrease in goodwill amortization in 1996 related
to the revaluation of the Company's assets and liabilities pursuant to
purchase accounting in connection with the MGM Acquisition, which resulted in
lower goodwill than carried in the balance sheet prior to the MGM Acquisition.
Provision For Impairment. In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," the Company recorded a
charge of $563.8 million during 1996 in connection with CDR's sale of MGM
Studios to the Company to write-off certain intangible assets, including
$404.4 million to write-off its remaining investment in the film distribution
organization and a charge of $159.4 million to reduce its investment in
goodwill to net realizable value.
Interest Expense, Net of Amounts Capitalized. Net interest expense increased
by $14.9 million, or 22 percent, to $81.3 million in 1996 as compared to 1995.
Net interest expense increased in 1996 due to higher average borrowing levels
in the 1996 pre-MGM Acquisition period, partially offset by lower interest in
the 1996 post-MGM Acquisition period due to reduced debt levels associated
with the equity infusions received in connection with the MGM Acquisition.
Interest and Other Income, Net. Interest and other income, net decreased by
$6.4 million, or 62 percent, to $4.0 million in 1996 as compared to 1995. In
1995 the Company recovered proceeds under a directors' and officers' insurance
policy relating to litigation originating prior to 1991 and also reduced
certain prior period litigation reserves, resulting in additional income in
the period. There was no such comparable activity in 1996.
Provisions For Income Taxes. The income tax provision of $4.6 million in
1996 reflects foreign remittance taxes attributable to foreign distribution
revenues, net of the reversal of certain tax reserves of approximately $14.0
million, and tax expense on net profits in the post-MGM Acquisition period.
The income tax provision of $0.9 million in 1995 resulted from foreign
remittance taxes incurred on international distribution revenues, net of the
reversal of certain tax reserves of approximately $10.0 million. The Company
does not anticipate any further substantial reversals of tax reserves.
35
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
(PREDECESSOR)
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Feature films................................ $ 539,557 $ 770,740
Television programs.......................... 57,564 90,231
----------- -----------
Total revenues............................. 597,121 860,971
Operating income (loss):
Feature films................................ (86,422) (61,560)
Television programs.......................... 15,027 28,251
General corporate administration expenses.... (49,314) (64,175)
Goodwill amortization........................ (14,876) (14,876)
----------- -----------
Total operating income (loss).............. (135,585) (112,360)
Interest expense, net of amounts capitalized... (33,860) (66,386)
Interest and other income, net................. 2,070 10,372
----------- -----------
Income (loss) before provision for income
taxes......................................... (167,375) (168,374)
Provision for income taxes..................... (3,877) (935)
----------- -----------
Net income (loss).............................. $ (171,252) $ (169,309)
=========== ===========
</TABLE>
Feature Films. Feature film revenues increased by $231.2 million, or 43
percent, to $770.7 million in the year ended December 31, 1995 as compared to
the year ended December 31, 1994. Explanations for the increase in revenues
are discussed in the following paragraphs.
Worldwide theatrical revenues increased by $142.6 million, or 162 percent,
to $230.5 million in 1995 as compared to 1994. In 1995, the Company released
13 new feature films as compared to only six in 1994. Theatrical revenues
increased due to the significant contributions of GoldenEye, Get Shorty and
Species and due to the additional number of films released in 1995 as compared
to 1994. In 1995 these feature films included, among others, GoldenEye, Get
Shorty, Species and Rob Roy. In 1994, the Company released theatrically, among
others, the feature films Stargate, Speechless, Blown Away and Getting Even
With Dad.
Worldwide home video revenues increased by $67.6 million, or 25 percent, to
$332.8 million in 1995 as compared to 1994. Home video revenues in 1995
increased primarily due to the release of Species, Rob Roy and Speechless in
the domestic rental market, the release of Pebble and the Penguin in the
domestic sell-through market, and significant international revenues generated
by Blown Away and Getting Even With Dad. In 1994 there were only two
significant domestic rental releases, Blown Away and Getting Even With Dad,
and no significant international video releases.
Worldwide pay television and network revenues increased by $6.8 million, or
11 percent, to $67.4 million in 1995 as compared to 1994, principally as a
result of the recognition of significant domestic pay license fees in 1995 for
Stargate and Blown Away. There were no such comparable license fees earned in
1994.
Domestic syndication revenues decreased by $15.6 million, or 31 percent, to
$34.8 million in 1995 due to significant Library revenues generated in 1994 in
connection with an amendment to the Company's agreement with Turner, which
resulted in a one-time increase in license fees recognized in 1994.
International television syndication revenues increased by $7.4 million, or 12
percent, to $70.7 million in 1995, primarily due to the recognition of license
fees under a new agreement covering free television in Germany.
Other operating revenues increased by $22.4 million, or 184 percent, to
$34.6 million in 1995 primarily due to payments received in connection with an
Australian pay television joint venture, an audit settlement with a
36
<PAGE>
major distributor, the reversal of certain prior period litigation reserves,
and additional music and other ancillary revenues.
The Company recognized an operating loss from feature films of $61.6 million
in 1995 as compared to an operating loss of $86.4 million in 1994. The
improvement in the operating loss in 1995 reflects the substantial increase in
revenues earned in the period, partially offset by increased feature film
write-downs of $49.0 million on 1995 releases. In 1995, feature film write-
downs were $134.0 million, as compared to feature film write-downs of $85.0
million in 1994.
Television Programming. Television programming revenues increased by $32.7
million, or 57 percent, to $90.2 million in 1995 as compared to 1994.
Worldwide pay television revenues increased by $11.2 million to $14.3 million,
primarily due to the distribution of the new Outer Limits series and made-for-
television movies. Worldwide syndication revenues increased by $34.9 million,
or 98 percent, to $70.5 million, primarily due to the success of the In The
Heat Of The Night series in syndication. These increases were partially offset
by a decrease in network television revenues of $15.9 million, or 85 percent,
to $2.8 million in 1995 compared to 1994, which included the final season of
the In The Heat Of The Night series. In 1995 the only network revenues were
generated by one made-for-television movie. The remaining revenue increase in
1995 of $2.5 million resulted from home video revenues earned on the new Outer
Limits series and made-for-television movies.
Television programming operating profit increased by $13.2 million, or 88
percent, to $28.3 million in 1995 as compared to 1994 due to the
aforementioned increase in revenues and improved margins on the television
library as a result of increases in profitability estimates.
General Corporate Administration Expenses. General corporate administration
expenses increased by $14.9 million, or 30 percent, to $64.2 million in 1995
compared to 1994 primarily due to the accrual of non-recurring management
incentive bonuses of $10.0 million and higher legal and professional fees of
$6.2 million, partially offset by a net decrease in various other items of
$1.3 million.
Interest Expense, Net of Amounts Capitalized. Net interest expense increased
by $32.5 million, or 96 percent, to $66.4 million in 1995 from $33.9 million
in 1994. Net interest expense increased due to higher borrowings outstanding
in 1995 and increases in interest rates.
Interest and Other Income, Net. Other income in 1995 includes proceeds
recovered under a directors' and officers' insurance policy relating to
litigation originating prior to 1991 and reductions in certain litigation
reserves.
Provisions For Income Taxes. The income tax provision of $0.9 million in
1995 includes foreign remittance taxes incurred on international distribution
revenues, partially offset by a reduction in tax reserves of approximately
$10.0 million due to the favorable settlement of certain international tax
audits. The provision for income taxes of $3.9 million in 1994 reflects
foreign remittance taxes, partially offset by the recognition of net operating
loss tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
In recent years the Company has funded its operations primarily from
internally generated funds and bank borrowings. The Company is currently
operating under a business plan which calls for substantial continued
borrowing, primarily to fund film and television production.
In connection with the MGM Acquisition, MGM Studios obtained the Original
MGM Credit Facility aggregating $800 million, of which $450 million was used
to fund such acquisition. As of June 30, 1997, MGM Studios had $235 million
available under the Original MGM Credit Facility to fund ongoing operating
activities of the Company, and the interest rate was equal to the average of
the reserve-adjusted London Interbank Offered Rates quoted by certain
reference banks for deposits of U.S. dollars in comparable amounts and for
comparable periods in the London interbank market ("LIBOR") plus 2.75 percent.
37
<PAGE>
On July 10, 1997 the Company completed the Orion Acquisition for a total
purchase price of approximately $573 million. In connection with the Orion
Acquisition, the Company issued 15,000,120 shares of the Common Stock to
Tracinda and Seven for $360 million. In addition, Orion obtained the Original
Orion Credit Facility, consisting of a $200 million term loan and a
$50 million revolving credit facility. The interest rate on the Orion Credit
Facility was equal to LIBOR plus 2.50 percent.
In October 1997 MGM Studios and its principal lenders amended and restated
the Original MGM Credit Facility into the Amended Credit Facility, a
syndicated facility aggregating $1.3 billion which includes Orion as a co-
borrower, consisting of a six year $400 million revolving credit facility,
increasing to $600 million upon receipt by the Company of gross proceeds of at
least $250 million from the issuance and sale of the Common Stock, including
in connection with the Offering, a $400 million seven and one-half year term
loan and a $300 million eight and one-half year term loan. The facility also
contains provisions allowing, with the consent of the requisite lenders and
subject to syndication thereof, for an additional $200 million tranche,
raising the amount of the Amended Credit Facility to $1.5 billion. Proceeds
drawn from the Amended Credit Facility have been used to retire all amounts
outstanding under the Original Orion Credit Facility. Scheduled amortization
of the term loans under the Amended Credit Facility is $0 in 1998, $0 in 1999,
$0 in 2000, $33 million in 2001, $73 million in 2002, $103 million in 2003,
$103 million in 2004 and $103 million in 2005, with the remaining balance due
at maturity. The revolving facility portion of the Amended Credit Facility
matures in October 2003, subject to extension under certain conditions. The
Amended Credit Facility contains various covenants, including limitations on
indebtedness, dividends and capital expenditures and maintenance of certain
financial ratios. See "Financing Arrangements."
The Company's strategy and business plans contemplate substantial on-going
investments in production of new feature films and television programs. In
addition, the Company plans to make investments or enter into joint ventures
to develop new distribution channels to further exploit the Library.
Furthermore, the Company may make strategic acquisitions, including
acquisitions to obtain such distribution channels or to further expand the
Library and may enter into joint ventures, including ventures to produce
motion pictures. The nature and extent of such additional investments
(including potential acquisitions and joint ventures) are dependent upon the
future evaluation of the strategic and economic factors underlying such
opportunities. The Company believes that the available credit under the
Amended Credit Facility, together with the proceeds from the Offering and the
Tracinda Purchase, should be sufficient to meet the Company's current
obligations and commitments and will enable the Company to continue to conduct
its operations in accordance with its current business plans, although no
assurance can be given in that regard. The Company may need to seek other
sources of financing in order to complete any future acquisitions. Even if the
Company does not consummate any acquisitions, in order to take advantage of
opportunities in the debt markets, the Company may from time to time seek
additional financing. No assurance can be given that such other sources will
be available or on terms acceptable to the Company. See "Risk Factors--Risks
Relating to Liquidity and Financing Requirements."
38
<PAGE>
THE INDUSTRY
THE MOTION PICTURE INDUSTRY
General. The motion picture industry consists of two principal activities:
production and distribution. Production involves the development, financing
and production of feature-length motion pictures. Distribution involves the
promotion and exploitation of motion pictures throughout the world in a
variety of media, including theatrical exhibition, home video, television and
other ancillary markets. The U.S. motion picture industry can be divided into
major studios and independent companies, but the major studios dominate the
industry in the number of theatrical releases. In addition to the Company
(including MGM Pictures, UA Pictures, Orion and Goldwyn), the major studios as
defined by the MPAA are The Walt Disney Company (including Buena Vista,
Touchstone and Miramax) ("Disney"), Paramount, Sony Pictures Entertainment
Inc. (including Columbia and TriStar) ("Sony"), Twentieth Century Fox Film
Corporation ("Fox"), Universal and Warner Bros. (including Turner, New Line
Cinema and Castle Rock Entertainment) ("Warner"). The major studios are
typically large diversified corporations that have strong relationships with
creative talent, exhibitors and others involved in the entertainment industry
and have global film production and distribution capabilities.
Historically, the major studios have produced and distributed the majority
of high grossing theatrical motion pictures released annually in the United
States. Over the past decade, the number of feature-length motion pictures
released by the major studios has increased dramatically from 133 in 1986
(34.6 percent of the total) to a high of 233 in 1996 (71.7 percent of the
total). In addition, most of the studios have created or accumulated
substantial and valuable motion picture libraries that generate significant
revenues. These revenues can provide the major studios with a stable source of
earnings that offsets the variations in the financial performance of their
motion picture releases and other aspects of their motion picture operations.
The independent companies have more limited production and distribution
capabilities than do the major studios. While certain independent companies
may produce as many films as a major studio in any year, independent motion
pictures typically have lower negative costs and are not as widely released as
motion pictures produced and distributed by the major studios. Additionally,
the independent companies may have limited or no internal distribution
organizations and rely on the major studios for distribution and financing.
Motion Picture Production. The production of a motion picture begins with
the screenplay adaptation of a popular novel or other literary work acquired
by the producer of the motion picture or the development of an original
screenplay based upon a story line or scenario conceived or acquired by the
producer. In the development phase, the producer may seek production financing
and tentative commitments from a director, the principal cast members and
other creative personnel. A proposed production schedule and budget are
prepared. At the end of this phase, the decision is made whether or not to
"greenlight," or approve for production, the motion picture.
After greenlighting, 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 guaranties, if necessary. Moreover, the
producer establishes filming locations, secures any necessary studio
facilities and stages and prepares for the start of actual filming.
Principal photography, or the actual filming of the screenplay, generally
extends from seven to 16 weeks, depending upon such factors as budget,
location, weather and complications inherent in the screenplay. Following
completion of principal photography, the motion picture enters what is
typically referred to as post-production. In this phase, the motion picture is
edited, opticals, dialogue, music and any special effects are added, and
voice, effects and music soundtracks and pictures are synchronized. This
results in the production of the negative from which release prints of the
motion picture are made. Major studios and independent film companies hire
editors, composers and special effects technicians on the basis of their
suitability for a particular picture.
39
<PAGE>
Motion Picture Distribution. The distribution of a motion picture involves
the licensing of the picture for distribution or exploitation in various
markets, both domestically and internationally, pursuant to a release pattern.
These markets include theatrical exhibition, non-theatrical exhibition (which
includes airlines, hotels and armed forces facilities), home video (including
rental and sell-through), presentation on television (including pay-per-view,
pay, network, syndication or basic cable) and marketing of the other rights in
the picture and underlying literary property, which may include books,
merchandising and soundtracks. The domestic and international markets
generally follow the same release pattern, with the starting date of the
release in the international market varying from being concurrent with the
domestic theatrical release to being as long as nine months afterwards. A
motion picture typically is distributed by a major studio or one or more
distributors that acquire rights from a studio or other producer in one or
more markets or media or a combination of the foregoing.
Both major studios and independent film companies often acquire 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 a production company all rights to a film upon completion of production,
and also acquire completed films.
THE TELEVISION INDUSTRY
Television Production. The production of television series programming
involves the development of a format based on a creative concept or literary
property into a television script, the hiring of talent, the filming or taping
of the program and the technical and post-production work necessary to produce
a finished program. Television producers may originate projects internally or
acquire them from others. If a concept is deemed suitable for development, the
studio or other producer or network typically commissions and pays for a
script. Once a script is ordered, one or more license agreements are
negotiated with the potential broadcasters of such program. A pilot episode
usually is ordered or commissioned prior to the determination of whether a
series will be produced.
Television production can generally be divided into two distinct businesses:
network production (i.e., television shows for ABC, CBS, NBC, Fox, UPN and WB)
and non-network production (i.e., made-for-cable and first-run syndication).
The economics of the two types of television production are different. In
network production, a network generally orders approximately six to 13 initial
episodes of each new series for a license fee equal to a percentage of the
program's cost. The balance of the production cost can only be recouped
through international sales and syndication if a series is successful and
generally remains unrecouped for at least four years. In the non-network
production or first-run syndication business, a producer seeking to launch a
new series commits to produce a minimum number of episodes if the producer can
"clear" the series by selling to individual television stations in sufficient
markets throughout the country (generally comprising 70 percent of television
households). Once produced, the episodes are immediately available for
licensing to international broadcasters as well. This approach generally
involves a lower production cost risk and earlier return on investment ("ROI")
than the network production business; however, non-network programming also
generally provides a lower ROI than successful network production. See
"Business--Free and Pay Television--Television Production."
Television Distribution. The U.S. television market is served by network
affiliated stations, independent stations and cable systems, although the
number of independent stations has decreased as many formerly independent
stations have become affiliated with new networks in recent years. During
"prime time" hours, network affiliates primarily broadcast programming
produced for the network. In non-prime time, network affiliates telecast
network programming, off-network programming, first-run programming
(programming produced for distribution on a syndicated basis) and programming
produced by the local stations themselves. Independent television stations and
cable networks, during both prime and non-prime time, produce their own
programs and telecast off-network programs or first-run programs acquired from
independent producers or syndicators. Syndicators generally are companies that
sell to independent television stations and network affiliates programming
produced or acquired by the syndicator for distribution.
40
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is engaged primarily in the development, production and
worldwide distribution of theatrical motion pictures and television programs.
The Company, including MGM Studios, UA, Orion, Goldwyn and its other
subsidiaries, is one of only seven major film and television studios
worldwide. With approximately 4,000 film titles and over 8,200 episodes of
television programming, the Library constitutes the largest collection of
post-1948 feature films in the world. Motion pictures in the Library have won
over 185 Academy Awards, including Best Picture Awards for Annie Hall, The
Apartment, The Best Years of Our Lives, Dances With Wolves, The Deer Hunter,
Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon, Rain Man,
Rocky, Silence of the Lambs, Tom Jones and West Side Story. The Library also
includes 17 titles in the James Bond film franchise, five titles in the Rocky
film franchise and nine titles in the Pink Panther film franchise.
Tracinda, Seven and senior management of MGM Studios formed the Company to
acquire all of the outstanding capital stock of MGM Studios and its
subsidiaries, including UA, in October 1996 for an aggregate consideration of
$1.3 billion pursuant to the MGM Acquisition. Tracinda is wholly-owned by Kirk
Kerkorian. Seven is one of the largest television broadcast networks in
Australia with stations in five major Australian metropolitan areas and one
regional television station. Frank G. Mancuso, Chairman and Chief Executive
Officer of MGM Studios since July 1993 and of the Company since its formation,
has approximately 35 years of entertainment industry experience.
In July 1997 the Company acquired all of the outstanding capital stock of
Orion and its subsidiaries including Goldwyn, from Metromedia International
Group, Inc. pursuant to the Orion Acquisition. In connection with the Orion
Acquisition, the Company obtained the film and television libraries of the
Orion Companies consisting of approximately 1,900 film titles and 3,000
television episodes, effectively doubling the size of the Library to its
current size of approximately 4,000 film titles and over 8,200 episodes of
television programming. The Company also acquired 12 substantially completed
theatrical motion pictures and five direct-to-video features. The Goldwyn
cinema operations were excluded from the Orion Acquisition. See "Background of
the Company."
BUSINESS STRATEGY
The Company's goal is to enhance its position as a premier global
entertainment content company by maximizing the value of its assets, including
the Library and its film and television production units, under the direction
of its experienced management team. To achieve this goal, the Company intends
to:
Build and Leverage the Library. The Company believes that the Library is its
most powerful asset and that the Library will continue to generate relatively
stable cash flows through the worldwide distribution of its titles. Management
intends to maximize the value of the Library by (i) producing new motion
pictures and television programs that will not only be successful on their
own, but will also increase the depth and breadth of the Library, (ii)
aggressively marketing and repackaging the Library's titles, (iii) developing
new distribution channels for delivering MGM branded programming, (iv)
capitalizing on developments in technology and (v) further penetrating
international markets as they grow. As opportunities arise, the Company may
pursue strategic acquisitions, including acquisitions of titles or new
distribution channels for the Library. Additionally, the Company expects to
benefit as certain rights to its Library that have been previously licensed to
others revert to the Company over time.
Develop, Produce and Distribute Theatrical Motion Pictures. Through MGM
Pictures and UA Pictures, the Company plans to produce or co-produce and
distribute approximately ten to 12 motion pictures annually across a variety
of genres. The Company intends to (i) actively manage its production and
release schedules to maximize overall performance of those motion pictures,
(ii) tightly control development and production expenditures while maintaining
the artistic integrity required to develop and produce successful feature
films and
41
<PAGE>
(iii) utilize the Library as an inexpensive source for sequels and remakes and
the expansion of certain well-tested, familiar film franchises. Additionally,
the Company plans to produce or acquire and release approximately four to six
specialty motion pictures annually through Goldwyn. The Company also plans to
distribute annually approximately four to six motion pictures produced by
others.
Develop, Produce and Distribute Television Programming. The Company intends
to focus primarily on the development and production of series for pay
television and the first-run syndication business by using its extensive
Library as a source of ideas. Under its television programming strategy, the
Company has been able to recover substantially all production costs for a
series shortly following completion of production by obtaining up-front
financial commitments from domestic pay television broadcasters for production
of multiple episodes of the series and concurrently licensing the series in
international markets. The Company also develops programs such as two-hour
television movies and mini-series. The Company intends to allocate a portion
of its future television production budget to producing series for network
television.
Leverage the MGM Brand Name. The Company believes that the MGM name and its
lion logo are among the most recognized in the world. The Company intends to
capitalize on the value inherent in its name and logo through the distribution
of branded programming and the selective development of high quality consumer
products.
When Mr. Mancuso was appointed Chairman and Chief Executive Officer in 1993,
he began implementing the above business strategy. Under Mr. Mancuso's
direction, the Company completed the Orion Acquisition to build the Library.
In addition, under Mr. Mancuso's direction the Company has produced and/or
released such successful motion pictures as The Birdcage, Get Shorty,
GoldenEye, Leaving Las Vegas, Species and Stargate. Although the Company did
not approve any motion pictures for production during the Sale Period, since
completion of the MGM Acquisition, management has taken steps to return
operations to a higher level. Since October 1996 the Company has approved six
motion pictures for production. See "Risk Factors--Curtailment of Certain
Operations Due to Sale of the Company." Since Mr. Mancuso's appointment, the
Company has reestablished a television series production business and has
taken steps to leverage the MGM brand name.
FILM AND TELEVISION LIBRARY
The Library is one of the most critically acclaimed libraries in the motion
picture industry, representing one of the largest collections of Academy
Award-winning films. As of August 1, 1997 the Company owned, or held certain
distribution rights with respect to, approximately 4,000 theatrical motion
pictures, excluding the approximately 2,950 titles that the Company has the
right to distribute in home video markets under an agreement with Turner. See
"Risk Factors--Certain Limitations on the Exploitation of the Library" and "--
Distribution--Home Video Distribution." The motion pictures in the Company's
Library have won over 185 Academy Awards. Fifteen motion pictures have won the
Academy Award for Best Picture, including Annie Hall, The Apartment, The Best
Years of Our Lives, Dances With Wolves, The Deer Hunter, Hamlet, In the Heat
of the Night, Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, Silence of the
Lambs, Tom Jones and West Side Story.
The Library also constitutes the largest collection of post-1948 feature
films in the world. In 1948 certain major studios negotiated consent decrees
requiring that the studios separate their exhibition businesses from their
production and distribution businesses and mandating the divestiture of
certain theater holdings. This is generally believed to have triggered greater
competition among the studios and an increased emphasis on the potential for
commercial success in the development and production stages, resulting in a
greater focus on the content and quality of the motion pictures produced and
distributed by the studios. The Company believes that films produced and
developed after 1948 generally are more valuable than films that were produced
and developed earlier.
Additionally, the Library includes motion pictures from a wide range of
genres, including dramas, comedies, action-adventure movies, westerns and
suspense thrillers. Management believes that the Library's diversity, quality
and extensive size provides the Company with substantial competitive
advantages. The Company intends to continue to build upon these advantages by
producing and acquiring new motion pictures across a variety of genres and
budget ranges to update and enhance the Library. See "--Production--Motion
Picture Production."
42
<PAGE>
The Library also includes over 8,200 episodes from television series
previously broadcast on prime-time network television or in first-run
syndication, including episodes of The Addams Family, American Gladiators, Bat
Masterson, Cagney & Lacey, Fame, Green Acres, Highway Patrol, In the Heat of
the Night, Mr. Ed, The Patty Duke Show, Pink Panther, Sea Hunt and
thirtysomething. The television series in the Library have won 41 Emmy awards
and six Golden Globe awards.
The Company will continue to implement its strategy of developing new
projects from existing Library assets. The Library represents a readily-
available, "market tested" source of development ideas. For example, the
Company recently had success with the film The Birdcage, a remake of La Cage
aux Folles, and is expected to release Species II, the sequel to Species, in
1998. Furthermore, the Company has successfully expanded the valuable film
franchises within its Library, most notably the James Bond franchise, with the
1995 commercial success of GoldenEye. The Company expects to release the
latest James Bond film, Tomorrow Never Dies, in December 1997. Additionally,
the Company has successfully developed four television series based on Library
motion pictures: Poltergeist: The Legacy based on Poltergeist; Stargate SG-1
based on Stargate; All Dogs Go to Heaven, based on the movie of the same name;
Fame L.A. based on Fame; and The Magnificent Seven, based on the movie of the
same name. The Company also recently produced a remake of Twelve Angry Men as
a made-for-television movie, which has aired on Showtime Networks Inc.
("Showtime").
Eighteen James Bond motion pictures in the Library, including the upcoming
release, are produced and distributed pursuant to a series of agreements with
Danjaq. The motion pictures are produced by Danjaq, and the Company has the
right to approve all key elements of the pictures, such as the selection of
the director and the leading actors. The copyright in each of the motion
pictures is owned jointly by the Company and Danjaq. Generally, the Company
has the right to distribute each of the pictures in all media worldwide in
perpetuity or for a term of 15 years. Where the Company's distribution rights
are not perpetual, the rights revert to joint control by the Company and
Danjaq after expiration of the distribution term. Danjaq owns any television
series created that is based on the James Bond motion pictures, and the
Company has the distribution rights to such series. Danjaq controls the
merchandising rights with respect to the pictures, with the Company being
entitled to receive a portion of the revenues from all merchandising licenses.
Additionally, the Company controls all marketing rights, and controls the
music from The Living Daylights (1987) and all subsequent pictures. All other
rights relating to the pictures are controlled jointly by the Company and
Danjaq. The agreements contain certain restrictions on the sale or licensing
by the Company of any of its rights in the pictures.
Prior to 1959, Ian Fleming authored a number of novels depicting the
adventures of James Bond, and commencing in 1959, Mr. Fleming and Kevin
McClory collaborated on the development of certain plot lines and treatments
and a script entitled Thunderball, featuring the James Bond character. In that
connection, Mr. McClory ultimately acquired from Mr. Fleming certain rights to
make a feature film using the James Bond character in these plot lines. Mr.
Fleming thereafter wrote a novel of the same name. In 1961, Mr. McClory
commenced litigation against Mr. Fleming with regard to the script, the novel
and certain related rights.
In 1962, prior to the settlement of the Fleming-McClory litigation, Mr.
Fleming effectively granted to a predecessor-in-interest of Danjaq the
exclusive worldwide rights to, among other things, make films based on Mr.
Fleming's existing or future James Bond novels (other than Thunderball or
Casino Royale) and to create original screenplays about the adventures of
James Bond not based on Mr. Flemings's James Bond novels. This agreement
further provides that the film rights to the Thunderball novel that were the
subject of the Fleming-McClory litigation would also be transferred to
Danjaq's predecessor to the extent Mr. Fleming was permitted to transfer such
rights following completion of the litigation.
The Fleming-McClory litigation was resolved in 1963 by a settlement among
Mr. Fleming, Mr. McClory and the other parties to the litigation in which Mr.
McClory acknowledged that Mr. Fleming was the creator and proprietor of the
James Bond character. Pursuant to that settlement, Mr. McClory was, in effect,
given the film rights in the Thunderball documents and scripts attached to the
settlement agreement, the rights to reproduce any part of Mr. Flemings's
Thunderball novel in a film and to exhibit any such film in any manner
whatsoever and the rights to use the James Bond character in the film
Thunderball. The Company believes these rights, at most,
43
<PAGE>
give Mr. McClory the right to make films of the story in the novel Thunderball
(i.e. a "remake" of Thunderball). Mr. McClory produced the film Thunderball
(with UA and Danjaq) in 1965. Mr. McClory has at various times since 1963
taken the position that he has broader rights to use the James Bond character
than simply remake Thunderball, but since 1965 he has only made the 1983 film
Never Say Never Again, which Mr. McClory claimed was a remake of the film
Thunderball.
On October 13, 1997, Sony issued a press release announcing plans by its
Columbia Pictures division to produce a series of new James Bond feature films
based on works created by Mr. Fleming, Mr. McClory and John Whittingham. The
Company believes that Sony and Mr. McClory intend to take the position that,
among other things, Mr. McClory's rights in the ideas embodied in the
Thunderball novel and the documents attached to the Fleming-McClory settlement
agreement form the basis for producing James Bond feature films whose plot
lines are not limited to the plot lines of the novel Thunderball. The Company
believes that no party, other than the Company and Danjaq, has the right to
produce or exploit a feature film, television program or similar program
based, in whole or in part, on the character James Bond, with the possible
exception of Mr. McClory's right to remake Thunderball. If Mr. McClory, Sony
or others were to attempt to produce or exploit another remake of Thunderball
or to produce or exploit any other film, television program or other similar
program based, in whole or in part, on the character James Bond that goes
beyond a remake of Thunderball, the Company would vigorously oppose any such
attempt and take all actions necessary to protect its rights in the James Bond
character and all related rights. The Company believes that a remake of
Thunderball by Mr. McClory, Sony or others would not have a material adverse
effect on the Company's business or results of operations. However, a
determination that Mr. McClory, Sony or others have broader rights to produce
or exploit other films, television programs or other similar programs that are
based, in whole or in part, on the James Bond character could have a material
adverse effect on the Company's business and results of operations.
The Company intends to aggressively market and distribute titles in the
Library in existing pay and free television, home video and other markets
worldwide, as well as through developing technologies. Rather than selling its
titles on a single or multi-picture basis, the Company strives to pool
strategically its motion picture and television titles into cohesive
programming packages directed at specific markets, including purchasers of
large quantity programming and services in emerging markets which may not have
their own programming capabilities. The Company believes that the development
and growth of direct broadcast satellite ("DBS") and other new distribution
systems may generate significant incremental profits for the industry as the
number of channels requiring content grows. The Company believes that, with
its extensive Library and its branded programming strategy, the Company is
well positioned to benefit from such growth and development.
As opportunities arise, the Company expects to consider acquisitions,
including acquisitions to expand the Library or to obtain new distribution
channels. The Company has recently submitted a non-binding indication of
interest for the acquisition of a film library of approximately 1,000 titles.
If invited by the seller of such library, the Company may make a binding offer
to purchase prior to the end of 1997. The Company anticipates that, if such
offer is accepted, completion of the acquisition would be subject to, among
other things, the successful completion of due diligence and the negotiation
and preparation of a definitive agreement on terms acceptable to the Company.
There can be no assurance that any such offer will be accepted or that the
acquisition will be completed or that, if completed, the anticipated benefits
of such acquisition will be achieved.
Due to certain long-term pre-paid licenses entered into by prior management,
the Company does not expect to receive significant revenue with respect to
substantial portions of its Library from domestic free and certain major
international television markets for the next several years. This includes
many of the most valuable titles in the Library, including approximately 50
percent of the pre-1990 MGM and UA titles, which have been licensed in one or
more of the U.S., France, Spain and Germany, and less than 50 percent of the
Orion titles, which have been licensed in one or more of France, Spain,
Germany and the United Kingdom. See "--Distribution--Pay and Free Television
Distribution." The Company expects to benefit as certain rights to the Library
that have been previously licensed to others revert to the Company over time.
See "Risk Factors--Certain Limitations on the Exploitation of the Library" and
"--Distribution--Home Video Distribution."
44
<PAGE>
PRODUCTION
MOTION PICTURE PRODUCTION
The Company currently develops and produces theatrical motion picture
projects through two separate production entities, MGM Pictures and UA
Pictures. The Company operates these production units independently with
separate management teams and allows them to compete directly for the best new
projects on the creative side of the business. At the same time, the Company
supports the units with the benefits of centralized marketing, sales, legal,
physical production and distribution functions. Direct access to senior
management also expedites major decision-making. By utilizing its two separate
production units, management believes that the Company benefits from the
distinct creative talents and perspective of each of its chief production
executives, resulting in greater diversity within its overall release slate.
Through these production units, the Company plans to produce or co-produce
and distribute between approximately ten and 12 motion pictures annually
across a variety of genres and budget ranges and release approximately four to
six additional pictures each year that are produced by other producers. Both
production units employ a development staff of creative executives who work to
refine concepts and scripts so that projects are developed to the point that
production decisions can be made. The creative staffs of both MGM Pictures and
UA Pictures currently have approximately 90 ongoing projects in the aggregate,
which are in various phases of development and pre-production. The Company's
current strategy is to have fewer projects in development at any one time than
the other major studios in order to concentrate its efforts and assets on the
projects that management believes could be the most commercially successful.
The Company believes that this strategy will result in lower development
related write-offs and abandonment costs. Historically, the Company's
development related write-offs and abandonment costs were $11.6 million, $19.5
million and $11.6 million in the years ended December 31, 1996, 1995 and 1994,
respectively.
Additionally, the Company plans to release approximately four to six
specialty motion pictures each year through Goldwyn. These motion pictures
will be produced or co-produced by Goldwyn or acquired through negative
pickups or other distribution arrangements and will include motion pictures in
a variety of genres generally involving producers and directors, writers or
other talent who typically work outside of the studio system. The Company's
investment in such pictures is expected to be significantly less than the
Company's investment for pictures produced through MGM Pictures or UA
Pictures. The Company believes that this strategy of releasing independent
motion pictures will add greater diversity to the Company's release slate and
enhance the Library both through the addition of new film product and the
building of relationships with up-and-coming producers and directors, writers
and other talent.
In order to manage the financial risks inherent in motion picture
production, management has developed a rigorous budgeting and approval process
and strictly controls the cost of each motion picture through active
management involvement in all phases of the production process. When a project
is considered to have commercial potential, budgets are developed
independently by the physical production department to determine the below-
the-line cost of a motion picture. At a point early in this process, a
preliminary below-the-line estimate is combined with potential above-the-line
costs, such as talent costs and participations, to form a model of the total
cost of the motion picture. The Company's financial planning and analysis
group then performs sensitivity analyses to determine the motion picture's
potential ROI. The ROI range is developed using a preliminary cost model
together with a revenue model based on the picture's budget, genre, cast,
international appeal and other factors. The Company believes that, as a result
of its focus on budgeting and controlling production expenditures, it will be
able to avoid unnecessary cost-overruns and excess expenditures.
The Company pursues fewer producer or talent "overhead" arrangements, in
which a studio pays a portion of the overhead of creative talent (i.e.,
producer, director or actor) for the right to receive a "first look" at that
party's projects, than other major studios. In general, the Company believes
that its capital resources are better allocated to acquire literary property
or the services of talent for a specific project than to fund overhead. See
"Risk Factors--Risks of Motion Picture and Television Production."
The Company does not own any studio facilities or stages but rather leases
facilities and sound stages on an "as needed" basis in connection with the
production of specific motion picture and television projects. The Company has
not experienced any difficulties in leasing appropriate facilities and sound
stages when needed.
45
<PAGE>
The following table details the Company's release schedule, as announced by
the Company in August 1997, for the remainder of 1997 and the first six months
of 1998.
RELEASE SCHEDULE
<TABLE>
<CAPTION>
APPROXIMATE
TITLE RELEASE DATE SUMMARY PRINCIPAL ACTORS
----- ------------ ------- ----------------
<C> <C> <C> <S>
Paperback Romance........... Released Madcap romantic comedy Gia Carides, Anthony
LaPaglia
Hoodlum(2).................. Released 1930's gangland action film Laurence Fishburne, Tim
centered on Bumpy Johnson Roth, Vanessa Williams,
Andy Garcia, Cicely Tyson
The End of Violence......... Released Wim Wenders' look at Bill Pullman, Andie
exploitation and violence MacDowell, Gabriel Byrne,
Loren Dean, Traci Lind,
Pruitt Taylor-Vince
The Locusts................. Released Film noir pot-boiler set in Kate Capshaw, Jeremy Davies,
1960's rural Kansas Vince Vaughn, Ashley Judd
Gang Related................ Released Tupac Shakur's last movie, a James Belushi, Tupac Shakur,
thought-provoking police Dennis Quaid, James Earl
action thriller Jones
Napoleon.................... Released Live-action children's Voices by: Adam Wylie,
adventure about a puppy lost Bronson Pinchot, Blythe
in the Australian outback Danner, Joan Rivers
Red Corner(1)............... Released Political thriller/courtroom Richard Gere, Bai Ling
drama directed by Jon Avnet
Deceiver.................... November 1997 Suspenseful thriller Tim Roth, Chris Penn, Renee
centered on a web of lies Zellweger, Ellen Burstyn,
and deceits Rosanna Arquette
Bent........................ December 1997 Based on the critically Lothaire Bluteau, Clive
acclaimed play Owen, Brian Webber, Ian
McKellen, Mick Jagger
Tomorrow Never Dies(2)...... December 1997 Latest installment of the Pierce Brosnan, Jonathan
James Bond series Pryce, Michelle Yeoh, Teri
Hatcher, Joe Don Baker,
Judi Dench
Welcome to Woop Woop........ January 1998 Twisted road comedy from the Johnathon Schaech, Rod
director of "The Adventures Taylor, Susie Porter, Dee
of Priscilla, Queen of the Smart
Desert"
Hurricane Streets........... January 1998 Disturbing look at modern- Brendan Sexton III, Shawn
day youth Elliott, Jose Zuniga
Music From Another Room..... February 1998 Romantic comedy about a Jude Law, Jennifer Tilly,
man's search for his one Martha Plimpton, Brenda
true love Blethyn
The Man in the Iron Mask(2). February 1998 Period piece based on the Leonardo DiCaprio, Jeremy
Alexandre Dumas novel Irons, John Malkovich,
Gerard Depardieu, Gabriel
Byrne
Storefront Hitchcock........ March 1998 Concert/performance movie Robyn Hitchcock
directed by Academy Award-
winning director, Jonathan
Demme
I Love You Don't Touch Me... April 1998 A bold romantic comedy Marla Schaffel, Mitchell
Whitfield, Meredith Scott
Lynn, Michael Harris
Dirty Work(1)............... April 1998 Comedy about the revenge Norm Macdonald, Chevy Chase,
business Jack Warden, Don Rickles,
Chris MacDonald, Artie
Lange, Taylor Howard
Species II(1)............... May 1998 Sequel to the successful Michael Madsen, Marg
1995 film Helgenberger, Natasha
Henstridge, Mykelti
Williamson, Justin Lazard,
James Cromwell,
George Dzundza
</TABLE>
- --------
(1) Developed and produced by MGM Pictures.
(2) Developed and produced by UA Pictures.
46
<PAGE>
The Company may revise the release date of a motion picture as the
production schedule changes or otherwise to maximize revenues. Additionally,
there can be no assurance that any of the motion pictures scheduled for
release will be completed, that completion will occur in accordance with the
anticipated schedule or budget, or that the motion pictures will necessarily
involve all of the creative talent listed above. See "Risk Factors--Risks of
Motion Picture and Television Production."
TELEVISION PRODUCTION
Through MGM Worldwide Television, Inc., a subsidiary of MGM Studios, the
Company is engaged in the development and production of episodic television
series, mini-series and movies for distribution on domestic and international
television networks, local independent and network-affiliated television
stations, pay television networks, basic cable networks and home video. Since
the re-establishment of its television series production operations in 1994,
the Company has obtained commitments for approximately 625 hours of television
programming, of which approximately 50 percent remained to be aired as of
September 30, 1997. Historically, the Company's television activities were
focused on the traditional network production business and made-for-television
movies, and many of the television programs in the Library were produced as
network series. Since the networks have been able to substantially lower the
license fees as a percentage of the budget for network television programming
in recent years, resulting in significantly larger production investment risks
for the producers of such programming, the Company altered its television
strategy in 1994 when the Company's management re-established the Company's
television series production operations. See "The Industry."
Since 1994 the Company has focused primarily on the development and
production of series for the first-run syndication business, which involves a
lower production investment risk for the Company, and movies and mini-series
for both network and off-network broadcasters. The Company's strategy is
designed to (i) minimize up-front capital investment through the production of
series for the first-run syndication business and through co-production
arrangements, (ii) minimize risks associated with large deficit financing by
developing product such as two-hour movies or mini-series that generally offer
stable, predictable cash flows, (iii) use valuable Library assets such as The
Outer Limits, Poltergeist, Stargate, All Dogs Go to Heaven, Fame and The
Magnificent Seven to develop recognizable products with enhanced marketability
at a reduced cost and (iv) develop alternative types of programming, such as
animated cartoon strips, talk shows, variety shows and reality-based
programming such as LAPD--Life on the Beat.
As part of its strategy, the Company entered into a programming arrangement
with Showtime whereby the Company provides television series and movies for
premiere on Showtime. Showtime has agreed to license exclusive U.S. pay
television rights to the following television series: (i) 110 one-hour
episodes (five seasons) of The Outer Limits (winner of the Cable Ace award for
Best Dramatic Series in 1995 and 1996) of which 44 episodes remained to be
aired as of September 30, 1997; (ii) 88 episodes (four seasons) of
Poltergeist: The Legacy of which 44 episodes remained to be aired as of
September 30, 1997; (iii) 44 episodes (two seasons) of Stargate-SG1 of which
32 episodes remained to be aired as of September 30, 1997; (iv) 44 episodes
(two seasons) of a series to be developed by the Company to air beginning in
2000; and (v) 22 episodes (one season) of a series to be developed by the
Company to air beginning in 2001. Showtime has also agreed to license
exclusive U.S. pay television rights to ten original television movies to be
produced by the Company for premiere on Showtime in the years 1997 through
2003. The production budgets for the movies are between $2.5 million and $5
million and will be funded jointly by the Company and Showtime.
Additionally, the Company has obtained a commitment to license 40 episodes
of All Dogs Go to Heaven, a one-half hour animated series, of which 14
episodes are scheduled to air beginning in fall 1998. Furthermore, the Company
has cleared 44 episodes (two seasons) of Fame L.A. with individual television
stations in markets throughout the country comprising approximately 90 percent
of television households.
The Company recently expanded its focus to produce series for network
television on a selective basis, which typically require deficit financing but
generally offer the potential for greater financial return. In its first sale
of a series to network television since 1994, the Company has produced a two-
hour pilot of The Magnificent Seven and obtained a commitment from CBS for
such pilot and six additional one-hour episodes.
47
<PAGE>
DISTRIBUTION
THEATRICAL DISTRIBUTION
General. The initial step in the release of a motion picture is the booking
of engagements with theatrical exhibitors. The exhibitors retain a portion of
the admissions paid at the box office, which generally includes a fixed amount
per week, as well as a percentage of the admissions that escalates over time.
A studio's or other producer's (or third party distributor's) share is
approximately 50 percent of gross box office admissions, although such
percentage, which has generally decreased in recent years, varies depending
upon factors such as the number and box office performance of such studio's or
other producer's recent releases. Although the lack of production during the
Sale Period may have adversely affected the Company's relationship with major
domestic exhibitors, the Company believes that its exhibitor relationships and
negotiated share of box office receipts will improve to the extent that it
achieves box office success with the films in its new release slate.
The Company intends to release a slate of films appealing to a wide variety
of audiences. By strategically timing the release of its motion pictures
throughout the year, the Company intends to avoid some of the risks posed when
a motion picture is inappropriately released during the most crowded and
competitive box office seasons. The Company believes that this strategy is
unlikely to have a negative impact on its ability to generate home video
rentals.
All motion pictures that are released theatrically by the Company in the
U.S. and Canada, whether produced by MGM Pictures or UA Pictures or third
parties, are marketed and distributed by Metro-Goldwyn-Mayer Distribution Co.
Additionally, the Company generally distributes its motion pictures in
theatrical markets outside of the U.S. and Canada through UIP, a partnership
owned equally by the Company, Paramount and Universal. UIP is the world's
largest theatrical motion picture distribution company outside the U.S., with
distribution activities in over 50 countries. UIP has a cost sharing
arrangement that requires each partner to be responsible for one-third of
UIP's annual operating overhead. UIP charges each partner a distribution fee
of 35 percent of gross theatrical receipts until the fee equals one-third of
the annual operating costs of the partnership, and thereafter a negotiated
percentage of any additional gross receipts as a fee for incremental use of
the organization. Each partner bears all of its own releasing costs and
retains all cash flow from its pictures after payment of fees. See "--
Regulation."
The Company can elect to withdraw from UIP on November 1 of any year with at
least one year's prior notice (although the Company has no current intention
to withdraw). If the Company, or either other partner, withdraws, that partner
is entitled to one-third of the book value of UIP less one-third of the
estimated winding down costs of the partnership. Both Universal and Paramount
have agreed not to withdraw from the partnership until after 2001; however,
the Company believes that either party's exit from UIP would not have a
material adverse effect on the Company's financial condition or results of
operations, as the Company would expect to distribute its motion pictures in
these territories by either modifying and downsizing the UIP structure or
finding or developing satisfactory alternative methods for international
distribution. There can be no assurance, however, that such alternatives would
not result in decreased revenues or profitability. The partners are prohibited
from transferring their respective partnership interests.
Co-Production and Distribution Agreements. In addition to producing feature
motion pictures independently, the Company occasionally enters into co-
production agreements under which the Company retains certain distribution
rights with respect to a picture and shares the cost of production with a
partner that obtains other rights (generally outside of the U.S. and Canada).
While such agreements limit the Company's risk relating to a motion picture's
performance as they reduce the Company's production costs, such agreements
also limit profitability. The Company also acquires rights to distribute films
through negative pickup arrangements under which the Company acquires a
completed motion picture, or certain rights therein, from a third party. Under
co-production or negative pickup arrangements, the Company may be committed to
spend specified amounts for prints and advertising. Additionally, the Company
occasionally enters into "rent-a-system" arrangements under which the Company
provides distribution services to an independent film company for a percentage
distribution fee. Under rent-a-system arrangements the independent film
company generally is
48
<PAGE>
responsible for all print and advertising costs. These types of arrangements
may be entered into before, during or after production of a particular motion
picture.
Theatrical Marketing. The Company's theatrical marketing department consists
of five functional groups: research, media planning, advertising, promotion
and publicity. The objective of the marketing department is to maximize the
Company's ROI on each motion picture by designing and implementing a marketing
campaign tailored to appeal to the picture's most receptive audience. The
marketing process begins with research before a motion picture is completed.
The research department determines, through audience screenings and focus
groups, a motion picture's appeal to its most likely target audience. The
marketing group begins to develop media plans and marketing materials well in
advance of a motion picture's scheduled theatrical release. The media campaign
generally begins six months before release with the circulation of teaser
trailers, posters and exhibitor advertising materials. The campaign becomes
more aggressive two to three months before release as full-length trailers are
released in theaters and more significant materials are sent to exhibitors.
Finally, a national campaign is launched four to five weeks before opening
day. This media campaign generally involves advertising a picture's release on
national television, including network prime time and syndication markets,
national cable and radio and in magazines, newspapers and specific target
markets, such as colleges. In addition, public appearances, such as television
talk shows, are arranged for a picture's stars in order to promote the film.
The entire process is managed by the Company's in-house staff, although
outside agencies are frequently retained to provide creative input.
HOME VIDEO DISTRIBUTION
The Company's marketing and distribution strategy in the home video market
domestically and internationally is to (i) market its motion picture and
television titles in cohesive packages, (ii) create branded product lines,
(iii) adapt to a maturing home video market and (iv) release new motion
pictures into the home entertainment market at the time of the year that it
believes will generate the most sales without diminishing revenues from other
markets. Under current management, the Company has repackaged and repriced a
number of Library titles. The Company believes this has resulted in increased
shelf space in video retail stores and that this increased visibility has led
to increased sales. For example, the Company recently experienced increased
sales with the packaging of groups of titles from the Rocky franchise.
Additionally, the Company will release Library films, or groups of Library
films, in connection with new films which it releases into the market, in
order to increase sales of both Library films and new releases. An example is
the recent James Bond video campaign, under which the 16 Bond films then in
the Library were remastered and repackaged into two sets of videos. The first
set was introduced in connection with the theatrical release of GoldenEye, in
order to capitalize on public awareness. The second set was introduced in
connection with the release of GoldenEye on video. The Company intends to
continue this strategy of packaging groups of films or film franchises and
releasing them in connection with the releases of its most highly visible new
films. Additionally, the Company intends to utilize new formats for home video
sales, such as the successful "infomercials" for James Bond and Elvis Presley
videos, the first in the motion picture business.
MGM Home Entertainment Inc. ("Home Entertainment") manages the marketing and
distribution of both current feature motion pictures and Library product of
MGM Studios and its subsidiaries in the home video and other home
entertainment markets. In addition, the Company has an agreement with Turner
pursuant to which the Company distributes the Turner library, the Old MGM
Library and all pre-1949 Warner titles in worldwide home video markets, for a
total of approximately 2,950 titles. The Company's rights under this agreement
with Turner expire in June 2001. As more fully described below, these titles
as well as the current pictures and Library product of MGM Studios and its
subsidiaries, and any theatrical motion picture in which MGM Studios or, with
certain exceptions, one of its affiliates acquires home video rights, are
serviced pursuant to the WHV Agreement.
In 1990, as part of the acquisition of MGM/UA by Pathe, MGM-Pathe (the
predecessor in interest to MGM Studios), MGM/UA and UA Pictures, Inc.
(collectively, the "Parties") entered into the WHV Agreement with WHV. Under
the WHV Agreement, the Parties have granted to WHV certain home video
distribution rights with respect to new motion pictures and the motion picture
library of MGM/UA, UA and their respective affiliates, subject to certain
limited exceptions, throughout the world for a distribution fee expressed as a
percentage of
49
<PAGE>
worldwide home video revenues (as determined under the WHV Agreement) and
reimbursement of certain distribution expenses. In general, the percentage
varies from 10 percent to 15 percent based upon the amount of worldwide home
video revenues in any calendar year and other factors. MGM Studios and its
affiliates maintain direct control of all significant elements of distribution
such as the determination of release dates, marketing, return policies and
pricing for these home video releases. Laser disc and digital video disc
("DVD") distribution rights are also covered by the WHV Agreement.
The WHV Agreement expires in May 2003, with the home video rights of each of
the films still covered by the WHV Agreement at that time reverting to MGM
Studios or its affiliates five years after the film's initial availability in
the U.S. home video market. Management believes that the Company will be able
to manage home video distribution in a more cost-effective manner and increase
sales and profitability upon the expiration of the WHV Agreement. Even with
the agreement in effect, the Company's home video sales have increased since
1993. From 1993 to 1996, the Company increased its worldwide home video gross
revenue from feature films by 145 percent, from $243.0 million to $595.1
million. The Company believes that this increase is a result of more effective
and efficient marketing by the Company, the renegotiation by the Company of
key vendor relationships and a reorganization of the Company's distribution
infrastructure.
The WHV Agreement provides that it applies (with certain exceptions
discussed below) to (i) all motion pictures owned or controlled by the Parties
or their affiliates prior to the date of the WHV Agreement, (ii) new motion
pictures financed, developed, produced, owned and/or acquired by the Parties
or any of their present or future affiliates during the term of the agreement
and (iii) all other motion pictures as to which the Parties or any of their
present or future affiliates own, control or acquire any home video rights
during the term of the agreement. In general, the WHV Agreement requires that
the Parties and their present and future affiliates acquire home video rights
for any motion picture in which they acquire theatrical and/or television
rights throughout the world, unless WHV otherwise agrees. With respect to
licenses existing on such product prior to the date of acquisition, the
Parties have agreed to allow such rights to expire or terminate such rights
when and to the extent permitted. The Parties have limited termination rights
for WHV's failure to make certain payments or to provide certain accountings.
Currently, Orion manages the marketing and distribution of both current
feature motion pictures and library product of the Orion Companies in the home
video markets, except for the current feature motion pictures and library
product of Goldwyn. Goldwyn has licensed to Hallmark Entertainment
Distribution Company, Inc. ("Hallmark") the right to distribute in the U.S.
home video market substantially all of the Goldwyn library and all feature
motion pictures produced or acquired by Goldwyn between May 1995 and April
2000. The term of Hallmark's license of each of its library pictures expires
on the later of five and a half years after the date of the picture's initial
availability in the U.S. home video market or Hallmark's recoupment of its
advance under the license, but no later than June 30, 2005. There is a maximum
license period for each of the current motion pictures of five and a half
years from the date on which the picture is first available to be sold in the
U.S. home video market and a maximum period of ten years from such
availability. In October 1997 the Company and Hallmark reached an agreement in
principle to terminate the Hallmark license. The Company believes that such
termination will not have a material impact on the Company.
The WHV Agreement expressly provides that WHV's rights do not extend to,
among other things, motion pictures owned, produced or released by another
major studio in the event that any of the Parties or any of their affiliates
acquires control of any such major studio (so long as substantially the same
quality and quantity of motion pictures are produced that are covered by the
WHV Agreement following the acquisition as prior to the acquisition) and
specifically names Orion as well as others as major studios. Despite this
provision, MGM Studios has received correspondence from WHV alleging that the
Orion Companies' future production and library is subject to the WHV
Agreement. The Company has responded by referring to the express Orion
exclusion and is currently in discussions with WHV about this matter. No
assurance can be made as to the outcome of this matter. To the extent that the
future production and library films of the Orion Companies, or any future
affiliate of MGM Studios, were determined to be subject to the WHV Agreement,
there would likely be a reduction in the revenue and profits from the
distribution of that product.
50
<PAGE>
The Company intends to capitalize on developing technologies such as DVD, a
high-quality mass-produced delivery system for video and audio data. The
Company believes that DVD is a promising technology that could generate
significant incremental profits for the industry because the cost of
manufacturing DVDs is substantially less than the cost of manufacturing
videocassettes and the format may be more attractive to retail purchasers than
videocassettes. The Company was among the first major studios to make titles
available on DVD. The Company believes that it is well positioned to benefit
if DVD is successful, since the high quality of DVD is expected to create
additional demand for the many classic or familiar "collectible" titles in the
Library. As DVD is a developing technology, it is uncertain when and if DVD
will become viable and, therefore, the Company does not anticipate that it
will receive any material incremental revenue from DVD in the near future.
PAY AND FREE TELEVISION DISTRIBUTION
General. The Company generally licenses its current theatrical motion
pictures for pay and free television through output agreements pursuant to
which films not yet produced are pre-licensed for a specified fee paid on
delivery. The Company believes that output agreements with international
distributors with recognized expertise are beneficial as they assure that a
significant advance will be received for a given territory and that a
prominent distributor with recognized distribution and marketing capabilities
will distribute the picture in such territory. The Company currently has a
long-term output agreement with a subsidiary of Seven. See "Certain
Transactions--Other Transactions with Seven and its Affiliates."
The Company does not intend to enter into any new long-term licensing
arrangements for its Library films as it believes that this would limit the
ability of the Company to respond quickly to changing marketplace needs, would
tie future revenue to current price levels and could decrease the value of the
Library. Instead, the Company expects to enter into relatively short-term
licenses of its Library motion pictures for pay and free television in
packages that are strategically designed for the relevant marketplace. The
Company has created a proprietary database for use by its salesforce which
contains detailed information on each of the Company's films, including dates
of availability, media controlled by the Company, sales history, genre,
format, length, stars, soundtrack, etc. This information can be utilized by
the sales force in order to create strategically designed packages of motion
pictures based on one or more various criteria. The Company believes that this
system is the most advanced in the entertainment business and provides its
sales force with an advantage in a competitive marketplace that requires large
amounts of diverse content and is becoming more receptive to packaged
programming.
Previously, the Company had distributed its motion pictures in pay
television markets outside of the U.S. and Canada through UIP. However, as
part of an agreement reached between UIP and the competition authorities of
the European Union in 1997, UIP agreed that it will no longer engage in the
licensing or marketing of motion picture product for pay television, and the
Company now licenses its motion pictures to such markets directly. See "--
Regulation."
Domestic Pay Television. The Company and Showtime have entered into a
theatrical motion picture output agreement requiring the Company's future
theatrical motion pictures to air on Showtime's pay television network. The
first output period expires upon the first to occur of August 31, 2001 or the
delivery of 150 pictures (other than specialty pictures) under the agreement.
As of August 1, 1997, the Company had delivered 25 pictures to Showtime. The
second output period commences on September 1, 2001 and expires upon the first
to occur of December 31, 2003 or the delivery of 65 additional pictures (other
than specialty pictures). Additionally, the agreement requires the Company's
future specialty motion pictures to air on Showtime's pay television network.
The output period for specialty motion pictures expires upon the first to
occur of December 31, 2003 or the delivery of 50 independent motion pictures.
The license fees for each picture are determined according to a formula based
on U.S. theatrical rentals of such picture.
Orion and Home Box Office ("HBO") have entered into a theatrical motion
picture output agreement requiring future theatrical motion pictures produced
and distributed by the Orion Companies (excluding pictures produced by Goldwyn
and distributed under the Goldwyn logo) to air on HBO's pay television
network. The
51
<PAGE>
license fees for each picture are determined according to a formula based on
U.S. theatrical rentals of such picture. The agreement expires on December 31,
2001, but HBO has the right to extend the agreement through December 31, 2006.
Goldwyn is not a party to any significant pay television licensing
agreements.
Domestic Free Television. The Company distributes its feature motion
pictures to U.S. and Canadian networks, local television stations in the U.S.
and Canada and basic cable networks. The Company also generates revenue by
granting syndication licenses on a barter basis. Barter syndication allows the
television stations to license the Company's product in exchange for a portion
of the local commercial air time. The Company, in turn, sells the inventory of
commercial air time to advertisers on a national basis, while the television
stations retain a portion of the commercial air time for local advertisers.
The Company has used outside barter companies to sell television spots to
advertisers in the past, but the Company commenced its own barter sales
business in 1996.
In connection with the acquisition of MGM/UA by Pathe in November 1990, MGM-
Pathe licensed the domestic free television rights to a substantial portion of
its library (the UA library and the post-1986 MGM/UA titles in theatrical
release at the time) and selected television programs to Turner for a period
of ten years beginning from the availability of each such product in that
market. The license excludes motion pictures released theatrically after 1987.
With respect to most of the motion pictures and television programming covered
by the license, the domestic free television rights revert to the Company
between 2000 and 2003. The Company expects to receive relatively little
revenue from the licensing of the product covered by the agreement with Turner
in the domestic free television market until 2000. The Company believes that,
due to the significant increases in licensing fees for domestic television
since 1990, the expiration of the Turner license and the subsequent ability of
the Company to freely license the Library in this market will generate
incremental revenue for the Company. See "Risk Factors--Certain Limitations on
the Exploitation of the Library."
International Pay and Free Television. The Company currently distributes its
motion pictures through pay television licenses in over 90 territories. The
Company has output agreements with licensees in major territories, including
the United Kingdom, Spain, Italy, Germany, Japan and Brazil. In 1996 the
Company received $24.3 million in revenue from international pay television
distribution, accounting for two percent of the Company's total revenue for
the year.
The Company currently distributes its motion pictures and television product
through free television licenses in over 100 territories. In 1996 the Company
received $54 million in revenues under these agreements, accounting for five
percent of the Company's total revenues for the year. These license
arrangements typically provide licensees with the right to exhibit the motion
pictures licensed on television for a specific number of airings over a period
of three to seven years.
However, in connection with the acquisition of MGM/UA by Pathe in November
1990, MGM-Pathe entered into long-term licenses of pay and free television
rights for theatrical and television movies and, in some cases, television
series in its Library at that time with United Communications (France) and
F.O.R.T.A. (Spain). A similar agreement had been entered into in 1984 with
Degeto Film (Germany). Substantially all of the license fees under these long-
term licenses have already been paid to the Company, and, therefore, the
Company does not expect to receive significant revenue from these licenses in
future periods. With respect to most of the motion pictures licensed to United
Communications, the rights granted revert to the Company between 2000 and
2003. The James Bond features were excluded from such license. With respect to
most of the motion pictures licensed to F.O.R.T.A., the free television rights
revert to the Company between 1997 and 2000. With respect to most of the
motion pictures and television series licensed to Degeto, the distribution
rights granted revert to the Company between 1999 and 2010. See "Risk
Factors--Certain Limitations on the Exploitation of the Library."
Additionally, Orion has entered into certain long-term licenses covering a
significant number of its library motion pictures in the international free
and pay television markets. Orion has already received substantially all
52
<PAGE>
of the license fees under these licenses, and therefore, the Company does not
expect significant revenue from these licenses in future periods. Orion has
licensed titles to Capitol Film and TV International (Germany), Compagnie
Luxembourgeoise de Telediffusion (France), British Sky Broadcasting (the
United Kingdom), Film Finance Group, Inc. and Principal Network Limited
(Italy) and Televisio de Catalunya, S.A. (Spain). The distribution rights
granted to Capitol Film and TV International revert to Orion in 2025. The
distribution rights granted to Compagnie Luxembourgeoise de Telediffusion
revert to Orion between 2003 and 2013. The distribution rights granted to
British Sky Broadcasting currently are reverting to Orion, with such reversion
being complete in 2002. The distribution rights granted to Film Finance Group,
Inc. and Principal Network Limited revert to Orion between 1999 and 2012. The
distribution rights granted to Televisio de Catalunya, S.A. currently are
reverting to Orion, with such reversion being complete in 2010. The Company
believes that, due to the importance of France, Spain, Germany, the United
Kingdom and Italy and the significant increases in licensing fees for
television in these markets since 1990, the expiration of these licenses and
subsequent ability of the Company to freely license its Library in these
markets will create substantial incremental revenue for the Company.
The MGM/UA and Orion licenses discussed above (in "--Domestic Free
Television" and "--International Pay and Free Television") cover many of the
most valuable motion pictures in the Library. Although the Company exploits
the remaining titles in the Library in these markets, they do not generate
significant revenues.
In addition to licensing packages of films, the Company holds equity
positions ranging from 12.5 percent to 25 percent in joint ventures such as
CineCanal, Telecine, Star Channel (through UIP) and MovieVision, which are
emerging international cable television networks broadcasting in different
territories around the world. The Company has entered into license agreements
with respect to each of CineCanal, Telecine, Star Channel and MovieVision,
licensing theatrical and television motion pictures and, in some cases,
television series to each of the ventures.
The Company believes its strategy of providing strategically pooled, branded
MGM programming through the licensing of programming packages to cable
networks and television broadcasters, as well as through the development of
new channels of distribution that deliver the Company's programming, will
provide opportunities in the international marketplace as foreign countries
continue to develop cable television infrastructures and satellite television
becomes more available.
In June 1996 the Company announced the creation of MGM Gold (Asia), a 24-
hour satellite and cable delivered Hollywood entertainment television channel
serving various Asian markets, featuring programming from the Library. MGM
Gold (Asia) is a joint venture between the Company and an indirect subsidiary
of Tele-Communications, Inc. in which each of the joint venturers shares
equally in the profits of the venture and is obligated to fund 50 percent of
the joint venture's expenses up to a maximum of $23.3 million each. As of
September 30, 1997, the Company had contributed $8.6 million to fund such
expenses. MGM Gold (Asia) commenced operations in Hong Kong in November 1996.
As of September 30, 1997 MGM Gold (Asia) was being delivered to approximately
one million subscribers in Hong Kong, Indonesia, Malaysia, the Philippines,
Singapore and Taiwan, and had authorization to deliver in various hotels in
the People's Republic of China. MGM Gold (Asia) intends to launch in Thailand
within the next twelve months. The Company has entered into license agreements
with MGM Gold (Asia), licensing certain motion pictures and trademarks to the
venture.
The Company plans to launch MGM Gold branded programming in Brazil in
December 1997. The Company is entering into agreements with two of the largest
cable delivery systems in Brazil that will allow the Company to deliver MGM
Gold programming 24 hours a day to over 90 percent of the cable households in
that country.
TRADEMARKS AND CONSUMER PRODUCTS
The Company owns the registered trademarks Metro-Goldwyn-Mayer, MGM, United
Artists, UA, Orion and variations thereof, as well as trademarks, logos and
other representations of characters, such as The Pink
53
<PAGE>
Panther, from motion pictures and television series produced or distributed by
the Company. In 1996, the Company received $8.3 million in revenue from the
licensing of these trademarks, logos and other representations.
The Company believes that the MGM name and its lion logo are among the most
recognized in the world, evoking images of classic Hollywood. The Company
believes that the name and logo represent assets the value of which has been
substantially unrealized in the past. The Company plans to pursue a focused
branded strategy that will capitalize upon the Company's name and logo and
seek licensing opportunities for such name and logo, as well as other
trademarks of the Company, in a range of high quality product categories
(including gifts and apparel), distribution channels and venues (e.g.,
location-based entertainment, such as theme restaurants and theme parks) in
both the domestic and the international markets.
In February 1980 Old MGM granted MGM Grand Inc. ("Grand Hotel") an exclusive
open-ended royalty-free license to use certain trademarks and trade names that
include the letters "MGM," as well as logos consisting of a stylized depiction
of a lion, in Grand Hotel's hotel/gaming business and businesses that are not
entertainment-related. In 1986 MGM/UA granted MGM Grand Air, Inc. ("Grand
Air") an exclusive open-ended royalty-free license to use one of its logos
consisting of a stylized depiction of a lion in Grand Air's airline business.
See "Certain Transactions--Other Transactions with Tracinda and its
Affiliates."
In June 1985 Old MGM granted to Walt Disney Productions ("Disney
Productions") an exclusive long-term worldwide license (the "Disney License")
to use all trademarks, trade names and logos of MGM Studios that do not
include "United Artists" or "UA" and portions from certain MGM and UA motion
pictures and television programming in movie theme parks of Disney Productions
that include a working movie production studio, as long as Disney Productions
makes the annual license payments. The Disney License becomes non-exclusive
with respect to the licensed trademarks, trade names and logos on May 1, 2004
and is subject to early termination under certain circumstances. Additionally,
if Disney Productions did not develop a movie theme park in any given
territory by June 27, 1994, the Disney License requires that Disney
Productions reconvey all the licensed rights in that territory to MGM Studios.
MGM Studios has requested the reconveyance of the licensed rights in all
territories except the U.S., and Disney reconveyed those rights in 1995 for
all territories except the U.S. and Western European territories in 1995. The
Company filed a lawsuit against Disney to compel the reconveyance of the
licensed rights in Western Europe and for termination of the Disney License,
and has recently received a jury verdict in its favor with respect to the
rights in Western Europe. See "--Legal Proceedings."
COMPETITION
Motion picture production and distribution are highly competitive
businesses. The Company faces competition from companies within the
entertainment business, as well as alternative forms of leisure entertainment.
The Company competes with the other major studios, numerous independent motion
picture and television production companies, television networks and pay
television systems for the acquisition of literary properties, the services of
performing artists, directors, producers and other creative and technical
personnel and production financing. Numerous organizations with which the
Company competes in the motion picture industry have significantly greater
financial and other resources than does the Company, while the independent
production companies may have less overhead than the Company. Most of the
other major studios are part of large diversified corporate groups with a
variety of other operations, including television networks and cable channels,
which can provide both means of distributing their products and stable sources
of earnings that offset the fluctuations in the financial performance of their
motion picture and television operations. See "Distribution--Pay and Free
Television Distribution."
In addition, the Company's motion pictures compete for audience acceptance
and exhibition outlets with motion pictures produced and distributed by other
companies. As a result, the success of any of the Company's motion pictures is
dependent not only on the quality and acceptance of a particular picture, but
also on the quality and acceptance of other competing motion pictures released
into the marketplace at or near the same time. The number of films released by
the Company's competitors, particularly the other major film studios, in any
given
54
<PAGE>
period may create an oversupply of product in the market, thereby potentially
reducing the Company's share of gross box office admissions and may make it
more difficult for the Company's films to succeed. See "Risk Factors--Risks of
Motion Picture and Television Production."
Competition also is intense within the television industry. There are
numerous suppliers of television programming, including the networks, the
television production divisions of the major studios and independent
producers, all of which compete actively for the limited number of available
broadcast hours. The Company's programming competes with first-run
programming, network reruns and programs produced by local television
stations. Competition is also intense in supplying motion pictures and other
programming for the pay television and home video markets. Numerous
organizations with which the Company competes in the television industry have
significantly greater financial and other resources than does the Company. See
"Risk Factors--Risks of Motion Picture and Television Production."
EMPLOYEES
As of September 30, 1997, the Company had approximately 920 full-time and
part-time regular employees in its worldwide operations. Of that total,
approximately 135 were primarily engaged in production and development,
approximately 310 were primarily engaged in sales, marketing and distribution
and approximately 475 were primarily engaged in management and administration.
Approximately 150 of the Company's employees are currently covered by
employment contracts. The Company also hires additional employees on a
picture-by-picture basis in connection with the production of the Company's
motion pictures and television programming. The salaries of these additional
employees, as well as portions of the salaries of certain full-time employees
of the Company who provide direct production services, are typically allocated
to the capitalized cost of the related motion pictures or television
programming.
Approximately 45 of the Company's employees are represented under industry-
wide collective bargaining agreements with various unions, including the WGA,
the DGA, SAG and IATSE. A strike, job action or labor disturbance by the
members of any of these organizations may have a material adverse effect on
the production of a motion picture or television program within the U.S. The
Company believes that its employee and labor relations are good.
PROPERTIES
The Company leases approximately 300,000 square feet of office space, as
well as related parking facilities, for its corporate headquarters in Santa
Monica, California under several leases which generally expire in May 2003.
The Company also leases approximately 27,000 square feet in New York City for
its East Coast theatrical, publicity, marketing and theatrical and television
distribution offices under a lease that expires in June 2004. Additionally,
the Company leases approximately 96,000 square feet of office space in Los
Angeles, California, which has been used by Orion, under a lease that expires
in January 2004. The monthly rent for the above properties is approximately
$1.2 million in the aggregate (in addition to taxes, insurance and certain
expenses paid by the Company). The Company plans to sublease the office space
used by Orion as the operations of MGM Studios and Orion are integrated. In
addition, the Company maintains relatively small domestic theatrical and
television distribution branches in Boca Raton, Chicago, Montreal, San Juan
and Toronto and has small international television distribution offices in
London, Paris and Sydney. The Company also leases studio facilities and stages
from unaffiliated parties on an as-needed basis in connection with the
production of specific motion picture and television projects.
The Company believes that its current facilities are adequate to conduct its
business operations for the foreseeable future.
REGULATION
In 1994 the U.S. was unable to reach agreement with its major international
trading partners to include audiovisual works, such as television programs and
motion pictures, under the terms of the General Agreement
55
<PAGE>
on Trade and Tariffs Treaty ("GATT"). The failure to include audiovisual works
under GATT allows many countries (including members of the European Union,
which consists of Belgium, Denmark, Germany, Greece, Spain, France, Ireland,
Italy, Luxembourg, The Netherlands, Portugal and the United Kingdom) to
continue enforcing quotas that restrict the amount of U.S. produced television
programming which may be aired on television in such countries. The European
Union Council of Ministers has adopted a directive requiring all member states
of the European Union to enact laws specifying that broadcasters must reserve
a majority of their transmission time (exclusive of news, sports, game shows
and advertising) for European works. The directive does not itself constitute
law, but must be implemented by appropriate legislation in each member
country. In addition, France requires that original French programming
constitute a required portion of all programming aired on French television.
These quotas generally apply only to television programming and not to
theatrical exhibition of motion pictures, but quotas on the theatrical
exhibition of motion pictures could also be enacted in the future. There can
be no assurance that additional or more restrictive theatrical or television
quotas will not be enacted or that countries with existing quotas will not
more strictly enforce such quotas. Additional or more restrictive quotas or
more stringent enforcement of existing quotas could materially and adversely
affect the business of the Company by limiting the ability of the Company to
exploit fully its motion pictures internationally and, consequently, to
finance such motion pictures.
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the U.S. and most foreign countries, which laws provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. The Company seeks to take appropriate and
reasonable measures to secure, protect and maintain or obtain agreements to
secure, protect and maintain copyright protection for all of its motion
pictures or television programming under the laws of applicable jurisdictions.
Motion picture piracy is an international as well as a domestic problem.
Motion picture piracy is extensive in many parts of the world, including South
America, Asia (including Korea, China and Taiwan), the countries of the former
Soviet Union and other former Eastern bloc countries. In addition to the MPAA,
the Motion Picture Association, the American Film Marketing Association and
the American Film Export Association monitor the progress and efforts made by
various countries to limit or prevent piracy. In the past, these various trade
associations have enacted voluntary embargoes of motion picture exports to
certain countries in order to pressure the governments of those countries to
become more aggressive in preventing motion picture piracy. In addition, the
U.S. government has publicly considered trade sanctions against specific
countries which do not take steps to prevent copyright infringement of U.S.
produced motion pictures. There can be no assurance that voluntary industry
embargoes or U.S. government trade sanctions will be enacted. If enacted, such
actions could impact the amount of revenue that the Company realizes from the
international exploitation of its motion pictures depending upon the countries
subject to such action and the duration of such action. If not enacted or if
other measures are not taken, the motion picture industry (including the
Company) may continue to lose an indeterminate amount of revenues as a result
of motion picture piracy.
Article 85(1) of the Treaty of Rome prohibits certain agreements and
concerted practices which prevent, restrict or distort trade within the
European Union. In 1989 after several years of proceedings before the European
Commission, UIP received an exemption from Article 85(1) with respect to its
theatrical distribution activities in the European Union. In connection with
this exemption, UIP gave certain undertakings to the European Commission. The
1989 exemption expired in 1993 and, although UIP has filed an application
seeking renewal of such exemption, such renewal has not yet been granted. In
July 1996 the European Commission conducted unannounced visits of four of
UIP's offices in Europe, interviewing officers and copying documents. These
visits were based on complaints submitted to the European Commission by third
parties, to the effect that UIP was acting in an anti-competitive manner and
was not complying with certain of the undertakings given by it in connection
with receiving the 1989 exemption. There can be no assurances that the 1989
exemption will be renewed or renewed on terms acceptable to UIP. If the 1989
exemption is not renewed at all or not renewed on terms satisfactory to UIP
and UIP ceased operations, the Company believes that it would be able to find
or develop satisfactory alternative methods for international distribution.
See "Risk Factors--Importance of Third Party Relationships."
56
<PAGE>
The Code and Ratings Administration of the MPAA assigns ratings indicating
age-group suitability for theatrical distribution of motion pictures. The
Company has followed and will continue to follow the practice of submitting
its pictures for such ratings. As 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.
United States television stations and networks as well as foreign
governments impose content restrictions on motion pictures which may restrict
in whole or in part exhibition on television or in a particular territory.
There can be no assurance that such restrictions will not limit or alter the
Company's ability to exhibit certain motion pictures in such media or markets.
LEGAL PROCEEDINGS
MGM Pictures and UA Pictures are named defendants in a matter entitled
Estate of Jim Garrison, et al v. Warner Bros., Inc., et al, which was filed as
a putative class action in the Los Angeles County Superior Court in November
1995. Warner, Paramount, Fox, Universal, Sony, Columbia Pictures Inc., Disney,
Disney Productions, Touchstone Pictures Inc., Hollywood Pictures Inc., Tri-
Star Pictures Inc. and the MPAA were also named as defendants in the action.
The plaintiffs in the action are the heirs of Jim Garrison, the former New
Orleans District Attorney who wrote the book "On The Trail of the Assassins"
upon which the Warner film JFK was based. The action is a purported class
action against all of the major studios in which the plaintiffs claim that the
defendant studios had conspired to fix the price and terms of contingent
compensation payable by the studios to actors, directors, producers, writers
and other "rights holders" (collectively identified as "talent"), through the
use of "standard net profits" provisions in contracts entered into with
respect to motion pictures produced by the defendant studios between January
1, 1988 and the date of the complaint.
In December 1995 the defendants removed the Garrison action to the U.S.
District Court for the Central District of California. MGM Pictures and UA
Pictures have denied all of the material allegations of the complaint and have
asserted 33 separate and additional defenses. The other studio defendants have
similarly responded to the complaint. The court has denied class certification
with respect to the plaintiffs' claims for breach of contract, breach of
implied covenant, unjust enrichment, imposition of constructive trust and
declaratory relief, but has granted class certification with respect to the
plaintiffs' claims for price fixing under the Sherman Antitrust Act, price
fixing under state law, boycott/concerted refusal to deal under the Sherman
Antitrust Act and boycott/concerted refusal to deal under state law.
Discovery was recently commenced in the case, but no dispositive motions
have been filed. The plaintiffs have not yet quantified their claim for
damages, nor has the size and membership of the class been determined. Based
upon the information available to date, the Company's management does not
believe that any adverse determination in the Garrison matter is likely to
have a material adverse effect on the financial condition or results of
operations of the Company.
MGM Studios is a defendant in an action filed in the Los Angeles County
Superior Court in March 1994, entitled Parretti v. CLBN, MGM et al. The
complaint seeks damages totaling $3.9 billion dollars for breach of Mr.
Parretti's employment contract, rescission of certain pledge agreements
pursuant to which CLBN foreclosed on the stock of MGM/Pathe owned by Pathe,
injunctive relief to prohibit the sale or transfer of the MGM Studios' assets
or shares and indemnification for three pending lawsuits. MGM Studios' motions
for final judgment have been granted on all grounds, although a notice of
appeal was filed in August 1997 by Mr. Parretti. MGM Studios has
indemnification from liability in the Parretti proceeding from CDR.
Accordingly, the Company's management does not believe that any adverse
determination in the Parretti litigation will have any material adverse effect
on the Company's financial condition or results of operations.
In May 1996 MGM Studios initiated an action in Los Angeles County Superior
Court against Disney to compel the reconveyance of rights granted with respect
to Western European territories to Disney Productions
57
<PAGE>
under the Disney License. See"--Consumer Products." MGM Studios also claims
that Disney Productions' breach of the reconveyance obligation entitles MGM
Studios under the terms of the Disney License to terminate the Disney License
altogether. The Company believes that if the Disney License is terminated, the
loss of revenue to the Company will be minimal, and the Company may be able to
relicense or otherwise exploit these rights on more favorable terms. Trial
proceedings with respect to such action began in October 1997, and the Company
has recently received a jury verdict in its favor with respect to the Western
European rights. The time for Disney to file post-judgment motions or to
appeal has not yet elapsed. Additionally, the court has indicated that it will
grant summary judgment in favor of Disney on the claim that the Disney License
has been terminated; the Company may appeal such decision.
MGM Studios, as successor in interest to UA, is a defendant in an action
filed in the United States District Court for the Northern District of Georgia
entitled Turner Broadcasting System Inc., et al. v. Metro-Goldwyn-Mayer Inc.,
et al. Turner alleges that, as a result of the 1986 acquisition of Old MGM by
Turner, UA was unjustly enriched by reason of a tax benefit (loss) in excess
of $260 million to which Turner was entitled but was actually utilized by
Tracinda. Turner has moved to remand the action to the Fulton County Superior
Court, and that motion has yet to be decided. If the case is not remanded, it
is likely that it will be transferred to the United States District Court for
the District of Nevada, in which a similar action between Turner and Tracinda
currently is pending. Management believes that UA did not receive any benefit
from these transactions and accordingly that it is unlikely that the Turner
matter would have a material adverse effect on the Company's financial
condition or results of operations.
Certain subsidiaries of the Company are defendants in an action pending in
the Commercial Court of Brussels, Belgium entitled Credit General Foncier et
Mobilier S.A. ("Cregefon") et al. v. Canon International V.O.F., Canon
International N.V., Canon Film Distribution Nederland B.V. and Pathe
Entertainment N.V. The action involves a suit by the bankruptcy trustee of
Cregefon to recover a 1990 loan made to Canon International V.O.F., as a
depository for Comfinance S.A. (a company associated with Mr. Parretti). The
suit seeks damages of up to approximately $60 million. The Company has
indemnification from CDR with respect to this matter. As a result, management
believes that the Cregefon litigation will not have any material adverse
effect on the Company's financial condition or results of operations.
Orion is a defendant in a matter entitled Sidney Sapsowitz et al. v. John W.
Kluge, Metromedia International Inc., and Orion Pictures Corp., et al., which
was filed in June 1997. The plaintiffs claim a "finder's fee" of $28.5 million
in connection with the Orion Acquisition. There have been no material
developments in the Sapsowitz case to date. Pursuant to the terms of
agreements executed in connection with the Orion Acquisition, the Company has
indemnification from Metromedia International Group, Inc. ("MIG") with respect
to the payment of any finder's fee. As a result, management believes that the
Sapsowitz litigation will not have any material adverse effect on the
Company's financial condition or results of operations.
The Company is a defendant in an action entitled Samuel Goldwyn, Jr., et al.
v. Metro-Goldwyn-Mayer Inc., et al., pending in the Los Angeles County
Superior Court, which alleges claims for damages, injunctive and declaratory
relief for, among other things, fraud and deceit, breach of various
agreements, breach of fiduciary duty, trademark infringement, and unfair
competition. The complaint was served on the Company on October 30, 1997, and
no responsive pleading is due until December 1, 1997. The complaint seeks,
among other relief, damages in excess of $5 million, an injunction against the
defendants' use of the trademarks covered by the trademark license, injunctive
relief preventing the Company from using the "Goldwyn" name in connection with
the licensing or exhibition of any new film that has not been acquired by the
Company's Goldwyn subsidiary, termination of the distribution agreement,
unspecified punitive damages and attorneys' fees. The Company intends to
contest the litigation vigorously and believes that this action will not have
a material adverse effect on the Company's financial condition or results of
operations.
In addition, from time to time the Company becomes involved in other
litigation arising in the normal course of business, and the Company believes
that none of such other litigation as is currently pending will have a
material adverse effect on the Company's financial condition or results of
operations.
58
<PAGE>
MANAGEMENT
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company as of September 30, 1997. Each
director will hold office until the next annual meeting of stockholders or
until his or her successor has been elected and qualified. Executive officers
are elected by the Board of Directors and serve at the discretion of the Board
of Directors and Mr. Mancuso.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
Frank G. Mancuso... 64 Chairman of the Board, Chief Executive Officer
and Director
A. Robert Pisano... 54 Vice Chairman
James D. Aljian.... 64 Director
Michael R. Gleason. 43 Director
Kirk Kerkorian..... 80 Director
Kerry M. Stokes.... 57 Director
Alex Yemenidjian... 41 Director
Jerome B. York..... 59 Director
Michael G. 40 Senior Executive Vice President and Chief
Corrigan.......... Financial Officer
David G. Johnson... 41 Senior Executive Vice President and General
Counsel
William A. Jones... 55 Senior Executive Vice President and Secretary
</TABLE>
All members of the Board of Directors of the Company are elected annually by
the stockholders of the Company for a one-year term. The Common Stock does not
have cumulative voting rights. The Company, MGM Studios, Tracinda, Seven and
Mr. Mancuso are parties to an Amended and Restated Investors Shareholder
Agreement dated as of August 4, 1997 (the "Investors Shareholder Agreement")
pursuant to which they have agreed to vote their respective shares of the
Common Stock as a group with respect to certain matters, including, but not
limited to, certain corporate governance matters and the election of the Board
of Directors of the Company. See "Risk Factors--Ownership and Control of
Principal Stockholders" and "Ownership of Voting Securities--Investors
Shareholder Agreement."
BACKGROUNDS OF CURRENT DIRECTORS AND EXECUTIVE OFFICERS
Frank G. Mancuso. Mr. Mancuso has been the Chairman of the Board and Chief
Executive Officer of the Company since October 1996 and has been the Chairman
of the Board and Chief Executive Officer of MGM Studios since July 1993. Prior
to joining MGM Studios, Mr. Mancuso was the Chairman and Chief Executive
Officer of Paramount from September 1984 to March 1991, having served
Paramount in numerous other capacities beginning in 1963, and was an
entertainment industry consultant and private investor from March 1991 to July
1993.
A. Robert Pisano. Mr. Pisano will be appointed as a director and Vice
Chairman of the Board of Directors of the Company immediately following the
Offering. Mr. Pisano has served as Vice Chairman of the Company and MGM
Studios since March 1997 and, prior thereto, served as Executive Vice
President of MGM Studios from August 1993 to March 1997. Prior to joining MGM
Studios, Mr. Pisano was Executive Vice President of Paramount from June 1985
to May 1991, where he served as General Counsel and a member of the Office of
the Chairman. Prior to 1985 and from February 1992 to August 1993, Mr. Pisano
was a partner with the law firm of O'Melveny & Myers LLP.
James D. Aljian. Mr. Aljian has been a director of the Company since October
1996. Mr. Aljian has served as an executive of Tracinda since October 1987. In
addition, Mr. Aljian serves on the board of directors of MGM Grand, Inc. and
Chrysler Corporation.
Michael R. Gleason. Mr. Gleason has been a director of the Company since
October 1996. Mr. Gleason has served as President of MPK Capital, Inc., the
general partner of Culmen Group, L.P., a Texas limited
59
<PAGE>
partnership since November 1993. Culmen Group, L.P. regularly provides
financial advisory services to Seven. Prior thereto, Mr. Gleason served as
Vice President of PaineWebber Group, Inc. from February 1991 to November 1993.
Kirk Kerkorian. Mr. Kerkorian has been a director of the Company since
October 1996 and has had a professional relationship with MGM Studios for over
25 years. See "Background of the Company." Mr. Kerkorian has served as Chief
Executive Officer, President and sole director and shareholder of Tracinda for
more than the past five years. In addition, Mr. Kerkorian serves on the board
of directors of MGM Grand, Inc.
Kerry M. Stokes. Mr. Stokes has been a director of the Company since October
1996. Mr. Stokes has served as the Chairman of Australian Capital Equity Pty
Ltd, an Australian private holding company, for more than the past fifteen
years. Australian Capital Equity has various interests, including a
Caterpillar dealership, print and electronic media and investments in real
estate, industrial and other listed public companies. In addition, Mr. Stokes
has been the Chairman of Seven since June 1995.
Alex Yemenidjian. Mr. Yemenidjian became a director of the Company in
November 1997. Mr. Yemenidjian has served as the President of MGM Grand, Inc.
since July 1995, as Chief Operating Officer of MGM Grand, Inc. since June
1995, as Chief Financial Officer of MGM Grand, Inc. since May 1994 and was an
Executive Vice President of MGM Grand, Inc. from June 1992 to July 1995. Prior
thereto, Mr. Yemenidjian served as the Chairman of the executive committee of
MGM Grand, Inc. from January 1991 to June 1992, and as the President and Chief
Operating Officer of MGM Grand, Inc. from March 1990 to January 1991.
Mr. Yemenidjian has been a director of MGM Grand, Inc. since 1989. Mr.
Yemenidjian served as an executive of Tracinda from January 1990 to January
1997.
Jerome B. York. Mr. York has been a director of the Company since October
1996. Mr. York has served as the Vice Chairman of Tracinda since September
1995. Prior to joining Tracinda, Mr. York served as Senior Vice President and
Chief Financial Officer of IBM Corporation from May 1993 to September 1995 and
as a director of IBM Corporation from January 1995 to September 1995. Prior
thereto, Mr. York served as Executive Vice President-Finance and Chief
Financial Officer of Chrysler Corporation from May 1990 to May 1993 and as a
director of Chrysler Corporation from April 1992 to May 1993. In addition, Mr.
York serves on the board of directors of MGM Grand, Inc., Apple Computer, Inc.
and USA Waste Services, Inc.
Michael G. Corrigan. Mr. Corrigan has been Senior Executive Vice President
and Chief Financial Officer of the Company and MGM Studios since July 1997.
From 1978 until July 1997, Mr. Corrigan was with Price Waterhouse LLP, an
independent accounting firm, most recently as a senior partner with the
entertainment, media and communications practice group.
David G. Johnson. Mr. Johnson has been Senior Executive Vice President and
General Counsel of the Company and MGM Studios since June 1997 and, prior
thereto, was Executive Vice President and General Counsel of MGM Studios since
January 1995. From September 1990 until January 1995 Mr. Johnson was with the
law firm of White & Case, most recently as a partner in its Los Angeles
office.
William A. Jones. Mr. Jones has been Senior Executive Vice President and
Secretary of the Company and MGM Studios since June 1997 and, prior thereto,
served as Executive Vice President-Corporate Affairs and Secretary of MGM
Studios since January 1995. Mr. Jones served as Executive Vice President,
General Counsel and Secretary of MGM-Pathe and MGM Studios from May 1991 to
January 1995 and as General Counsel and Secretary of predecessors to the
Company since 1983. Mr. Jones was a director of MGM-Pathe from June 1991 to
January 1992.
DIRECTORS TO BE APPOINTED FOLLOWING COMPLETION OF THE OFFERING
It is anticipated that, promptly following the completion of the Offering,
three persons meeting the requirements of the NYSE for serving as independent
directors will be selected and, together with Mr. Pisano, added to the Board
of Directors.
60
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In November 1997 a Compensation Committee of the Board of Directors was
established, consisting of Mr. Stokes and Mr. Yemenidjian, and will be
responsible for administering the Company's stock incentive plans and
reviewing and making recommendations to the Board of Directors with respect to
employment agreements and the compensation of officers and key employees,
including the granting of options under the stock incentive plans. See "--
Executive Compensation" and "--Employment Agreements." During 1996 the Company
did not have a Compensation Committee of the Board of Directors. Messrs.
Mancuso and Pisano, as well as Mr. Michael Hope (who is no longer employed by
the Company), served on a Management Committee of the Company which, among
other things, was responsible for the functions of the Compensation Committee.
None of the executive officers of the Company served on the board of directors
or the compensation committee of any other entity, any of whose officers
served either on the Board of Directors or on the Management or Compensation
Committee of the Company.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors of the Company currently
consists of Mr. York and Mr. Gleason. Promptly following completion of the
Offering the Company shall cause the Audit Committee to consist of persons
meeting the requirements of the NYSE for serving as independent directors. The
function of the Audit Committee is to: (i) review and approve the selection
of, and all services performed by, the Company's independent auditors; (ii)
meet and consult with and receive reports from, the Company's independent
auditors, its financial and accounting staff and its internal audit department
regarding internal controls; and (iii) review and act with respect to the
scope of audit procedures, accounting practices and internal accounting and
financial controls of the Company.
EXECUTIVE COMMITTEE
Promptly following completion of the Offering, the Company shall create an
Executive Committee of the Board of Directors consisting of Messrs. Mancuso,
Pisano, Aljian, Gleason, Kerkorian and York.
61
<PAGE>
EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth the cash compensation
(including cash bonuses) paid or awarded by the Company for the fiscal year
ended December 31, 1996, to the Chief Executive Officer and the other four
most highly compensated executive officers of the Company who were serving as
executive officers at December 31, 1996 and certain other individuals who
would have been included among the four most highly compensated executive
officers of the Company, but for the fact that they were not serving as
executive officers of the Company at December 31, 1996 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -------------------------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL BONUS UNDERLYING ALL OTHER
POSITION SALARY ($) BONUS ($) COMPENSATION ($) INTERESTS (#)(1) OPTIONS (#)(2) COMPENSATION ($)
------------------ ---------- --------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Frank G. Mancuso........ $2,691,408 $750,000 $576,923(3) 811,756 1,745,680 $17,228,129(4)
Chairman of the Board
and Chief Executive
Officer
A. Robert Pisano........ 816,984 -- -- 243,544 523,754 1,800,706(5)
Vice Chairman
Michael S. Hope(6)...... 771,600 -- -- -- -- 1,800,969(7)
Executive Vice
President
David G. Johnson........ 482,893 122,692 -- 83,334 179,168 538,858(8)
Senior Executive Vice
President and General
Counsel
William A. Jones........ 467,238 -- -- 74,209 159,584 1,051,476(9)
Senior Executive Vice
President and Secretary
</TABLE>
- --------
(1) Represents the number of bonus interests granted pursuant to the Senior
Management Bonus Plan (as such term is defined below). If approved by the
stockholders, each bonus interest entitles the participant to receive up
to $24.00 under certain circumstances. See "--Incentive and Bonus Plans--
Senior Management Bonus Plan."
(2) Represents options granted under the 1996 Incentive Plan (as such term is
defined below, see "--Incentive and Bonus Plans--1996 Incentive Plan")
after giving effect to the cancellation and re-grant of options (described
under "--Incentive and Bonus Plans") as follows: 872,840, 261,877, 89,584,
and 79,792 Series A Options and 872,840, 261,877, 89,584, and 79,792
Series B Options granted to Messrs. Mancuso, Pisano, Johnson and Jones,
respectively.
(3) Represents the portion of the annual stock purchase payment paid to Mr.
Mancuso during the period of October 10, 1996 to December 31, 1996
pursuant to his employment agreement, out of the after-tax proceeds of
which he is required to purchase shares of the Common Stock at a purchase
price of $24.00 through December 31, 1997 and, thereafter, at the fair
market value of such shares. See "--Employment Agreements--Frank G.
Mancuso."
(4) Includes: $14,468,220 paid to Mr. Mancuso by CL in 1997 as additional
compensation as a result of the sale of MGM Studios to the Company (see
"--CL Payments"); $1,020,000 in cash and 63,751 shares of the Common Stock
(valued at $24.00 per share) paid or issued to Mr. Mancuso by the
Company in connection with the MGM Acquisition, the waiver of certain
rights under his prior employment
62
<PAGE>
agreement and the execution of his current employment agreement;
and $209,885 in life insurance premiums paid by the Company for the benefit
of Mr. Mancuso. See "--Employment Agreements--Frank G. Mancuso."
(5) Includes: $1,200,963 paid to Mr. Pisano by CL in 1997 as additional
compensation as a result of the sale of MGM Studios to the Company (see
"--CL Payments"); $235,343 in cash and 15,000 shares of the Common Stock
(valued at $24.00 per share) paid or issued to Mr. Pisano by the Company
in connection with the MGM Acquisition, the waiver of certain rights under
his prior employment agreement and the execution of his current employment
agreement; and $4,400 in life insurance premiums paid by the Company for
the benefit of Mr. Pisano. See "--Employment Agreements--A. Robert
Pisano."
(6) Mr. Hope, in addition to other duties, performed the duties of the Chief
Financial Officer of the Company and resigned from the Company effective
as of January 31, 1997. On July 1, 1997 Michael G. Corrigan was appointed
Chief Financial Officer of the Company. See "--Employment Agreements--
Michael G. Corrigan."
(7) Includes: $1,200,963 paid to Mr. Hope by CL in 1997 as additional
compensation as a result of the sale of MGM Studios to the Company (see
"--CL Payments"); $595,166 paid to Mr. Hope by the Company in connection
with Mr. Hope's election to terminate his employment with the Company as a
result of the MGM Acquisition; and $4,840 in life insurance premiums paid
by the Company for the benefit of Mr. Hope.
(8) Includes: $213,850 in cash and 13,542 shares of the Common Stock (valued
at $24.00 per share) paid or issued to Mr. Johnson by the Company in
connection with the MGM Acquisition, the waiver of certain rights under
his prior employment agreement and the execution of his current employment
agreement. See "--Employment Agreements--David G. Johnson."
(9) Includes: $416,178 in cash and 26,042 shares of the Common Stock (valued
at $24.00 per share) paid or issued to Mr. Jones by the Company in
connection with the MGM Acquisition and the termination of his prior
employment agreement; and $10,290 in life insurance premiums paid by the
Company for the benefit of Mr. Jones. See "--Employment Agreements--
William A. Jones."
Option Grants. The following table sets forth information with respect to
grants of employee stock options issued by the Company to the Named Executive
Officers for the fiscal year ended December 31, 1996. The Company did not
grant any stock appreciation rights during such fiscal year.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM ($)
-------------------------------------------------------- -----------------------
PERCENT OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR (%)(2) ($/SH) DATE 5% 10%
- ---- -------------- ------------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frank G. Mancuso........ 1,745,680 44.6% $24.00 10/1/2006 $26,348,371 $66,771,944
A. Robert Pisano........ 523,754 13.4 24.00 10/1/2006 7,905,266 20,033,496
Michael S. Hope......... -- -- 24.00 -- -- --
David G. Johnson........ 179,168 4.6 24.00 10/1/2006 2,704,267 6,853,144
William A. Jones........ 159,584 4.1 24.00 10/1/2006 2,408,676 6,104,059
</TABLE>
- --------
(1) Represents options granted under the 1996 Incentive Plan after giving
effect to the cancellation and regrant of options (described under "--
Incentive and Bonus Plans") as follows: 872,840, 261,877, 89,584, and
79,792 Series A Options and 872,840, 261,877, 89,584, and 79,792 Series B
Options granted to Messrs. Mancuso, Pisano, Johnson and Jones,
respectively.
(2) Based on a total of 3,914,944 employee stock options granted as of
December 31, 1996.
63
<PAGE>
The following table sets forth information with respect to the ownership and
value of options as of December 31, 1996 held by the Named Executive Officers.
No Named Executive Officer exercised any options in the fiscal year ended
December 31, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1996 OPTIONS AT DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
NAME EXERCISABLE (#)(1) UNEXERCISABLE (#)(2) EXERCISABLE ($)(1) UNEXERCISABLE ($)(3)
- ---- ------------------ -------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Frank G. Mancuso........ -- 1,745,680 $ -- $ --
A. Robert Pisano........ -- 523,754 -- --
Michael S. Hope......... -- -- -- --
David G. Johnson........ -- 179,168 -- --
William A. Jones........ -- 159,584 -- --
</TABLE>
- --------
(1) No options under the 1996 Incentive Plan were exercised during the fiscal
year ended December 31, 1996. Each outstanding option under the 1996
Incentive Plan is exercisable at $24.00 per share of the Common Stock,
generally vests over a period of five years and is not exercisable until
vested and, as to the outstanding Series A Options and Series B Options
(described below), until six months after completion of the Offering or
December 31, 2001, respectively, subject in each case to early vesting
and, depending on the circumstances, early exercisability in certain
events, including the death or permanent disability of the optionee,
termination of the optionee's employment under certain circumstances or a
Designated Change in Control of the Company (as defined in the 1996
Incentive Plan). See "--Incentive and Bonus Plans--1996 Incentive Plan."
(2) Represents options granted under the 1996 Incentive Plan after giving
effect to the cancellation and regrant of options (described under "--
Incentive and Bonus Plans") as follows: 872,840, 261,877, 89,584, and
79,792 Series A Options and 872,840, 261,877, 89,584, and 79,792 Series B
Options granted to Messrs. Mancuso, Pisano, Johnson and Jones,
respectively.
(3) The Board of Directors of the Company has determined that the fair market
value of the Common Stock as of December 31, 1996 was $24.00 per share,
the same as the exercise price under the 1996 Incentive Plan.
The following table sets forth information with respect to the ownership of
bonus interests granted under the 1997 Senior Management Bonus Plan as of
December 31, 1996 held by the Named Executive Officers.
LONG-TERM INCENTIVE PLANS--AWARDS IN FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SHARES, PERFORMANCE OR OTHER
UNITS OR OTHER PERIOD UNTIL
NAME RIGHTS (#)(1) MATURATION OR PAYOUT
- ---- ----------------- --------------------
<S> <C> <C>
Frank G. Mancuso......................... 811,756 5 years
A. Robert Pisano......................... 243,544 5 years
Michael S. Hope.......................... -- --
David G. Johnson......................... 83,334 5 years
William A. Jones......................... 74,209 5 years
</TABLE>
- --------
(1) Represents the number of bonus interests granted pursuant to the Senior
Management Bonus Plan. If approved by the Stockholders, each bonus
interest entitles the participant to receive up to $24.00 under certain
circumstances. See "--Incentive and Bonus Plans--Senior Management Bonus
Plan."
64
<PAGE>
Pension Plans. The Company maintains a retirement plan (the "MGM Retirement
Plan"), which covers substantially all of the employees of the Company. See
"--Employee Benefit Plans--MGM Retirement Plan." The Company also has entered
into the MGM Supplemental Executive Retirement Agreement dated April 22, 1996,
as amended and restated as of July 18, 1997 (the "Supplemental Executive
Retirement Agreement"), with Mr. Pisano. See "--Employee Benefit Plans--
Supplemental Executive Retirement Agreement." The following table sets forth
estimated annual benefits payable upon retirement with regard to the MGM
Retirement Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE(1)
-----------------------------------------
REMUNERATION(2) 15 20 25 30 35
- --------------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$50,000.............................. $11,625 $15,500 $19,375 $ 23,250 $ 27,125
100,000.............................. 25,067 33,422 41,778 50,133 58,489
150,000.............................. 39,317 52,422 65,528 78,633 91,739
160,000.............................. 42,167 56,222 70,278 84,333 98,389
200,000.............................. 53,567 71,422 89,278 107,133 124,989
</TABLE>
- --------
(1) As of September 30, 1997, Messrs. Mancuso, Pisano, Johnson and Jones were
credited with 4, 4, 2 and 14 years of service, respectively. As of
December 31, 1996, Mr. Hope was credited with 3.5 years of service.
(2) The compensation covered by the MGM Retirement Plan includes base salary
only, and not bonus or other amounts. The amount of the benefit to which a
participant is entitled is an annual amount equal to 1.55% of annual base
salary up to the Social Security wage base (currently $65,400) plus 1.9%
of annual base salary above that amount up to the maximum allowable under
the MGM Retirement Plan (currently $160,000 per year) for each year of
credited service up to a maximum of 35 years, at which time the applicable
percentage is 1.55% of the annual base salary for each year of service in
excess of 35. Benefits become vested upon completion of five years of
service. For each of the Named Executive Officers, other than Mr. Hope,
the current compensation covered by the MGM Retirement Plan is the maximum
allowable under the MGM Retirement Plan, which is substantially less than
the annual compensation for each such Named Executive Offices listed in
the "Salary" column of the Summary Compensation Table. Mr. Hope resigned
from the Company effective January 1, 1997 and, therefore, is no longer
covered by the MGM Retirement Plan and, since Mr. Hope did not complete
five years of service with the Company, his benefits under the MGM
Retirement Plan did not vest.
CL Payments. Pursuant to agreements entered into prior to the MGM
Acquisition, certain persons who were then executive officers of MGM Studios,
including Mr. Mancuso, Mr. Pisano, and Mr. Hope, received cash payments from
CL, the then-sole stockholder of the Company, in connection with the sale of
MGM Studios to the Company in return for services rendered by them to MGM
Studios in their capacities as executive officers of MGM Studios in connection
with the revitalization of MGM Studios. The amounts of such payments were
based on the appreciation in the value of MGM Studios prior to the MGM
Acquisition.
INCENTIVE AND BONUS PLANS
1996 Incentive Plan. The Company has an Amended and Restated 1996 Stock
Incentive Plan (the "1996 Incentive Plan"). The 1996 Incentive Plan will be
administered by the Compensation Committee, which will have broad authority.
Awards under the 1996 Incentive Plan are generally not restricted to any
specific form or structure and may include, without limitation, qualified or
non-qualified stock options, incentive stock options, restricted stock awards
and stock appreciation rights (collectively, "Awards"). Awards may be
conditioned on continued employment, have various vesting schedules and
accelerated vesting and exercisability provisions in the event of, among other
things, a change in control of the Company.
At September 30, 1997, 8,125,065 shares of the Common Stock were reserved
for award under the 1996 Incentive Plan, of which options to purchase
5,205,702 shares of the Common Stock were outstanding. Of the outstanding
options, 1,020,031 options are vested and exercisable (or will vest or become
exercisable within 60
65
<PAGE>
days). The outstanding options are exercisable at $24.00 per share, generally
vest over a period of five years and are not exercisable until vested and,
even if vested, are not exercisable until six months after completion of the
Offering (as to approximately one-half of the options) or December 31, 2001
(as to the balance), subject in each case to early vesting and, depending on
the circumstances, early exercisability in certain events, including the death
or permanent disability of the optionee, termination of the optionee's
employment under certain circumstances or a "Designated Change in Control" of
the Company. A Designated Change in Control is defined to include (i) Tracinda
and Seven ceasing to beneficially own in the aggregate 50.1% or more of the
voting securities of the Company and any other person, other than an entity
controlled by the Company, beneficially owning 30% or more of the voting
securities of the Company or (ii) the sale of substantially all of the assets
of the Company. See "--Original Plan; Repricing of Options and Cancellation of
Bonus Interests."
Senior Management Bonus Plan. The Company has a Senior Management Bonus Plan
(the "Senior Management Bonus Plan") under which 2,420,685 bonus interests
("Bonus Interests") have been granted to key employees. No additional bonus
interests may be issued under the Bonus Plan. The Senior Management Bonus Plan
will be administered by the Bonus Plan Committee of the Board of Directors,
which is a committee of outside directors and currently composed of the same
members as the Compensation Committee. The Senior Management Bonus Plan is
subject to approval by the stockholders of the Company no later than December
31, 1998. If the Senior Management Bonus Plan is not approved by the holders
of a majority of the outstanding shares of the Common Stock present at a
meeting at which a quorum is present (or by the written consent of a majority
of the Common Stock), the Senior Management Bonus Plan will be null and void
and no amounts will be paid pursuant to the Bonus Interests. Tracinda and
Seven, which together will own in excess of the majority of the outstanding
shares of the Company after the Offering, have committed to the holders of the
Bonus Interests to vote their shares in favor of the approval of the Senior
Management Bonus Plan and the Bonus Interests.
Subject to the stockholder approval requirement discussed above and to
certain vesting and other requirements, each Bonus Interest entitles the
holder to receive a cash payment if (a) the sum of the average closing price
of the Common Stock during the 20 trading days and, in certain circumstances,
per share distributions on the Common Stock (together, the "Price") preceding
a Determination Date (defined below) is greater than (b) $24.00 and less than
$48.00 (adjusted for stock splits, reverse stock splits and similar events).
The cash payment will be equal to (i) the vested portion of the Bonus Interest
at the Determination Date multiplied by (ii) the amount by which the Price at
the Determination Date is less than $48.00 (i.e., a maximum of $24.00 per
Bonus Interest). Once a payment is made in respect of the vested portion of a
Bonus Interest, no further payment is due in respect of that portion. If at
any Determination Date the Price exceeds $48.00, no payment will thereafter be
due in respect of any then-vested portion of a Bonus Interest.
Determination Dates occur on June 30 and December 31 of each year,
commencing December 31, 2001 and ending December 31, 2006, and will also occur
upon a Designated Change in Control or the taking of any action for the
dissolution or liquidation of the Company (each a "Special Circumstance").
Bonus Interests generally vest 20% at October 1, 1997 and 1.67% each month
thereafter. The Senior Management Bonus Plan provides for accelerated vesting
and payment in the event of a Special Circumstance, accelerated vesting in the
event of termination of employment in certain circumstances and a special
Determination Date and payment at discounted present value, for the key
employee involved, in the event of death or permanent disability.
Original Plan; Repricing of Options and Cancellation of Bonus
Interests. Options to purchase 2,602,851 shares of the Common Stock at $24.00
per share ("Series A Options"), 2,859,648 shares of the Common Stock at $78.43
per share ("Series B Options") and 2,602,851 Bonus Interests that were granted
in tandem with Series A Options were outstanding under the 1996 Incentive Plan
prior to its amendment and restatement (the "Original Plan"). Subject to
vesting, which generally was to occur over a five-year period ending October
1, 2001 and was subject to acceleration under certain circumstances, these
bonus interests entitled the holder to $22.32 per Bonus Interest if the fair
market value of the outstanding capital stock of the Company (as determined in
the Original Plan) was more than $1.26 billion (subject to adjustment to
reflect certain capital distributions and contributions) at any determination
date specified in the Original Plan.
66
<PAGE>
In connection with the amendment and restatement of the Original Plan, the
optionees and holders of Bonus Interests agreed with the Company that the
Series A Options, Series B Options and Bonus Interests outstanding under the
Original Plan would be cancelled. Concurrently with the amendment and
restatement, the options and Bonus Interests described above were granted.
EMPLOYMENT AGREEMENTS
Frank G. Mancuso. The Company has entered into an employment agreement with
Frank G. Mancuso effective as of October 10, 1996, as amended as of August 4,
1997, which provides that he will serve as Chairman and Chief Executive
Officer of the Company for a term of five years. Mr. Mancuso is entitled to an
annual base salary of $2 million, subject to increase at the discretion of the
Board of Directors of the Company and an annual stock purchase payment of $3
million (payable monthly) out of the after tax proceeds of which he is
required to purchase shares of the Common Stock at a price of $24.00 per share
until December 31, 1997 and, thereafter, at the fair market value of such
shares. In addition, Mr. Mancuso is entitled to receive certain other
benefits, including a car allowance, medical insurance and any other similar
plan or program which the Company provides for its senior officers generally,
participation in the Company's 1996 Incentive Plan and other benefits
customarily afforded to executives of similar stature in the motion picture
industry. The Company is also obligated to maintain a five year, reducing-term
life insurance policy in the initial face amount of $25 million on Mr.
Mancuso's life for his benefit. Pursuant to his employment agreement, Mr.
Mancuso holds stock options to purchase shares of the Common Stock. See "--
Executive Compensation" and "--Incentive and Bonus Plans--1996 Incentive
Plan." In connection with the MGM Acquisition, in consideration of the waiver
by Mr. Mancuso of certain rights relating to the change of control under his
previous employment agreement with the Company and to induce him to enter into
the existing employment agreement, in October 1996 Mr. Mancuso received 63,751
shares of the Common Stock and $1,020,000 in cash. If Mr. Mancuso's employment
is terminated without cause by the Company or if Mr. Mancuso terminates the
agreement for "good reason," which includes a Designated Change in Control of
the Company (as defined in the 1996 Incentive Plan), he will be entitled to
receive as severance an amount equivalent to the present value of the sum of
the base salary and the stock purchase payment for the entire remaining term
of the employment agreement, and his account in the 1996 Incentive Plan will
vest immediately. As of September 30, 1997, the amount payable to Mr. Mancuso
in the event of such circumstances would be approximately $18 million. Mr.
Mancuso is entitled to resign at any time on not less than 30 days' prior
notice.
A. Robert Pisano. The Company has entered into an employment agreement with
Mr. Pisano effective as of October 10, 1996, which provides that he will serve
as Vice Chairman of the Company for an initial term of five years. Pursuant to
the agreement, Mr. Pisano is entitled to an annual salary of $950,000, an
annual guaranteed bonus of $750,000 and an annual discretionary bonus which is
determined by the Chief Executive Officer of the Company, subject to the
approval of the Compensation Committee of the Board of Directors. In addition,
Mr. Pisano is entitled to receive certain other benefits, including a car
allowance, medical insurance, participation in the Company's 1996 Incentive
Plan and participation in the Company's 401(k), savings plan, pension plan and
any other similar plan or program which the Company provides for its senior
officers generally. The Company is also obligated to maintain a term life
insurance policy in the face amount of $5 million on Mr. Pisano's life for his
benefit. Furthermore, Mr. Pisano is entitled to receive certain additional
retirement benefits under his Supplemental Executive Retirement Agreement. See
"--Employee Benefit Plans--Supplemental Executive Retirement Agreement." Under
the 1996 Incentive Plan, Mr. Pisano holds stock options to purchase shares of
the Common Stock. See "--Executive Compensation" and "--Incentive and Bonus
Plans--1996 Incentive Plan." In connection with the MGM Acquisition, in
consideration of the waiver by Mr. Pisano of certain rights relating to the
change of control under his previous employment agreement with the Company and
to induce him to enter into his existing employment agreement, Mr. Pisano
received 15,000 shares of the Common Stock and $235,343 in cash. If Mr.
Pisano's employment is terminated without cause by the Company or if he
terminates the agreement for "good reason," which includes a Designated Change
in Control of the Company (as defined in the 1996 Incentive Plan), he will be
entitled to receive the net present value of the difference between
(i) $8.5 million and (ii) the sum of the annual salary and the guaranteed
bonuses paid to him
67
<PAGE>
to the date of the termination and, in addition, all insurance benefits for
the remainder of the term of the employment agreement. As of September 30,
1997, the amount payable to Mr. Pisano in the event of such circumstances
would be approximately $6.6 million.
Michael G. Corrigan. The Company has entered into an employment agreement
with Mr. Corrigan effective as of July 1, 1997, which provides that he will
serve as Senior Executive Vice President and Chief Financial Officer of the
Company for an initial term of five years. Pursuant to the agreement, Mr.
Corrigan is entitled to an annual salary of $700,000 and an annual
discretionary bonus which is determined by the Chief Executive Officer of the
Company, subject to the approval of the Compensation Committee of the Board of
Directors. In addition, Mr. Corrigan is entitled to receive certain other
benefits, including a car allowance, medical insurance, participation in the
Company's 1996 Incentive Plan and participation in the Company's 401(k),
savings plan, pension plan and any other similar plan or program which the
Company provides for its senior officers generally. Under the 1996 Incentive
Plan, Mr. Corrigan holds options to purchase 179,168 shares of the Common
Stock, each at an exercise price of $24.00 per share. See "--Incentive and
Bonus Plans--1996 Incentive Plan." Mr. Corrigan also holds 83,334 Bonus
Interests granted to him under the Senior Management Bonus Plan. See "--
Incentive and Bonus Plans--Senior Management Bonus Plan." If Mr. Corrigan's
employment is terminated without cause by the Company or if he terminates the
agreement for "good reason," he will be entitled to receive the net present
value of the sum of the annual salary through the entire remaining term of the
employment agreement and all insurance benefits for the remainder of the term
of the employment agreement.
David G. Johnson. The Company has entered into an employment agreement with
Mr. Johnson effective as of October 10, 1996, which provides that he will
serve as Senior Executive Vice President and General Counsel of the Company
for an initial term of five years. Pursuant to the agreement, Mr. Johnson is
entitled to a current annual salary of $600,000, which will increase by
$50,000 each year for three years, an annual guaranteed bonus of $100,000 and
an annual discretionary bonus which is determined by the Chief Executive
Officer of the Company, subject to the approval of the Compensation Committee
of the Board of Directors. In addition, Mr. Johnson is entitled to receive
certain other benefits, including a car allowance, medical insurance,
participation in the Company's 1996 Incentive Plan and participation in the
Company's 401(k), savings plan, pension plan and any other similar plan or
program which the Company provides for its senior officers generally. Under
the 1996 Incentive Plan, Mr. Johnson holds stock options to purchase shares of
the Common Stock. See "--Executive Compensation" and "--Incentive and Bonus
Plans--1996 Incentive Plan." In connection with the MGM Acquisition, in
consideration of the waiver by Mr. Johnson of certain rights relating to the
change in control under his previous employment agreement with the Company and
to induce him to enter into his existing employment agreement, Mr. Johnson
received 13,542 shares of the Common Stock and $213,850 in cash. If
Mr. Johnson's employment is terminated without cause by the Company or if he
terminates the agreement for "good reason," which includes a Designated Change
in Control of the Company (as defined in the 1996 Incentive Plan), he will be
entitled to receive the net present value of the sum of the annual salary and
the guaranteed bonus through the entire remaining term of the agreement and
all insurance benefits for the remainder of the term of the employment
agreement. As of September 30, 1997, the amount payable to Mr. Johnson in the
event of such circumstances would be approximately $2.6 million.
William A. Jones. The Company has entered into an employment agreement with
Mr. Jones effective as of October 10, 1996, which provides that he will serve
as Senior Executive Vice President of the Company for an initial term of five
years. Pursuant to the agreement, Mr. Jones is entitled to a current annual
salary of $575,000, which will increase $50,000 next year and then be subject
to adjustment as determined by the Company, and an annual discretionary bonus
which is determined by the Chief Executive Officer of the Company, subject to
the approval of the Compensation Committee of the Board of Directors. In
addition, Mr. Jones is entitled to receive certain other benefits, including a
car allowance, medical insurance, participation in the Company's 1996
Incentive Plan and participation in the Company's 401(k), savings plan,
pension plan and any other similar plan or program which the Company provides
for its senior officers generally. The Company is also obligated to maintain a
term life insurance policy in the face amount of $2 million on Mr. Jones' life
for his benefit. Under the 1996 Incentive Plan, Mr. Jones holds stock options
to purchase shares of Common Stock. See "--Executive
68
<PAGE>
Compensation" and "--Incentive and Bonus Plans--1996 Incentive Plan." In
connection with the MGM Acquisition, in consideration of the waiver by Mr.
Jones of certain rights relating to the change in control under his previous
employment agreement with the Company and to induce him to enter into his
existing employment agreement, Mr. Jones received 26,042 shares of the Common
Stock and $416,178 in cash. If Mr. Jones' employment is terminated without
cause by the Company or if he terminates the agreement for "good reason," he
will be entitled to receive the net present value of the sum of the annual
salary through the entire remaining term of the employment agreement and all
insurance benefits for the remainder of the term of the employment agreement.
The employment agreement of each of Messrs. Pisano, Corrigan, Johnson and
Jones also contains: (i) a nondisclosure provision which is effective for the
term of such individual's employment with the Company and for an indefinite
period thereafter; (ii) noninterference and non-competition provisions, each
of which is effective for the term of such individual's employment with the
Company and one year thereafter; and (iii) a provision prohibiting the
solicitation for employment and employment of certain Company employees, or
making public statements concerning the Company, for a period of one year
following termination of employment.
LIMITATION ON THE DEDUCTIBILITY OF COMPENSATION UNDER SECTION 162(M)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a publicly held corporation for compensation in excess of $1
million paid in any fiscal year to the corporation's chief executive officer
or the four other most highly compensated executive officers (the "Top
Executives"). Section 162(m) further provides, however, that compensation will
not be subject to the deduction limit if (i) the compensation is paid for the
attainment of one or more performance goals, (ii) the performance goals are
determined by a compensation committee of the board of directors comprised
solely of two or more independent directors, (iii) the material terms of such
compensation and performance goals are disclosed to the shareholders and
approved by a majority of the vote in a separate shareholder vote before the
payment of such compensation and (iv) before the payment of such compensation
the compensation committee certifies that the performance goals and other
material terms of such compensation have been satisfied. Any compensation that
meets the foregoing requirements is referred to as "performance-based
compensation".
In the case of a privately held corporation that undergoes an initial public
offering, the Treasury Regulations under Section 162(m) provide that the
deduction limit does not apply to any compensation paid, during a specified
reliance period, pursuant to a plan or agreement that existed while the
corporation was privately held, if the prospectus accompanying the initial
public offering discloses such plans and agreements in accordance with the
applicable securities laws. The reliance period terminates on the earliest to
occur of (i) the expiration of the plan or agreement, (ii) the material
modification of the plan or agreement, (iii) the issuance of all stock and
other compensation allocated under the plan and (iv) the first meeting of the
shareholders at which directors are to be elected that occurs after the close
of the third calendar year following the calendar year in which the initial
public offering occurs. In the case of stock options, the reliance period
applies to the date of grant and not exercise. As this Prospectus has
disclosed, in accordance with the applicable securities laws, the terms of any
compensation plan or agreement applicable to its executive officers and in
effect prior to the Offering, the Company believes any compensation paid or
options granted pursuant to such plans or agreements during the reliance
period will not be subject to the deduction limit of Section 162(m). However,
compensation paid and options granted after the reliance period to a Top
Executive will be subject to the limitations of Section 162(m) unless it
qualifies as performance-based compensation. In general, any salary paid after
the reliance period, including salary paid pursuant to the Employment
Agreements, will not qualify as performance-based compensation and will be
subject to Section 162(m). With respect to the Bonus Interests, the Company
believes it has structured them to qualify as performance-based compensation.
Therefore, the Company believes that any payments after the reliance period
pursuant to the Bonus Interests should not be subject to Section 162(m),
although there is no assurance that this conclusion may not be challenged by
the taxing authorities. Similarly, the Company intends to structure any
options granted under the 1996 Incentive Plan to Top Executives after the
reliance period to qualify as performance-based.
69
<PAGE>
The Company has the authority to award non-deductible compensation as it
deems appropriate. In addition, because of ambiguities and uncertainties as to
the application and interpretation of Section 162(m) and the Treasury
Regulations issued thereunder, no assurance can be given that compensation
intended by the Company to satisfy the requirements for deductibility under
Section 162(m) will so qualify.
EMPLOYEE BENEFIT PLANS
MGM Retirement Plan. The MGM Retirement Plan was adopted in March 1986 to
provide retirement income to certain employees who have completed at least one
year of service. The MGM Retirement Plan is a defined benefit plan under which
all contributions are made by MGM Studios. The compensation covered by the MGM
Retirement Plan includes base salary only, and not bonus or other amounts.
Subject to certain limits, the amount of the pension to which a participant is
entitled is an annual amount equal to 1.55 percent of annual base salary up to
the Social Security wage base (currently $65,400) plus 1.9 percent of annual
base salary above that amount up to the maximum amount allowable under the MGM
Retirement Plan (currently $160,000 per year) for each year of credited
service up to 35 years, at which time the applicable percentage is 1.55
percent of the annual base salary for each year of service in excess of 35.
Participants become vested upon completion of five years of service.
Participants, or their beneficiaries, are entitled to receive benefits which
have vested under the MGM Retirement Plan upon their normal or early
retirement (or deferred retirement if the participant has been an executive
for at least two years and will be entitled to receive at least $44,000 of
retirement income annually) or upon the total and permanent disability, death
or other termination of such participant's employment and after attaining
normal or early retirement age. Benefits are normally payable on a monthly
basis either (i) in a "life only" form to a unmarried participant during his
or her life or (ii) in a qualified "joint and survivor" form to married
participants, which shall be the actuarial equivalent of the life only form
and which shall provide equal monthly payments to the participant during his
or her lifetime with an amount equal to 50 percent (or 75 percent or 100
percent at the election of the participant) of such payments continued after
his or her death payable to his or her spouse for the remainder of such
spouse's life. Alternatively, participants may, under certain circumstances,
elect that a single lump-sum death benefit be payable to his or her
beneficiary or a "ten-year certain and life" form, providing that equal
monthly payments be made to the participant during his or her lifetime with
the provision that in the event the participant dies prior to the expiration
of ten years, such payments would continue for the remainder of the ten-year
period.
It is the intention of the Company to continue the MGM Retirement Plan;
however, the Company has the right to amend or terminate the MGM Retirement
Plan at any time. If the plan is terminated, the available assets held in
trust will be used to pay benefits to retired employees (including
beneficiaries), terminated vested employees entitled to benefits and active
employees. If termination occurs when the MGM Retirement Plan assets are not
sufficient to pay all benefits accrued to the date of the termination, the
assets held in trust under the plan will be allocated among employees and
beneficiaries in accordance with the provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The Company is not liable
for the payment of MGM Retirement Plan benefits from its own assets. Upon full
satisfaction of the MGM Retirement Plan's liability to employees and their
beneficiaries, any amount remaining in the plan will be returned to the
Company.
The Internal Revenue Code requires certain provisions for benefit accruals
if a defined benefit plan becomes "top heavy," that is, if the value of
accrued benefits for "key employees" is more than 60 percent of the total
value of all accrued benefits. While the Company believes that it is unlikely
that the MGM Retirement Plan will ever become top heavy, in such an event, it
may become necessary to amend the MGM Retirement Plan to conform it to the
applicable Internal Revenue Code requirements.
Supplemental Executive Retirement Agreement. Pursuant to Mr. Pisano's
previous employment agreement and in place of certain benefits under a pension
plan maintained for Mr. Pisano's benefit by a prior employer (the "Prior
Plan") which Mr. Pisano forfeited when he joined the Company in 1993, the
Company entered into the Supplemental Executive Retirement Agreement with Mr.
Pisano. The Supplemental Executive Retirement Agreement provides Mr. Pisano
with an annual benefit equal to $150,000 (the "Benefit Amount"), less an
amount equal to the benefit Mr. Pisano is entitled to receive under the Prior
Plan and subject to certain
70
<PAGE>
adjustments, payable in the form of a single life annuity commencing on the
later of the date Mr. Pisano attains age 60 and the date Mr. Pisano's
employment with the Company is terminated, including due to Mr. Pisano's
death. The minimum aggregate amount payable to Mr. Pisano or his beneficiaries
will be $900,000, less all benefits to which Mr. Pisano is entitled under the
Prior Plan. All benefits under the Supplemental Executive Retirement Agreement
are fully vested. If Mr. Pisano continues in the employment of the Company
after attaining age 60, the Benefit Amount shall be increased by 5/12ths of
one percent for each month Mr. Pisano continues to be employed by the Company
after such date. In addition, after payments have commenced under the
Supplemental Executive Retirement Plan, the Benefit Amount shall be increased
effective each January 1 by the adjustment factor applied to retiree payments
for the calendar year under the Prior Plan. If Mr. Pisano is unmarried on the
date benefits commence, the benefit shall be payable monthly for Mr. Pisano's
life ("life only" basis). If, however, Mr. Pisano is married on the date
benefits commence, he may elect to have the benefits to which he is entitled
payable on the life only basis or have the actuarial equivalent of the life
only form payable in equal monthly payments to him during his lifetime with an
amount equal to 50% or 100% of such payments to continue after his death to
his spouse for the remainder of his spouse's life. In the event of a
Designated Change of Control of the Company (as defined in the 1996 Incentive
Plan and the Supplemental Executive Retirement Agreement) or the termination
of Mr. Pisano's employment agreement by the Company without cause or by Mr.
Pisano for good reason, the Company will deposit into escrow an amount
sufficient to provide on an actuarial basis the level of payments required
under the Supplemental Executive Retirement Agreement.
MGM Savings Plan. Employees, including officers, who have completed one year
of service have the opportunity to participate in the MGM Savings Plan (the
"Savings Plan") which is managed by the Merrill Lynch Asset Management L.P.
Participants in the Savings Plan may contribute a portion of their pre-tax
compensation (up to a maximum of $9,500) and after-tax compensation (subject
to certain limitations) into the Savings Plan and direct the investment of
such contributions. MGM Studios matches 100 percent of such employee
contributions up to four percent of such employee's eligible compensation.
Shortly after completion of the Offering, the Company intends to amend the
Savings Plan such that the matching contributions shall be made in shares of
the Common Stock. The employee contributions to the Savings Plan and the
earnings thereon are always 100 percent vested. The matching contributions and
the earnings thereon vest 20 percent for each full year of service and
employees become 100 percent vested (i) after five years of service, (ii) upon
their total and permanent disability or (iii) upon their death. Employees
receive a lump sum payment of the vested portion of their respective Savings
Plan account when their employment is terminated. In addition, an employee
may, under certain conditions, withdraw or borrow from the vested portion of
his or her respective Savings Plan account.
DIRECTOR COMPENSATION
During 1996, no compensation was paid to the directors for services provided
in such capacity. Following the Offering, the Board of Directors intends to
adopt a policy whereby each independent director will be paid customary
amounts for services provided as a director as well as reimbursement for his
or her out-of-pocket expenses in attending Board meetings. See "Certain
Transactions" for a description of transactions involving directors or their
affiliates and the Company, if any.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by applicable provisions of the Delaware General Corporation
Law (the "DGCL"), the Company's Certificate of Incorporation contains a
provision eliminating, to the fullest extent permitted by the DGCL as it
exists or may in the future be amended, the liability of a director to the
Company and its stockholders for monetary damages for breaches of fiduciary
duty as a director. However, in accordance with the DGCL, such provision does
not limit the liability of a director for (i) any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) payment of dividends, stock purchases or redemptions that
violate the DGCL or (iv) any transaction from which the director derived an
improper personal benefit. Such limitation of liability also does not affect
the availability of equitable remedies such as injunctive relief or
rescission.
71
<PAGE>
The Certificate of Incorporation and Bylaws of the Company also provide
that, to the fullest extent permitted by the DGCL as it exists or may in the
future be amended, the Company will indemnify each of the officers and
directors of the Company (or their estates, if applicable), and may indemnify
any employee or agent of the Company (or their estates, if applicable), who is
or was a party to, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, by reason of the fact that
such person is or was an officer, director, employee or agent of the Company
or is or was serving at the request of Company as an officer, director,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. The Company will so indemnify such officer or director, and
may so indemnify such employee or agent (if indemnification is authorized by
the Board of Directors), in the case of such actions (whether or not by or in
the right of the Company) if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests
of the Company, and with respect to any criminal action or proceeding other
than by or in the right of the Company, had no reasonable cause to believe
such person's conduct was unlawful. With respect to indemnification other than
by or in the right of the Company, the termination of any action, suit or
proceeding by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, will not, of itself, create a presumption
that the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, that such
person had reasonable cause to believe that such person's conduct was
unlawful. No indemnification will be made in connection with actions by or in
the right of the Company in respect of any claim, issue or matter as to which
such person has been adjudged to be liable for negligence or misconduct in the
performance of such person's duty to the Company unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court deems proper. In addition, to the fullest
extent permitted by the DGCL, expenses (including attorneys' fees), judgments,
fines incurred by and amounts paid in settlement may be advanced by the
Company prior to the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on the behalf of such director, officer,
employee or agent to repay such amounts if it shall ultimately be determined
that he or she is not entitled to be indemnified as authorized in accordance
with the DGCL and the Company's Certificate of Incorporation. The Company's
Certificate of Incorporation and Bylaws also state that such indemnification
is not exclusive of any other rights of the indemnified party, including
rights under any indemnification agreements or otherwise.
The Company currently maintains insurance in the aggregate amount of $25
million on behalf of its officers and directors against any liability which
may be asserted against any such officer or director, subject to certain
customary exclusions.
The Company has entered into indemnification agreements with its directors,
its executive officers and certain other officers providing for
indemnification by the Company, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. These
agreements constitute binding agreements between the Company and each of the
other parties thereto, thus preventing the Company from modifying its
indemnification policy in a way that is adverse to any person who is a party
to such an agreement.
72
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company's authorized common stock consists of 125,000,000 shares of the
Common Stock. All authorized shares of the Common Stock have a par value of
$0.01 per share and are entitled to one vote per share on all matters
submitted to a vote of stockholders. In the event of a liquidation,
dissolution or winding up of the Company, the holders of the Common Stock are
entitled to share ratably in all assets remaining after all liabilities and
the liquidation preference attributable to any outstanding preferred stock
have been paid. The holders of the Common Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders. Other than as
described under "Ownership of Voting Securities--Investors Shareholder
Agreement," the holders of the Common Stock will have no pre-emptive rights or
cumulative voting rights and no rights to convert their Common Stock into any
other securities. The Company will effect the Stock Split immediately prior to
the completion of the Offering (and, unless otherwise indicated, all
information in this Prospectus gives effect to such Stock Split).
As of September 30, 1997 there were outstanding 52,711,921 shares of the
Common Stock. As of September 30, 1997 there were reserved for issuance upon
the exercise of options 8,437,567 shares of the Common Stock, of which options
for 5,518,204 shares of the Common Stock are outstanding (1,332,533 of which
are vested and exercisable or will become vested and exercisable within 60
days).
PREFERRED STOCK
As of September 30, 1997, 502,820 shares of the Company's Series A Preferred
Stock were outstanding (prior to giving effect to the Series A Preferred Stock
Conversion). All of the holders of the Company's outstanding Series A
Preferred Stock have agreed to the Series A Preferred Stock Conversion
(whereby each such share of the Series A Preferred Stock will be converted
into one share of the Common Stock immediately prior to the Stock Split,
resulting in an aggregate of 20,951,000 shares of Common Stock after giving
effect to the Stock Split). Unless otherwise indicated, all information in
this Prospectus gives effect to the Series A Preferred Stock Conversion. Thus,
upon completion of the Offering, the Company will not have outstanding any
shares of preferred stock (the "Preferred Stock"), although the Company will
be authorized to issue up to 25 million shares of the Preferred Stock.
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
is authorized to fix by resolution the voting power, designations, powers,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations, or restrictions thereof, including, without
limitation, the dividend rate, conversion or exchange rights, redemption price
and liquidation preference, of one or more series of the Preferred Stock, and
to fix the number of shares constituting any such series. In the event of any
dissolution, liquidation or winding up of the affairs of the Company, whether
voluntary or involuntary, after payment or provision for payment of the debts
and other liabilities of the Company, the holders of each series of the
Preferred Stock shall be entitled to receive, out of the net assets of the
Company, an amount for each share of the Preferred Stock equal to the amount
fixed and determined by the Board of Directors in the resolution creating such
series and providing for the issuance of such shares, and no more, prior to
any of the assets of the Company being distributed to the holders of the
Common Stock (the "Liquidation Preference"). The issuance of the Preferred
Stock could adversely affect the voting power and other rights of the holders
of the Common Stock.
The authority possessed by the Board of Directors to issue the Preferred
Stock could potentially be used to discourage attempts by third parties to
obtain control of the Company through a merger, tender offer, proxy contest or
otherwise by making such attempts more difficult or more costly to
successfully complete. See "Risk Factors--Possible Anti-takeover Effect of
Certain Charter Provisions."
There are no agreements or understandings for the issuance of the Preferred
Stock and the Board of Directors has no present intention to issue any of the
Preferred Stock.
73
<PAGE>
OWNERSHIP OF VOTING SECURITIES
The table below sets forth the beneficial ownership of the Common Stock
(which, giving effect to the Series A Preferred Stock Conversion, constitutes
the only class of issued and outstanding capital stock of the Company) as of
September 30, 1997 (assuming no exercise of the Underwriters' over-allotment
options) by each director of the Company, each of the Named Executive
Officers, the directors and executive officers of the Company as a group and
each person who at such time beneficially owned more than five percent of the
outstanding shares of any class of voting securities of the Company.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OWNERSHIP AFTER THE
OFFERING AND THE OFFERING AND THE
TRACINDA PURCHASE TRACINDA PURCHASE
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
OWNER SHARES(1) OF CLASS SHARES OF CLASS
- ------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tracinda Corporation(2)(3)......... 36,448,208 68.7% 40,139,607 61.1%
4835 Koval Lane
Las Vegas, NV 89109
Seven Network Limited(3)........... 16,208,463 30.6 16,208,463 24.7
ATN7, Mobbs Lane
Epping NSW 2121 Australia
Frank G. Mancuso(3)(4)............. 542,610 1.0 542,610 *
A. Robert Pisano(5)................ 137,244 * 137,244 *
James D. Aljian(6)................. -- -- -- --
Michael R. Gleason(7).............. 156,251 * 156,251 *
Kirk Kerkorian(3)(8)............... 36,448,208 68.7 40,139,607 61.1
Kerry M. Stokes(3)(9).............. 16,208,463 30.6 16,208,463 24.7
Alex Yemenidjian(6)................ -- -- -- --
Jerome B. York(6).................. -- -- -- --
Michael S. Hope(10)................ -- -- -- --
Michael G. Corrigan................ -- -- -- --
David G. Johnson(11)............... 55,360 * 55,360 *
William A. Jones(12)............... 63,289 * 63,289 *
All Directors and Executive
Officers as a group (11 persons).. 53,611,425 99.9 57,302,824 86.4
</TABLE>
- --------
* Less than 1 percent.
(1) The shares of the Common Stock which a person has the right to acquire
within 60 days of September 30, 1997 and the shares of Common Stock
underlying options that are vested as of September 30, 1997 or that will
become vested within 60 days thereafter are deemed to be outstanding for
the purpose of calculating the beneficial ownership of the holder of such
options or other rights, but are not deemed to be outstanding for the
purpose of computing the beneficial ownership of any other person. As a
result, the aggregate percentage ownership of the Common Stock may exceed
100 percent.
(2) Includes 156,251 shares of the Common Stock issuable at a price of $6.41
per share pursuant to a presently exercisable stock option which expires
on October 10, 2002. See "Certain Transactions--Certain Matters Relating
to the MGM Acquisition." All of the shares of the Common Stock held by
Tracinda are pledged to a group of banks to secure a syndicated credit
facility to Tracinda.
(3) For a description of certain voting agreements applicable to such shares,
see "--Investors Shareholder Agreement."
74
<PAGE>
(4) Includes an estimated 9,917 shares of the Common Stock which Mr. Mancuso
will be required to purchase with his stock purchase payment within 60
days of September 30, 1997 and 407,442 shares of the Common Stock
underlying options vested as of September 30, 1997 or that will become
vested within 60 days thereafter.
(5) Includes 122,244 shares of the Common Stock underlying options vested as
of September 30, 1997 or that will become vested within 60 days
thereafter.
(6) Each of Messrs. Aljian and York is an employee of, and, along with Mr.
Yemenidjian, was nominated to the Board of Directors of the Company by,
Tracinda.
(7) Mr. Gleason was nominated to the Board of Directors of the Company by
Seven. Mr. Gleason serves as the President of the general partner of
Culmen Group, L.P., which regularly provides financial advisory services
to Seven. Represents 156,251 shares of the Common Stock issuable at a
price of $6.41 per share pursuant to a presently exercisable stock option
which expires on October 10, 2002 held by Celsus, an entity wholly owned
by Mr. Gleason. See "Certain Transactions--Certain Matters Relating to
the MGM Acquisition."
(8) Mr. Kerkorian is the President and sole shareholder and director of, and
was nominated to the Board of Directors of the Company by, Tracinda.
Represents 36,448,208 shares of the Common Stock beneficially owned by
Tracinda prior to, and 40,139,607 shares of the Common Stock owned after,
the consummation of the Offering and the Tracinda Purchase.
(9) Mr. Stokes is the Chairman of, and was nominated to the Board of
Directors of the Company by, Seven. Represents 16,208,463 shares of the
Common Stock beneficially owned by Seven as to which Mr. Stokes disclaims
beneficial ownership.
(10) Mr. Hope resigned from the Company effective as of January 31, 1997.
(11) Includes 41,818 shares of the Common Stock underlying options vested as
of September 30, 1997 or that will become vested within 60 days
thereafter.
(12) Includes 37,247 shares of the Common Stock underlying options vested as
of September 30, 1997 or that will become vested within 60 days
thereafter.
INVESTORS SHAREHOLDER AGREEMENT
The following is a summary description of the material terms of the
Investors Shareholder Agreement. This summary description does not purport to
be complete and is subject to and qualified in its entirety by reference to
the definitive Investors Shareholder Agreement, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Voting of Shares. Until the fifteenth anniversary of the closing date of the
Offering and the Tracinda Offering, (i) each of Tracinda and Seven has agreed
to vote all of the shares of capital stock of the Company beneficially owned
by such party and take all necessary or desirable action within such party's
control, (ii) the Company has agreed to vote all of the shares of capital
stock of MGM Studios beneficially owned by it and take all necessary or
desirable action within its control, and (iii) Mr. Mancuso has agreed to vote
all his shares of capital stock of the Company and to take all necessary or
desirable action, in each case so that the Board of Directors of the Company
consists of eleven members (subject to the provisions described below), up to
four of whom are nominated by Tracinda (subject to reduction if Tracinda does
not maintain a certain level of ownership of the Common Stock), up to two of
whom are nominated by Seven (subject to reduction if Seven does not maintain a
certain level of ownership of the Common Stock), two of whom are nominated by
the Chairman and Chief Executive Officer of the Company (one of whom shall be
Mr. Mancuso as long as he serves as the Chief Executive Officer of the
Company), and three independent directors who are nominated by the majority of
the Board of Directors of the Company (which majority, so long as Tracinda
beneficially owns at least 16,666,800 shares of the Common Stock, must include
Tracinda's nominees on the Board of Directors of the Company) and who are not
affiliated or associated with either Tracinda or Seven and otherwise meet the
requirements of the NYSE for serving as independent directors; provided,
however, that each of Tracinda and Seven is only obligated
75
<PAGE>
to vote for nominees selected by the Board of Directors of the Company which
are acceptable to Tracinda or Seven, as the case may be. The Board of
Directors may determine to reduce the size of the Board of Directors to ten
persons, in which case the number of independent directors will be reduced to
two. Furthermore, each of Tracinda and Seven has the exclusive right (which,
to the extent the same may be required by law, may be exercised indirectly)
(i) to remove, with or without cause, any director designated by it in
accordance with the foregoing and (ii) to designate and elect any replacement
for a director designated by it in accordance with the foregoing upon the
death, resignation, retirement, disqualification or removal from office of
such director.
Until the fifteenth anniversary of the closing date of the Offering and the
Tracinda Purchase, (i) each of Tracinda and Seven has agreed to vote all of
the shares of capital stock of the Company beneficially owned by such party
and take all necessary or desirable action within such party's control, (ii)
the Company has agreed to vote all of the shares of capital stock of MGM
Studios beneficially owned by it and take all necessary or desirable action
within its control and (iii) Mr. Mancuso has agreed to vote all his shares of
capital stock of the Company and to take all necessary or desirable action, in
each case so that the compensation committee of the Board of Directors of the
Company consists of one member of the Board of Directors of the Company
nominated by Tracinda (so long as Tracinda maintains a certain level of
ownership of the Common Stock), one member of the Board of Directors of the
Company nominated by Seven (so long as Seven maintains a certain level of
ownership of the Common Stock), and one independent director nominated by the
majority of the Board of Directors of the Company (which majority, so long as
Tracinda beneficially owns at least 16,666,800 shares of the Common Stock,
must include Tracinda's nominees on the Board of Directors of the Company) and
who is not affiliated or associated with either Tracinda or Seven and
otherwise meets the requirements of the NYSE for serving as an independent
director.
Until the fifteenth anniversary of the closing date of the Offering and the
Tracinda Purchase, (i) each of Tracinda and Seven has agreed to vote all of
the shares of capital stock of the Company beneficially owned by such party
and take all necessary or desirable action within such party's control, (ii)
the Company has agreed to vote all of the shares of capital stock of MGM
Studios beneficially owned by it and take all necessary or desirable action
within its control and (iii) Mr. Mancuso has agreed to vote all his shares of
capital stock of the Company and to take all necessary or desirable action, in
each case so that the executive committee of the Board of Directors of the
Company consists of three members of the Board of Directors of the Company
nominated by Tracinda (so long as Tracinda maintains a certain level of
ownership of the Common Stock), one member of the Board of Directors of the
Company nominated by Seven (so long as Seven maintains a certain level of
ownership of the Common Stock), and two members of the Board of Directors of
the Company nominated by the Chairman and Chief Executive Officer of the
Company (one of whom shall be Mr. Mancuso as long as he serves as the Chief
Executive Officer of the Company).
Except to the extent consistent with the Investors Shareholder Agreement,
the Board of Directors of the Company shall not be authorized to fill a
vacancy on the Board of Directors of the Company caused by the death,
resignation, retirement, disqualification or removal of a director.
For as long as Mr. Mancuso serves as a member of the Board of Directors of
the Company and MGM Studios, Mr. Mancuso shall act as the Chairman of the
Board of Directors of the Company and MGM Studios. The Board of Directors of
the Company shall have the right to remove Mr. Mancuso as a director of the
Company, with or without cause, only upon the termination of his employment as
Chief Executive Officer of MGM Studios, subject to the terms of Mr. Mancuso's
employment agreement. See "Management-- Employment Agreements--Frank G.
Mancuso." If Mr. Mancuso ceases to act as Chief Executive Officer of the
Company, Mr. Mancuso has agreed to resign as a director of the Company and MGM
Studios and all other positions held by Mr. Mancuso at the Company, MGM
Studios and their respective subsidiaries effective as of the time he ceases
to act as Chief Executive Officer of the Company. Any person selected by Mr.
Mancuso as the second management director must agree to resign as a director
of the Company and a member of the executive and compensation committees of
the Board of Directors of the Company at such time as Mr. Mancuso ceases to
serve as the Chief Executive Officer of the Company, unless such other person
is acceptable to the new
76
<PAGE>
Chief Executive Officer of the Company. If Mr. Mancuso ceases to act as the
Chief Executive Officer of the Company, the parties to the Investors
Shareholder Agreement shall promptly remove the other person nominated by Mr.
Mancuso and then serving as a director of the Company and a member of the
executive and compensation committees of the Board of Directors of the
Company, unless such other person is acceptable to the new Chief Executive
Officer of the Company.
Until October 10, 2001, the obligations described under the heading "--
Voting of Shares" will be binding upon any transferee of Seven or Tracinda
except for any person (other than an affiliate of Tracinda or Seven) who
acquires (i) shares of Common Stock from Tracinda or Seven pursuant to a
public offering registered under the Securities Act or pursuant to Rule 144 or
Regulation S promulgated thereunder or (ii) not more than 4,166,700 shares of
Common Stock from Tracinda or Seven, as the case may be, in one transaction or
a series of related transactions.
In addition, each of the Company, MGM Studios, Seven, Tracinda and Mr.
Mancuso has agreed that until the earlier to occur of (i) the fifteenth
anniversary of the closing date of the Offering and the Tracinda Purchase and
(ii) the date that Seven no longer beneficially owns at least 10,416,750
shares of the Common Stock, neither the Company nor MGM Studios shall (a) sell
or agree to sell or (b) license or agree to license for a period of more than
three years, in substantially all major territories of the world in one
transaction, or a series of related transactions, all or 85 percent or more of
the films then in the Library unless such sale, license or agreement shall
have been unanimously approved by the Board of Directors of the Company.
Thereafter, any such sale, license or agreement shall only require the
approval of a majority of a quorum of directors at a duly called meeting of
the Board of Directors of the Company.
Business Operations. Each of the Company, MGM Studios, Tracinda, Seven and
Mr. Mancuso has agreed to use their best efforts (until the fifteenth
anniversary of the closing date of the Offering and the Tracinda Purchase) to
ensure that neither the Company nor any of its subsidiaries engages in any
business activity except the entertainment business unless (i) all directors
of the Board of Directors shall have approved such engagement in other
business activities or (ii) a majority of the Board of Directors shall have
approved such engagement in other business activities and such engagement in
other business activities shall have been approved by the stockholders of the
Company in accordance with the applicable provisions of the DGCL. For purposes
of the Investors Shareholder Agreement, the entertainment business shall
include the acquisition, development, production, marketing, distribution,
exhibition, publication or use of intellectual property for purposes of
providing entertainment, education or information and all services and
activities reasonably related thereto, including the services and activities
currently provided or conducted by the Company and its subsidiaries.
First Refusal Rights. Each of Seven and Tracinda has agreed to be bound by
certain "first refusal" rights with respect to the sale, pledge, transfer,
assignment or other disposition ("Transfer") of their shares of capital stock
of the Company, subject to certain conditions. If prior to October 10, 2001,
either Tracinda or Seven desires to Transfer, directly or indirectly, in whole
or part, all or any portion of the shares of capital stock of the Company
beneficially owned by it, such party must provide the other party with a
written notice detailing the terms and conditions of such proposed Transfer
and the other party shall have, subject to certain notice requirements, the
right to purchase such shares on the same terms and conditions as the proposed
Transfer. The provisions relating to the right of first refusal will
terminate, with respect to such capital stock of the Company, upon the
transfer, in compliance with the provisions described in this paragraph, by
Tracinda or Seven of such capital stock to any person other than Tracinda or
Seven or their respective affiliates. These first refusal rights do not apply
to any bona fide pledge to a bank or other institutional financial lender.
The provisions relating to the right of first refusal will not apply to, in
the case of each of Tracinda and Seven, (i) the transfer of, or the grant of
options for the acquisition of, up to 312,502 shares of Common Stock (such
number to be appropriately adjusted in the event that the Company should
effect any stock dividend, stock split, reverse stock split or any similar
transaction after the date of the Investors Shareholder Agreement)
beneficially owned by it to officers, directors, employees, consultants and
affiliates so long as such transferee agrees in writing to be bound by all the
terms of the Investors Shareholder Agreement applicable to its transferor
77
<PAGE>
as if the transferee originally had been a party to the Investors Shareholder
Agreement and (ii) the transfer and assignment of all or any portion of the
capital stock of the Company beneficially owned by it to any direct or
indirect wholly owned subsidiary of such entity so long as (a) such transferee
agrees in writing to be bound by all the terms of the Investors Shareholder
Agreement applicable to its transferor as if the transferee originally had
been a party to the Investors Shareholder Agreement and (b) the transferor
agrees to cause such direct or indirect wholly owned subsidiary to continue to
be a direct or indirect wholly owned subsidiary of the transferor for so long
as such direct or indirect wholly owned subsidiary beneficially owns any such
capital stock of the Company.
Pre-emptive Rights. The Company has granted to each of Seven, Tracinda and
Mr. Mancuso certain pre-emptive rights with respect to the Common Stock. If,
at any time prior to the fifteenth anniversary of the closing date of the
Offering and the Tracinda Purchase, the Company proposes to issue to any
person any shares of the Common Stock or any securities exercisable for the
purchase of or convertible into the Common Stock, each of Seven, Tracinda and
Mr. Mancuso may subscribe for and purchase for cash a number of shares of the
Common Stock or securities exercisable for the purchase of or convertible into
the Common Stock, respectively, such that, after giving effect to such
issuance to such other persons and such purchase by any one or more of Seven,
Tracinda and Mr. Mancuso, as the case may be, such purchaser will continue to
beneficially own the same percentage of the outstanding Common Stock
(including securities exercisable for the purchase of or convertible into the
Common Stock) that such purchaser beneficially owned prior thereto.
Such pre-emptive rights shall not apply to: (i) the issuance of the Common
Stock or securities exercisable for the purchase of or convertible into the
Common Stock pursuant to a firm commitment underwritten public offering or
pursuant to Rule 144A or Regulation S promulgated under the Securities Act;
(ii) the issuance of the Common Stock or securities exercisable for the
purchase of or convertible into the Common Stock pursuant to a registration
statement directly or indirectly to the holders of the outstanding capital
stock of a corporation or other business entity with a class of equity
securities registered under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), in connection with the Company's acquisition of
such corporation or other business or substantially all of its assets (whether
by merger, consolidation, purchase of stock or assets or otherwise); (iii) the
grant of stock options to officers, directors or employees of the Company or
any of its subsidiaries pursuant to stock option plans approved by the Board
of Directors of the Company or the issuance of the Common Stock upon the
exercise of any such stock option; or (iv) the issuance of the Common Stock to
officers, directors or employees of the Company or any of its subsidiaries to
fulfill the Company's obligations pursuant to any savings plans or retirement
plans approved by the Board of Directors of the Company.
The price to be paid in any such purchase by any one or more of Seven,
Tracinda and Mr. Mancuso and the other terms of purchase shall be the same as
applicable to the purchase of the Common Stock or such other securities by
such other person, except that in all cases the price to be paid by Seven,
Tracinda and Mr. Mancuso shall be paid in cash. If such shares of the Common
Stock or such other securities are to be issued to such other person for
property or services, the price per share or other security to be paid by
Seven, Tracinda and Mr. Mancuso shall be equal to the fair market value per
share or other security of the property or services to be received by the
Company from such other person, as such fair market value is determined by the
independent directors of the Company elected to the Board of Directors of the
Company.
Such pre-emptive rights will terminate, with respect to either Seven or
Tracinda, at such time as such party beneficially owns less than 10,416,750
shares of the Common Stock (as presently constituted) and, with respect to
Mr. Mancuso, at such time as Mr. Mancuso is no longer the Chief Executive
Officer of the Company.
SHAREHOLDERS AGREEMENT
The following is a summary description of the material terms of the Amended
and Restated Shareholders Agreement (the "Shareholders Agreement") dated as of
August 4, 1997, by and among the Company, MGM Studios, Seven, Tracinda, Mr.
Mancuso and the other persons specified on the signature pages thereto
(Mr. Mancuso and such specified persons, collectively, "Executives"). This
summary description does not
78
<PAGE>
purport to be complete and is subject to and qualified in its entirety by
reference to the definitive Shareholders Agreement, a copy of which is filed
as an exhibit to the Registration Statement of which this Prospectus is a
part.
Tag-Along Rights. Each of Seven and Tracinda has agreed to be bound by
certain "tag-along" restrictions with respect to certain Transfers of their
shares of the Common Stock. If either Seven or Tracinda desires to Transfer
shares of the Common Stock beneficially owned by it, directly or indirectly,
in whole or in part (a "Tag-Along Sale"), then each of Seven, Tracinda, and
each of the Executives (collectively, the "Other Securityholders") shall have
certain "tag-along" rights, subject to certain notice provisions.
Specifically, each Other Securityholder shall have the right but not the
obligation, (i) in the case of the Executives, to exercise in the manner
provided in the Shareholders Agreement certain options held by such Executives
pursuant to the 1996 Incentive Plan to the extent required to realize the
"tag-along" rights of such Executives and (ii) to elect that Seven or
Tracinda, as the case may be, be obligated to require, as a condition to such
Tag-Along Sale, that the proposed purchaser purchase from each such electing
Other Securityholder a proportional number of shares (excluding shares of the
Common Stock acquired pursuant to open market purchases). Any such sales by
any Other Securityholder shall be on the same terms and conditions as the
proposed Tag-Along Sale by Seven or Tracinda, as the case may be and on the
same date as the closing of the proposed Tag-Along Sale.
In exercising the tag-along rights with respect to an Executive's options:
(i) the Executive's Series A Options must be exercised (to the extent then
vested) before the Executive's Series B Options may be exercised; (ii)
thereafter, the Executive's Series B Options (to the extent then vested) must
be exercised before the Executive's Series A Options (to the extent not
vested) may be exercised; (iii) then, the balance of the Executive's Series A
Options must be exercised before the balance of the Executive's Series B
Options may be exercised; and (iv) thereafter, the balance of the Executive's
Series B Options may be exercised.
The tag-along rights shall not apply to: (i) any transaction in which shares
of the Common Stock are proposed to be sold publicly pursuant to a
registration statement filed under the Securities Act or pursuant to Rule 144
promulgated under the Securities Act; (ii) any one transaction or series of
related transactions involving the transfer of less than one percent of the
then issued and outstanding shares of the Common Stock; (iii) any bona fide
pledge to a bank or other institutional financial lender; or (iv) any sale
from one of the parties to the Shareholders Agreement to another party
thereto, and shall terminate with respect to each of Seven and Tracinda at
such time as such party beneficially owns less than 10,416,750 shares of the
Common Stock.
In addition, the tag-along provisions shall not apply to, in the case of
each of Tracinda and Seven, (i) the transfer of, or the grant of options for
the acquisition of, up to 312,502 shares of the Common Stock (such number to
be appropriately adjusted in the event that the Company should effect any
stock dividend, stock split, reverse stock split, or any similar transaction
after the date of the Shareholders Agreement) beneficially owned by it to its
officers, directors, employees, consultants and affiliates so long as such
transferee agrees in writing to be bound by all the terms of the Shareholders
Agreement applicable to its transferor as if the transferee originally had
been a party to the Shareholders Agreement and (ii) the transfer and
assignment of all or any portion of the capital stock of the Company
beneficially owned by it to any direct or indirect wholly owned subsidiary of
such entity so long as (a) such transferee agrees in writing to be bound by
all the terms of the Shareholders Agreement applicable to its transferor as if
the transferee originally had been a party to the Shareholders Agreement and
(b) the transferor agrees to cause such direct or indirect wholly owned
subsidiary to continue to be a direct or indirect wholly owned subsidiary of
the transferor for so long as such direct or indirect wholly owned subsidiary
beneficially owns any such capital stock of the Company.
Demand Registration Rights. Seven, Tracinda and the Executives, at any time
following 180 days after the closing date of the Offering and the Tracinda
Purchase, have the right to make up to three requests, in the case of each of
Seven and Tracinda, and up to two requests with respect to all of the
Executives, for registration ("Demand Registration") under the Securities Act
of all or part of the Common Stock or securities issued as a dividend on or
distribution with respect to or in exchange, replacement or in subdivision of,
any such Common Stock, which have not been sold pursuant to an effective
registration statement under the Securities Act or
79
<PAGE>
pursuant to Rule 144 under the Securities Act (the "Registrable Securities")
held by them; provided that any request for a Demand Registration shall not be
otherwise deemed to be effective unless such request includes Registrable
Securities with an estimated value of no less than $50 million. Demand
Registration requests may be for shelf registrations (covering sales on a
delayed or contingent basis) if the Company is then eligible to effect shelf
registrations. The Company will pay all of the expenses of any such Demand
Registration, including the fees and expenses of a single counsel retained by
the selling stockholders; however, each selling stockholder will be
responsible for the underwriting discounts and commissions and transfer taxes
in connection with shares sold by such stockholder and any party requesting
long-form registration when short-form registration is available will bear the
incremental cost thereof. Each selling stockholder and the underwriters
through whom shares are sold on behalf of a selling stockholder will be
entitled to customary indemnification from the Company and MGM Studios, in the
case of the selling stockholders, and the Company, in the case of the
underwriters, against certain liabilities, including liabilities under the
Securities Act.
The Company will not be obligated to effect any Demand Registration within
six months after the effective date of a previous Demand Registration and
during any two-year period, the Company may make a one-time election to
postpone the filing or the effectiveness of a registration statement for a
Demand Registration for up to six months if the Board of Directors of the
Company determines, in its good faith judgment, that (i) such Demand
Registration would reasonably be expected to have a material adverse effect
on, interfere with or delay any proposal or plan by the Company to engage in
any acquisition of assets (other than in the ordinary course of business) or
any merger, consolidation, tender offer or similar transaction, (ii) the
filing of a registration statement or a sale of Registrable Securities
pursuant thereto would require disclosure of material information that the
Company has a bona fide business purpose for preserving as confidential or
(iii) the Company is unable to comply with the registration requirements of
the Commission; provided, that, in such event, the holders of shares of
Registrable Securities initially requesting such Demand Registration will be
entitled to withdraw such request and, if such request is withdrawn, such
request for Demand Registration will not count as a request for Demand
Registration under the Shareholders Agreement and the Company will pay all
Registration Expenses in connection with such withdrawn registration request.
The party requesting Demand Registration may select the managing underwriters,
who must be of national prominence and reasonably acceptable to the Company.
"Piggyback" Registration Rights. If after the closing date of the Offering
and the Tracinda Purchase the Company proposes to register any of its equity
securities under the Securities Act (other than a registration on Form S-4 or
Form S-8 or any successor or similar forms) and the registration form to be
used may be used for the registration of Registrable Securities, whether or
not for sale for its own account, each of Tracinda, Seven and the Executives
shall be entitled to request that Registrable Securities of the same class
beneficially owned by such party be included in such registration (a
"Piggyback Registration"); provided that if a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
shares of the Common Stock requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
reasonably acceptable to the Company, the Company will include in such
registration (i) first, the securities the Company proposes to sell and (ii)
second, all other securities requested to be included in such registration,
pro rata among the respective holders thereof on the basis of the number of
securities owned by each such holder; provided further, that if a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
securities of the Company, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering within a price range reasonably acceptable to such holders, the
Company will include in such registration the securities requested to be
included in such registration, pro rata among the respective holders thereof
on the basis of the number of securities owned by each such holder. The
Company will pay all of the expenses of any such Piggyback Registration,
including the fees and expenses of a single counsel retained by the selling
stockholders; however, each selling stockholder will be responsible for the
underwriting discounts and commissions and transfer taxes in connection with
shares sold by such stockholder. Each selling stockholder and the underwriters
through whom shares are sold on behalf of a selling stockholder will be
entitled to customary indemnification from the Company and MGM Studios, in the
case of the selling stockholders, and the Company, in the case of the
underwriters against certain liabilities, including liabilities under the
Securities Act.
80
<PAGE>
Certain Holdback Agreements. Each of Seven, Tracinda and the Executives has
agreed, if requested in writing by the Company or any managing underwriters of
registration effected in accordance with the proceeding described in the
preceding three paragraphs, not to effect any public sale or distribution
(including sales pursuant to Rule 144) of shares of equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
equity securities, during the period reasonably requested by the managing
underwriters, not to exceed the period commencing with the date seven days
prior to and ending with the date 90 days, or such longer period, not to
exceed 180 days, as the managing underwriters shall request, after the
effective date of any underwritten registration by the Company of its
securities (except as part of such underwritten registration). The Company has
agreed to a similar restriction, if requested by the managing underwriters of
any such underwritten registration (except as part of such underwritten
registration or pursuant to registrations on Form S-4 or Form S-8 or any
successor forms), and to use its best efforts to cause certain holders of its
capital stock (other than in a registered public offering), to so agree.
Form S-8. The Company will, within six months following the closing date of
the Offering and the Tracinda Purchase, cause to become effective a
registration statement on Form S-8 with the Commission with respect to shares
of capital stock of the Company subject to options granted to the Executives
pursuant to the 1996 Incentive Plan.
81
<PAGE>
FINANCING ARRANGEMENTS
The following is a summary of the material terms of the Amended Credit
Facility, and is qualified in its entirety by reference to the definitive
agreements and instruments governing such indebtedness, copies of which have
been filed as exhibits to the Registration Statement.
General. In October 1997 MGM Studios and Orion (collectively, the
"Borrowers") entered into the Amended Credit Facility with Morgan, as
Administrative Agent (the "Agent") and a syndicate of banks (the "Banks")
arranged by J.P. Morgan Securities Inc. and BancAmerica Securities, Inc.,
which provides for borrowings up to $1.3 billion in aggregate principal
amount. The credit facilities provided in the Amended Credit Facility consist
of a seven and one-half year amortizing term loan in the amount of
$400 million (the "Tranche A Facility"), an eight and one-half year term loan
in the amount of $300 million (the "Tranche B Facility") and a six-year
revolving loan in the maximum amount of $400 million (the "Revolving Credit
Facility"). The Revolving Credit Facility will be increased to $600 million
upon receipt by the Company of gross proceeds of at least $250 million from
the issuance and sale of Common Stock, including in connection with the
Offering and the Tracinda Purchase. Amounts available under the Revolving
Credit Facility may be utilized for general corporate purposes.
The Borrowers have the option to borrow an additional $200 million term loan
in the future (the "Tranche C Facility"), with the consent of lenders holding
at least 66 2/3 percent of the aggregate loans and commitments and subject to
syndication thereof. The Tranche C Facility would be required to have a final
maturity no earlier than the final maturity of the Tranche B Facility and no
substantial amortization prior to that date.
Amortization. The Tranche A Facility will require no substantial
amortization until 2001, and thereafter will fully amortize by final maturity.
The Tranche B Facility requires no substantial amortization prior to the final
maturity thereof. The borrowing availability under the Revolving Credit
Facility is not scheduled to be reduced prior to final maturity.
Prepayment. The term loans are required to be prepaid (and, if the term
loans are prepaid in full, the Revolving Credit Facility is required to be
reduced) out of (i) the net proceeds of incurrence of additional indebtedness
by the Company or any of its subsidiaries, with certain exceptions, (ii) the
net proceeds of certain asset sales (including certain license agreements with
respect to motion picture and television product) and of casualty insurance
proceeds and condemnation awards, subject to certain exceptions, and (iii) 75
percent of excess cash flow (as defined in the Amended Credit Facility) in
each fiscal year (or 50 percent for any year in which the Borrowers' leverage
ratio is below a specified level on the last day of the year), in any case
subject to certain exceptions, including an exception for the first
$50 million of cumulative excess cash flow.
Guarantees and Security. All of the Borrowers' domestic material
subsidiaries have guaranteed the Borrowers' obligations under the Amended
Credit Facility. The Borrowers' obligations under the Amended Credit Facility,
and their respective subsidiaries' obligations under their respective
guarantees, are secured by security interests and liens granted to the Agent
in substantially all of the assets of the Borrowers and their respective
subsidiaries, including copyrights, distribution rights, license, royalty and
other contract rights with respect thereto, trademarks and other intellectual
property, securities and receivables, except to the extent that granting such
a security interest or lien would constitute a breach of or default under a
contract by which such property interest arises.
Interest Rates. Interest is payable quarterly in arrears on all borrowings
under the Amended Credit Facility at a variable rate equal to either (i) the
sum of 1.50 percent (1.75 percent for the Tranche B Facility) plus the rate
established by the Agent from time to time as its base rate or (ii) the sum of
2.50 percent (2.75 percent for the Tranche B Facility) plus LIBOR. Interest
that accrues at the LIBOR-based rate will be payable at the end of each
interest period for interest periods of three months or less and quarterly in
arrears for interest periods of six months. The interest rate margins over the
base rate and LIBOR will be decreased by 0.25 percent upon consummation of the
Offering, and are subject to further adjustment from time to time based on the
Borrowers' performance under certain financial tests and ratios.
82
<PAGE>
If at any time an event of default, as defined in the Amended Credit
Facility, occurs, interest will accrue on the principal amount of all
outstanding obligations under the Amended Credit Facility at an annual rate
that is two percent greater than the rate that would otherwise be in effect,
for so long as such event of default continues.
Covenants. The Amended Credit Facility contains customary covenants which,
among other things, (i) require the Borrowers to satisfy certain financial
tests and ratios (including a minimum net worth requirement, maximum leverage
(measured both by reference to the Borrowers' combined earnings before
interest, taxes, depreciation and amortization and to cash flow from the
Library), an interest coverage ratio and maximum annual capital expenditures)
and (ii) impose certain limitations on (a) the incurrence of additional
indebtedness by the Company or the Borrowers, (b) the creation or incurrence
of liens, (c) the making of investments, (d) mergers and acquisitions and
sales or other dispositions of assets (including certain licensing
agreements), (e) transactions with affiliates and (f) the incurrence of lease
obligations. The Amended Credit Facility also requires the Borrowers to enter
into certain interest rate hedging arrangements, and requires them to release
a minimum number of new films each year.
The Amended Credit Facility also generally prohibits the Borrowers from
making any dividend payment or other distribution with respect to, or
redeeming or acquiring, any capital stock of the Borrowers.
These covenants will continue in effect so long as any of the funding
commitments under the Amended Credit Facility are in effect and until all
loans under the Amended Credit Facility and interest thereon and other amounts
payable by the Borrowers under the Amended Credit Facility are paid in full.
As of the date hereof, the Borrowers were in compliance with these covenants
in all material respects.
Events of Default. The Amended Credit Facility enumerates several
occurrences that constitute events of default thereunder, including: (i) the
failure to pay any principal, interest or other amounts due under the Amended
Credit Facility when due, subject in some cases to a period of grace; (ii) the
failure to maintain financial covenants or to comply with other restrictive
covenants; (iii) the failure to comply with any other provision of the Amended
Credit Facility or related documents, subject in some cases to a period of
grace; (iv) the occurrence of certain events of bankruptcy or insolvency with
respect to the Company or a material subsidiary; (v) a default in certain
other obligations of the Company or its subsidiaries; and (vi) the breach of
any representation or warranty made by the Company.
Additionally, the occurrence of a "change in control" constitutes an event
of default. A change of control occurs if Tracinda and Seven collectively do
not maintain voting and economic control over at least 35 percent of each
class of capital stock of the Company, any person or group of persons obtains
voting or economic control over a greater percentage of any class of the
outstanding capital stock of the Company than Tracinda and Seven,
collectively, or if the directors nominated by Tracinda, Seven or Mr. Mancuso
pursuant to the Investors Shareholder Agreement (or appointed by such
directors to fill vacancies) no longer constitute a majority of the Company's
Board of Directors.
83
<PAGE>
CERTAIN TRANSACTIONS
The Company believes the transactions described below that were entered into
by the Company and its subsidiaries were beneficial to the respective
companies, and were no less favorable to the respective companies than could
have been obtained from unaffiliated third parties pursuant to arms-length
negotiations.
CERTAIN MATTERS RELATING TO THE MGM ACQUISITION
The First Private Placement
In October 1996 the Company acquired all of the outstanding capital stock of
MGM Studios and its subsidiaries from CDR for an aggregate consideration of
$1.3 billion. In order to finance such purchase, the Company sold capital
stock to Tracinda and Seven as described below. (The remainder of the purchase
price was financed by borrowings under the Original MGM Credit Facility.)
Pursuant to an investment agreement dated July 11, 1996 among Seven, Tracinda
and the Company, Tracinda purchased 8,333,400 shares of the Common Stock and
450,000 shares of the Series A Preferred Stock (which will be converted into
18,750,150 shares of the Common Stock immediately prior to the completion of
the Offering pursuant to the Series A Preferred Stock Conversion and the Stock
Split) and Seven purchased 8,333,400 shares of the Common Stock and 50,000
shares of the Series A Preferred Stock (which will be converted into 2,083,350
shares of the Common Stock immediately prior to the completion of the Offering
pursuant to the Series A Preferred Stock Conversion and the Stock Split), for
a purchase price (after giving effect to the Series A Preferred Stock
Conversion and Stock Split) of $24.00 per share (which is $2.50 more than the
mid-point of the price range set forth on the cover page hereof) and an
aggregate purchase price of $900 million. The Series A Preferred Stock will be
converted into shares of the Common Stock pursuant to the Series A Preferred
Stock Conversion.
Consideration Paid by the Company to Directors, Named Executive Officers and
Current Stockholders
In consideration of financial advisory services provided to the Company in
connection with the MGM Acquisition, the Company entered into Stock Option
Agreements dated October 10, 1996 with Tracinda and Celsus, an entity wholly-
owned by Michael R. Gleason, pursuant to which each of Tracinda and Celsus was
granted an option by the Company to purchase 156,251 shares of the Common
Stock, at a price per share of $6.41 (which is $15.09 less than the mid-point
of the price range set forth on the cover page hereof). The options became
exercisable on October 10, 1997 and expire on October 10, 2002. The Company
also paid each of Tracinda and Celsus $4,750,000 as additional consideration
for such services and for certain out-of-pocket and other expenses incurred by
Tracinda and Celsus in connection with the MGM Acquisition.
In order to induce certain employees to waive certain rights under their
then-existing employment agreements (relating to the change in control) and to
induce certain of such employees to enter into new employment agreements, the
Company made payments in cash and in-kind in the form of capital stock (valued
at $24.00 per share) to such persons. The aggregate amount of such cash
payments to the directors of the Company and the Named Executive Officers was
$1,885,371. (The foregoing amount does not include an aggregate amount of
$15,669,183 in CL Payments paid by CL to such persons. See "Management--
Executive Compensation--CL Payments.") The aggregate number of shares of the
Common Stock so granted to directors of the Company or the Named Executive
Officers was 118,335. The new employment agreements referenced above contain
certain provisions regarding termination payments. See "Management--Executive
Compensation," "--Employment Agreements" and "Ownership of Voting Securities."
In addition to the foregoing, the Company paid fees and expenses in
connection with the MGM Acquisition (and the Original MGM Credit Facility) to
unrelated third parties totaling $48.6 million, including investment banking
fees of $18.0 million, financing fees of $25.7 million and legal fees of $3.9
million.
84
<PAGE>
THE SECOND PRIVATE PLACEMENT
Pursuant to an investment agreement dated May 2, 1997 among Seven, Tracinda
and the Company, and in connection with the Orion Acquisition, Tracinda
purchased 13,375,107 shares of the Common Stock and Seven purchased 1,625,013
shares of the Common Stock, for a purchase price of $24.00 per share and an
aggregate purchase price of $360 million.
CAPITAL CALL AGREEMENT
Pursuant to an agreement dated as of October 10, 1996 among Seven, Tracinda,
the Company, MGM Studios and the agent for the lending banks under the
Original MGM Credit Facility (the "Capital Call Agreement"), Tracinda and
Seven agreed to provide an aggregate of up to $60 million of equity to the
Company upon the occurrence of certain events. The Capital Call Agreement and
the obligations of Tracinda and Seven thereunder will terminate upon
completion of the Offering and the Tracinda Purchase.
SALES OF UNREGISTERED SECURITIES TO MR. MANCUSO
Pursuant to Mr. Mancuso's employment agreement, Mr. Mancuso receives a
monthly payment of $250,000, out of the after tax proceeds of which he is
required to purchase shares of the Common Stock at a price of $24.00 per share
until December 31, 1997 and, thereafter, at the fair market value of such
shares. As of September 30, 1997, Mr. Mancuso had purchased 61,500 shares of
the Common Stock for aggregate consideration of $1,476,000. See "Management--
Employment Agreements--Frank G. Mancuso." The Company believes that the
issuance of such shares to Mr. Mancuso was exempt from registration under
Section 4(2) of the Securities Act.
INVESTORS SHAREHOLDER AGREEMENT AND SHAREHOLDERS AGREEMENT
Seven, Tracinda, Mr. Mancuso, the Company and MGM Studios are parties to the
Investors Shareholder Agreement and the Shareholders Agreement, each of which
contains certain provisions relating to the corporate governance of the
Company and provide for certain rights relating to the shares of the Common
Stock, including registration rights and transfer restrictions. See "Ownership
of Voting Securities--Investors Shareholder Agreement" and "--Shareholders
Agreement."
TRACINDA PURCHASE
Concurrently with the consummation of the Offering, Tracinda and the Company
will consummate the Tracinda Purchase, pursuant to which Tracinda will
purchase directly from the Company, at a purchase price of $ per share
(equal to the per share price to public, less the underwriting discount),
shares of the Common Stock, for an aggregate purchase price of $75
million. Based on the mid-point ($21.50) of the range set forth on the cover
page, the number of shares of the Common Stock to be purchased by Tracinda in
the Tracinda Purchase would be 3,691,399 and the price per share is estimated
to be $20.3175.
OTHER TRANSACTIONS WITH TRACINDA AND ITS AFFILIATES
In 1980 Old MGM granted to Grand Hotel an exclusive open-ended royalty-free
license to use certain trademarks and tradenames that include the letters
"MGM," as well as logos consisting of a stylized depiction of a lion in its
hotel/gaming business and other businesses that are not entertainment-related.
In 1986 MGM/UA granted Grand Air an exclusive open-ended royalty-free license
to use one of its logos consisting of a stylized depiction of a lion in Grand
Air's airline business. The Company did not receive any compensation for this
license. See "Business--Trademarks and Consumer Products." Tracinda owns a
majority of the outstanding common stock of Grand Hotel, and Grand Air was a
subsidiary of Grand Hotel. Additionally, the Company and affiliates of
Tracinda occasionally conduct cross-promotional campaigns, in which the
Company's motion pictures and the affiliates' hotels are promoted together;
however, the Company believes that the amounts involved are immaterial.
85
<PAGE>
Home Entertainment has granted to Grand Hotel, or certain of its affiliates,
limited short-term, nonexclusive licenses to key art, still photographs of
artwork and one minute film clips from certain MGM Pictures and UA Pictures
releases for use in an "in-room" only publication for the MGM Grand
Hotel/Casino in Las Vegas, a clip reel program for the benefit of Make-a-Wish
foundation and promoting the sale of videocassettes containing such releases
at the MGM Grand Hotel/Casino in Las Vegas. The Company did not receive any
compensation for these licenses.
The Company sells to Grand Hotel, and certain of its affiliates, on a
wholesale basis merchandise such as baseball caps, clothing, keychains and
watches bearing the Company's trademarks and logos for resale to consumers in
retail shops located within Grand Hotel's hotels. Grand Hotel currently is the
Company's largest wholesale customer of the Company's merchandise and,
consequently, receives customary volume discounts from the Company.
In 1997 MGM Studios and Grand Hotel entered into a site location agreement
with respect to production of a pilot episode of a television series being
developed by MGM Studios. Grand Hotel was not compensated for the use of the
site, but was compensated, on customary terms, for services provided by Grand
Hotel.
From time to time, the Company uses aircraft owned by Tracinda for use in
the Company's business. The Company believes that the terms of such
arrangements are no less favorable to the Company than those that could be
obtained from unrelated parties. From October 10, 1996 to June 30, 1997, the
aggregate of the payments made to Tracinda for the use of such aircraft was
approximately $10,000.
In January 1997 MGM Studios entered into an agreement with Tracinda and
certain former directors of MGM/UA (including Kirk Kerkorian) (the "Insurance
Allocation Agreement") to allocate the proceeds of directors and officers
liability insurance policies relating to litigation filed prior to 1991
against MGM/UA, Tracinda and such former directors. The Insurance Allocation
Agreement provides for the proceeds of such policies (and certain legal fees
incurred to obtain such proceeds) to be allocated 65 percent to MGM Studios
and 35 percent to Tracinda (on behalf of such former directors). The Company
believes that the terms of the Insurance Allocation Agreement were fair and
equitable to the respective parties and were the result of arm's-length
negotiations between MGM Studios and Tracinda (on behalf of such former
directors). The total proceeds of such policies aggregated $8 million as of
September 30, 1997, of which $5.2 million was allocated to MGM Studios.
OTHER TRANSACTIONS WITH SEVEN AND ITS AFFILIATES
In 1995 the Company licensed to a subsidiary of Seven the right to
distribute certain motion picture and television product in the Australian
free television market. This agreement was amended on September 9, 1997. The
product licensed includes certain Library pictures and theatrical motion
pictures and television series, miniseries and made-for-television movies
produced or distributed by the Company during the term of the agreement. The
license fees for the Library product are at a rate which the Company believes
is arm's-length. The term of the output portion of the agreement is 20 years,
subject to reduction to 10 years if there is a change of control of Seven or
Seven no longer beneficially owns shares of the Common Stock having a value of
at least $185 million. The license fees for output product television series,
television movies and television mini-series are on a "most favored nations"
basis with prices paid by the Seven subsidiary for comparable programming.
During the period from October 11, 1996 to December 31, 1996 and for the six
months ended June 30, 1997, the Company recognized revenues of $1,055,000 and
$2,395,000, respectively, under this agreement.
In 1994, in connection with the formation of MovieVision, a joint venture in
which the Company and a subsidiary of Seven have non-controlling interests,
the Company licensed to the joint venture certain of its current theatrical
and television motion pictures, as well as a number of Library pictures, for
distribution on Australian pay and basic cable television. The agreement
expires on June 30, 2000, with all motion pictures covered by the agreement
reverting to the Company within one year after that date, but both the Company
and MovieVision have the right to extend the license for a further five years.
The Company receives a license fee for each picture that is based on the
number of MovieVision's subscribers. The Company believes that the terms of
86
<PAGE>
the agreement are no less favorable to the Company than those contained in its
licenses with unaffiliated licensees. See "Business--Pay and Free Television."
Seven has agreed to reimburse the Company for losses that the Company may
incur in connection with the distribution of Joey, an Australian film with
respect to which the Company has acquired distribution rights from an
unrelated third party.
OTHER
The Company has an exclusive producer overhead arrangement with Frank
Mancuso, Jr., the son of Mr. Mancuso, which expires on July 31, 2002. Mr.
Mancuso, Jr. receives $400,000 each year, subject to five to ten percent
annual increases, for overhead expenses, as well as a development fund and a
production fund to pay for the costs of developing and producing projects. Mr.
Mancuso, Jr. must submit all projects that he wishes to produce or develop to
the Company. Mr. Mancuso, Jr. receives a producing fee, as well as certain
participations and royalties, for each picture that is produced under the
arrangement. From January 1, 1996 to July 31, 1997 these fees, participations
and royalties (for movies produced by Mr. Mancuso, Jr. such as Species, Fled
and Hoodlum) have totalled approximately $2.2 million. The Company has the
right to acquire the domestic or worldwide rights to each picture produced
under the arrangement and controls all remake, sequel and television rights.
In connection with the commencement of Mr. Corrigan's employment with the
Company, the Company entered into a loan agreement dated July 30, 1997 with
Mr. Corrigan pursuant to which the Company made an unsecured and interest-free
loan to Mr. Corrigan in the principal amount of $91,000 in order to assist
Mr. Corrigan in the purchase of a residence in the Los Angeles area. Mr.
Corrigan has repaid all amounts borrowed under this loan agreement.
87
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1997 there were outstanding 52,711,921 shares of Common
Stock. Upon completion of the Offering and the Tracinda Purchase, the Company
will have approximately 65,403,320 of the Common Stock outstanding. The
9,000,000 shares sold in the Offering will be freely tradable without
restriction under the Securities Act, except for any such shares held at any
time by an "affiliate" of the Company, as such term is defined under Rule 144
promulgated under the Securities Act.
All of the shares of the Common Stock outstanding prior the consummation of
the Offering (52,711,911 as of September 30, 1997) were issued, and the
estimated 3,691,399 shares to be issued in the Tracinda Purchase will be
issued, in private transactions and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption
from registration, such as Rule 144. In general, under Rule 144, as currently
in effect, a person who has beneficially owned shares for at least one year,
including an "affiliate," as that term is defined in Rule 144, is entitled to
sell, within any three-month period, a number of "restricted" shares that does
not exceed the greater of one percent of the then outstanding shares of the
Common Stock (approximately 652,500 shares immediately after the Offering) and
the average weekly trading volume during the four calendar weeks preceding
such sale. Sales under Rule 144 are subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Rule 144(k) provides that a person who is not
deemed an "affiliate" and who has beneficially owned shares for at least two
years is entitled to sell such shares at any time under Rule 144 without
regard to the limitations described above.
The Company has granted outstanding employee stock options to purchase an
aggregate of 5,205,702 shares of the Common Stock as of September 30, 1997.
The shares issuable upon the exercise of such options will be "restricted"
shares for Rule 144 purposes until such time as the Company registers such
shares under the Securities Act. The Company has undertaken to register the
shares of the Common Stock issuable upon exercise of employee stock options
within six months following completion of the Offering. See "Management--
Incentive and Bonus Plans--1996 Incentive Plan" and "Ownership of Voting
Securities--Shareholders Agreement--Form S-8." The Company also has
outstanding options to purchase an aggregate of 312,502 shares of the Common
Stock, which options are held by Tracinda and Celsus. See "Certain
Transactions--Stock Option Grants and Reimbursement of Fees to Tracinda and
Celsus in Connection with the MGM Acquisition."
The parties to the Shareholders Agreement, who in the aggregate held all of
the outstanding shares of Common Stock as of September 30, 1997, have been
granted certain registration rights with respect to shares of the Common Stock
in connection with this Offering by the Company and in connection with certain
future public offerings effected by the Company, Seven, Tracinda and each of
the Executives have waived their registration rights with respect to the
Offering. See "Ownership of Voting Securities--Shareholders Agreement."
The Company, Tracinda, Seven and each of the Executives will agree with the
Underwriters not to sell or otherwise dispose of any shares of the Common
Stock for a period of 180 days from the date of this Prospectus without the
prior written consent of Merrill Lynch.
The Company is unable to estimate the number of shares that may be sold in
the future by the existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of the Common Stock
by such stockholders could adversely affect prevailing market prices. See
"Risk Factors--Shares Eligible for Future Sale."
88
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Merrill Lynch, J.P. Morgan Securities Inc., Bear,
Stearns & Co. Inc. and Furman Selz LLC are acting as representatives (the
"U.S. Representatives"), severally has agreed to purchase, the number of
shares of the Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce Fenner & Smith
Incorporated.......................................................
J.P. Morgan Securities Inc. .......................................
Bear, Stearns & Co. Inc. ..........................................
Furman Selz LLC....................................................
---------
Total......................................................... 7,200,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement" and, together with the U.S. Purchase Agreement, the
"Purchase Agreements") with certain Underwriters outside the United States and
Canada (the "International Underwriters"), for whom Merrill Lynch
International, J.P. Morgan Securities Ltd., Bear, Stearns International
Limited and Furman Selz LLC are acting as representatives (the "International
Representatives" and, together with the U.S. Representatives, the
"Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, the Company has agreed to sell to the
International Underwriters, and the International Underwriters have severally
agreed to purchase from the Company, an aggregate of 1,800,000 shares of the
Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of the Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of the Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain circumstances
under the Purchase Agreements, the purchase commitments of non-defaulting
Underwriters may be increased. Each Purchase Agreement provides that the
Company is not obligated to sell, and the Underwriters named therein are not
obligated to purchase, the shares of the Common Stock under the terms of such
Purchase Agreement unless all of the shares of the Common Stock to be sold
pursuant to such Purchase Agreement are contemporaneously sold. The sale of
shares of the Common Stock to the U.S. Underwriters and the sale of shares of
the Common Stock to the International Underwriters are conditioned on each
other.
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose to offer the shares of the Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of the Common Stock, and that the U.S. Underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of the Common
Stock on sales to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.
The Company has granted options to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
864,000 additional shares of the Common Stock at the initial
89
<PAGE>
public offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The U.S. Underwriters may exercise these options only
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the U.S. Underwriters exercise these options, each
U.S. Underwriter will be obligated, subject to certain conditions, to purchase
a number of additional shares of the Common Stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Company has
also granted options to the International Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
216,000 additional shares of the Common Stock to cover over-allotments, if
any, on terms similar to those granted to the U.S. Underwriters.
The initial public offering price per share of the Common Stock and the
underwriting discount per share of Common Stock are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.
The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the U.S.
Underwriters and the International Underwriters are permitted to sell shares
of the Common Stock to each other.
Each of the Company, Tracinda, Seven and each of the Executives has agreed
not to sell, offer to sell, grant any options for the sale of, or otherwise
dispose of, any shares of the Common Stock or securities convertible into or
exchangeable or exercisable for the Common Stock (other than, in the case of
the Company, sales pursuant to the exercise of the outstanding options) for a
period of 180 days after the date of this Prospectus without the prior written
consent of Merrill Lynch, subject to certain limited exceptions included in
the Purchase Agreements.
The Company has been informed that, under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
the Common Stock will not offer to sell or resell shares of the Common Stock
to persons who are non-U.S. or non-Canadian persons, or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Underwriters and any bank, broker, or dealer to whom
they sell shares of the Common Stock will not offer to sell or resell shares
of the Common Stock to U.S. persons or to Canadian persons or to persons they
believe intend to resell to U.S. persons or to Canadian persons, except in the
case of transactions pursuant to the Intersyndicate Agreement which, among
other things, permits the Underwriters to purchase from each other and to
offer to resell such number of shares of the Common Stock as the selling
Underwriter or Underwriters and the purchasing Underwriter or Underwriters may
agree.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
The Common Stock has been approved for listing (subject to official notice
of issuance) on the NYSE under the symbol "MGM." In order to meet requirements
for listing on the NYSE, the Underwriters have undertaken to sell lots of 100
or more shares of the Common Stock to a minimum of 2,000 beneficial holders.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of the Common
Stock than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing shares of the Common
Stock in the open market.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
90
<PAGE>
In general, purchases of shares of the Common Stock for the purpose of
stabilization or to reduce a short position could cause the price of the
Common Stock to be higher than it might be in the absence of such purchases.
The imposition of a penalty bid might also have an effect on the price of the
Common Stock to the extent that it were to discourage resales of the Common
Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Underwriters have reserved for sale, at the initial public offering
price, shares of the Common Stock for certain employees, directors, vendors
and affiliates of the Company who have expressed an interest in purchasing
such shares of Common Stock. Such employees, directors and other persons are
expected to purchase, in the aggregate, not more than 5% of the Common Stock
offered in the Offering. The number of shares available for sale to the
general public in the Offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same basis as the other shares offered
hereby.
Net proceeds of the Offering will be used to reduce indebtedness under the
Amended Credit Facility. An affiliate of J.P. Morgan Securities Inc. serves as
an agent for a syndicate of lenders and as a lender under the Company's
Amended Credit Facility. Therefore, J.P. Morgan Securities Inc. may be deemed
to have an affiliate receiving more than 10 percent of the net proceeds of the
Offering. In such circumstances, Rule 2710 of the National Association of
Securities Dealers, Inc. ("NASD") requires that initial public offering price
be no higher than that recommended by a "qualified independent underwriter"
meeting certain standards. In addition, Culmen Group, L.P. (an NASD member and
a member of the selling group) may be deemed to be an affiliate of the Company
under NASD Rule 2720, which provides that, among other things, the initial
public offering price must be recommended by a qualified independent
underwriter when an NASD member participates in the underwriting of an
affiliate's equity securities. Merrill Lynch has agreed to serve in such role
and has agreed to recommend a price in compliance with the requirement of NASD
Rule 2720. In connection with the Offering, Merrill Lynch, in its role as
qualified independent underwriter, has performed due diligence investigations
and reviewed and participated in the preparation of the Prospectus and the
Registration Statement of which this Prospectus forms a part. In addition, the
Underwriters may not confirm sales to any discretionary account without the
prior written approval of the customer.
Prior to the Offering, there has been no public market for the shares of the
Common Stock. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representatives.
Among the factors that will be considered in such negotiations, in addition to
prevailing market conditions, will be the current market valuations of
publicly traded companies that the Company and Representatives believe to be
reasonably comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which the Company will compete, an assessment of the Company's management,
the past and present operations of the Company, the prospects for, and timing
of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
The U.S. Underwriters and the International Underwriters have informed the
Company that they do not intend to confirm sales of the shares of the Common
Stock offered hereby to any accounts over which they exercise discretionary
authority.
Furman Selz LLC and certain affiliates of J.P. Morgan Securities Inc. and
Merrill Lynch have been engaged from time to time (including, in the case of
J.P. Morgan Securities Inc., at the present time), and may in the future be
engaged, to perform banking, advisory-related and/or other services to the
Company and its affiliates in the ordinary course of business. In connection
with rendering such services, such Underwriters receive customary
compensation, including reimbursement of related expenses.
91
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los
Angeles, California. Certain matters in connection with the offering will be
passed upon for the Underwriters by O'Melveny & Myers LLP, Los Angeles,
California, which represents the Company with respect to unrelated matters,
and may continue to do so in the future.
EXPERTS
The Audited Consolidated Financial Statements of the Company for the period
from October 11 to December 31, 1996 and the Consolidated Financial Statements
of MGM Studios for the period from January 1 to October 10, 1996 included in
this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. The Consolidated
Financial Statements of MGM Studios for the years ended December 31, 1994 and
1995 were audited by Price Waterhouse LLP, independent public accountants, as
stated in their report appearing herein. The Consolidated Financial Statements
of MGM for the years ended December 31, 1992 and 1993 were audited by KPMG
Peat Marwick LLP, independent auditors. The consolidated financial statements
of Orion Pictures Corporation and subsidiaries as of December 31, 1996 and for
the year then ended have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) on Form S-1 under the Securities Act, with respect
to the Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the content
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. The Registration Statement, including the exhibits and schedules
thereto, as well as reports, proxy and information statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at its principal office
located at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
the New York Regional Office located at 75 Park Place, New York, New York
10007, and the Chicago Regional Office located at Northwest Atrium Center, 500
West Madison Street, Room 1204, Chicago, Illinois 60661-2511, and copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Electronics filings made by the Company through the Commission's
Electronic Data Gathering, Analysis and Retrieval System are publicly
available through the Commission's World Wide Web site (http://www.sec.gov),
which contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Upon
listing on the NYSE, reports and other information concerning the Company can
also be inspected at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
METRO-GOLDWYN-MAYER INC.
SUCCESSOR CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997
(Unaudited)............................................................ F-3
Consolidated Statements of Operations for the Period From October 11,
1996 to December 31, 1996 and for the Six Months Ended June 30, 1997
and 1996 (Unaudited)................................................... F-4
Consolidated Statements of Stockholders' Equity for the Period From
October 11, 1996 to December 31, 1996 and for the Six Months Ended June
30, 1997 (Unaudited)................................................... F-5
Consolidated Statements of Cash Flows for the Period From October 11,
1996 to December 31, 1996 and for the Six Months Ended June 30, 1997
and 1996 (Unaudited)................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
METRO-GOLDWYN-MAYER STUDIOS INC.
PREDECESSOR CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................ F-23
Report of Independent Public Accountants................................ F-24
Consolidated Balance Sheets as of October 10, 1996 and December 31,
1995................................................................... F-25
Consolidated Statements of Operations for the Period From January 1,
1996 to October 10, 1996 and for the Years Ended December 31, 1995 and
1994................................................................... F-26
Consolidated Statements of Stockholder's Equity for the Period From
January 1, 1996 to October 10, 1996 and for the Years Ended December
31, 1995 and 1994...................................................... F-27
Consolidated Statements of Cash Flows for the Period From January 1,
1996 to October 10, 1996 and for the Years Ended December 31, 1995 and
1994................................................................... F-28
Notes to Consolidated Financial Statements.............................. F-29
ORION PICTURES CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................ F-41
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997
(Unaudited)............................................................ F-42
Consolidated Statements of Operations for the Year Ended December 31,
1996 and the Six Months Ended June 30, 1997 and 1996 (Unaudited)....... F-43
Consolidated Statements of Shareholder's Equity (Capital Deficiency) for
the Year Ended December 31, 1996 and for the Six Months Ended June 30,
1997 (Unaudited)....................................................... F-44
Consolidated Statements of Cash Flow for the Year Ended December 31,
1996 and for the Six Months Ended June 30, 1997 and 1996 (Unaudited)... F-45
Notes to Consolidated Financial Statements.............................. F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Inc.:
We have audited the accompanying consolidated balance sheet of Metro-
Goldwyn-Mayer Inc. (formerly known as P&F Acquisition Corp.) (a Delaware
corporation) and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from October 11, 1996 (date of commencement of principal
operations) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metro-
Goldwyn-Mayer Inc. and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the period from October 11, 1996
(date of commencement of principal operations) to December 31, 1996 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
February 25, 1997 (except with
regard to the matters discussed
in Note 15, as to which the date
is November 7, 1997)
F-2
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents............................. $ 16,381 $ 20,255
Accounts and contracts receivable (net of allowance
for doubtful accounts of $11,728 and $11,730,
respectively)........................................ 271,106 150,920
Film and television costs, net........................ 1,099,201 1,263,073
Investments and advances to affiliates................ 16,107 7,858
Property and equipment, net........................... 27,347 29,411
Excess of cost over net assets of acquired businesses,
net.................................................. 302,741 298,920
Other assets.......................................... 41,785 36,137
---------- ----------
$1,774,668 $1,806,574
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Bank and other debt................................. $ 444,427 $ 566,258
Accounts payable and accrued liabilities............ 90,933 63,006
Accrued participants' share......................... 173,094 150,035
Income taxes payable................................ 29,269 37,749
Advances and deferred revenues...................... 104,516 83,548
Other liabilities................................... 29,307 29,270
---------- ----------
Total liabilities................................. 871,546 929,866
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 25,000,000 shares
authorized, 501,006 and 502,588 shares issued and
outstanding........................................ 5 5
Common Stock, $.01 par value, 125,000,000 shares
authorized, 16,700,342 and 16,753,050 shares issued
and outstanding.................................... 167 168
Additional paid-in capital.......................... 901,639 904,485
Retained earnings (deficit)......................... 166 (28,839)
Cumulative translation adjustment................... 1,145 889
---------- ----------
Stockholders' equity.............................. 903,122 876,708
---------- ----------
$1,774,668 $1,806,574
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR)
OCTOBER 11 TO SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1996
------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues....................... $ 228,686 $ 351,014 $ 595,132
Expenses:
Film and television
production and distribution. 195,076 317,912 607,908
General and administrative
expenses.................... 18,319 35,140 29,597
Goodwill amortization........ 1,717 3,821 7,437
---------- ---------- ---------
Total expenses............. 215,112 356,873 644,942
---------- ---------- ---------
Operating income (loss)........ 13,574 (5,859) (49,810)
Other income (expense):
Interest expense, net of
amounts capitalized......... (9,875) (20,599) (45,086)
Interest and other income,
net......................... 813 1,388 874
---------- ---------- ---------
Total other expense........ (9,062) (19,211) (44,212)
---------- ---------- ---------
Income (loss) from operations
before provision for income
taxes......................... 4,512 (25,070) (94,022)
Income tax provision........... (4,346) (3,935) (9,530)
---------- ---------- ---------
Net income (loss).............. $ 166 $ (29,005) $(103,552)
========== ========== =========
Pro forma earnings (loss) per
share......................... $ 0.00 $ (0.77)
========== ==========
Pro forma weighted average
number of common and common
equivalent shares outstanding. 37,567,634 37,643,426
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK
------------- ----------------
NUMBER ADDITIONAL CUMULATIVE TOTAL
OF PAR NUMBER OF PAR PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
------- ----- ---------- ----- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE....... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of Preferred
and Common Stock....... 501,006 5 16,700,342 167 901,639 -- -- 901,811
Foreign currency
translation adjustment. -- -- -- -- -- -- 1,145 1,145
Net income.............. -- -- -- -- -- 166 -- 166
------- ---- ---------- ---- -------- -------- ------ --------
BALANCE DECEMBER 31,
1996................... 501,006 5 16,700,342 167 901,639 166 1,145 903,122
Issuance of Preferred
and Common Stock....... 1,582 -- 52,708 1 2,846 -- -- 2,847
Foreign currency
translation adjustment. -- -- -- -- -- -- (256) (256)
Net loss................ -- -- -- -- -- (29,005) -- (29,005)
------- ---- ---------- ---- -------- -------- ------ --------
BALANCE JUNE 30, 1997
(UNAUDITED)............ 502,588 $ 5 16,753,050 $168 $904,485 $(28,839) $ 889 $876,708
======= ==== ========== ==== ======== ======== ====== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
(SUCCESSOR) (PREDECESSOR)
(SUCCESSOR) SIX MONTHS SIX MONTHS
OCTOBER 11 TO ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1996
------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net income (loss).................... $ 166 $ (29,005) $(103,552)
Adjustments to reconcile net income
from operations to net cash
provided by operating activities:
Amortization of film and television
costs and participants' share..... 83,508 155,938 403,085
Depreciation and amortization of
property and equipment............ 1,418 3,230 2,871
Amortization of goodwill and
deferred financing costs.......... 2,761 6,322 12,137
Reduction in goodwill due to
realization of tax benefits....... 1,206 -- --
Losses (gains) on equity
investments, net.................. (2,592) 13,838 3,485
Decrease in accounts and contracts
receivable and other assets....... 12,895 122,268 40,436
Decrease in accounts payable,
accrued and other liabilities,
accrued participants' share and
domestic and foreign taxes........ (31,542) (92,631) (2,995)
Decrease in advances and deferred
revenues.......................... (6,258) (20,968) (26,989)
Foreign currency exchange (gain)
loss.............................. (234) 1,064 333
----------- --------- ---------
Net cash provided by operating
activities...................... 61,328 160,056 328,811
----------- --------- ---------
Investing activities:
Acquisition of Metro-Goldwyn-Mayer
Studios Inc......................... (1,331,430) -- --
Additions to film costs, net......... (55,814) (269,722) (272,613)
Additions to property and equipment.. (2,079) (5,294) (5,291)
Other investing activities........... (1,538) (5,588) --
----------- --------- ---------
Net cash used in investing
activities...................... (1,390,861) (280,604) (277,904)
----------- --------- ---------
Financing activities:
Proceeds from issuance of Preferred
and Common Stock.................... 901,811 2,847 --
Proceeds from debt issuance.......... 475,000 -- --
Net bank advances (repayments)....... (31,417) 121,831 (50,829)
Dividends paid to parent............. -- -- (4,159)
----------- --------- ---------
Net cash provided by financing
activities...................... 1,345,394 124,678 (54,988)
----------- --------- ---------
Net change in cash and cash equivalents
from operating, investing and
financing activities.................. 15,861 4,130 (4,081)
Net increase (decrease) in cash due to
foreign currency fluctuations......... 520 (256) (538)
----------- --------- ---------
Net change in cash and cash
equivalents........................... 16,381 3,874 (4,619)
Cash and cash equivalents at beginning
of period............................. -- 16,381 17,128
----------- --------- ---------
Cash and cash equivalents at end of the
period................................ $ 16,381 $ 20,255 $ 12,509
=========== ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-6
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of Metro-Goldwyn-Mayer Inc. (formerly known as P&F
Acquisition Corp.) ("MGM"), and Metro-Goldwyn-Mayer Studios Inc. and its
majority owned subsidiaries ("MGM Studios") (collectively, the "Company"). MGM
is a Delaware corporation formed on July 10, 1996 specifically to acquire MGM
Studios. The acquisition of MGM Studios by MGM was completed on October 10,
1996 (see Notes 2 & 7), at which time MGM commenced principal operations.
Prior to its acquisition by MGM, MGM Studios was wholly owned by MGM Group
Holdings Corporation, an indirect wholly owned subsidiary of Consortium de
Realisation ("CDR"). CDR is a wholly owned subsidiary of Credit Lyonnais S.A.
and is controlled by the French State.
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures", the
Company has presented an unclassified consolidated balance sheet.
Unaudited Information as of June 30, 1997 and 1996. The accompanying
consolidated financial statements as of June 30, 1997 and 1996 reflect all
adjustments which are, in the opinion of management, necessary for the fair
presentation of the financial statements for such interim periods. Such
adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
Business. The Company is engaged primarily in the development, production
and worldwide distribution of theatrical motion pictures and television
programs. The Company also distributes films produced or financed, in whole or
in part, by third parties.
Motion picture and television production and distribution is highly
speculative and inherently risky. There can be no assurance of the economic
success of such motion pictures and television programming since the revenues
derived form the production and distribution (which do not necessarily bear a
direct correlation to the production or distribution costs incurred) depend
primarily upon its acceptance by the public, which cannot be predicted. The
commercial success of a motion picture also depends upon the quality and
acceptance of other competing films released into the marketplace at or near
the same time, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. The theatrical success of a motion picture is a very important
factor in generating revenues from such motion picture in other media.
The success of the Company's television programming also may be impacted by
prevailing advertising rates, which are subject to fluctuation. Therefore,
there is a substantial risk that some or all of the Company's motion picture
and television projects will not be commercially successful, resulting in
costs not being recouped or anticipated profits not being realized.
Principles of Consolidation. The consolidated financial statements include
the accounts of MGM, MGM Studios and all of its majority-owned and controlled
subsidiaries. The Company's investments in related companies which represent a
20% to 50% ownership interest over which the Company has significant influence
but not control are accounted for using the equity method (see Note 4). All
significant intercompany balances have been eliminated.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments, purchased with an initial maturity of three months or less, to be
cash equivalents. Included in other assets at June 30, 1997 and December 31,
1996 is approximately $8,648,000 and $11,357,000, respectively, of cash
restricted by various
F-7
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
escrow agreements. The carrying value of the Company's cash equivalents
approximated cost at each balance sheet date.
Revenue Recognition. Revenues from theatrical distribution of feature films
are recognized on the dates of exhibition. Revenues from direct home video
distribution are recognized, net of an allowance for estimated returns,
together with related costs, in the period in which the product is available
for sale by the Company's customers. Revenues from television licensing,
together with related costs, are recognized when the feature film or
television program is available to the licensee for telecast. Long-term non-
interest-bearing receivables arising from licensing agreements are discounted
to present value.
Accounting for Film and Television Costs. Except for purchase accounting
adjustments, film costs include the costs of production, prints, pre-release
and other advertising expected to benefit future periods and capitalized
overhead and interest. These costs, as well as participations and talent
residuals, are charged against earnings on an individual film basis in the
ratio that the current year's gross film revenues bear to management's
estimate of total remaining ultimate gross film revenues from all sources. The
cost allocated to films revalued in purchase accounting is being amortized
over their estimated economic lives not to exceed 20 years.
Film costs are stated at the lower of cost or estimated net realizable value
on an individual film basis. Revenue and cost forecasts are continually
reviewed by management and revised when warranted by changing conditions. When
estimates of total revenues and costs indicate that a feature film or
television program will result in an ultimate loss, additional amortization is
recognized to the extent required to produce a zero gross margin over the
remaining life of the film or television program.
Property and Equipment. Except for purchase accounting adjustments, property
and equipment are stated at cost. Property and equipment acquired as part of
the acquisition of MGM Studios are stated at estimated fair market value.
Depreciation of property and equipment is computed under the straight-line
method over the expected useful lives of applicable assets, ranging from three
to five years. Leasehold assets are amortized under the straight-line method
over the shorter of the estimated useful lives of the assets or the terms of
the related leases. When property is sold or otherwise disposed of, the cost
and related accumulated depreciation is removed from the accounts, and any
resulting gain or loss is included in income. The costs of normal maintenance,
repairs and minor replacements are charged to expense when incurred.
Goodwill. The excess cost of acquisition over the fair market values of
identifiable net assets acquired (goodwill) is amortized over an estimated
useful life of 40 years using the straight-line method. The Company has
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to
be Disposed of". This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The carrying value of
existing assets are reviewed when events or changes in circumstances indicate
that an impairment test is necessary in order to determine if an impairment
has occurred. When factors indicate that such assets should be evaluated for
possible impairment, the Company will estimate the future cash flows expected
to result from the use of the assets and their eventual disposition, and
compare the amounts to the carrying value of the assets to determine if an
impairment loss has occurred. For the period from October 11, 1996 to December
31, 1996, goodwill was reduced by $1,206,000 due to the utilization of certain
tax assets not benefitted at the acquisition date. Accumulated amortization of
goodwill was $1,717,000 and $5,538,000 as of December 31, 1996 and June 30,
1997, respectively.
F-8
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
Income Taxes. In accordance with SFAS No. 109, "Accounting for Income
Taxes," deferred tax assets and liabilities are recognized with respect to the
tax consequences attributable to differences between the financial statement
carrying values and tax bases of existing assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary differences are
expected to be recovered or settled. Further, the effect on deferred tax
assets and liabilities of changes in tax rates is recognized in income in the
period that includes the enactment date.
Foreign Currency Translation. Generally, foreign subsidiary assets and
liabilities are translated into United States dollars at the exchange rates in
effect at the balance sheet date. Revenues and expenses of foreign
subsidiaries are translated into United States dollars at the average exchange
rates that prevailed during the period. The gains or losses that result from
this process are included as a component of the cumulative translation
adjustment balance in stockholders' equity. Foreign currency denominated
transactions are recorded at the exchange rate in effect at the time of
occurrence, and the gains or losses resulting from subsequent translation at
current exchange rates are included in the statement of operations.
Financial Instruments. The carrying values of short-term trade receivables
and payables approximate their estimated fair values because of the short
maturity of these instruments. The carrying values of receivables with
maturities greater than one year have been discounted at LIBOR plus 2.75%
(approximately 8.56% at June 30, 1997 and 8.38% at December 31, 1996), which
approximates current market rates.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate risks. The Company enters into interest rate
swaps to lower funding costs, to diversify sources of funding, or to alter
interest rate exposures arising from mismatches between assets and
liabilities. Interest rate swaps allow the Company to raise long-term
borrowings at floating rates and effectively swap them into fixed rates that
are lower than those available to the Company if fixed-rate borrowings were
made directly. Under interest rate swaps, the Company agrees with other
parties to exchange, at specified intervals, the difference between fixed-rate
and floating-rate interest amounts calculated by reference to an agreed
notional principal amount.
Premiums paid for purchased interest rate swap agreements are amortized to
interest expense over the terms of the swaps. Unamortized premiums are
included in other assets in the statement of financial position. Amounts
receivable under swap agreements are accrued as a reduction of interest
expense.
Accounts and Contracts Receivable. At December 31, 1996, accounts and
contracts receivable aggregated $282,834,000 (before allowance for doubtful
accounts), of which approximately $230,000,000 is due within one year.
Concentration of credit and geographic risk with respect to accounts
receivable is limited due to the large number and general dispersion of
accounts which constitute the Company's customer base. The Company performs
credit evaluations of its customers and in some instances requires collateral.
At December 31, 1996, approximately 27% of the Company's accounts and
contracts receivable arose from an exclusive home video servicing agreement
with Warner Home Video.
Use of Estimates in the Preparation of Financial Statements. 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. Management estimates ultimate
revenues and costs for feature films and television programs for each market
based on anticipated release patterns, public acceptance and historical
results for similar products. Actual results could differ from those
estimates.
F-9
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
New Accounting Pronouncements. In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share" which is
effective for the Company's fiscal year ending December 31, 1997. The new
standard simplifies the computation of earnings per share (EPS) and increases
comparability to international standards. Under SFAS No. 128, primary EPS is
replaced by "Basic" EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of
common shares outstanding for the period. "Diluted" EPS, which is computed
similarly to fully diluted EPS, reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which is effective for the Company's fiscal year
ending December 31, 1997. This statement establishes standards for disclosing
information about an entity's capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for the Company's fiscal year ending December 31,
1998. This statement establishes standards for the reporting and display of
comprehensive income and its components in financial statements and thereby
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events other than transactions with owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", which is effective for the Company's
fiscal year ending December 31, 1998. This statement changes the requirements
under which publicly held companies report disaggregated information.
The Company will adopt these statements on their respective effective dates.
The effect of these new accounting pronouncements has not yet been determined
by Management.
NOTE 2--ACQUISITION OF THE COMPANY
On October 10, 1996, MGM completed the acquisition of all the common stock
of MGM Studios (the "Acquisition") for a purchase price of $1,300,000,000 in
cash, plus payment of acquisition related costs of approximately $31,430,000.
In connection with an investment agreement (the "Investment Agreement")
between Mr. Frank Mancuso and an investor group comprised of Tracinda
Corporation ("Tracinda") and Seven Network Limited ("Seven") (collectively,
the "Investors") and MGM, Tracinda acquired $200,000,000 of the common stock
of MGM (the "Common Stock") and $450,000,000 of the Series A Cumulative
Convertible Preferred Stock of MGM (the "Preferred Stock"), and Seven acquired
$200,000,000 of the Common Stock and $50,000,000 of the Preferred Stock,
concurrent with the closing of the Acquisition. Also, in connection with the
acquisition Tracinda and Celsus Financial Corp., an entity wholly-owned by
Michael R. Gleason (a director of the Company), were each granted an option by
the Company to purchase 156,251 shares of the Common Stock at an exercise
price of $6.41 per share (the options expire on October 10, 2002) and
reimbursed an agreed-upon amount of $4,750,000 each for costs related to the
Acquisition. In addition, Tracinda and Seven may be required to purchase
$60,000,000 in the aggregate of equity of MGM upon the occurrence of certain
events stipulated in the $800,000,000 Senior Secured Credit Facilities
established, in part, to fund a portion of the acquisition of MGM Studios (see
Note 6).
F-10
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
The Acquisition has been accounted for as a purchase. MGM Studios' assets
and liabilities have been recorded in the Company's financial statements at
their estimated fair values at the acquisition date allocated as follows (in
thousands):
<TABLE>
<S> <C>
Accounts and contracts receivable............................. $ 291,550
Film and television costs..................................... 1,108,768
Other assets.................................................. 73,675
Excess of cost over net assets of acquired businesses......... 305,664
Liabilities assumed........................................... (448,227)
----------
Aggregate purchase price...................................... $1,331,430
==========
</TABLE>
The excess purchase price over the estimated fair value of the net assets
acquired is being amortized on a straight-line basis over 40 years.
The results of operations of MGM Studios have been included in the
consolidated statement of operations from October 11, 1996 (date of
commencement of principal activities) through December 31, 1996. The pro forma
results of operations for the year ended December 31, 1996 and six months
ended June 30, 1996 as if the Acquisition had occurred on January 1, 1996 are
as follows (in thousands, except share data):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ --------
<S> <C> <C>
Revenues........................................... $1,141,392 $595,132
Operating loss..................................... $ (620,165) $(19,509)
Net loss........................................... $ (664,238) $(41,557)
</TABLE>
NOTE 3--FILM AND TELEVISION COSTS
Film and television costs, net of amortization, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Theatrical productions:
Released....................................... $ 912,216 $ 859,427
Completed not released......................... -- 20,832
In process and development..................... 59,077 208,633
Television programming........................... 127,908 174,181
---------- ----------
$1,099,201 $1,263,073
========== ==========
</TABLE>
Interest costs capitalized to theatrical productions were $524,000 during
the period from October 11, 1996 to December 31, 1996, and $4,241,000 and
$3,437,000 for the six months ended June 30, 1997 and 1996, respectively.
Based on the Company's estimates of projected gross revenues as of December
31, 1996, approximately 60% of unamortized film costs applicable to released
theatrical films and released television programs will be amortized during the
five years ending December 31, 2001.
F-11
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
NOTE 4--INVESTMENTS
Distribution in foreign theatrical and certain pay television markets is
performed by United International Pictures B.V. ("UIP"), in which the Company
has a one-third interest. The Company's investment in UIP, which is included
in investments and advances to affiliates, is stated at cost plus equity in
undistributed earnings. The Company includes in its financial statements the
revenues and related costs associated with its films distributed by UIP. The
distribution fees paid to UIP by the Company are included in film and
television production and distribution expense. Due to timing differences
there are no taxable earnings and, therefore, there is no tax provision on
undistributed earnings. The Company's carrying value of its investment in UIP
at June 30, 1997 and at December 31, 1996 was $4,297,000 and $12,490,000,
respectively.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements......................... $ 13,691 $ 14,169
Furniture, fixtures and equipment.............. 15,074 19,890
-------- --------
28,765 34,059
Less accumulated depreciation and amortization. (1,418) (4,648)
-------- --------
$ 27,347 $ 29,411
======== ========
NOTE 6--BANK AND OTHER DEBT
Bank and other debt is summarized as follows (in thousands):
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revolving Facility............................. $ 94,000 $215,000
Term Loans..................................... 349,750 349,250
Capitalized lease obligations and other
borrowings.................................... 677 2,008
-------- --------
$444,427 $566,258
======== ========
</TABLE>
Revolving Facility. In conjunction with the acquisition of MGM Studios (see
Note 2), on October 10, 1996 the Company obtained from a syndicate of banks a
$450,000,000 revolving credit facility (the "Revolving Facility") expiring on
August 31, 2001, subject to extension under certain conditions. Loans under
the Revolving Facility bear interest at 2.75% over the Adjusted LIBOR rate, as
defined (8.56% at June 30, 1997 and 8.38% at December 31, 1996). A commitment
fee of 0.5% per annum, adjustable under certain conditions, is charged on the
unused portion of the commitment.
Term Loans. In addition to the Revolving Facility, on October 10, 1996 the
Company obtained from the same syndicate of banks two term loans ("Term Loan
A" and "Term Loan B", or, collectively, the "Term Loans") aggregating
$350,000,000, which were used to partially finance the purchase of MGM
Studios. Term Loan A of $250,000,000 expires on September 30, 2002 and bears
interest at 2.75% over the Adjusted LIBOR
F-12
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
rate, as defined (8.56% at June 30, 1997 and 8.38% at December 31, 1996). Term
Loan B of $100,000,000 expires on March 31, 2004 and bears interest at 3.25%
over the Adjusted LIBOR rate, as defined (9.06% at June 30, 1997 and 8.88% at
December 31, 1996). Term Loan A requires quarterly principal payments of
$12,500,000 commencing December 1999 through September 2000, $18,750,000 from
December 2000 through September 2001, and $31,250,000 quarterly thereafter
through maturity. Term Loan B requires quarterly principal payments of
$250,000 commencing in December 1996 through September 2000, $1,750,000 from
December 2000 through September 2002, $10,250,000 from December 2002 through
September 2003, and $20,500,000 quarterly thereafter through maturity.
The Company has entered into three year fixed interest rate swap contracts
in relation to a portion of the Term Loans with a notional value of
$300,000,000 at an average rate of 8.9%. At December 31, 1996, the Company
would have to pay approximately $373,000 to terminate such swap contracts.
The Company's borrowings under the Revolving Facility and the Term Loans are
secured by substantially all the assets of the Company. The Revolving Facility
and Term Loans contain various covenants including limitations on dividends,
capital expenditures and indebtedness, and the maintenance of certain
financial ratios.
Lease and other borrowings. Capitalized lease obligations relate principally
to computer equipment financing at interest rates of approximately 10%.
Maturity schedule. Credit facilities, lease and other borrowings at December
31, 1996 are scheduled to mature as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................ $ 1,637
1998............................................................ 1,021
1999............................................................ 13,519
2000............................................................ 152,750
2001............................................................ 94,500
Thereafter...................................................... 181,000
--------
$444,427
========
</TABLE>
NOTE 7--STOCKHOLDERS' EQUITY
Common Stock. The Company had 16,753,050 and 16,700,342 shares of the Common
Stock outstanding at June 30, 1997 and December 31, 1996, of which 16,695,133
shares were issued for cash in connection with the initial capitalization of
MGM (see Note 2).
Preferred Stock. The Company had 502,588 and 501,006 shares of the Preferred
Stock outstanding at June 30, 1997 and December 31, 1996, of which 500,850
shares were issued for cash in connection with the initial capitalization of
MGM (see Note 2). The Preferred Stock has no voting rights until October 10,
2000. Thereafter, the holders of the Preferred Stock will vote with the
holders of the common stock, and each share of the Preferred Stock will have a
number of votes equal to the number of shares of the Common Stock into which
such Preferred Stock is convertible. Each share of the Preferred Stock is
convertible into a share of the Common Stock at any time at the election of
the holder, subject to certain limitations. The Preferred Stock is redeemable
at the option of MGM at any time of the earlier of (i) an underwritten initial
public offering of the Company's Common Stock and (ii) October 10, 2001. MGM
may redeem any or all shares of the Preferred Stock (pro rata from each holder
of the Preferred Stock subject to the conversion rights) by payment of the
liquidation value
F-13
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
(the "Liquidation Value"), as defined, plus any accrued but unpaid dividends.
The Preferred Stock accrues dividends beginning after October 1, 2001 at an
annual rate of 14.044% of the stated value of $1,000 per share (the "Stated
Value"), payable quarterly in arrears.
The Preferred Stock has a Liquidation Value per share equal to the greater
of the accreted stated value (the "Accreted Stated Value") plus unpaid
dividends; or 75% of the amount such holder would have been entitled to with
respect to each share of the Preferred Stock in connection with any such
dissolution, liquidation or winding-up of the Company had such holder
converted the Preferred Stock into the Common Stock. The term Accreted Stated
Value with respect to any share of the Preferred Stock is defined as the
Stated Value of $1,000 plus an amount equal to 9% per annum of the Stated
Value compounded quarterly from October 11, 1996 through October 1, 2001.
The Liquidation Value per share of the Preferred Stock was $1,020 as of
December 31, 1996 and $1,066 as of June 30, 1997.
Stock Option & Bonus Plan. The 1996 Management Stock Option and Bonus Plan
(the "Plan") adopted on October 10, 1996 provides for the granting of non-
qualified stock options to purchase shares of MGM capital stock to officers
and executives responsible for the direction and management of the Company.
Each option granted affords the holder the right to acquire 18.519 shares of
the Common Stock and 5/9ths of one share of the Preferred Stock, exercisable
only as a unit. All options will be designated as either Series A Options or
Series B Options (the "Options"). Each employee receiving Series A Options
shall also receive an equal number of bonus interests (the "Bonus Interests")
which entitles the holder to $22.32 per Bonus Interest if the equity value of
the Company exceeds a defined amount. The total potential value of the
available Bonus Interests is approximately $65,000,000. The Company is
accruing the potential value of the available Bonus Interests ratably over the
five years ending October 1, 2001. Compensation expense of $2,921,000 and
$6,500,000 relating to this plan was charged to income for the period from
October 11, 1996 to December 31, 1996 and the six months ended June 30, 1997,
respectively.
The Plan provides that the Options and Bonus Interests vest at a rate of 20%
per year from the date of the grant. The Options expire on October 1, 2006 or,
if a significant public offering has not occurred by October 1, 2006, then the
Options expire on May 15, 2007. The Bonus Interests expire on May 15, 2007. No
Options or Bonus Interests shall be granted after October 1, 2001 or, if
earlier, immediately prior to designated change in control, as defined. Each
vested Option may be exercised on or after October 1, 2001 through their
expiration date, unless a significant public offering occurs prior to October
1, 2001 in which case the Options are exercisable six months from such date,
or earlier as provided in the Plan. If a significant public offering of the
Company's equity has not taken place, participants may exercise vested Options
during the period from April 15 through May 15 of each of the years 2002
through and including 2007 and require the Company to repurchase the
underlying Preferred Stock and Common Stock required from such exercise at
fair market value. Compensation expense based on the increase in the market
value of the Options and the Bonus Interests since the date of grant will be
amortized over the vesting period. No Options or Bonus Interests were vested
as of December 31, 1996.
F-14
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
Stock option transactions as of December 31, 1996 and June 30, 1997 under
the plan were as follows:
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------- ---------------------
SERIES A SERIES B SERIES A SERIES B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance as of October 11, 1996. -- -- -- --
Granted...................... 387,962 426,004 11,638 12,781
---------- ---------- ---------- ----------
Balance as of December 31,
1996.......................... 387,962 426,004 11,638 12,781
Granted...................... 466,795 512,629 14,005 15,380
---------- ---------- ---------- ----------
Balance as of June 30, 1997.... 854,757 938,633 25,643 28,161
========== ========== ========== ==========
Number of shares authorized for
grant......................... 1,293,135 1,420,053 38,794 42,602
========== ========== ========== ==========
Exercise Price................. $ 24.00 $ 78.43 $ 1,000 $ 3,268
========== ========== ========== ==========
Weighted average remaining
contractual life
As of December 31, 1996...... 5.5 years 5.5 years 5.5 years 5.5 years
========== ========== ========== ==========
As of June 30, 1997.......... 4.86 years 4.86 years 4.86 years 4.86 years
========== ========== ========== ==========
</TABLE>
No Options were exercisable as of December 31, 1996 and June 30, 1997.
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting For Stock Issued to Employees," and related interpretations in
accounting for its plans. Had compensation cost for these plans been
determined consistent with FASB Statement No. 123, the Company's net income
(loss) would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
SIX MONTHS
OCTOBER 11 TO ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- ----------
<S> <C> <C>
Net income (loss):
As reported................................... $166 $(29,005)
Pro forma..................................... (15) (29,955)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
model based on the following assumptions: the weighted average fair value of
each of the Series A and Series B Common Stock Options granted in the six
months ended June 30, 1997 was $6.55 and $0, respectively, and the weighted
average fair value of each of the Series A and Series B Common Stock Options
granted in 1996 was $6.94 and $0, respectively. The weighted average fair
value of each of the Series A and Series B Preferred Stock Options granted in
the six months ended June 30, 1997 was $273 and $0, respectively, and the
weighted average fair value of each of the Series A and Series B Preferred
Stock Options granted in 1996 was $289 and $0, respectively. The dividend
yield and expected volatility was 0% for both periods. Also, the calculation
uses an expected life of 5.5 years and 5 years respectively, from the period
from October 11, 1996 through December 31, 1996 and the six months ended
June 30, 1997, respectively, and an assumed risk-free interest rate of 6.2%
and 6.4%, respectively, from the period from October 11, 1996 through December
31, 1996 and the six months ended June 30, 1997, respectively.
F-15
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
NOTE 8--INCOME TAXES
The Company's domestic and foreign tax liability balances consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Current..................................................... $29,269
Deferred.................................................... --
-------
$29,269
=======
</TABLE>
For tax purposes, the historical tax basis of the assets and liabilities of
MGM Studios has been retained following MGM Studio's acquisition by MGM. The
tax effects of temporary differences between book value and tax basis of
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Film and television costs.................................. $ 6,594
Film revenue............................................... 4,444
Participations and residuals payable....................... 15,574
Reserves and investments................................... 50,521
Net miscellaneous tax assets............................... 25,368
Operating loss carryforwards............................... 4,564
---------
Subtotal gross tax assets................................ 107,065
Valuation allowance........................................ (107,065)
---------
Total tax assets....................................... --
Deferred tax liabilities................................... --
---------
Net deferred tax asset..................................... $ --
=========
</TABLE>
As of December 31, 1996, the Company and its subsidiaries had a net
operating loss ("NOL") carryforward of $11,702,000, which expires in 2011.
Presently, the NOL carryforward is not limited in its utilization. However,
pursuant to Internal Revenue Code Section 382, "Limitation on Net Operating
Loss Carryforwards," the NOL may become subject to further limitation on its
use when there is a change of ownership of 50% or more by a 5% or more
shareholder during a three-year period.
At December 31, 1996, management has determined that $107,065,000 of
deferred tax assets do not satisfy the recognition criteria set forth in SFAS
No. 109. Accordingly, a valuation allowance has been recorded by the Company
for this amount. The net decrease in the valuation allowance attributable to
activity occurring after the ownership change described in Note 2 is reflected
as an adjustment to goodwill in accordance with purchase accounting.
F-16
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
Details of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 11 TO
DECEMBER 31,
1996
-------------
<S> <C>
Current taxes:
Foreign taxes.............................................. $ 3,140
Deferred taxes:
Federal and state taxes.................................... 6,055
Adjustment for change in valuation allowance............... (4,849)
-------
Total tax provision........................................ $ 4,346
=======
</TABLE>
The following is a summary reconciliation of the effective tax rate to the
assumed federal tax rate:
<TABLE>
<CAPTION>
OCTOBER 11 TO
DECEMBER 31,
1996
-------------
<S> <C>
Assumed federal tax rate on pre-tax book income............ 35%
Goodwill and other permanent differences................... 14%
Foreign taxes, net of available federal tax benefit........ 45%
---
Effective tax rate......................................... 94%
===
</TABLE>
The Company has various foreign subsidiaries formed or acquired to produce
or distribute motion pictures outside the United States. In the opinion of
management, the earnings of these subsidiaries are not permanently invested
outside the United States. Pursuant to APB No. 23, "Accounting For Income
Taxes-Special Areas," tax expense has accordingly been provided for these
unremitted earnings.
Federal income tax returns for the periods ended through March 25, 1986 have
been examined by the Internal Revenue Service. In the opinion of management,
any adjustments which may result from the examination of subsequent periods
for which the Company is responsible will not have a material effect on the
Company's consolidated financial position or results of operations.
In accordance with APB No. 28 "Interim Financial Reporting," the provision
for taxes for the six months ended June 30, 1997 and 1996 have been calculated
using an estimated effective tax rate. The effective tax rate is based upon
projected results for a full fiscal year.
F-17
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
NOTE 9--RETIREMENT PLANS
The Company has a non-contributory retirement plan (the "Basic Plan")
covering substantially all regular full-time, non-union employees. Benefits
are based on years of service and compensation, as defined.
The following table summarizes the funded status of the Basic Plan (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Actuarial present value of benefit obligations (including
vested benefits of $7,427)................................... $ 8,469
=======
Projected benefit obligations................................. $ 9,913
Plan assets at fair value (primarily debt securities)......... 8,403
-------
Projected benefit obligations in excess of plan assets........ (1,510)
Unrecognized net asset as of beginning of year................ (180)
Unrecognized net loss......................................... 505
Unrecognized prior service cost............................... (177)
-------
Accrued pension liability..................................... $(1,362)
=======
Key assumptions used in the actuarial computations were as follows:
Discount rate................................................. 7.50%
=======
Long-term rate of return on assets............................ 7.25%
=======
Rate of increase in future compensation levels................ 5.00%
=======
</TABLE>
The unrecognized net asset is being amortized over the estimated remaining
service life of 19.4 years. Domestic pension benefits and expense were
determined under the entry age actuarial cost method.
Pension costs includes the following components (in thousands):
<TABLE>
<CAPTION>
OCTOBER 11 TO
DECEMBER 31,
1996
-------------
<S> <C>
Service cost............................................... $ 244
Interest cost on projected benefit obligation.............. 163
Actual loss on plan assets................................. 224
Net amortization and deferral.............................. (330)
-----
Net periodic pension cost.................................. $ 301
=====
</TABLE>
A significant number of the Company's production employees are covered by
union sponsored, collectively bargained multi-employer pension plans. The
Company contributed approximately $2,824,000 for such plans in the period from
October 11, 1996 to December 31, 1996. Information from the plans'
administrators is not sufficient to permit the Company to determine its share
of unfunded vested benefits, if any.
The Company also provides each of its employees, including its officers, who
have completed one year of service with the Company the opportunity to
participate in the MGM Savings Plan (the "Savings Plan"). Participants in the
Savings Plan may contribute a portion of their pre-tax compensation and after-
tax compensation (subject to certain limitations) into the Savings Plan. The
Company matches 100% of such employee contributions up to 4% of such
employee's eligible compensation. The employee contributions to the Savings
Plan and the earnings thereon are always 100% vested. The Company's matching
contributions and the
F-18
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
earnings thereon vest 20% for each full year of service with the Company and
employees become 100% vested (i) after five years of service with the Company,
(ii) upon their total and permanent disability or (iii) upon their death. The
Company contributed approximately $219,000 to the Savings Plan in the period
from October 11, 1996 to December 31, 1996.
NOTE 10--RELATED PARTY TRANSACTIONS
In 1980 MGM Studios granted to MGM Grand, Inc. ("Grand Hotel") an exclusive
open-ended royalty-free license to use certain trademarks, tradenames and
logos in Grand Hotel's hotel/gaming business and other businesses that are not
entertainment-related. Tracinda owns the majority of the outstanding common
stock of Grand Hotel. During the period from October 11, 1996 to December 31,
1996 and for the six months ended June 30, 1997, the Company recognized
revenues of $70,000 and $90,000, respectively, under these agreements.
The Company sells to Grand Hotel, and certain of its affiliates, on a
wholesale basis merchandise such as baseball caps, clothing, keychains and
watches bearing the Company's trademarks and logos for resale to consumers in
retail shops located within Grand Hotel's hotels. Grand Hotel currently is the
Company's largest wholesale customer of the Company's merchandise and,
consequently, receives pricing discounts from the Company.
From time to time, the Company charters airplanes from Tracinda for use in
the Company's business. The Company believes that the terms of the charter
arrangements are no less favorable to the Company than those that could be
obtained from unrelated third parties. From October 10, 1996 to June 30, 1997,
the aggregate of the payments made to Tracinda for such charters was
approximately $10,000.
The Company has entered into various television license agreements with a
subsidiary of Seven providing for broadcast of the Company's films and
television programs in Australia. During the period from October 11, 1996 to
December 31, 1996 and for the six months ended June 30, 1997, the Company
recognized revenues of $1,055,000 and $2,395,000, respectively, under these
agreements. Management believes that the terms of these agreements are
consistent with the terms of comparable television license arrangements with
third parties.
The Company has entered into various agreements to develop and produce
certain films and television programs with Mr. Frank Mancuso, Jr., the son of
the Company's Chairman of the Board and Chief Executive Officer. Pursuant to
these agreements, the Company paid Mr. Mancuso, Jr. approximately $39,000
during the period from October 11, 1996 to December 31, 1996 and approximately
$351,000 for the six months ended June 30, 1997. The agreements provide for
additional producer fees and potential profit participations to be paid in the
future at terms consistent with comparable development and production
agreements with third parties.
On January 14, 1997, MGM Studios and Tracinda entered into an agreement to
share the proceeds from certain insurance claims relating to litigation which
arose prior to October 10, 1996. The potential insurance proceeds (if any) of
up to approximately $15,000,000 will be paid 65% to MGM Studios and 35% to
Tracinda based on the relative value of each company's respective claims, as
determined by the parties.
F-19
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
NOTE 11--FOREIGN OPERATIONS AND EXPORT SALES
The Company's foreign activities are principally motion picture and
television production and distribution in territories outside of the United
States and Canada. Net foreign assets of subsidiaries operating in foreign
countries are not material in relation to consolidated net assets.
Foreign export revenues are revenues earned from motion picture and
television films produced in the United States. Export revenues for the period
from October 11, 1996 to December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 11 TO
DECEMBER 31,
1996
-------------
<S> <C>
Europe..................................................... $62,298
Western Hemisphere......................................... 12,485
Other...................................................... 16,743
-------
$91,526
=======
</TABLE>
NOTE 12--COMMITMENTS AND CONTINGENCIES
Leases. The Company has operating leases for offices and equipment. Certain
property leases include provisions for increases over base year rents as well
as for escalation clauses for maintenance and other building operations. Rent
expense was approximately $2,936,000 for the period from October 11, 1996 to
December 31, 1996.
Employment Agreements. The Company has employment agreements with several
principal officers and employees. The agreements provide for minimum salary
levels as well as, in some cases, bonuses.
Creative Talent Agreements. The Company has entered into contractual
agreements for creative talent related to future film production. Such amounts
are scheduled to be paid through 1997.
Future minimum annual commitments under non-cancelable operating leases,
employment agreements, and creative talent agreements as of December 31, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
1997......................................................... $ 34,585
1998......................................................... 38,643
1999......................................................... 35,717
2000......................................................... 30,406
2001......................................................... 21,102
Thereafter................................................... 12,291
--------
$172,744
========
</TABLE>
Litigation. The Company, together with other major companies in the filmed
entertainment industry, has been subject to numerous antitrust suits brought
by various motion picture exhibitors, producers and others. In addition,
various legal proceedings involving alleged breaches of contract, antitrust
violations, copyright infringement and other claims are now pending, which the
Company considers routine to its business activities.
In the opinion of Company management, any liability under pending litigation
is not material in relation to the Company's financial condition.
F-20
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
NOTE 13--SUPPLEMENTARY CASH FLOW INFORMATION
The Company paid interest, net of capitalized interest, of $7,103,000 during
the period from October 11, 1996 to December 31, 1996, and $14,743,000 and
$14,442,000 during the six months ended June 30, 1997 and 1996, respectively.
Income taxes paid were $922,000 during the period from October 11, 1996 to
December 31, 1996. The Company received net foreign remittance tax refunds of
$4,845,000 in the six months ended June 30, 1997 and paid income taxes of
$5,052,000 in the six months ended June 30, 1996.
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain quarterly information is presented below (in thousands):
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
OF 1997 OF 1997
-------- --------
<S> <C> <C>
Revenues............................................... $197,629 $153,385
Operating income (loss)................................ (1,084) (4,775)
Interest expense, net.................................. 11,016 9,583
Net income (loss)...................................... (14,193) (14,812)
</TABLE>
NOTE 15--RECAPITALIZATION
On November 7, 1997, the Company approved a recapitalization pursuant to
which the Company, immediately prior to the closing of the initial public
offering and the Tracinda Purchase, will (i) convert each share of Preferred
Stock into one share of Common Stock, (ii) effect a 1:41.667 stock split and
(iii) increase the number of common shares authorized from 50,000,000 to
125,000,000. Share and per share information have been retroactively restated
for all periods presented to reflect this recapitalization.
Primary earnings per share represents the per share income or loss
applicable to common stockholders and is computed based on the weighted
average number of common shares outstanding. When dilutive, stock options are
included as share equivalents using the treasury stock method. The number of
shares used in computing primary earnings (loss) per share was 37,567,634 and
37,643,426 in the period from October 11, 1996 to December 31, 1996 and for
the six months ended June 30, 1997, respectively.
The per share computations for all periods presented reflect assumed
conversion of the Preferred Stock and the 1:41.667 stock split.
NOTE 16--EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS REPORT (UNAUDITED)
On July 10, 1997, the Company acquired certain entertainment assets of
Metromedia International Group, Inc. (the "Orion Acquisition") for a total
purchase price of $573,000,000, consisting of $560,000,000 in cash and
$13,000,000 in assumed liabilities. In connection with the Orion Acquisition,
MGM issued 13,375,107 shares of the Common Stock to Tracinda for $321,000,000
and 1,625,013 shares of the Common Stock to Seven for $39,000,000. In
addition, the Company obtained a new $250,000,000 Senior Secured Credit
Facility with a syndicate of banks, consisting of a $200,000,000 term loan and
a $50,000,000 revolving credit facility. The term loan and the revolving
credit facility bear interest at LIBOR plus 2.5% and mature on July 10, 2002.
The Orion Acquisition will be accounted for as a purchase.
F-21
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 ARE UNAUDITED)
In September 1997, the Company changed its name from P&F Acquisition Corp.
to Metro-Goldwyn-Mayer Inc.
On October 15, 1997, the Company and its principal lenders agreed to amend
and restate the Revolving Facility and Term Loans (see Note 6) into a
syndicated facility aggregating $1.3 billion, consisting of a six year $400
million revolving credit facility, increasing to $600 million upon
consummation of an initial public offering (the "Offering") (provided that the
gross proceeds of the Offering are at least $250 million), a $400 million
seven and one-half year term loan and a $300 million eight and one-half year
term loan (the "Amended Credit Facility"). The Amended Credit Facility also
contains provisions allowing, with the consent of the requisite lenders, for
an additional $200 million tranche, raising the amount of the Amended Credit
Facility to $1.5 billion. Proceeds drawn from the Amended Credit Facility will
be used to retire amounts outstanding under the Revolving Facility, Term Loans
and the Orion Credit Facility. Scheduled maturities of the term loans under
the Amended Credit Facility are $0 in 1998, $0 in 1999, $0 in 2000, $33
million in 2001, $73 million in 2002, $103 million in 2003, $103 million in
2004 and $103 million in 2005 with the remaining balance due at maturity. The
revolving facility portion of the Amended Credit Facility matures in October,
2003, subject to extension under certain conditions. The Amended Credit
Facility contains various covenants, including limitations on indebtedness,
dividends, capital expenditures, and maintenance of certain financial ratios.
On September 9, 1997, the Company amended and restated (subject to the
consummation of the Offering) its Stock Option Plan (the "Restated Stock
Option Plan") and Bonus Plan (the "Restated Bonus Plan") discussed in Note 7.
The Restated Stock Option Plan will allow the Company to grant options to
purchase up to 8,125,065 shares of the Common Stock. Awards can be made in the
form of qualified or non-qualified options, incentive stock options,
restricted stock, or stock appreciation rights. The exercise price of the
awards and other terms will be determined by the Compensation Committee of the
Board of Directors.
Subject to certain vesting and other requirements, each Bonus Interest
entitles the holder to receive a cash payment if (a) the sum of per share
distributions on the Common Stock and the average closing price of the Common
Stock during the 20 trading days (together, the "Price") preceding a
Determination Date (defined below) is (b) greater than $24.00 and less than
$48.00 (adjusted for stock splits, reverse stock splits and similar events).
The cash payment will be equal to (i) the vested portion of the Bonus Interest
at the Determination Date multiplied by (ii) the amount by which the Price at
the Determination Date is less than $48.00 (i.e., a maximum of $24.00 per
Bonus Interest). Once a payment is made in respect of the vested portion of a
Bonus Interest, no further payment is due in respect of that portion. If at
any Determination Date the Price exceeds $48.00, no payment will thereafter be
due in respect of any then-vested portion of a Bonus Interest.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Metro-Goldwyn-Mayer Studios Inc.
We have audited the accompanying consolidated balance sheet of Metro-
Goldwyn-Mayer Studios Inc. (formerly known as Metro-Goldwyn-Mayer Inc.) and
its subsidiaries (the "Company") as of October 10, 1996, and the related
consolidated statements of operations and equity and cash flows for the period
from January 1, 1996 to October 10, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of October 10, 1996 and the results of their operations and their
cash flows for the period from January 1, 1996 to October 10, 1996 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
December 16, 1996
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of
Metro-Goldwyn-Mayer Studios Inc.
We have audited the accompanying consolidated balance sheet of Metro-Goldwyn-
Mayer Studios Inc. (formerly known as Metro-Goldwyn-Mayer Inc.), and its
subsidiaries (the "Company") as of December 31, 1995, and the related
consolidated statements of operations, stockholder's equity and of cash flows
for each of the two years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We have not audited the consolidated financial statements of the
Company and its subsidiaries for any period subsequent to December 31, 1995.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our report dated February 29, 1996, we expressed an opinion that the 1995
financial statements did not fairly present financial position, results of
operations, and cash flows in conformity with generally accepted accounting
principles because the Company did not record executive compensation expense
relating to bonuses payable to certain of the Company's executives. These
bonuses, payable by the Company's sole shareholder, reflect the increase in
value of the Company during the period of these executives' employment, based
upon the amount realized by the sole shareholder upon the sale of the Company
in excess of a defined amount. As described in note 12, the Company has
restated the 1995 financial statements to conform with generally accepted
accounting principles. Accordingly, our present opinion on the 1995 financial
statements, as presented herein, is different from that expressed in our
previous report.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Metro-Goldwyn-
Mayer Studios Inc., and its subsidiaries at December 31, 1995, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Price Waterhouse LLP
Century City, California
February 29, 1996, except for the restatement
described in Note 12, as to which the date
is July 31, 1996
F-24
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents........................... $ 24,717 $ 17,128
Accounts and contracts receivable (net of allowance
for doubtful accounts of $12,718 and $18,479 in
1996 and 1995, respectively)....................... 291,550 255,444
Film and television costs, including film distribu-
tion organization, net............................. 1,006,402 1,565,438
Investments and advances to affiliates.............. 26,420 15,238
Property and equipment, net......................... 26,686 32,078
Trademarks, logos and excess of cost over net assets
of acquired businesses, net........................ 349,158 520,199
Other assets........................................ 19,301 34,729
----------- -----------
$ 1,744,234 $ 2,440,254
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Bank and other debt............................... $ 1,229,499 $ 1,217,316
Accounts payable and accrued liabilities.......... 84,379 112,521
Interest payable.................................. 72,079 76,859
Accrued participants' share....................... 170,257 140,316
Income taxes payable.............................. 27,313 58,900
Due to affiliate.................................. 11,900 --
Advances and deferred revenues.................... 110,774 161,973
Other liabilities................................. 38,033 12,870
----------- -----------
Total liabilities............................... 1,744,234 1,780,755
Commitments and contingencies
Stockholder's equity:
Common Stock, $1.00 par value, 1,000 shares
authorized, 10 shares issued and outstanding in
1996 and 1995.................................... 1 1
Additional paid-in capital........................ $ 2,222,133 $ 2,132,694
Cumulative translation adjustment................. (318) (413)
Accumulated deficit............................... (2,221,816) (1,472,783)
----------- -----------
Stockholder's equity............................ -- 659,499
----------- -----------
$ 1,744,234 $ 2,440,254
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-25
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 10, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................ $ 912,706 $ 860,971 $ 597,121
Expenses:
Film and television production and
distribution......................... 953,820 894,280 668,516
General and administrative............ 60,056 64,175 49,314
Goodwill amortization................. 11,570 14,876 14,876
Provision for impairment.............. 563,829 -- --
---------- --------- ---------
Total expenses...................... 1,589,275 973,331 732,706
---------- --------- ---------
Operating loss.......................... (676,569) (112,360) (135,585)
Other income (expense):
Interest expense, net of amounts
capitalized.......................... (71,375) (66,386) (33,860)
Interest and other income, net........ 3,179 10,372 2,070
---------- --------- ---------
Total other expense................. (68,196) (56,014) (31,790)
---------- --------- ---------
Loss from operations before provision
for income taxes....................... (744,765) (168,374) (167,375)
Income tax provision.................... (273) (935) (3,877)
---------- --------- ---------
Net loss................................ $ (745,038) $(169,309) $(171,252)
========== ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-26
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL CUMULATIVE TOTAL
NUMBER OF PAR PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
SHARES VALUE CAPITAL DEFICIT ADJUSTMENT EQUITY
--------- ----- ---------- ----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31,
1993................... 10 $ 1 $2,100,000 $(1,116,774) $ 1,380 $ 984,607
Foreign currency
translation adjustment. -- -- -- -- (1,090) (1,090)
Forgiveness of interest
payable to affiliate... -- -- 16,794 -- -- 16,794
Net loss................ -- -- -- (171,252) -- (171,252)
--- --- ---------- ----------- ------- ---------
BALANCE DECEMBER 31,
1994................... 10 1 2,116,794 (1,288,026) 290 829,059
Contributions received
from affiliate......... -- -- 15,900 -- -- 15,900
Dividends declared...... -- -- -- (15,448) -- (15,448)
Foreign currency
translation adjustment. -- -- -- -- (703) (703)
Net loss................ -- -- -- (169,309) -- (169,309)
--- --- ---------- ----------- ------- ---------
BALANCE DECEMBER 31,
1995................... 10 1 2,132,694 (1,472,783) (413) 659,499
Contributions received
from affiliate......... -- -- 89,439 -- -- 89,439
Dividends declared...... -- -- -- (3,995) -- (3,995)
Foreign currency
translation adjustment. -- -- -- -- 95 95
Net loss................ -- -- -- (745,038) -- (745,038)
--- --- ---------- ----------- ------- ---------
BALANCE OCTOBER 10,
1996................... 10 $1 $2,222,133 $(2,221,816) $ (318) $ --
=== === ========== =========== ======= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-27
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 10, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss.............................. $(745,038) $(169,309) $(171,252)
Adjustments to reconcile net loss from
operations to net cash provided by
operating activities:
Amortization of film and television
costs, film distribution
organization and participants'
share.............................. 608,704 628,420 434,354
Depreciation and amortization of
property and equipment............. 4,645 4,021 5,335
Provision for impairment and
amortization of intangibles........ 575,399 14,876 14,876
(Decrease) increase in bad debt and
other reserves..................... 430 (17,425) 3,266
Losses (gains) on equity
investments........................ (1,967) 1,620 (1,762)
Increase in accounts and contracts
receivable, advances to affiliates
and other assets................... (28,192) (65,454) (32,905)
Increase (decrease) in accounts
payable, accrued and other
liabilities, accrued participants'
share and domestic and foreign
taxes.............................. (19,970) 680 (8,967)
Decrease in advances and deferred
revenues........................... (51,199) (24,597) (27,458)
Foreign currency exchange (gain)
loss and other..................... 325 (1,175) 802
--------- --------- ---------
Net cash provided by operating
activities....................... 343,137 371,657 216,289
--------- --------- ---------
Investing activities:
Additions to film costs, net.......... (369,148) (701,436) (454,932)
Additions to property and equipment... (6,901) (9,376) (9,099)
Other investing activities............ (4,093) -- --
--------- --------- ---------
Net cash used in investing
activities....................... (380,142) (710,812) (464,031)
--------- --------- ---------
Financing activities:
Net bank advances..................... 51,012 340,148 251,918
Contribution received from parent..... -- 5,900 --
Dividends paid........................ (6,160) (13,283) --
Financing costs and other............. -- (4,736) (11,953)
--------- --------- ---------
Net cash provided by financing
activities....................... 44,852 328,029 239,965
--------- --------- ---------
Net change in cash and cash equivalents
from operating, investing and financing
activities............................. 7,847 (11,126) (7,777)
Net decrease in cash due to foreign
currency fluctuations.................. (258) (543) (199)
--------- --------- ---------
Net change in cash and cash equivalents. 7,589 (11,669) (7,976)
Cash and cash equivalents at beginning
of period.............................. 17,128 28,797 36,773
--------- --------- ---------
Cash and cash equivalents at end of the
period................................. $ 24,717 $ 17,128 $ 28,797
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-28
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 10, 1996
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of Metro-Goldwyn-Mayer Studios Inc. (formerly known as
Metro-Goldwyn-Mayer Inc.). and its majority-owned subsidiaries ("MGM Studios"
or "the Company"). The Company is wholly owned by MGM Group Holdings
Corporation ("MGM Group Holdings"), an indirect wholly owned subsidiary of
Consortium de Realisation ("CDR"). CDR is a wholly owned subsidiary of Credit
Lyonnais S.A. ("Credit Lyonnais") and is controlled by the French State. On
October 10, 1996, the Company was sold to an unaffiliated group of investors
(see Note 15). The sale transaction has not been reflected in the accompanying
historical financial statements, except to reduce certain long-lived assets to
their net realizable value (see Note 5).
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures", the
Company has presented unclassified consolidated balance sheets. Certain
reclassifications have been made to amounts reported in prior periods to
conform with the current presentation.
Business. The Company is engaged in the financing, production and worldwide
distribution of theatrical motion pictures and television programming, as well
as new media and interactive products. The Company also distributes films
produced or financed, in whole or in part, by third parties.
Principles of Consolidation. The consolidated financial statements include
the accounts of MGM Studios and all of its majority-owned and controlled
subsidiaries. The Company's investments in related companies which represent a
20% to 50% ownership interest over which the Company has significant influence
but not control are accounted for using the equity method (see Note 4). All
significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments, purchased with an initial maturity of three months or less, to be
cash equivalents. Included in other assets at October 10, 1996 and December
31, 1995 is approximately $12,774,000 and $12,354,000, respectively, of cash
restricted by various escrow agreements. The carrying value of the Company's
cash equivalents approximated cost at each balance sheet date.
Revenue Recognition. Revenues from theatrical distribution of feature films
are recognized on the dates of exhibition. Revenues from direct home video
distribution are recognized, net of an allowance for estimated returns,
together with related costs, in the period in which the product is available
for sale by the Company's customers. Revenues from television licensing,
together with related costs, are recognized when the feature film or
television program is available to the licensee for telecast. Generally,
feature films are first made available for home video release in a particular
territory six months after theatrical release in such territory; for pay
television, one year after theatrical release; for initial free television,
two to three years after theatrical release; and for syndication,
approximately three to five years after theatrical release. Long-term non-
interest-bearing receivables arising from licensing agreements are discounted
to present value.
Accounting for Film Costs. Except for purchase accounting adjustments, film
costs include the costs of production, prints, pre-release and other
advertising expected to benefit future periods and capitalized overhead and
interest. These costs, as well as participations and talent residuals, are
charged against earnings on an individual film basis in the ratio that the
current year's gross film revenues bear to management's estimate of total
remaining ultimate gross film revenues from all sources.
F-29
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Film costs are stated at the lower of cost or estimated net realizable value
on an individual film basis. Revenue and cost forecasts are continually
reviewed by management and revised when warranted by changing conditions. When
estimates of total revenues and costs indicate that a feature film or
television program will result in an ultimate loss, additional amortization is
recognized to the extent required to produce a zero gross margin over the
remaining life of the film or television program.
The film distribution organization is an intangible asset reflecting the
estimated value of the Company's investment in its worldwide distribution
organization; these costs are being amortized on a straight-line basis over 40
years. During the period ended October 10, 1996, the Company recorded a charge
of $404,409,000 to write off its remaining investment in the film distribution
organization (see Notes 2 and 5).
Property and equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is computed under the straight-line
method over the expected useful lives of applicable assets, ranging from three
to five years. Amortization of leasehold assets is computed under the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the related leases. When property is sold or otherwise
disposed of, the cost and related accumulated depreciation is removed from the
accounts, and any resulting gain or loss is included in income. The costs of
normal maintenance and repairs and minor replacements are charged to expense
when incurred.
Trademarks, Logos and Goodwill. Trademarks, logos and the excess cost of
acquisitions over the fair market values of identifiable net assets acquired
(goodwill) are amortized over an estimated useful life of 40 years using the
straight-line method. During 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The carrying value of
existing assets are reviewed when events or changes in circumstances indicate
that an impairment test is necessary in order to determine if an impairment
has occurred. When factors indicate that such assets should be evaluated for
possible impairment, the Company will estimate the future cash flows expected
to result from the use of the assets and their eventual disposition, and
compare the amounts to the carrying value of the assets to determine if an
impairment loss has occurred. Accordingly, the Company recorded a charge of
$159,420,000 to reduce the net realizable value of goodwill (see Note 5).
Income Taxes. In accordance with SFAS No. 109, "Accounting For Income
Taxes", deferred tax assets and liabilities are recognized with respect to the
tax consequences attributable to differences between the financial statement
carrying values and tax bases of existing assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary differences are
expected to be recovered or settled. Further, the effect on deferred tax
assets and liabilities of changes in tax rates is recognized in income in the
period that includes the enactment date.
From May 7, 1992 to October 10, 1996, the Company has been included in the
consolidated federal income tax return of MGM Holdings. The Company's income
tax provision has been computed on a separate return basis, modified to
allocate to MGM Studios the benefits calculated at the MGM Holdings level
which results from the Company's tax attributes. Foreign subsidiaries file
separate or consolidated returns depending on the statutes and elections
available in each foreign jurisdiction.
Foreign Currency Translation. Generally, foreign subsidiary assets and
liabilities are translated into United States dollars at the exchange rates in
effect at the balance sheet date. Revenues and expenses of foreign
subsidiaries are translated into United States dollars at the average exchange
rates that prevailed during the period. The gains or losses that result from
this process are included as a component of the cumulative translation
adjustment balance in stockholder's equity. Foreign currency denominated
transactions are recorded at the
F-30
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exchange rate in effect at the time of occurrence, and the gains or losses
resulting from subsequent translation at current exchange rates are included
in the statement of operations.
Financial Instruments. The carrying values of short-term trade receivables
and payables approximate their estimated fair values because of the short
maturity of these instruments. The carrying values of receivables with
maturities greater than one year have been discounted at LIBOR plus 2.25%
(approximately 7.78% at October 10, 1996), which approximates current market
rates.
Accounts and Contracts Receivable. At October 10, 1996, accounts and
contracts receivable aggregated $304,268,000 (before allowance for doubtful
accounts), of which approximately $240,000,000 is due within one year.
Concentration of credit risk with respect to accounts receivable is limited
due to the large number and general dispersion of accounts which constitute
the Company's customer base. The Company performs credit evaluations of its
customers and in some instances requires collateral. At October 10, 1996 and
December 31, 1995, approximately 41% and 18%, respectively, of the Company's
accounts and contracts receivable arose from an exclusive home video
distribution agreement with Warner Home Video.
Use of Estimates in the Preparation of Financial Statements. 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. Management estimates ultimate
revenues and costs for feature films and television programs for each market
based on anticipated release patterns, public acceptance and historical
results for similar products. Actual results could differ from those
estimates.
NOTE 2--FILM AND TELEVISION COSTS, INCLUDING FILM DISTRIBUTION ORGANIZATION
Film costs, net of amortization, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Theatrical productions:
Released.......................................... $ 796,715 $ 825,623
Completed not released............................ 25,782 --
In process and development........................ 72,678 210,955
Television programming.............................. 111,227 115,216
Film distribution organization...................... -- 413,644
---------- ----------
$1,006,402 $1,565,438
========== ==========
</TABLE>
Interest costs capitalized to theatrical productions were $4,112,000,
$21,498,000 and $7,022,000 during the period ended October 10, 1996 and the
years ended December 31, 1995 and 1994, respectively.
Based on the Company's estimates of projected gross revenues as of October
10, 1996, approximately 64% of unamortized film costs applicable to released
theatrical films and released television programs will be amortized during the
three years ending September 30, 1999.
NOTE 3--INVESTMENTS
Distribution of foreign theatrical and certain pay television product is
performed by United International Pictures B.V. ("UIP"), in which the Company
has a one-third interest. The Company's investment in UIP, which is included
in investments and advances to affiliates, is stated at cost plus equity in
undistributed earnings. The Company includes in its financial statements the
revenues and related costs associated with its films distributed
F-31
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
by UIP. The distribution fees paid to UIP by the Company are included in film
and television production and distribution expense. Due to timing differences
there are no taxable earnings and, therefore, there is no tax provision on
undistributed earnings. The Company's carrying value of its investment in UIP
at October 10, 1996 and December 31, 1995 was $9,898,000 and $10,008,000,
respectively.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Leasehold improvements.. $ 17,923 $ 22,867
Furniture, fixtures and
equipment.............. 50,490 50,082
---------- ----------
68,413 72,949
Less accumulated depre-
ciation and amortiza-
tion................... (41,727) (40,871)
---------- ----------
$ 26,686 $ 32,078
========== ==========
NOTE 5--IMPAIRMENT OF INTANGIBLE ASSETS
As discussed in Note 15, the Company was sold to an unaffiliated group of
investors effective on October 10, 1996. The proceeds from the sale of
$1,300,000,000 were insufficient to recover the net asset value of the Company
on the date of the disposition, and were insufficient to repay the bank debt
and related accrued interest due to Credit Lyonnais (see Note 6). In accordance
with SFAS No. 121, the Company recorded a charge of $404,409,000 to write off
its remaining investment in the film distribution organization (see Note 2) and
a charge of $159,420,000 to reduce its investment in goodwill to net realizable
value during the period ended October 10, 1996.
NOTE 6--BANK AND OTHER DEBT
Bank and other debt is summarized as follows (in thousands):
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Senior Facility......... $ 390,000 $ 339,000
CL Facility............. 298,936 333,926
Term Loan............... 539,760 539,504
Capitalized lease obli-
gations and other
borrowings............. 803 4,886
---------- ----------
$1,229,499 $1,217,316
========== ==========
</TABLE>
Senior Facility. On September 16, 1994, the Company obtained from a
syndicate of banks a $450,000,000 senior secured credit facility, as amended
(the "Senior Facility"). Borrowings under the Senior Facility bear interest at
2.25% over the three-month LIBOR (7.78% at October 10, 1996), subject to
adjustment under certain conditions. Borrowings outstanding under the Senior
Facility prior to extinguishment (see Note 15) as of October 10, 1996 were
$390,000,000.
CL Facility. On September 14, 1994, the Company obtained a $400,000,000
credit facility (the "CL Facility") from Credit Lyonnais, a portion of which
was used to retire a previously outstanding $190,000,000 credit facility with
CLBN. Borrowings under the CL Facility bear interest at 0.25% over the three-
month LIBOR (5.78% at October 10, 1996). The principal amount outstanding at
October 10, 1996 prior to extinguishment (see Note 15) was $298,936,000.
F-32
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Term Loan. Prior to April, 1993, the Company was financed under two credit
facilities with CLBN (the "CLBN Facilities"). As of September 14, 1994, all of
the Company's outstanding borrowings under the CLBN Facilities, together with
accrued interest of $67,290,000, were converted into a term loan (the "Term
Loan"). The Term Loan bears interest at 0.25% over the three-month LIBOR
(5.78% at October 10, 1996). The principal amount outstanding at October 10,
1996 prior to extinguishment (see Note 15) was $539,760,000.
The Company's borrowings under the Senior Facility, the CL Facility and the
Term Loan are secured by all the assets of the Company. The security interests
under the CL Facility and the Term Loan are subordinate to the Senior
Facility. The Senior Facility contains various covenants including limitations
on dividends, capital expenditures and indebtedness, and the maintenance of
certain financial ratios.
The Senior Facility, CL Facility and Term Loan aggregating $1,379,797,000,
including accrued interest, were extinguished on October 10, 1996 upon the
sale of the Company (see Notes 7 and 15). At that time, the Company obtained
$800,000,000 in Senior Secured Credit Facilities to partially finance the
acquisition of the Company and to provide for ongoing operations of the
Company.
Lease and other borrowings. The capitalized lease obligations relate
principally to computer equipment financing at interest rates of approximately
10%.
Maturity schedule. Credit facilities, lease and other borrowings are
scheduled to mature as follows (in thousands):
<TABLE>
<S> <C>
October 10, 1996.................................................. $1,228,696
December 31, 1996................................................. 6
December 31, 1997................................................. 788
December 31, 1998................................................. 9
----------
$1,229,499
==========
</TABLE>
NOTE 7--STOCKHOLDER'S EQUITY
Capital Contributions. Pursuant to the terms of the sale of the Company, the
proceeds from the transaction were insufficient to repay the entire bank debt
and accrued interest due to Credit Lyonnais as of October 10, 1996.
Accordingly, the deficit of $79,798,000 has been accounted for as a
contribution of capital from the parent in the accompanying financial
statements.
Additionally, an affiliate of Credit Lyonnais has agreed to pay bonuses of
$19,641,000 to certain executives of the Company due upon the sale of the
Company (see Note 15). Accordingly, the Company has recorded compensation
expense and a corresponding contribution to capital of $9,641,000 during the
period ended October 10, 1996 and $10,000,000 during the year ended December
31, 1995, respectively.
Upon commencement of the CL Facility in 1994 (see Note 6), CLBN agreed to
waive $16,794,000 in accrued interest charges on the Company's credit
facilities for the period from January 1, 1994 through September 14, 1994.
Accordingly, the Company has included this amount as a contribution to paid-in
capital in the consolidated financial statements.
F-33
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES
The Company's domestic and foreign tax liability balances consist of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current............................................. $27,313 $58,900
Deferred............................................ -- --
------- -------
$27,313 $58,900
======= =======
</TABLE>
Prior to December 30, 1993, the assets and operations of the Company had
been held by MGM Group Holdings. On that date, pursuant to a financial
restructuring program approved by the Company's Board of Directors,
substantially all the assets and operations of MGM Group Holdings, other than
certain litigation claims and deferred tax assets, were transferred to the
Company. At the same time, the Company assumed all of the liabilities of MGM
Group Holdings other than (i) certain litigation liabilities; (ii) certain
deferred tax liabilities; and (iii) certain of the outstanding indebtedness of
MGM Group Holdings owing to General Bank Nederland N.V. (formerly Credit
Lyonnais Bank Nederland B.V. or "CLBN"), an affiliate of Credit Lyonnais.
Under the tax sharing agreement arising out of the restructuring, the Company
is deemed to have tax basis in the transferred assets and liabilities equal to
the book values at the date of the restructuring. The deferred tax liabilities
and assets for the temporary differences between book value and tax basis of
assets and liabilities transferred to the Company are recorded by MGM Group
Holdings.
Pursuant to the tax sharing agreement, the Company computes its income tax
provision and corresponding deferred tax liabilities and assets, net of a
valuation allowance, on a separate tax return basis, modified as discussed
above with respect to the tax basis of assets transferred in the
restructuring, and further modified to reflect the allocation to the Company
of any tax benefits recognized by the consolidated filing group to the extent
that the Company's losses in the current period reduce the current or deferred
income taxes payable.
Management believes certain of the Company's deferred tax assets are more
likely than not to be realized. For deferred tax assets which do not meet that
standard, a valuation allowance is applied. At October 10, 1996, management
has determined that $69,161,000 of deferred tax assets related to assets and
liabilities existing at the time of restructuring do not satisfy the
recognition criteria set forth in SFAS No. 109. Similarly, deferred tax assets
of $270,427,000 related to the period after the restructuring have been
determined not to satisfy the recognition criteria. Accordingly, a valuation
allowance has been recorded by the Company for these amounts.
F-34
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences between book value and tax bases of
assets and liabilities transferred to the Company in the restructuring (for
which the deferred tax benefits are recorded by MGM Group Holdings) are as
follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Deferred tax (assets):
Film revenue...................................... $ (25,678) $ (66,153)
Reserves/investments.............................. (86,872) (121,320)
Participations and residuals payable.............. (6,208) (8,174)
Net miscellaneous assets.......................... (6,707) (17,289)
--------- ---------
Subtotal gross tax (assets)..................... (125,465) (212,936)
Valuation allowance............................... 69,161 61,650
--------- ---------
Total tax (assets).............................. $ (56,304) $(151,286)
--------- ---------
Deferred tax liabilities:
Film distribution system.......................... $ -- $ 161,321
Film and television costs......................... 56,304 67,261
Net miscellaneous liabilities..................... -- --
--------- ---------
Total tax liabilities........................... $ 56,304 $ 228,582
--------- ---------
Net deferred tax liability.......................... $ -- $ 77,296
========= =========
</TABLE>
The net operating loss carryforwards of MGM Group Holdings are in excess of
the net deferred tax liabilities for the temporary differences related to
assets and liabilities transferred to the Company.
The tax effects of temporary differences and carryforwards arising after the
restructuring date which give rise to deferred tax assets and liabilities for
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Deferred tax (assets):
Film and television costs......................... $(109,302) $ (33,526)
Miscellaneous liabilities......................... (53,425) (36,185)
Investment tax credit carryforwards............... (12,836) (16,575)
Net operating loss carryforwards.................. (116,417) (50,429)
--------- ---------
Subtotal gross tax (assets)..................... (291,980) (136,715)
Valuation allowance............................... 270,427 36,308
--------- ---------
Total tax (assets).............................. (21,553) (100,407)
Deferred tax liabilities
Film revenue...................................... 17,153 96,007
--------- ---------
Total tax liabilities........................... 17,153 96,007
--------- ---------
Net deferred tax (asset)............................ $ (4,400) $ (4,400)
========= =========
</TABLE>
Under the terms of the tax sharing agreement discussed above, the deductible
temporary differences of the Company which originate after the restructuring
date are available to be used against the deferred tax liability retained by
MGM Group Holdings.
F-35
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of October 10, 1996, the Company and its subsidiaries had net operating
loss carryforwards of $268,888,000, capital loss carryforwards of $29,616,000
and investment tax credit carryforwards of $12,836,000, before adjustments for
the effect of the tax sharing agreement, which expire through 2010. These
carryforwards are available for use in the U.S. consolidated tax return group,
of which the Company is a member, and are subject to the tax sharing agreement
between the Company and MGM Group Holdings. A portion of these losses are
subject to substantial limitations on utilization because of various income
tax rules.
Details of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 10, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current taxes:
Foreign taxes......................... $ 273 $ 935 $ 8,277
Deferred taxes:
Federal and state taxes (benefit)..... (241,630) 1,997 (26,130)
Adjustment for change in enacted tax
rate................................. -- -- --
Adjustment for change in valuation
allowance............................ 241,630 (1,997) 21,730
--------- ------- --------
Total tax provision................. $ 273 $ 935 $ 3,877
========= ======= ========
</TABLE>
Tax expense for 1994 reflects a $4,400,000 deferred tax benefit arising from
the carryforward and use by MGM Group Holdings of a portion of the Company's
current year net operating losses. As a result, the Company has recorded a
corresponding $4,400,000 receivable from MGM Group Holdings.
The following is a summary reconciliation of the effective tax rate to the
assumed federal tax rate:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 10, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Assumed federal tax rate on loss........ (35)% (35)% (35)%
Goodwill and other permanent
differences............................ 8 % 3 % 3 %
Foreign taxes, net of available federal
tax benefit............................ 1 % (2)% 5 %
Loss carryforward not benefited......... 27 % 35 % 29 %
--- --- ---
Effective tax rate.................... 1 % 1 % 2 %
=== === ===
</TABLE>
The Company has various foreign subsidiaries formed or acquired to produce
or distribute motion pictures outside the United States. In the opinion of
management, the earnings of these subsidiaries are not permanently invested
outside the United States. Pursuant to APB 23, tax expense has accordingly
been provided for these unremitted earnings.
Federal income tax returns for the periods ended through March 25, 1986 have
been examined by the Internal Revenue Service. In the opinion of management,
any adjustments which may result from the examination of subsequent periods
for which the Company is responsible will not have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 9--RETIREMENT PLANS
The Company has a non-contributory retirement plan (the "Basic Plan")
covering substantially all regular full-time, non-union employees. Benefits
are based on years of service and compensation, as defined.
F-36
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the funded status of the Basic Plan (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 10, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations
(including vested benefits of $6,880
and $7,348, respectively)............................ $ 7,870 $ 8,030
======= =======
Projected benefit obligations......................... $ 9,182 $ 9,361
Plan assets at fair value (primarily debt securities). 8,700 6,287
------- -------
Projected benefit obligations in excess of plan
assets............................................... (482) (3,074)
Unrecognized net asset as of beginning of year........ (184) (200)
Unrecognized net (gain) loss.......................... (215) 1,359
Unrecognized prior service cost....................... (181) (191)
------- -------
Accrued pension liability............................. $(1,062) $(2,106)
======= =======
</TABLE>
Key assumptions used in the actuarial computations for the reported periods
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rate.................................................. 7.75% 7.00%
==== ====
Long-term rate of return on assets............................. 7.25% 7.25%
==== ====
Rate of increase in future compensation levels................. 5.00% 5.00%
==== ====
</TABLE>
The unrecognized net asset is being amortized over the estimated remaining
service life of 19.4 years. Domestic pension benefits and expense were
determined under the entry age actuarial cost method.
Pension costs includes the following components (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 10, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Service cost......................... $ 854 $ 658 $ 805
Interest cost on projected benefit
obligation.......................... 570 630 633
Actual return on plan assets......... (521) (797) 24
Net amortization and deferral........ 148 329 (529)
------ ----- -----
Net periodic pension cost............ $1,051 $ 820 $ 933
====== ===== =====
</TABLE>
A significant number of the Company's production employees are covered by
union sponsored, collectively bargained multi-employer pension plans. The
Company contributed approximately $5,775,000, $11,950,000 and $6,521,000 in
1996, 1995 and 1994, respectively, for such plans. Information from the plans'
administrators is not sufficient to permit the Company to determine its share
of unfunded vested benefits, if any.
NOTE 10--RELATED PARTY TRANSACTIONS
See Note 6 regarding the Company's credit arrangements with CLBN and Credit
Lyonnais (collectively, the "Bank").
Interest of approximately $45,000,000, $58,000,000 and $36,000,000 was
charged by the Bank during the period ended October 10, 1996 and the years
ended December 31, 1995 and 1994, respectively. Of the total
F-37
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest charged during 1994, the Bank waived $16,794,000 representing
interest on the Company's credit facilities for the period from January 1,
1994 through September 14, 1994 (see Note 7). Pursuant to the terms of its
credit facilities, the Company also paid to the Bank charges related to
letters of credit and other fees of approximately $19,000, $52,000 and
$278,000, respectively, during these periods.
The Company has entered into various agreements to develop and produce
certain films and television programs with Hometown Films Inc., an entity
controlled by Mr. Frank Mancuso, Jr., who is a relative of the Company's
Chairman of the Board and Chief Executive Officer. Pursuant to these
agreements, the Company paid Hometown Films Inc., approximately $1,582,000
during the period from January 1, 1996 to October 10, 1996 and approximately
$633,000 and $444,000 for the years ended December 31, 1995 and 1994,
respectively. The agreements provide for additional producer fees and
potential profit participations to be paid in the future at terms consistent
with comparable development and production agreements with third parties.
During the period ended October 10, 1996 and the years ended December 31,
1995 and 1994, the Company incurred legal fees of approximately $1,735,000,
$2,737,000 and $802,000, respectively, to White & Case, one of whose partners
is also a director of the Company.
NOTE 11--FOREIGN OPERATIONS AND EXPORT SALES
The Company's foreign activities are principally motion picture and
television production and distribution in territories outside of the United
States and Canada. Net foreign assets and income from subsidiaries operating
in foreign countries are not material in relation to consolidated net assets
or consolidated net loss.
Foreign export revenues are revenues earned from motion picture and
television films produced in the United States. Export revenues for the period
ended October 10, 1996 and the years ended December 31, 1995 and 1994 were as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 10, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Europe................................ $215,588 $223,830 $132,003
Western Hemisphere.................... 24,066 29,882 18,745
Other................................. 102,466 90,274 61,706
-------- -------- --------
$342,120 $343,986 $212,454
======== ======== ========
</TABLE>
NOTE 12--COMMITMENTS AND CONTINGENCIES
Leases. The Company has operating leases for offices and equipment. Certain
property leases include provisions for increases over base year rents as well
as for escalation clauses for maintenance and other building operations. Rent
expense was approximately $8,500,000, $8,630,000 and $8,008,000 for the period
ended October 10, 1996 and the years ended December 31, 1995, and 1994,
respectively.
F-38
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rental commitments under non-cancelable operating leases as
of October 10, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996.............................................................. $ 2,624
1997.............................................................. 10,242
1998.............................................................. 6,666
1999.............................................................. 10,808
2000.............................................................. 11,314
2001.............................................................. 7,437
Thereafter........................................................ 9,813
-------
$58,904
=======
</TABLE>
Employment Agreements. The Company has employment agreements with several
principal officers and employees. The agreements provide for minimum salary
levels as well as, in some cases, bonuses. In addition, the Company's
shareholder is obligated to pay bonuses to certain executives in the event the
value of the Company is eventually determined to exceed a defined amount.
Based on the sales price of the Company, as described in Note 14, this
incentive bonus amounted to $19,641,000. The Company has recorded compensation
expense and a corresponding contribution to capital of $9,641,000 for the
period ended October 10, 1996 and restated its financial statements for the
year ended December 31, 1995 by recording compensation expense and a
corresponding contribution to capital of $10,000,000. Certain executives are
entitled to terminate their employment agreements upon the sale of the
Company.
Creative Talent Agreements. The Company has entered into contractual
agreements for creative talent related to future film production which
aggregate approximately $9,449,000 at October 10, 1996. Such amounts are
scheduled to be paid through 1997.
Litigation. The Company, together with other major companies in the filmed
entertainment industry, has been subject to numerous antitrust suits brought
by various motion picture exhibitors, producers and others. In addition,
various legal proceedings involving alleged breaches of contract, antitrust
violations, copyright infringement and other claims are now pending, which the
Company considers routine to its business activities.
In the opinion of Company management, any liability under pending litigation
is not material in relation to the Company's results of operations.
NOTE 13--SUPPLEMENTARY CASH FLOW INFORMATION
Total interest paid, net of capitalized interest, was $29,490,000 and
$15,416,000 in the period ended October 10, 1996 and the years ended December
31, 1995, respectively. No interest was paid in 1994. Income taxes paid were
$17,856,000, $5,140,000 and $5,164,000 in the period ended October 10, 1996
and the years ended December 31, 1995 and 1994, respectively.
The Company recorded a non-cash contribution of capital of $9,641,000 during
the period ended October 10, 1996 and $10,000,000 during the year ended
December 31, 1995, respectively, from CDR due to the payment of compensation
expense (see Note 12).
F-39
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
Certain quarterly information is presented below (in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER OF SECOND QUARTER OF
----------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 286,947 $156,804 $150,115 $308,185 $162,029 $106,613
Operating loss.......... (24,724) (27,144) (17,926) (25,086) (29,562) (44,197)
Interest expense, net... 22,361 13,014 5,699 22,725 15,256 6,600
Net loss................ (53,678) (38,716) (25,347) (49,874) (45,814) (50,787)
<CAPTION>
THIRD QUARTER OF FOURTH QUARTER OF
----------------------------- ------------------
1996 1995 1994 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 317,574 $206,239 $139,572 $335,845 $200,821
Operating loss.......... (626,759) (27,114) (34,938) (18,540) (38,524)
Interest expense, net... 26,289 17,281 9,378 20,835 12,183
Net loss................ (641,486) (46,048) (44,429) (28,731) (50,689)
</TABLE>
1996 Quarterly Results. The third quarter of 1996 includes the period from
July 1, 1996 to October 10, 1996, the date of the Acquisition. In the third
quarter of 1996, the Company recorded a charge of $563,829,000 to write off
its remaining investment in the film distribution organization and to reduce
its investment in goodwill to net realizable value (see Note 5).
The 1994 and 1995 interim financial information was not reviewed by the
Company's independent accountants in accordance with standards established for
such review.
NOTE 15--SUBSEQUENT EVENT
On October 10, 1996, CDR completed the sale of all of the Company's
outstanding stock to Metro-Goldwyn-Mayer Inc. (formerly P&F Acquisition Corp.)
an entity formed by Tracinda Corporation, Seven Network Limited and Mr. Frank
G. Mancuso, for $1,300,000,000. In connection with the sale of the Company,
Mr. Mancuso has entered into a new five year employment agreement to remain as
Chief Executive Officer and Chairman of the Board of Directors of the Company.
The acquisition price was financed with equity contributions of $900,000,000
and new bank debt of $400,000,000. The Company obtained $800,000,000 in Senior
Secured Credit Facilities to partially finance the acquisition of the Company
and to provide for ongoing operations of the Company. The Company's existing
bank debt, including the Senior Facility, the CL Facility and the Term Loan
(see Note 6), were extinguished upon the closing of the transaction. The
acquisition will be accounted for as a purchase.
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of Orion Pictures Corporation
We have audited the accompanying consolidated balance sheet of Orion
Pictures Corporation and its subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, stockholder's equity (capital
deficiency) and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orion
Pictures Corporation and subsidiaries as of December 31, 1996 and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 31, 1997
F-41
<PAGE>
ORION PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents............................. $ 2,922 $ 1,252
Accounts receivable, net.............................. 50,661 45,878
Film and television costs, net........................ 252,299 237,558
Property, plant and equipment, net.................... 38,470 39,287
Goodwill, net......................................... 132,139 129,439
Other assets.......................................... 13,797 12,901
--------- ---------
Total assets...................................... $ 490,288 $ 466,315
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Bank and other debt................................. $ 269,410 $ 292,434
Accounts payable and accrued expenses............... 35,489 38,082
Participations and residuals payable................ 62,916 56,657
Due to Parent....................................... 84,637 85,168
Deferred revenues................................... 64,912 64,829
--------- ---------
Total liabilities................................. 517,364 537,170
--------- ---------
Commitments and contingencies
Stockholder's equity (capital deficiency):
Common Stock, $.01 par value, authorized, issued and
outstanding 1,000 shares........................... -- --
Additional paid-in capital.......................... 350,774 350,774
Accumulated deficit................................. (377,850) (421,629)
--------- ---------
Total shareholder's equity (capital deficiency)... (27,076) (70,855)
--------- ---------
Total liabilities and shareholder's equity
(capital deficiency)............................. $ 490,288 $ 466,315
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-42
<PAGE>
ORION PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1996
------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues................................. $165,164 $ 90,910 $62,853
Costs and expenses:
Cost of rentals and operating expenses. 139,307 99,181 54,834
Selling, general, and administrative... 24,709 19,302 9,625
Depreciation and amortization.......... 5,555 4,984 596
-------- -------- -------
Operating loss........................... (4,407) (32,557) (2,202)
Interest expense......................... 17,166 11,019 6,823
Interest income.......................... (286) (197) (208)
-------- -------- -------
Interest expense, net.................. 16,880 10,822 6,615
Loss before extraordinary items and
provision for income taxes.............. (21,287) (43,379) (8,817)
Provision for income taxes............... 1,000 400 400
-------- -------- -------
Loss before extraordinary items.......... (22,287) (43,779) (9,217)
Extraordinary loss on extinguishment of
debt.................................... 4,505 -- --
-------- -------- -------
Net loss................................. $(26,792) $(43,779) $(9,217)
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-43
<PAGE>
ORION PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
--------- ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........... 1,000 $-- $290,238 $(351,058)
Net loss............................... -- -- -- (26,792)
Contribution by parent of net assets of
Motion Picture Corporation of America. -- -- 20,801 --
Contribution by parent of net assets of
The Samuel Goldwyn Company............ -- -- 39,735 --
----- ---- -------- ---------
Balance at December 31, 1996........... 1,000 -- 350,774 (377,850)
Net loss............................... -- -- -- (43,779)
----- ---- -------- ---------
Balance at June 30, 1997 (unaudited)... 1,000 $-- $350,774 $(421,629)
===== ==== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE>
ORION PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1996
------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATIONS:
Net loss............................... $ (26,792) $(43,779) $ (9,217)
Adjustments to reconcile loss to cash
provided by operations:
Amortization of film costs........... 61,472 53,660 29,418
Amortization of discount on notes,
subordinated debt and guarantee..... 2,243 1,039 1,205
Depreciation and amortization........ 5,555 4,984 596
Loss on early extinguishment of debt. 4,505 -- --
Payroll charge due to restricted
stock............................... 528 532 --
(Increase) decrease in accounts
receivable.......................... 16,122 3,793 (499)
Increase (decrease) in accounts
payable............................. 219 (416) (1,047)
Increase (decrease) in accrued
expenses............................ 371 4,145 (2,243)
Accrual of participations and
residuals........................... 34,255 9,192 17,051
Payments of participations and
residuals........................... (27,364) (15,451) (8,141)
Decrease in deferred revenues........ (20,984) (83) (11,514)
--------- -------- --------
Cash provided by operations............ 50,130 17,616 15,609
--------- -------- --------
INVESTING ACTIVITIES:
Investment in film inventories......... (67,176) (38,919) (22,392)
Additions to property, plant and
equipment............................. (3,648) (3,252) (587)
Cash acquired, net of contributions
from parent........................... 843 -- 568
Other investing activities............. (4,370) 193 --
--------- -------- --------
Cash used in investment activities..... (74,351) (41,978) (22,411)
--------- -------- --------
FINANCING ACTIVITIES:
Additions to notes and subordinated
debt.................................. 307,658 36,200 30,400
Payments on notes and subordinated
debt.................................. (275,829) (13,508) (20,914)
Payments of deferred financing costs... (10,700) -- (7,912)
Increase (decrease) in due to/from
parent................................ (270) -- (220)
--------- -------- --------
Cash provided by financing activities.. 20,859 22,692 1,354
--------- -------- --------
Net decrease in cash..................... (3,362) (1,670) (5,448)
Cash and cash equivalents at beginning of
period.................................. 6,284 2,922 6,284
--------- -------- --------
Cash and cash equivalents at end of
period.................................. $ 2,922 $ 1,252 $ 836
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-45
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Orion Pictures Corporation, a Delaware corporation, and its subsidiaries, most
of which are wholly-owned (the "Company") and reflect the acquisitions of the
Samuel Goldwyn Company and the Motion Picture Corporation of America each
effective as of July 2, 1996.
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures", the
Company has presented unclassified consolidated balance sheets as of December
31, 1996 and June 30, 1997. The Company is a wholly-owned subsidiary of
Metromedia International Group Inc. ("MIG").
Unaudited Information as of June 30, 1997 and 1996
The accompanying unaudited consolidated financial statements as of June 30,
1997 and 1996 reflect all adjustments which are, in the opinion of management,
necessary to present fairly the financial position of the Company as of June
30, 1997 and the results of its operations and cash flows for the six months
ended June 30, 1997 and 1996. Such adjustments consist only of normal
recurring items. Interim results are not necessarily indicative of results for
a full year.
DESCRIPTION OF THE BUSINESS
The business activities of the Company constitute a single business segment,
entertainment, which includes the financing, production and distribution of
theatrical motion pictures and television programming as well as the operation
of a theatre circuit. Theatrical motion pictures are produced initially for
exhibition in theaters. Initial theatrical release generally occurs in the
United States and Canada. Foreign theatrical exhibition generally begins
within the first year after initial release. Home video distribution in all
territories usually begins six to twelve months after theatrical release in
that territory, with pay television exploitation beginning generally six
months after initial home video release. Exhibition of the Company's product
on network and on other free television outlets begins generally three to five
years from the initial theatrical release date in each territory.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Orion Pictures Corporation and its subsidiaries, most of which are wholly-
owned. All significant intercompany transactions and accounts have been
eliminated.
Cash and Cash Equivalents
Cash equivalents consists of highly liquid instruments with original
maturities of three months or less.
REVENUE RECOGNITION
Revenue from the theatrical distribution of films is recognized as the films
are exhibited. The Company's home video revenue, less a provision for returns,
is recognized when the video cassettes are shipped. Distribution
F-46
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
of the Company's films to the home video markets in foreign countries is
generally effected through subdistributors who control various aspects of
distribution. When the terms of sale to such subdistributors include the
receipt of nonrefundable guaranteed amounts by the Company, revenue is
recognized when the film is available to the subdistributors for exhibition or
exploitation and other conditions of sale are met. When the arrangements with
such subdistributors call for distribution of the Company's product without a
minimum amount guaranteed to the Company, such sales are recognized when the
Company's share of the income from exhibition or exploitation is earned.
Revenue from the licensing of the Company's product to networks, basic and
pay cable companies and independent television stations or groups of stations
in the United States and Canada as well as in foreign territories is
recognized when the license period begins and when certain other conditions
are met. Such conditions include the availability of such product for
broadcast by the licensee.
Film Inventories and Cost of Rentals
Except for purchase accounting adjustments, theatrical and television
program inventories consist of direct production costs, production overhead
and capitalized interest, print and exploitation costs, less accumulated
amortization. Film inventories are stated at the lower of unamortized cost or
estimated net realizable value. Selling costs and other distribution costs are
charged to expense as incurred.
Film inventories and estimated total costs of participations and residuals
are charged to cost of rentals under the individual film forecast method in
the ratio that current period revenue recognized bears to management's
estimate of total gross revenue to be realized. Such estimates are re-
evaluated quarterly in connection with a comprehensive review of the Company's
inventory of film product, and estimated losses, if any, are provided for in
full. Such losses include provisions for estimated future distribution costs
and fees as well as participation and residual costs expected to be incurred.
Property, Plant and Equipment
Except for purchase accounting adjustments, buildings, property, equipment,
furniture and fixtures are carried at cost and depreciated over their
estimated useful lives. Generally depreciation is provided on the straight-
line method. The estimated useful life of buildings is approximately 25 years,
and for equipment, furniture and fixtures approximately three to seven years.
Theatre leasehold interests and leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful lives of the
improvements or the terms of the respective leases. Maintenance and repairs
are expensed as incurred.
Goodwill
Goodwill has been recognized for the excess of the purchase price over the
value of the identifiable net assets acquired. Such amount is being amortized
over 25 years using the straight-line method. Accumulated amortization of
goodwill was $2.9 million and $5.7 million at December 31, 1996 and June 30,
1997, respectively.
Management continuously monitors and evaluates the realizability of recorded
intangibles to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of intangible assets, their carrying
value is compared to management's best estimate of undiscounted future cash
flows over the remaining amortization period. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the assets.
The Company believes that the carrying value of the recorded intangibles is
not impaired.
F-47
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes "Statement 109",
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Financial Instruments
The estimated fair values of cash, accounts receivable, accounts payable and
accrued expenses approximate their carrying values because of the short
maturity of these instruments. The carrying value of receivables with
maturities greater than one year have been discounted and if such receivables
were discounted based on current market rates, the fair value of these
receivables would not be materially different than their carrying value.
Because the Company's bank debt is a floating interest rate instrument, it is
assumed that the carrying value would approximate fair value.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Significant estimates are primarily related to ultimate revenues and ultimate
costs relating to the Company's film and television properties and the
allowance for doubtful accounts. Actual results may differ from estimated
amounts.
2. ACQUISITIONS
On July 2, 1996 MIG consummated its acquisition (the "Goldwyn Merger") of
The Samuel Goldwyn Company ("Goldwyn"). Upon consummation of the Goldwyn
Merger, Goldwyn was renamed Goldwyn Entertainment Company. Holders of the
Goldwyn common stock received .3335 shares of MIG's common stock (the "Common
Stock") for each share of Goldwyn Common Stock in accordance with a formula
set forth in the Agreement and Plan of Merger relating to the Goldwyn Merger
("the Goldwyn Merger Agreement"). Pursuant to the Goldwyn Merger, MIG issued
3,130,277 shares of Common Stock. Goldwyn is a producer and distributor of
motion pictures and television product and has a film and television library
of over 850 titles. In addition, Goldwyn owns Landmark Theatre Corporation,
which the Company believes is the leading specialized theatre circuit in the
Unites States with 138 screens. The purchase price, including stock options
and transaction costs, related to the Goldwyn Merger was approximately $43.8
million.
Also on July 2, 1996, MIG consummated its acquisition (the "MPCA Merger,"
together with the Goldwyn Merger, the "July 2 Mergers") of Motion Picture
Corporation of America ("MPCA"). In connection with the MPCA Merger, MIG (i)
issued 1,585,592 shares of Common Stock to MPCA's stockholders, and (ii) paid
such stockholders approximately $1.2 million in additional consideration,
consisting of promissory notes. The purchase price, including transaction
costs, related to the acquisition of MPCA was approximately $21.9 million.
The purchases of Goldwyn and MPCA have been recorded by MIG in accordance
with the purchase method of accounting for business combinations. The purchase
price to acquire both Goldwyn and MPCA were allocated
F-48
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
to the net assets acquired according to management's estimate of their
respective fair values and resulted in $125.5 million of goodwill. Following
the consummation of the July 2 Mergers, MIG contributed its interests (at
MIG's net book value) in Goldwyn and MPCA to Orion with Goldwyn and MPCA
becoming wholly owned subsidiaries of Orion. The results of those purchased
businesses have been included in the accompanying consolidated financial
statements from July 2, 1996, the date of the acquisition. The following net
assets were contributed by MIG (in thousands):
<TABLE>
<CAPTION>
GOLDWYN MPCA
--------- --------
<S> <C> <C>
Assets acquired....................................... $ 178,352 $ 67,790
Liabilities assumed................................... (133,331) (46,989)
Due to Parent......................................... (5,286) --
--------- --------
Net assets contributed................................ $ 39,735 $ 20,801
========= ========
</TABLE>
The following unaudited proforma information illustrates the effect of the
July 2 Mergers on revenues and net loss for calendar 1996 and assumes that the
July 2 Mergers occurred at the beginning of the period and does not account
for refinancing of certain indebtedness of Goldwyn and MPCA debt as discussed
above (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR ENDED 1996
---------- ------------
<S> <C>
Revenues...................................................... $230,196
Net loss...................................................... $(37,672)
</TABLE>
3. ACCOUNTS RECEIVABLE, PARTICIPATION AND RESIDUALS PAYABLE, AND DEFERRED
REVENUES
Accounts receivable consists primarily of trade receivables due from film
distribution, including theatrical, home video, basic cable and pay
television, network, television syndication, and other licensing sources which
have payment terms generally covered under contractual arrangements. Of the
total accounts receivable as of December 31, 1996, $30.4 million is expected
to be collected during the twelve months ended December 31, 1997. Accounts
receivable is stated net of an allowance for doubtful accounts of $11.6
million and $13.6 million at December 31, 1996 and June 30, 1997,
respectively.
The Company has entered into contracts for licensing of theatrical and
television product to the pay cable, home video and free television markets,
for which the revenue and the related accounts receivable will be recorded in
future periods when the films are available for broadcast or exploitation.
These contracts, net of advance payments received and recorded in Deferred
revenues, as described below, aggregated approximately $175.0 million at
December 31, 1996. Included in this amount is $61.5 million of license fees
for which the revenue and the related accounts receivable will be recorded
only as if the Company is able to successfully produces or acquires new
product under the restrictions of the Plan.
Approximately $4.8 million and $4.6 million was payable to an officer of a
subsidiary of the Company and was included in participation and residuals
payable as of December 31, 1996 and June 30, 1997, respectively. The executive
is also entitled to future participations (limited to annual maximum payments)
on certain Goldwyn titles.
Deferred revenues consist principally of advance payments received on pay
cable, home video and other television contracts for which the films are not
yet available for broadcast or exploitation.
F-49
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land and buildings................................ $ 7,461 $ 7,461
Theatre leasehold interests....................... 18,633 19,301
Leasehold improvements............................ 7,678 8,685
Equipment, furniture and fixtures................. 8,535 9,916
------- -------
42,307 45,363
Accumulated depreciation.......................... (3,837) (6,076)
------- -------
$38,470 $39,287
======= =======
</TABLE>
4. FILM AND TELEVISION COSTS, NET
Film and television costs, net of amortization, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Theatrical and television product released........ $193,391 $186,214
Completed not released............................ 8,255 3,730
In process and development........................ 50,653 47,614
-------- --------
$252,299 $237,558
======== ========
</TABLE>
Orion had, in prior years, made substantial write-offs to its released
product. As a result, approximately one-half of the gross cost of film
inventories currently in release are stated at estimated net realizable value
and will not result in the recording of gross profit upon the recognition of
related revenues in future periods. As of December 31, 1996, approximately 62%
of the unamortized balance of film inventories will be amortized within the
next three-year period based upon the Company's revenue estimates at that
date.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Accounts payable.............................................. $ 6,584
Accrued salaries and wages.................................... 2,354
Accrued taxes................................................. 10,128
Accrued interest.............................................. 1,110
Accrued distribution costs.................................... 7,742
Other......................................................... 7,571
-------
$35,489
=======
</TABLE>
F-50
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
6. BANK AND OTHER DEBT
Bank and other debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Notes payable to banks under Credit, Security &
Guaranty Agreement.............................. $247,500 $276,200
Capital leases, other guarantees and notes
payable, net of unamortized discounts of $2,699
and $2,346, respectively........................ 21,910 16,234
-------- --------
Total notes payable.............................. $269,410 $292,434
======== ========
</TABLE>
On July 2, 1996, the Company entered into the Orion credit facility with
Chemical Bank ("Chemical"), as agent for a syndicate of lenders, pursuant to
which the lenders provided to Orion and its subsidiaries a $300 million credit
facility ("the Orion Credit Facility"). The $300 million facility consists of
a secured term loan of $200 million (the "Term Loan") and a revolving credit
facility of $100 million, including a $10 million letter of credit
subfacility, (the "Revolving Credit Facility"). Proceeds from the Term Loan
and $24 million of the Revolving Credit Facility were used to refinance
Orion's, Goldwyn's and MPCA's existing indebtedness.
Borrowings under the Orion Credit Facility which do not exceed the
"borrowing base," as defined in the agreement will bear interest at Orion's
option at a rate of LIBOR plus 2 1/2% or Chemical's alternative base rate plus
1 1/2%, and borrowings in excess of the borrowing base, which have the benefit
of the guarantee referred to below, will bear interest at Orion's option at a
rate of LIBOR plus 1% or Chemical's alternative base rate. The Term Loan has a
final maturity date of June 30, 2001 and will amortize in 20 equal quarterly
installments of $7.5 million commencing on September 30, 1996, with the
remaining principal amount due at the final maturity date. If the outstanding
balance under the Term Loan exceeds the borrowing base, the Company will be
required to pay down such excess amount. The Term Loan and the Revolving
Credit Facility are secured by a first priority lien on all of the stock of
Orion and its subsidiaries and on substantially all of Orion's assets,
including its accounts receivable and film and television libraries. Amounts
outstanding under the revolving Credit Facility in excess of the applicable
borrowing base are also guaranteed jointly and severally by Metromedia
Company, and John W. Kluge, its general partner. To the extent the borrowing
base exceeds the amount outstanding under the Term Loan, such excess will be
used to support the Revolving Credit Facility so as to reduce the exposure of
the guarantors under such facility.
The Orion Credit Facility contains customary covenants including limitations
on the issuance of additional indebtedness and guarantees, on the creation of
new liens, development costs and budgets for films, the aggregate amount of
unrecouped print and advertising costs Orion may incur, on the amount of
Orion's leases, capital and overhead expenses (including specific limitations
on Orion's theatrical exhibition subsidiary's capital expenditures),
prohibitions on the declaration of dividends or distributions by Orion (except
as defined in the agreement), limitations on merger or consolidation of Orion
or the sale by Orion of any substantial portion of its assets or stock and
restrictions on Orion's line of business, other than activities relating to
the production, distribution and exhibition of entertainment product. Orion's
Credit Facility also contains financial covenants, including requiring
maintenance by Orion of certain cash flow and operational ratios.
The Revolving Credit Facility contains certain events of default, including
nonpayment of principal or interest on the facility, the occurrence of a
"change of control" (as defined in the agreement) or an assertion by the
guarantors of such facility that the guarantee of such facility is
unenforceable. The Term Loan portion of
F-51
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
Orion's Credit Facility also contains a number of customary events of default,
including non-payment of principal and interest and the occurrence of a
"change of management" (as defined in the agreement), violation of covenants,
falsity of representations and warranties in any material respect, certain
cross-default and cross-acceleration provisions, and bankruptcy or insolvency
of Orion or its material subsidiaries.
In connection with the July 2, 1996 refinancing of the Orion Credit
Facility, Orion expensed deferred financing costs associated with old debt and
recorded an extraordinary loss of approximately $4.5 million.
During calendar 1996 and the six months ended June 30, 1997 and 1996, $18.4
million, $12.6 million and $6.8 million, respectively, of interest costs were
incurred of which $1.2 million, $1.6 million and $.2 million, respectively,
were capitalized to film inventories. Cash utilized for the payment of
interest during calendar 1996, and the six months ended June 30, 1997 and
1996, was $16.5 million, $10.0 million and $6.7 million, respectively.
Aggregate annual repayments of long-term debt, excluding capital leases and
debt discounts, over the next five years and thereafter are as follows as of
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $ 38,421
1998.............................................................. 32,489
1999.............................................................. 31,660
2000.............................................................. 31,666
2001.............................................................. 129,423
Thereafter........................................................ 2,679
</TABLE>
7. STOCKHOLDER'S EQUITY
In connection with the July 2 Mergers, MIG contributed $60.5 million (MIG's
net book value, excluding $5.3 million of the purchase price which became
payable to MIG) of assets to the Company including substantially all of the
operations of Goldwyn and MPCA.
8. INCOME TAXES
The provision for income taxes for calendar 1996 and for the six months
ended June 30, 1997 and 1996, all of which is current, consists of the
following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1996
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Federal............................... $ -- $-- $--
State and local....................... 100 100 100
Foreign............................... 900 300 300
------ ---- ----
Current............................... 1,000 400 400
Deferred.............................. -- -- --
------ ---- ----
Total................................. $1,000 $400 $400
====== ==== ====
</TABLE>
F-52
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
Such provision has been allocated to Loss before extraordinary items and
Extraordinary losses as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Loss before extraordinary items............................... $1,000
Extraordinary loss............................................ --
------
$1,000
======
</TABLE>
The federal income tax portion of the provision for income taxes includes
the benefit of state income taxes provided. The Company recognizes investment
tax credits on the flow-through method.
State and local income tax expense for the year ended December 31, 1996
includes an estimate for franchise and other state tax levies required in
jurisdictions which do not permit the utilization of the Company's calendar
1996 operating losses to mitigate such taxes.
Foreign tax expense for the year ended December 31, 1996 reflects estimates
of withholding and remittance taxes. Cash utilized for the payment of income
taxes during 1996, the six months ended June 30, 1997 and 1996, was $0.7
million, $0.3 million and $0.4 million, respectively.
Effective March 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a change to the "assets and liability method" of accounting for
income taxes from the "deferred method" of accounting for income taxes which
was required under Accounting Principles Board Opinion No. 11 ("APB 11").
Under SFAS 109, deferred tax assets and liabilities are recognized with
respect to the tax consequences attributable to differences between the
financial statement carrying values and the tax bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to the taxable income in the years in which these
temporary differences are expected to be recovered or settled. Further, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Under the
deferred method, deferred taxes were not adjusted for subsequent changes in
tax rates.
F-53
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
The Company's results of operations was not impacted by the change in method
of accounting for income taxes resulting from the adoption of SFAS 109 in the
current year. Deferred income taxes at December 31, 1996 reflects the impact
of "temporary differences" between assets and liabilities for financial
reporting purposes and their carrying values as measured by tax laws. The
temporary differences and carryforwards which give rise to deferred tax assets
and (liabilities) as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Net operating loss carryforward............................... $ 180,000
Deferred revenues............................................. 29,183
Investment credit carryforward................................ 25,000
Allowance for doubtful accounts............................... 4,640
Reserves...................................................... 1,020
Depreciation.................................................. (5,505)
Other deferred tax assets..................................... 7,782
Film costs.................................................... (29,412)
Shares payable................................................ 21,228
Other deferred tax liabilities................................ (132)
Notes and debentures.......................................... (1,080)
---------
Subtotal before valuation allowance........................... 232,724
Valuation allowance........................................... (232,724)
---------
Deferred taxes................................................ $ --
=========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1996 was a decrease in the allowance of approximately $45 million.
The Company's provision for income taxes for the year ended December 31,
1996 differs from the provision that would have resulted from applying the
federal statutory rates to loss before provision for income taxes. The reasons
for these differences are explained in the following table (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Benefit based upon federal statutory rate of 35%.............. $(7,450)
State taxes, net of federal benefit........................... 65
Foreign taxes in excess of federal credit..................... 900
Non-deductible direct expenses of chapter 11 filing........... 76
Current year operating loss not benefited..................... 6,302
Amortization of goodwill...................................... 1,017
Extraordinary loss on early extinguishment of debt............ (1,577)
Reduction of extraordinary loss not benefited................. 1,577
Other, net.................................................... 90
-------
Provision for income taxes.................................... $ 1,000
=======
</TABLE>
At December 31, 1996, the Company had available net operating loss
carryforwards and unused investment tax credits of approximately $450 million
and $25 million, respectively, which can reduce future federal income taxes.
The Company is included in the consolidated federal income tax return filed by
its parent MIG and
F-54
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
utilization of the available net operating loss carryforwards and unused
investment tax credits is limited. If not utilized, these carryforwards and
credits will begin to expire in 2005 and 1997, respectively. Of the $450
million loss carryforward, the amount that can be utilized to offset MIG
consolidated taxable income is limited to $11.9 million per year due to the
change in ownership associated with the merger of the former Orion Pictures
Corporation with The Actava Group Inc. (renamed Metromedia International Group
Inc. ("MIG")), Metromedia International Telecommunications, Inc. and MCEG
Sterling Incorporated ("MCEG") on November 1, 1995. Unused portions of each
year's limitation may be carried forward on a limited basis to increase the
limitation in future years. The utilization of additional federal net
operating loss carryforwards of approximately $6 million arising after the
change in ownership is not limited.
The provision for taxes for the six months ended June 30, 1997 and 1996 are
based, in part, upon estimates of the Company's effective tax rate. The
effective tax rate is based upon projected results for a full fiscal year.
Only a portion of such provision, are offset by losses from operations,
because of certain state and foreign taxes which cannot be mitigated by such
losses. In addition, foreign taxes are provided for certain transactions in
the period in which they occur.
9. REVENUE DATA
The Company derives significant revenues from the foreign distribution of
its theatrical motion pictures and television programming. The following table
sets forth foreign revenues from operations by major geographic area for the
last fiscal year (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Canada........................................................ $ 1,996
Europe........................................................ 32,699
Mexico and South America...................................... 3,151
Asia and Australia............................................ 8,669
-------
$46,515
=======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various operating and capital leases. Total
rent expense amounted to $4.4 million in calendar 1996.
Minimum rental commitments under noncancellable operating leases is set
forth in the following table (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996 AMOUNT
----------------- -------
<S> <C>
1997............................................................ $ 6,806
1998............................................................ 5,742
1999............................................................ 5,064
2000............................................................ 4,636
2001............................................................ 4,527
Thereafter...................................................... 24,187
-------
Total minimum rental commitments................................ $50,962
=======
</TABLE>
F-55
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 ARE UNAUDITED)
Future minimum lease payments under capital leases together with the present
value of minimum lease payments consisted of the following at December 31,
1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996 AMOUNT
----------------- -------
<S> <C>
1997............................................................ $ 870
1998............................................................ 869
1999............................................................ 1,384
2000............................................................ 835
2001............................................................ 540
Thereafter...................................................... 8,751
-------
Total minimum rental commitments................................ 13,249
=======
Less amount representing interest............................... (7,476)
-------
Present value of future minimum lease payments.................. $ 5,773
=======
</TABLE>
The Company and certain of its subsidiaries have employment contracts with
various officers with remaining terms of up to four and one half years. The
Company's remaining aggregate commitment at December 31, 1996 under such
contracts is approximately $27.4 million.
The Company and its subsidiaries are contingently liable with respect to
various matters, including litigation in the ordinary course of business and
otherwise wherein substantial amounts are claimed. In the opinion of counsel
and management, the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
11. RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) defined contribution retirement and savings plan
covering all eligible employees who prior to March 1 or September 1, have
completed 1,000 hours of service, as defined. Participants may make pretax
contributions to the plan of up to 15% of their compensation, as defined,
subject to certain limitations as prescribed by the Internal Revenue Code. The
Company matches fifty cents for each dollar contributed up to $1,000 per
participant per plan year. The Company may make discretionary contributions on
an annual basis to the plan. The exact amount of discretionary contributions
is decided each year by the Board of Directors. There have been no
discretionary contributions since the inception of the plan. Total employer
contribution expense for the year ended December 31, 1996 was approximately
$123,000.
12. SUBSEQUENT EVENT
On July 10, 1997, P&F Acquisition Corp. acquired certain entertainment
assets of the Company (the "Acquisition") from Metromedia International Group,
Inc., the Company's parent, for a total purchase price of $573.0 million,
consisting of $560.0 million in cash and $13.0 million in assumed liabilities.
In connection with the Acquisition, the Company obtained a new $200.0 million
term loan and a $50.0 million revolving credit facility. The term loan and the
revolving credit facility will bear interest at LIBOR plus 2.5% and mature on
July 10, 2002. The Acquisition will be accounted for as a purchase, and
therefore, the assets and liabilities of the Company will be adjusted to their
estimated fair market value as of the date of the Acquisition.
F-56
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 7
Background of the Company................................................. 17
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
Dividend Policy........................................................... 20
Selected Consolidated Financial Data...................................... 21
Unaudited Pro Forma Financial Information................................. 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
The Industry.............................................................. 40
Business.................................................................. 42
Management................................................................ 61
Description of Capital Stock.............................................. 75
Ownership of Voting Securities............................................ 76
Financing Arrangements.................................................... 83
Certain Transactions...................................................... 85
Shares Eligible for Future Sale........................................... 89
Underwriting.............................................................. 90
Legal Matters............................................................. 94
Experts................................................................... 94
Available Information..................................................... 94
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL DECEMBER , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9,000,000 SHARES
[LOGO OF METRO-GOLDWYN-MAYER INC.]
METRO-GOLDWYN-MAYER INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
BEAR, STEARNS & CO. INC.
FURMAN SELZ
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997
PROSPECTUS
9,000,000 SHARES
[LOGO METRO-GOLDWYN-MAYER INC.]
COMMON STOCK
----------
All of the shares of the common stock, $.01 par value per share (the "Common
Stock"), offered hereby are being sold by Metro-Goldwyn-Mayer Inc. ("MGM" or
the "Company"). Of the 9,000,000 shares offered by the Underwriters, 1,800,000
shares will be offered initially outside the United States and Canada (the
"International Offering") by the International Underwriters and 7,200,000
shares will be offered initially in the United States and Canada (the "U.S.
Offering" and, collectively, with the International Offering, the "Offering")
by the U.S. Underwriters (collectively, with the International Underwriters,
the "Underwriters"). The Company has granted the International Underwriters and
the U.S. Underwriters options to purchase up to an additional 216,000 and
864,000 shares, respectively, to cover over-allotments, if any. The public
offering price and the underwriting discount per share will be identical for
the International Offering and the U.S. Offering. See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial offering price per share will be
between $20 and $23. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. All information in
this Prospectus gives effect to a recapitalization of the Company occurring
immediately prior to the closing of the Offering and consisting of (i) the
conversion of each share of the Company's Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock") into one share of the Common
Stock (the "Series A Preferred Stock Conversion") and (ii) a subsequent 41.667
for 1 stock split of the Common Stock (the "Stock Split").
Concurrently with the consummation of the Offering, Tracinda Corporation
("Tracinda") will purchase directly from the Company, at a price per share
equal to the per share price to public, less the underwriting discount,
shares of the Common Stock, for an aggregate purchase price of $75
million (the "Tracinda Purchase"). The Underwriters will not participate in, or
receive any discount or commission on, the sale of the Common Stock to Tracinda
in the Tracinda Purchase. Based on the mid-point of the range set forth above,
the number of shares of the Common Stock to be purchased by Tracinda in the
Tracinda Purchase would be 3,691,399.
The Common Stock has been approved for listing (subject to official notice of
issuance) on the New York Stock Exchange (the "NYSE") under the symbol "MGM."
Following the Offering, Tracinda, Seven Network Limited, the directors and
officers of the Company and affiliates thereof will beneficially own
approximately 86.5% of the Common Stock (based on the mid-point of the range
set forth above) and, therefore, will be able to control all actions requiring
a vote of the stockholders, including the election of directors. The Company
does not expect to be profitable for at least several years.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- --------------------------------------------------------------------------------
Total(3)............................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at approximately $4,000,000 payable by
the Company.
(3) The Company has granted the International Underwriters and the U.S.
Underwriters options, exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional 216,000 and 864,000 shares of
Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively.
----------
Merrill Lynch International is acting as book running lead manager for the
Offering. Merrill Lynch International and J.P. Morgan Securities Ltd. are
acting as joint lead managers. The shares of the Common Stock are offered by
the several Underwriters, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters, subject to approval of certain legal matters
by counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that the delivery of the shares will be
made in New York, New York on or about November , 1997.
----------
MERRILL LYNCH INTERNATIONAL J.P. MORGAN SECURITIES LTD.
Joint Lead Managers
----------
BEAR, STEARNS INTERNATIONAL LIMITED FURMAN SELZ
----------
The date of this Prospectus is November , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement"), the Company has agreed to sell to each of
the Underwriters named below (the "International Underwriters"), and each of
the International Underwriters, for whom Merrill Lynch International, J.P.
Morgan Securities Ltd., Bear, Stearns International Limited and Furman Selz
LLC (the "International Representatives"), severally has agreed to purchase,
the number of shares of the Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Merrill Lynch International........................................
J.P. Morgan Securities Ltd. .......................................
Bear, Stearns International Limited................................
Furman Selz LLC....................................................
---------
Total......................................................... 1,800,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain Underwriters in the United States and
Canada (the "U.S. Underwriters"), for whom Merrill Lynch, J.P. Morgan
Securities Inc., Bear, Stearns & Co. Inc. and Furman Selz LLC are acting as
representatives (the "U.S. Representatives" and, together with the
International Representatives, the "Representatives"). Subject to the terms
and conditions set forth in the U.S. Purchase Agreement, the Company has
agreed to sell to the U.S. Underwriters, and the U.S. Underwriters have
severally agreed to purchase from the Company, an aggregate of 7,200,000
shares of the Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of the Common Stock being sold pursuant to such
Purchase Agreement if any of the shares of the Common Stock being sold
pursuant to such Purchase Agreement are purchased. Under certain circumstances
under the Purchase Agreements, the purchase commitments of non-defaulting
Underwriters may be increased. Each Purchase Agreement provides that the
Company is not obligated to sell, and the Underwriters named therein are not
obligated to purchase, the shares of the Common Stock under the terms of such
Purchase Agreement unless all of the shares of the Common Stock to be sold
pursuant to such Purchase Agreement are contemporaneously sold. The sale of
shares of the Common Stock to the International Underwriters and the sale of
shares of the Common Stock to the U.S. Underwriters are conditioned on each
other.
The International Representatives have advised the Company that the
International Underwriters propose to offer the shares of the Common Stock to
the public initially at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $ per share of the Common Stock, and that the International
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of the Common Stock on sales to certain other dealers. After
the initial public offering, the public offering price, concession and
discount may be changed.
The Company has granted options to the International Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 216,000 additional shares of the Common Stock at the initial
90
<PAGE>
public offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Underwriters may exercise these
options only to cover over-allotments, if any, made on the sale of the Common
Stock offered hereby. To the extent that the International Underwriters
exercise these options, each International Underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of
the Common Stock proportionate to such International Underwriter's initial
amount reflected in the foregoing table. The Company has also granted options
to the U.S. Underwriters, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of 864,000 additional shares of the
Common Stock to cover over-allotments, if any, on terms similar to those
granted to the International Underwriters.
The initial public offering price per share of the Common Stock and the
underwriting discount per share of Common Stock are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.
The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the International
Underwriters and the U.S. Underwriters are permitted to sell shares of the
Common Stock to each other.
Each of the Company, Tracinda, Seven and each member of management has
agreed not to sell, offer to sell, grant any options for the sale of, or
otherwise dispose of, any shares of the Common Stock or securities convertible
into or exchangeable or exercisable for the Common Stock (other than, in the
case of the Company, sales pursuant to the exercise of outstanding options)
for a period of 180 days after the date of this Prospectus without the prior
written consent of Merrill Lynch, subject to certain limited exceptions
included in the Purchase Agreements.
The Company has been informed that, under the terms of the Intersyndicate
Agreement, the International Underwriters and any dealer to whom they sell
shares of the Common Stock will not offer to sell or resell shares of the
Common Stock to persons who are U.S. or Canadian persons, or to persons they
believe intend to resell to persons who are U.S. or Canadian persons, and the
U.S. Underwriters and any bank, broker, or dealer to whom they sell shares of
the Common Stock will not offer to sell or resell shares of the Common Stock
to non-U.S. persons or to non-Canadian persons or to persons they believe
intend to resell to non-U.S. persons or to non-Canadian persons, except in the
case of transactions pursuant to the Intersyndicate Agreement which, among
other things, permits the Underwriters to purchase from each other and to
offer to resell such number of shares of the Common Stock as the selling
Underwriter or Underwriters and the purchasing Underwriter or Underwriters may
agree.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
The Common Stock has been approved for listing (subject to official notice
of issuance) on the NYSE under the symbol "MGM." In order to meet requirements
for listing on the NYSE, the Underwriters have undertaken to sell lots of 100
or more shares of the Common Stock to a minimum of 2,000 beneficial holders.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of the Common
Stock than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing shares of the Common
Stock in the open market.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
91
<PAGE>
In general, purchases of shares of the Common Stock for the purpose of
stabilization or to reduce a short position could cause the price of the
Common Stock to be higher than it might be in the absence of such purchases.
The imposition of a penalty bid might also have an effect on the price of the
Common Stock to the extent that it were to discourage resales of the Common
Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Underwriters have reserved for sale, at the initial public offering
price, shares of the Common Stock for certain employees, directors, vendors
and affiliates of the Company who have expressed an interest in purchasing
such shares of Common Stock. Such employees, directors and other persons are
expected to purchase, in the aggregate, not more than 5% of the Common Stock
offered in the Offering. The number of shares available for sale to the
general public in the Offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same basis as the other shares offered
hereby.
Net proceeds of the Offering will be used to reduce indebtedness under the
Amended Credit Facility. An affiliate of J.P. Morgan Securities Inc. serves as
an agent for a syndicate of lenders and as a lender under the Company's
Amended Credit Facility. Therefore, J.P. Morgan Securities Inc. may be deemed
to have an affiliate receiving more than 10 percent of the net proceeds of the
Offering. In such circumstances, Rule 2710 of the National Association of
Securities Dealers, Inc. ("NASD") requires that initial public offering price
be no higher than that recommended by a "qualified independent underwriter"
meeting certain standards. In addition, Culmen Group, L.P. (an NASD member and
a member of the selling group) may be deemed to be an affiliate of the Company
under NASD Rule 2720, which provides that, among other things, the initial
public offering price must be recommended by a qualified independent
underwriter when an NASD member participates in the underwriting of an
affiliate's equity securities. Merrill Lynch has agreed to serve in such role
and has agreed to recommend a price in compliance with the requirement of NASD
Rule 2720. In connection with the Offering, Merrill Lynch, in its role as
qualified independent underwriter, has performed due diligence investigations
and reviewed and participated in the preparation of the Prospectus and the
Registration Statement of which this Prospectus forms a part. In addition, the
Underwriters may not confirm sales to any discretionary account without the
prior written approval of the customer.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representatives.
Among the factors that will be considered in such negotiations, in addition to
prevailing market conditions, will be the current market valuations of
publicly traded companies that the Company and Representatives believe to be
reasonably comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which the Company will compete, an assessment of the Company's management,
the past and present operations of the Company, the prospects for, and timing
of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
Each International Underwriter has agreed that (i) it has not offered or
sold and, for a period of six months following consummation of the Offering,
will not offer or sell any shares of the Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995, (ii) it has complied with
and will comply with all applicable provisions of the Public Offers of
Securities Regulations 1995 and the Financial Services Act 1986 with respect
to anything done by it in
92
<PAGE>
relation to the Common Stock in, from, or otherwise involving the United
Kingdom and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue or sale of the Common Stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or to a person to whom the document may otherwise
lawfully be issued or passed on.
The International Underwriters and the U.S. Underwriters have informed the
Company that they do not intend to confirm sales of the shares of Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
Furman Selz LLC and certain affiliates of J.P. Morgan Securities Inc. and
Merrill Lynch have been engaged from time to time (including, in the case of
J.P. Morgan Securities Inc., at the present time), and may in the future be
engaged, to perform banking, advisory-related and/or other services to the
Company and its affiliates in the ordinary course of business. In connection
with rendering such services, such Underwriters receive customary
compensation, including reimbursement of related expenses.
93
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 7
Background of the Company................................................. 16
Use of Proceeds........................................................... 17
Capitalization............................................................ 18
Dividend Policy........................................................... 19
Selected Consolidated Financial Data...................................... 20
Unaudited Pro Forma Financial Information................................. 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
The Industry.............................................................. 39
Business.................................................................. 41
Management................................................................ 59
Description of Capital Stock.............................................. 73
Ownership of Voting Securities............................................ 74
Financing Arrangements.................................................... 82
Certain Transactions...................................................... 84
Shares Eligible for Future Sale........................................... 88
Underwriting.............................................................. 89
Legal Matters............................................................. 92
Experts................................................................... 92
Available Information..................................................... 92
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL DECEMBER , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9,000,000 SHARES
[LOGO OF METRO-GOLDWYN-MAYER INC.]
METRO-GOLDWYN-MAYER INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
BEAR, STEARNS INTERNATIONAL LIMITED
FURMAN SELZ
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Front Page:
- ----------
Text reading "MGM PROUDLY PRESENTS THE FUTURE OF ENTERTAINMENT" below which is
the Metro-Goldwyn-Mayer "Lion" logo: a roaring lion encircled by a banner of
film, on which is written "ARS GRATIA ARTIS".
Left Front Gatefold:
- -------------------
Text reading "MGM NOW HAS THE LARGEST POST-1948 FILM LIBRARY IN THE WORLD WHICH
HAS RECEIVED 186 ACADEMY AWARDS (r)" to the left of which is a wall of movie
posters with the following titles visible: The Apartment; The French
Lieutenant's Woman; Bill & Ted's Excellent Adventure; Blue Sky; Dirty Rotten
Scoundrels (remake); The Pink Panther; A View to a Kill; Mermaids; Robocop 3;
The Great Escape; Married to the Mob; Robocop; A Shot in the Dark; Rocky; Some
Like it Hot; The Birdcage; Get Shorty; Raging Bull; The Pink Panther Strikes
Again; A Fish Called Wanda; Leaving Las Vegas; Rainman; License to Kill; Rob
Roy; Rocky III; Fiddler on the Roof; Coming Home; The Woman in Red; The Good,
The Bad, and The Ugly; Species; Annie Hall; Dances with Wolves; The Silence of
the Lambs; West Side Story; Thelma and Louise; In the Heat of the Night; Baby
Boom; Mississippi Burning; The Living Daylights; Robocop 2; Robocop; The Deer
Hunter; Rocky IV; Bull Durham; All Dogs go to Heaven; Throw Momma From the
Train; Moonstruck; Marty; and Tom Jones.
Right Front Gatefold:
- ---------------------
Text reading "THE LONGEST RUNNING FILM SERIES IN MOTION PICTURE HISTORY"
underneath which is a large picture of the movie poster of "Tomorrow Never
Dies," smaller pictures of other movie posters from the James Bond series of
movies, and a picture of Roger Moore, Sean Connery and Pierce Brosnan, with
their names in text beside their images.
Back Gatefold:
- --------------
Text reading "GET READY FOR ACTION... ADVENTURE... COMEDY... ROMANCE... DRAMA...
SUSPENSE... "below which are large pictures of movie posters for the following
movies: Hoodlum; The Man in the Iron Mask; Red Corner; Species II; and Tomorrow
Never Dies.
Back Page:
- ----------
A wall of pictures containing images and titles from the following television
series and specials: Poltergeist: The Legacy; The Outer Limits; Fame L.A.;
Stargate SG-1; Creature; National Enquirer Presents 25 Years of Scandals; The
Magnificent 7; and 12 Angry Men. The "Lion" logo is far in the distance.
.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are as follows:
<TABLE>
<CAPTION>
EXPENSES AMOUNT
-------- ----------
<S> <C>
SEC Registration Fee............................................. $ 97,578
NASD Fee......................................................... 30,500
NYSE Fee......................................................... 326,100
Printing Expenses................................................ 750,000
Legal Fees and Expenses.......................................... 2,000,000
Transfer Agent and Registrar Fees................................ 16,000
Accounting Fees and Expenses..................................... 500,000
Blue Sky Fees and Expenses....................................... 4,000
Miscellaneous Expenses........................................... 244,572
----------
Total.......................................................... 3,968,750
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law ("DGCL") makes provision
for the indemnification of officers and directors in terms sufficiently broad
to indemnify officers and directors of the Company under certain circumstances
from liabilities (including reimbursement for expenses incurred) arising under
the Securities Act. The Certificate of Incorporation and Bylaws of the Company
provide, in effect, that, to the fullest extent and under the circumstances
permitted by the DGCL, the Company will indemnify any person (or the estate of
any person) who is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, by reason of the
fact that he or she is a director or officer of the Company or is or was
serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise. In
addition, the Company has entered into indemnification agreements with its
directors and certain of its officers providing, subject to the terms therein,
that the Company will indemnify such individuals for damages suffered by
reason of the fact that any such individual is a director or officer of the
Company or is or was serving at the request of the Company as a director or
officer of another corporation or enterprise. The Certificate of Incorporation
of the Company, together with such indemnification agreements, relieve its
directors from monetary damages for breach of such director's fiduciary duty
as directors to the fullest extent permitted by the DGCL. Consequently, a
director or officer will not be personally liable to the Company or its
stockholders for monetary damages for any breach of their fiduciary duty as
directors except (i) for a breach of the duty of loyalty, (ii) for failure to
act in good faith, (iii) for intentional misconduct or knowing violation of
law, (iv) for willful or negligent violation of certain provisions in the DGCL
imposing certain requirements with respect to stock repurchases, redemption
and dividends, or (v) for any transactions from which the director derived an
improper personal benefit. In connection with proceedings whether or not by or
in the right of the Company, under the Bylaws, the Company will indemnify the
officers and directors against expenses (including attorneys' fees), actually
and reasonably incurred in connection with any action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Company, and
with respect to any criminal action or proceeding other than by or in the
right of the Company, had no reasonable cause to believe such person's conduct
was unlawful. With respect to indemnification other than by or in the right of
the Company, the termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, will not, of itself, create a presumption that the person did not
act in good faith and in a manner which such person reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, that such person had reasonable cause to
believe that such person's conduct was unlawful. No indemnification will be
made in connection with actions by or in the right of the Company in respect
of any claim, issue or matter as to which such person has been adjudged to be
liable for negligence or
II-1
<PAGE>
misconduct in the performance of such person's duty to the Company unless and
only to the extent that the Court of Chancery or the court in which such
action or suit was brought determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court deems proper. Such expenses
(including attorneys, fees), judgments, fines and amounts paid in settlement
may, as permitted by Delaware law, be advanced by the Company prior to the
final disposition of such action upon receipt of an undertaking by or on the
behalf of such director or officer to repay such amounts if it shall
ultimately be determined that he or she is not entitled to be indemnified as
authorized in accordance with Delaware law. To the extent that a director or
officer of the Company has been successful in the defense of any action, suit
or proceeding referred to above, the Company will be obligated to indemnify
him or her against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith. In addition, prior to the MGM
Acquisition certain of the directors and officers had employment agreements
with MGM Studios, and such agreements contained indemnification provisions.
Such indemnification provisions are consistent with the agreements described
above and the obligations of MGM Studios thereunder are guaranteed by CL. The
Company maintains insurance in the aggregate amount of $25 million on behalf
of its officers and directors against any liability which may be asserted
against any such officer or director, subject to certain customary exclusions.
Upon consummation of the Offering, the Company will be required to renegotiate
the terms of such insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On October 10, 1996, as part of the First Private Placement, the Company
sold 8,333,400 shares of Common Stock to each of Tracinda and Seven, and
450,000 and 50,000 shares of Series A Preferred Stock (which will be converted
into 18,750,150 and 2,083,350 shares of the Common Stock, respectively,
immediately prior to the completion of the Offering pursuant to the Series A
Preferred Stock Conversion and the Stock Split) to Tracinda and Seven,
respectively, in connection with the MGM Acquisition for aggregate
consideration of $900 million. The Company believes that the First Private
Placement was exempt from registration under Section 4(2) of the Act.
On July 10, 1997, as part of the Second Private Placement, the Company sold
13,375,107 and 1,625,013 shares of Common Stock to Tracinda and Seven,
respectively, in connection with the Orion Acquisition for aggregate
consideration of $360 million. The Company believes that the Second Private
Placement was exempt from registration under Section 4(2) of the Act.
In connection with MGM Acquisition and the renegotiation of employment
agreements with certain employees of the Company, including certain members of
management, the Company issued an aggregate of 66,667 shares of the Common
Stock and 2,000 shares of the Series A Preferred Stock (which will be
converted into 83,334 shares of the Common Stock prior to the completion of
the Offering pursuant to the Series A Preferred Stock Conversion and the Stock
Split) to such employees. The Company received no cash consideration from such
issuance. Company believes that the issuance of such shares to such employees
was exempt from registration under Section 4(2) of the Securities Act.
In addition, pursuant to Mr. Mancuso's employment agreement, Mr. Mancuso
receives a monthly payment of $250,000, out of the after tax proceeds of which
he is required to purchase shares of the Common Stock at a price of $24.00 per
share until December 31, 1997 and, thereafter, at the fair market value of
such shares. As of September 30, 1997, Mr. Mancuso had purchased 61,500 shares
of the Common Stock for aggregate consideration of $1,476,000. The Company
believes that the issuance of such shares to Mr. Mancuso was exempt from
registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
See Exhibit Index attached hereto and incorporated herein by reference.
II-2
<PAGE>
(b) Financial Statement Schedules. The following financial statement
schedule is filed with Part II of this Registration Statement:
Schedule II--Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the applicable instructions or are inapplicable and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out of the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Commission, such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense in any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Santa Monica, California, on November 10, 1997.
METRO-GOLDWYN-MAYER INC.
By: /s/ David G. Johnson
_____________________________________
David G. Johnson
Senior Executive Vice President
and General Counsel
KNOW ALL MEN BY THESE PRESENTS, that Alex Yemenidjian, whose signature
appears below, hereby constitutes and appoints Michael G. Corrigan and David
G. Johnson his true and lawful attorneys-in-fact and agents, each with full
power and substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitution or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
*Frank G. Mancuso Chairman of the Board of Directors November 10, 1997
____________________________________ and Chief Executive Officer
Frank G. Mancuso (Principal Executive Officer)
*Michael G. Corrigan Chief Financial Officer (Principal November 10, 1997
____________________________________ Financial and Accounting Officer)
Michael G. Corrigan
*James D. Aljian Director November 10, 1997
____________________________________
James D. Aljian
*Michael R. Gleason Director November 10, 1997
____________________________________
Michael R. Gleason
*Kirk Kerkorian Director November 10, 1997
____________________________________
Kirk Kerkorian
*Kerry M. Stokes Director November 10, 1997
____________________________________
Kerry M. Stokes
/s/ Alex Yemenidjian Director November 10, 1997
____________________________________
Alex Yemenidjian
*Jerome B. York Director November 10, 1997
____________________________________
Jerome B. York
</TABLE>
*By: /s/ David G. Johnson_______
David G. Johnson
As attorney-in-fact pursuant
to power of attorney
previously filed with the
Commission
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Metro-Goldwyn-Mayer Inc. included in this registration
statement and have issued our report thereon dated February 25, 1997 (except
with regard to the matters discussed in Note 15, as to which the date is
November 7, 1997). Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Los Angeles, California
February 25, 1997 (except with Regard to the matters discussed In Note 15, as
to which date Is November 7, 1997)
S-1
<PAGE>
METRO-GOLDWYN-MAYER INC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES ACQUIRED DEDUCTIONS OF PERIOD
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the Period from
October 11, 1996 to
December 31, 1996:
Reserve for allowances
and doubtful accounts.. $12,718 $ (23) $ -- $ (967) $11,728
======= ======= ====== ======= =======
Reserve for home video
inventory obsolescence,
shrinkage, and
reduplication.......... $ -- $ -- $ -- $ -- $ --
======= ======= ====== ======= =======
For the Period from
January 1, 1996 to
October 10, 1996
(Predecessor):
Reserve for allowances
and doubtful accounts.. $18,479 $ 430 $ -- $(6,191) $12,718
======= ======= ====== ======= =======
Reserve for home video
inventory obsolescence,
shrinkage, and
reduplication.......... $ 1,769 $ -- $ -- $(1,769) $ --
======= ======= ====== ======= =======
For the Year Ended
December 31, 1995
(Predecessor):
Reserve for allowances
and doubtful accounts.. $26,059 $(2,565) $ -- $(5,015) $18,479
======= ======= ====== ======= =======
Reserve for home video
inventory obsolescence,
shrinkage, and
reduplication.......... $ 5,933 $ -- $ -- $(4,164) $ 1,769
======= ======= ====== ======= =======
For the Year Ended
December 31, 1994
(Predecessor):
Reserve for allowances
and doubtful accounts.. $26,276 $ 1,881 $ -- $(2,098) $26,059
======= ======= ====== ======= =======
Reserve for home video
inventory obsolescence,
shrinkage, and
reduplication.......... $ 6,013 $ -- $ -- $ (80) $ 5,933
======= ======= ====== ======= =======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of U.S. Purchase Agreement................................
1.2 Form of International Purchase Agreement.......................
2.1 Stock Purchase Agreement, dated as of July 16, 1996, by and
among the Company (f/k/a P&F Acquisition Corp.), CDR, MGM
Holdings, MGM Group Holdings Corporation and MGM Studios
(f/k/a Metro-Goldwyn-Mayer, Inc.)+*...........................
2.2 Stock Purchase Agreement, dated as of May 2, 1997, by and among
the Company, Orion and Metromedia International Group, Inc.
("MIG")+*.....................................................
2.3 Agreement and Plan of Merger, dated as of January 31, 1996, by
and among MIG, SGC Merger Corp. and the Samuel Goldwyn Company
(the "Goldwyn Merger Agreement")+*............................
2.4 Amendment No. 1 to Goldwyn Merger Agreement dated as of May 29,
1996*.........................................................
2.5 Amendment and Restated Plan of Merger, dated as of May 17,
1996, between MIG, MPCA Merger Corp., Bradley Krevoy, Steven
Stabler and MPCA+*............................................
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company*..................................................
3.2 Form of Amended and Restated Bylaws of the Company*............
5.1 Opinion of Gibson, Dunn & Crutcher LLP.........................
10.1 Credit Agreement, dated as of October 10, 1996, among the
Company, MGM Studios, certain lenders and Morgan, as agent+*..
10.2 Credit Agreement, dated as of July 10, 1997, among Orion,
certain lenders and Morgan, as agent+*........................
10.3 Amended and Restated Credit Agreement, dated as of October 15,
1997, among the Company, MGM Studios, Orion, certain lenders,
Morgan, as agent and Bank of America, as syndication agent+*..
10.4 Form of Modification and Cancellation Agreement, dated as of
November 5, 1997..............................................
10.5 Amended and Restated 1996 Stock Incentive Plan dated as of ,
1997 and form of related Stock Option Agreement...............
10.6 Senior Management Bonus Plan dated as of , 1997 and form of
related Bonus Interest Agreement .............................
10.7 Form of Amended and Restated Employment Agreement of Frank G.
Mancuso dated as of August 4, 1997............................
10.8 Employment Agreement of A. Robert Pisano dated as of October
10, 1996*.....................................................
10.9 Employment Agreement of Michael G. Corrigan dated as of July 1,
1997*.........................................................
10.10 Employment Agreement of David G. Johnson dated as of October
10, 1996*.....................................................
10.11 Employment Agreement of William A. Jones dated as of October
10, 1996*.....................................................
10.12 Indemnification Agreement dated as of October 10, 1996--Frank
G. Mancuso*...................................................
10.13 Indemnification Agreement dated as of October 10, 1996--A.
Robert Pisano*................................................
10.14 Form of Indemnification Agreement dated as of , 1997--
Michael G. Corrigan*..........................................
10.15 Indemnification Agreement dated as of October 10, 1996--David
G. Johnson*...................................................
10.16 Indemnification Agreement dated as of October 10, 1996--William
A. Jones*.....................................................
10.17 Indemnification Agreement dated as of October 10, 1996--James
D. Aljian*....................................................
10.18 Indemnification Agreement dated as of October 10, 1996--Michael
R. Gleason*...................................................
10.19 Indemnification Agreement dated as of October 10, 1996--Kirk
Kerkorian*....................................................
10.20 Indemnification Agreement dated as of October 10, 1996--Kerry
M. Stokes*....................................................
10.21 Indemnification Agreement dated as of October 10, 1996--Jerome
B. York*......................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.23 Amended and Restated Supplemental Executive Retirement Agreement
dated as of July 18, 1997--A. Robert Pisano*....................
10.24 Form of Amended and Restated Shareholders Agreement dated as of
August 4, 1997..................................................
10.25 Form of Amended and Restated Investors Shareholder Agreement
dated as of August 4, 1997......................................
10.26 Form of Amended and Restated Stock Option Agreement between the
Company and Tracinda............................................
10.27 Form of Amended and Restated Stock Option Agreement between the
Company and Celsus..............................................
10.28 Form of Inducement Agreement, dated as of November 5, 1997+......
10.29 Form of Investment Agreement dated November , 1997 between the
Company and Tracinda
21 List of Subsidiaries of Metro-Goldwyn-Mayer Inc. (updated)*......
23.1 Consent of Arthur Andersen LLP...................................
23.2 Consent of Price Waterhouse LLP..................................
23.3 Consent of KPMG Peat Marwick LLP.................................
23.4 Consent of Gibson, Dunn & Crutcher LLP (to be included in their
opinion filed as Exhibit 5.1)...................................
24 Power of Attorney (included on page II-4 with respect to Mr.
Yemenidjian; previously filed with respect to the other
directors and officers)*........................................
27 Financial Data Schedule*.........................................
99.1 Consent of A. Robert Pisano*.....................................
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
+To be filed without Schedules.
<PAGE>
EXHIBIT 1.1
______________________________________________________________________________
______________________________________________________________________________
METRO-GOLDWYN-MAYER INC.
(a Delaware corporation)
7,200,000 Shares of Common Stock
U.S. PURCHASE AGREEMENT
-----------------------
Dated: November __, 1997
______________________________________________________________________________
______________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Representations and Warranties................................................ 3
(a) Representations and Warranties by the Company and Certain of its
Subsidiaries............................................................. 3
(i) Compliance with Registration Requirements......................... 4
(ii) Independent Accountants........................................... 5
(iii) Financial Statements.............................................. 5
(iv) No Material Adverse Change in Business............................ 5
(v) Good Standing of the Company...................................... 6
(vi) Good Standing of Subsidiaries..................................... 6
(vii) Capitalization.................................................... 6
(viii) Authorization of Agreement........................................ 7
(ix) Authorization and Description of Securities....................... 7
(x) Absence of Defaults and Conflicts................................. 7
(xi) Absence of Labor Dispute.......................................... 8
(xii) Absence of Proceedings............................................ 8
(xiii) Accuracy of Exhibits.............................................. 8
(xiv) Possession of Intellectual Property............................... 8
(xv) Absence of Further Requirements................................... 9
(xvi) Possession of Licenses and Permits................................ 9
(xvii) Title to Property................................................. 9
(xviii) Compliance with Cuba Act.......................................... 10
(xix) Investment Company Act............................................ 10
(xx) Environmental Laws................................................ 10
(xxi) Registration Rights............................................... 11
(xxii) 1934 Act.......................................................... 11
(xxiii) Amended Credit Facility........................................... 11
(xxiv) Insurance......................................................... 11
(b) Officer's Certificates.................................................... 11
2. Sale and Delivery to U.S. Underwriters; Closing............................... 11
(a) Initial Securities........................................................ 11
(b) Option Securities......................................................... 11
(c) Payment................................................................... 12
(d) Denominations; Registration............................................... 12
(e) Appointment of Qualified Independent Underwriter.......................... 13
3. Covenants of the Company...................................................... 13
(a) Compliance with Securities Regulations and Commission Requests............ 13
(b) Filing of Amendments...................................................... 13
(c) Delivery of Registration Statements....................................... 14
(d) Delivery of Prospectuses.................................................. 14
(e) Continued Compliance with Securities Laws................................. 14
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(f) Blue Sky Qualifications................................................... 15
(g) Rule 158.................................................................. 15
(h) Use of Proceeds........................................................... 15
(i) Listing................................................................... 15
(j) Restriction on Sale of Securities......................................... 15
(k) Reporting Requirements.................................................... 16
(l) Compliance with NASD Rules................................................ 16
4. Payment of Expenses........................................................... 16
(a) Expenses.................................................................. 16
(b) Termination of Agreement.................................................. 17
5. Conditions of Underwriters' Obligations....................................... 17
(a) Effectiveness of Registration Statement................................... 17
(b) Opinion of Counsel for Company............................................ 17
(c) Opinions of Counsel and Special Counsel for Underwriters.................. 17
(i) Opinion of Counsel for Underwriters.................................. 18
(ii) Letter from Special Counsel for Underwriters......................... 18
(d) Officers' Certificate..................................................... 18
(e) Accountant's Comfort Letter............................................... 18
(f) Bring-down Comfort Letter................................................. 19
(g) Approval of Listing....................................................... 19
(h) No Objection.............................................................. 19
(i) Lock-up Agreements........................................................ 19
(j) Purchase of Initial International Securities.............................. 19
(k) Tracinda Purchase......................................................... 19
(l) Conditions to Purchase of U.S. Option Securities.......................... 19
(i) Officers' Certificate............................................... 19
(ii) Opinion of Counsel for Company...................................... 20
(iii) Opinion of Counsel for U.S. Underwriters............................ 20
(iv) Bring-down Comfort Letter........................................... 20
(m) Additional Documents...................................................... 20
(n) Termination of Agreement.................................................. 20
6. Indemnification............................................................... 20
(a) Indemnification of U.S. Underwriters...................................... 20
(b) Indemnification of Company, Directors and Officers........................ 22
(c) Actions against Parties; Notification..................................... 23
(d) Settlement without Consent if Failure to Reimburse........................ 23
(e) Indemnification for Reserved Securities................................... 24
7. Contribution.................................................................. 24
8. Representations, Warranties and Agreements to Survive Delivery................ 26
9. Termination of Agreement...................................................... 26
(a) Termination; General...................................................... 26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(b) Liabilities............................................................... 26
10. Default by One or More of the Underwriters.................................... 26
11. Notices....................................................................... 27
12. Parties....................................................................... 27
13. GOVERNING LAW AND TIME........................................................ 28
14. Effect of Headings............................................................ 28
</TABLE>
SCHEDULES
Schedule A - List of Underwriters
Schedule B - Pricing Information
Schedule C - List of Persons Subject to Lock-up
EXHIBITS
Exhibit A1 - Form of Opinion of Company's Counsel
Exhibit A2 - Form of Opinion of Underwriter's Special Counsel
Exhibit B - Form of Lock-up Letter
iii
<PAGE>
METRO-GOLDWYN-MAYER INC.
(a Delaware corporation)
7,200,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
------------------
November __, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
J.P. Morgan & Co.
Bear, Stearns & Co. Inc.
Furman Selz LLC
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Metro-Goldwyn-Mayer Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in
Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, J.P. Morgan & Co., Bear, Stearns & Co. Inc. and
Furman Selz LLC are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
864,000 additional shares of Common Stock to cover
1
<PAGE>
over-allotments, if any. The aforesaid 7,200,000 shares of Common Stock (the
"Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or
any part of the 864,000 shares of Common Stock subject to the option described
in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called,
collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of 1,800,000 shares of
Common Stock (the "Initial International Securities") through arrangements with
certain underwriters outside the United States and Canada (the "International
Managers") for which Merrill Lynch International, J.P. Morgan Securities Ltd.,
Bear, Stearns International Limited and Furman Selz LLC are acting as lead
managers (the "Lead Managers") and the grant by the Company to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to 216,000 additional
shares of Common Stock solely to cover overallotments, if any (the
"International Option Securities" and, together with the U.S. Option Securities,
the "Option Securities"). The Initial International Securities and the
International Option Securities are hereinafter called the "International
Securities". It is understood that the Company is not obligated to sell and the
U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities
unless all of the Initial International Securities are contemporaneously
purchased by the International Managers.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities, and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a public
offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
The Company and the U.S. Underwriters agree that up to _______ shares of
the Securities to be purchased by the U.S. Underwriters and that up to _______
shares of the Initial International Securities to be purchased by the
International Managers (collectively, the "Reserved Securities") shall be
reserved for sale by the Underwriters to certain eligible employees and persons
having business relationships with the Company, as part of the distribution of
the Securities by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. and all other applicable laws, rules and regulations.
To the extent that such Reserved Securities are not orally confirmed for
purchase by such eligible employees and
2
<PAGE>
persons having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-35411) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations. Two forms of prospectus are to be used in connection
with the offering and sale of the Securities: one relating to the International
Securities (the "Form of International Prospectus") and one relating to the U.S.
Securities (the "Form of U.S. Prospectus"). The Form of International
Prospectus is identical to the Form of U.S. Prospectus, except for the front
cover and back cover pages and the information under the caption "Underwriting."
The information included in any such prospectus that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective pursuant to
paragraph (b) of Rule 430A is referred to as "Rule 430A Information." Each Form
of U.S. Prospectus and Form of International Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information that was used after such effectiveness and
prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final Forms of U.S. Prospectus and the final Form
of International Prospectus in the forms first furnished to the Underwriters for
use in connection with the offering of the Securities are herein called the
"U.S. Prospectus" and the "International Prospectus," respectively,and
collectively, the "Prospectuses." For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the U.S.
Prospectus, or the International Prospectus or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company and Certain of its
Subsidiaries. The Company and each subsidiary of the Company named on the
signature pages hereto (the "Signatory Subsidiaries"), jointly and severally,
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof,
3
<PAGE>
and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and
agrees with each U.S. Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company (which shall mean for all purposes in this Agreement the knowledge
of the senior executives of the Company and each of the Signatory
Subsidiaries "knowledge of the Company"), are contemplated by the
Commission, and any request on the part of the Commission for additional
information has been complied with. At the respective times the
Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendments thereto became effective and at the Closing Time
(and, if any U.S. Option Securities are purchased, at the Date of
Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and the Prospectuses, any preliminary prospectuses and any
supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Time, complied and
will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectuses and such
preliminary prospectuses, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither of the Prospectuses nor any amendments or supplements thereto
(including any prospectus wrapper), at the time the Prospectuses or any
amendments or supplements thereto were issued and at the Closing Time (and,
if any Option Securities are purchased, at the Date of Delivery), included
or will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through the U.S.
Representatives expressly for use in the Registration Statement or
Prospectus.
The preliminary prospectus filed as part of Amendment No. 1 to the
Registration Statement, each subsequent preliminary prospectus, filed as a
part of an amendment to the Registration Statement, and the Prospectuses
included in the Registration Statement at the time it became effective or
filed pursuant to Rule 424 under the 1933 Act, complied as to form when the
Registration Statement became effective or when so filed, as applicable, in
all material respects with the 1933 Act
4
<PAGE>
Regulations and each preliminary prospectus and the Prospectuses delivered
to the Underwriters for use in connection with this offering was
substantially identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. Each of the accountants who certified
-----------------------
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
--------------------
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly in all material respects the financial
position of the Company, its predecessors and their respective consolidated
subsidiaries at the dates indicated and the results of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have been
prepared, in all material respects, in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules included in the Registration
Statement present fairly in all material respects in accordance with GAAP
the information required to be stated therein. The selected financial data
and the summary financial information included in the Prospectuses present
fairly in all material respects the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement and the Prospectuses present fairly in all material respects the
information shown therein, have been prepared in all material respects in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate in all material
respects to give effect to the transactions and circumstances referred to
therein.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, assets, properties, business affairs or, to the knowledge of the
Company, business prospects of the Company and its subsidiaries considered
as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in
the ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C) there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
5
<PAGE>
(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
-----------------------------
the Company (as such term is defined in Rule 1-02 of Regulation S-X), each
Signatory Subsidiary (each a "Subsidiary" and, collectively, the
"Subsidiaries"), and, to the Company's knowledge (without any obligation to
make any inquiries or any independent investigation), United International
Pictures ("UIP"), has been duly organized and is validly existing as a
corporation or partnership, as the case may be, in good standing under the
laws of the jurisdiction of its formation, has the power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and is duly qualified as a foreign
corporation or partnership, as the case may be, to transact business and is
in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each corporate subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable; all of the
outstanding partnership interests in each partnership subsidiary and, to
the Company's knowledge (without any obligation to make any inquiries or
any independent investigation) UIP, have been duly authorized by such
partnership; and except as disclosed in the Prospectus, all of such capital
stock and partnership interests are owned by the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; none of the outstanding shares
of capital stock or partnership interests, as the case may be, of any
Subsidiary was issued in violation of the preemptive or similar rights of
any securityholder of such Subsidiary. All of the Subsidiaries of the
Company are listed on Exhibit 21 to the Registration Statement.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectuses in the column
entitled "Pro Forma" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, or pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses, or pursuant to the Tracinda Purchase (as defined in the
Registration Statement), or pursuant to the exercise of convertible
securities or options referred to in the Prospectuses and except for the
Series A Preferred Stock Conversion and the Stock Split, each as referred
to in the
6
<PAGE>
Prospectuses). The shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar rights
of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement and the
--------------------------
International Purchase Agreement have been duly authorized, executed and
delivered by the Company and the Signatory Subsidiaries.
(ix) Authorization and Description of Securities. The Securities
-------------------------------------------
have been duly authorized for issuance and sale to the U.S. Underwriters
and the International Managers by the Company and, when issued and
delivered by the Company pursuant to this Agreement and the International
Managers pursuant to the International Purchase Agreement, respectively,
against payment of the consideration set forth herein, will be validly
issued and fully paid and non-assessable; the Common Stock conforms in all
material respects to all statements relating thereto contained in the
Prospectuses and such description conforms to any description thereof set
forth in the stock certificates evidencing the Common Stock, the Company's
Restated Certificate of Incorporation and bylaws; no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities in the Offering is not subject
to the preemptive or other similar rights of any securityholder of the
Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
---------------------------------
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the International Purchase Agreement and the consummation of
the transactions contemplated herein, and in the Registration Statement
(including the issuance and sale of the Securities, Metro-Goldwyn-Mayer
Studios Inc.'s and Orion Pictures Corporation's execution of the Amended
Credit Facility (as defined in the Registration Statement) and the use of
the proceeds from the sale of the Securities as described in the
Prospectuses under the caption "Use of Proceeds") and compliance by the
Company and the Signatory Subsidiaries with their respective obligations
hereunder and the International Purchase Agreement have been duly
authorized by all necessary corporate and partnership action and do not and
will not, whether with or without the giving of notice or passage of time
or both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any
7
<PAGE>
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults, Repayment Events or liens, charges or encumbrances that would not
result in a Material Adverse Effect), nor will such action result in any
violation of (i) the provisions of the charter or by-laws of the Company or
any subsidiary or (ii) any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their assets, properties or operations
(except in the case of clause (ii) for such violations that would not have
a Material Adverse Effect). As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company or any subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees
------------------------
of the Company or any Subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
Subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which the Company believes is likely
to result in a Material Adverse Effect, or which the Company believes is
likely to materially and adversely affect the properties or assets thereof
or the consummation of the transactions contemplated in this Agreement and
the International Purchase Agreement or the performance by the Company of
its obligations hereunder or thereunder; the aggregate of all pending legal
or governmental proceedings to which the Company or any subsidiary is a
party or of which any of their respective property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, is not reasonably expected
to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described or filed as required.
(xiv) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
8
<PAGE>
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder and the International Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
International Purchase Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state and foreign securities or blue sky laws and (ii) such
as have been obtained under the laws and regulations of jurisdictions
outside the United States in connection with the offering of the Reserved
Securities.
(xvi) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them except where lack of
such possession would not have a Material Adverse Effect; the Company and
its subsidiaries are in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would
not, singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xvii) Title to Property. Neither the Company nor any of its
-----------------
subsidiaries own any real property and the Company and each of its
subsidiaries have good title to all properties owned by them, in each case,
free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind ("Encumbrances") except
Encumbrances which (a) are described or referred to in the Prospectuses,
(b) do not, singly or in the aggregate, materially affect the value of such
property, or (c) do not materially interfere with the use made and proposed
to be made of such property by the Company or any of its subsidiaries; and
all of the
9
<PAGE>
leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the Company or
any of its subsidiaries holds properties described in the Prospectuses, are
in full force and effect, and neither the Company nor any subsidiary has
any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any of
the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease except where
the loss of possession of such leased or subleased premises would not have
a Material Adverse Effect.
(xviii) Compliance with Cuba Act. The Company has complied with, and
------------------------
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
Subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its Subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or, to the Company's knowledge, threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its Subsidiaries and (D) there are no events or
circumstances that could reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or
10
<PAGE>
affecting the Company or any of its Subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(xxi) Registration Rights. Other than as described in the
-------------------
Prospectuses, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(xxii) 1934 Act. The Company has filed a registration statement
--------
pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the "1934
Act"), to register the Common Stock, and such registration statement has
been declared effective.
(xxiii) Amended Credit Facility. The Company has delivered to
-----------------------
Merrill Lynch executed copies of the Amended Credit Facility Documents and
there have been no amendments to the Amended Credit Facility.
(xxiv) Insurance. Except as described in the Registration Statement,
---------
the Company and each of its Subsidiaries maintains insurance of the types
and in the amounts generally deemed adequate for their respective
businesses, all of which insurance is in full force and effect.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby.
2. Sale and Delivery to U.S. Underwriters; Closing.
-----------------------------------------------
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company, at the price per share set forth in Schedule B, the number of Initial
Securities set forth in Schedule A opposite the name of such U.S. Underwriter,
plus any additional number of Initial U.S. Securities which such U.S.
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional 864,000 shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial U.S. Securities but not payable on the Option Securities.
The option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part only for the purpose of covering over-allotments
which
11
<PAGE>
may be made in connection with the offering and distribution of the Initial U.S.
Securities upon notice by the Global Coordinator to the Company setting forth
the number of U.S. Option Securities as to which the several U.S. Underwriters
are then exercising the option and the time and date of payment and delivery for
such U.S. Option Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Global Coordinator, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the U.S. Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of U.S. Option Securities then being purchased which the number
of Initial U.S. Securities set forth in Schedule A opposite the name of such
Underwriter bears to the total number of Initial U.S. Securities, subject in
each case to such adjustments as the Global Coordinator in its discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for the Initial Securities
shall be made at the offices of Gibson, Dunn & Crutcher LLP, Los Angeles, or at
such place as shall be agreed to by the Global Coordinator and the Company, at
7:00 A.M. (California time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Global Coordinator and the Company (such time and date of payment
and delivery being herein called "Closing Time").
In addition, if any or all of the U.S. Option Securities are purchased by
the Underwriters, payment of the purchase price for such U.S. Option Securities
shall be made at the above-mentioned offices, or at such other place as shall be
agreed upon by the Global Coordinator and the Company, on each Date of Delivery
as specified in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the
12
<PAGE>
Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial U.S. Securities and the U.S. Option Securities, if
any, will be made available for examination and packaging by the U.S.
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") with respect to
the offering and sale of the Securities. Merrill Lynch, solely in its capacity
as qualified independent underwriter and not otherwise, is referred to herein as
the "Independent Underwriter". The Company and the U.S. Underwriters agree that
Merrill Lynch will not receive any additional benefits hereunder for serving as
the Independent Underwriter in connection with the offering and sale of the U.S.
Securities.
3. Covenants of the Company. The Company covenants with each U.S. Underwriter
------------------------
as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
and will notify the Global Coordinator immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectuses or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, if it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), or any amendment, supplement
or revision to either the prospectus included in the Registration Statement at
the time it became effective or to the Prospectuses and will furnish the Global
Coordinator with copies of any such documents a reasonable amount of time prior
to such proposed filing or use, as the case may be, and will
13
<PAGE>
not file or use any such document to which the Global Coordinator or counsel for
the U.S. Underwriters shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the U.S. Representatives and counsel for the U.S. Underwriters,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Representatives, without
charge, a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the Underwriters. The
copies of the Registration Statement and each amendment thereto furnished to the
Underwriters will be substantially identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each U.S. Underwriter, without charge, during the period when the
U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
such number of copies of the U.S. Prospectus (as amended or supplemented) as
such Underwriter may reasonably request. The U.S. Prospectus and any amendments
or supplements thereto furnished to the U.S. Underwriters will be substantially
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement, the
International Purchase Agreement, and in the Prospectuses. If at any time when
a prospectus is required by the 1933 Act to be delivered in connection with
sales of the Securities, any event shall occur or condition shall exist as a
result of which it is necessary, in the opinion of counsel for the U.S.
Underwriters or for the Company, to amend the Registration Statement or amend or
supplement any Prospectus in order that the Prospectus will not include any
untrue statements of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to Section
3(b), such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectuses comply
with such requirements, and the Company will furnish to the U.S. Underwriters
such number of copies of such amendment or supplement as the U.S. Underwriters
may reasonably request.
14
<PAGE>
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the U.S. Underwriters, to qualify the Securities for offering
and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Global Coordinator may designate and
to maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the listing
of the Common Stock (including the Securities) on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing,
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder or the International Purchase
Agreement, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof and referred to in the Prospectuses, or (C) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectuses. The
Company also agrees not to accelerate the exercise period of all or any portion
of any option outstanding at the Closing Time to
15
<PAGE>
a date less than 180 days from the date of the Prospectuses without the prior
written consent of the Global Coordinator.
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of this Agreement. The Underwriters will notify
the Company as to which persons will need to be so restricted. At the request
of the Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
4. Payment of Expenses.
-------------------
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the fees and disbursements of counsel for the Underwriters in connection
therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriters of copies
of each preliminary prospectus and of the Prospectuses and any amendments or
supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities and
(ix) the filing fees incident to, and the fees and disbursements of counsel to
the Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the listing of
the Securities on the New York Stock Exchange, (xi) the fees and disbursements
16
<PAGE>
of O'Melveny & Myers LLP for legal due diligence with respect to Company's
Intellectual Property and contractual rights to films and television programs in
the Library (as defined in the Registration Statement), and (xii) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and others
having a business relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the fees and disbursements of counsel
for the Underwriters.
5. Conditions of Underwriters' Obligations. The obligations of the several
---------------------------------------
Underwriters hereunder are subject to the accuracy of the representations and
warranties of the Company contained in Section 1 hereof or in certificates of
any officer of the Company or any Subsidiary of the Company delivered pursuant
to the provisions hereof, to the performance by the Company of its covenants and
other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A).
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Gibson, Dunn & Crutcher LLP, counsel for the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters, to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request. In giving
such opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the State of
California, the federal law of the United States and the General Corporation Law
of the State of Delaware, upon the opinions of counsel satisfactory to the U.S.
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(c) Opinions of Counsel and Special Counsel for Underwriters.
17
<PAGE>
(i) Opinion of Counsel for Underwriters. At Closing Time, the U.S.
-----------------------------------
Representatives shall have received the favorable opinion, dated as of
Closing Time, of O'Melveny & Myers LLP, counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the
other U.S. Underwriters, with respect to the matters set forth in clauses
(i), (v), (vi) (solely as to preemptive or other similar rights arising
under the charter or bylaws of the Company), (viii) through (xi),
inclusive, (xiii) (solely as to the information in the Prospectus under
"Description of Capital Stock--Common Stock") and the penultimate paragraph
of Exhibit A hereto (except with respect to any description or
interpretation of the WHV Agreement or any dispute relating thereto). In
giving such opinion such counsel may rely, as to all matters governed by
the laws of jurisdictions other than the law of the State of New York, the
State of California, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the U.S. Representatives. Such counsel may also state
that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(ii) Letter from Special Counsel for Underwriters. At Closing Time,
--------------------------------------------
the U.S. Representatives shall have received a letter, dated as of the
Closing Time, from Cahill Gordon & Reindel, special counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters, in the form of Exhibit A2 hereto.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, assets, properties, business affairs
or, to the knowledge of the Company, business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, and the U.S. Representatives shall have received a
certificate of the Vice Chairman or a Senior Executive Vice President of the
Company and of the Chief Financial Officer of the Company, dated as of Closing
Time, to the effect that (i) there has been no such material adverse change,
(ii) the representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, are contemplated
by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from each of Arthur
Andersen LLP, Price Waterhouse LLP and KPMG Peat Marwick LLP a letter dated such
date, in form and substance satisfactory to the U.S. Representatives, together
with signed or reproduced copies of such letters for each of the other U.S.
Underwriters containing statements and
18
<PAGE>
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from each of Arthur Andersen LLP, Price Waterhouse LLP and KPMG
Peat Marwick LLP a letter, dated as of Closing Time, to the effect that they
reaffirm the statements made in the letters furnished pursuant to subsection (e)
of this Section, except that the specified date referred to shall be a date not
more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) Purchase of Initial International Securities. Contemporaneously with
the purchase by the U.S. Underwriters of the Initial U.S. Securities under this
Agreement, the International Managers shall have purchased the Initial
International Securities under the International Purchase Agreement.
(k) Tracinda Purchase. Contemporaneously with the purchase by the U.S.
Underwriters of the Initial U.S. Securities under this Agreement, Tracinda shall
have made the Tracinda Purchase, and all executed copies of all documents
relating to the Tracinda Purchase shall have been delivered to the U.S.
Representatives.
(l) Conditions to Purchase of U.S. Option Securities. If the U.S.
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the U.S. Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the U.S. Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the Vice Chairman or a Senior Executive Vice President of the
Company and of the Chief Financial Officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(d)
hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of Gibson,
------------------------------
Dunn & Crutcher LLP, counsel for the Company, in form and substance
satisfactory to counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
19
<PAGE>
(iii) Opinion of Counsel for U.S. Underwriters. The favorable
----------------------------------------
opinion of O'Melveny & Myers LLP, counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from each of Arthur Andersen
-------------------------
LLP, Price Waterhouse LLP and KPMG Peat Marwick LLP, in form and substance
satisfactory to the U.S. Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letters furnished to
the U.S. Representatives pursuant to Section 5(f) hereof, except that the
"specified date" in the letter furnished pursuant to this paragraph shall
be a date not more than five days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the U.S. Underwriters shall have been furnished with such documents
and opinions as they may require for the purpose of enabling them to pass upon
the issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the U.S. Underwriters.
(n) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7 and
8 shall survive any such termination and remain in full force and effect.
6. Indemnification.
---------------
(a) Indemnification of U.S. Underwriters.
(1) The Company and each Signatory Subsidiary, jointly and severally,
agrees to indemnify and hold harmless each U.S. Underwriter and each person, if
any, who controls any U.S. Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any
20
<PAGE>
amendment thereto), including the Rule 430A Information or the omission or
alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of foreign jurisdictions in connection with the offer
or sale of Reserved Securities and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in Australia, Canada, France and
the United Kingdom in connection with the reservation and sale of the
Reserved Securities to eligible employees of, and persons having business
relationships with, the Company or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein, when
considered in conjunction with the Prospectuses or preliminary
prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation of
the nature referred to in Section 6(a)(1)(ii)(A) hereof; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission or
in connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, if applicable, or any preliminary prospectus or the
21
<PAGE>
U.S. Prospectus (or any amendment or supplement thereto); and provided further
that the Company will not be liable to a U.S. Underwriter with respect to any
preliminary U.S. prospectus or U.S. Prospectus (or any amendments or supplements
thereto) to the extent that the Company shall sustain the burden of proving that
any such loss, liability, claim, damage or expense resulted from the fact that
such U.S. Underwriter, in contravention of a requirement of this Agreement or
applicable law, sold U.S. Securities to a person to whom such U.S. Underwriter
failed to send or give, at or prior to the written confirmation of the sale of
such Securities to such person, a copy of the applicable prospectus (as then
amended or supplemented if the Company has furnished any amendments or
supplements thereto) if the Company has previously furnished a copy of such
prospectus (or amendment or supplement thereto) to such U.S. Underwriter
sufficiently in advance of such confirmation date to allow for distribution by
such date and the loss, liability, claim, damage or expense of such U.S.
Underwriter resulted from an untrue statement or omission or alleged untrue
statement or omission of a material fact contained in or omitted from any
previously delivered preliminary U.S. prospectus or U.S. Prospectus (or
amendment or supplement thereto) which was corrected in such prospectus as
amended or supplemented prior to such confirmation.
(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage, and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the NASD in connection with the offering of the U.S. Securities except to the
extent resulting primarily from the bad faith or gross negligence of the
Independent Underwriter.
(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a)(1) of this Section, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, if applicable, or any preliminary U.S. prospectus or the U.S.
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the U.S. Prospectus (or any amendment or supplement thereto).
22
<PAGE>
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances; provided, that, if indemnity is
sought pursuant to Section 6(a)(2), then, in addition to the fees and expenses
of such counsel for the indemnified parties, the indemnifying party shall be
liable for the fees and expenses of not more than one counsel (in addition to
any local counsel) separate from its own counsel and that of the other
indemnified parties for the Independent Underwriter in its capacity as a
"qualified independent underwriter" and all persons, if any, who control the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of 1934 Act in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances if, in the reasonable judgment of the Independent
Underwriter, there may exist a conflict of interest between the Independent
Underwriter and the other indemnified parties. Any such separate counsel for
the Independent Underwriter and such control persons of the Independent
Underwriter shall be designated in writing by the Independent Underwriter. No
indemnifying party shall, without the prior written consent of the indemnified
parties (which consent shall not be unreasonably delayed or withheld), settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(ii) or Section 6(a)(1)(iii) effected without its written consent
if (i) such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party
23
<PAGE>
shall have received notice of the terms of such settlement at least 45 days
prior to such settlement being entered into and (iii) such indemnifying party
shall not have reimbursed such indemnified party in accordance with such request
prior to the date of such settlement. Notwithstanding the immediately preceding
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, an indemnifying party shall not be liable for any settlement of the
nature contemplated by Section 6(a)(1)(ii) or Section 6(a)(1)(iii) effected
without its consent if such indemnifying party (i) reimburses such indemnified
party in accordance with such request to the extent it considers such request to
be reasonable and (ii) provides written notice to the indemnified party
substantiating the unpaid balance as unreasonable, in each case prior to the
date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of eligible employees of, and persons having business
relationships with, the Company to pay for and accept delivery of Reserved
Securities which, by the end of the first business day following the date of
this Agreement, were subject to a properly confirmed agreement to purchase.
7. Contribution. If the indemnification provided for in Section 6 hereof is
------------
for any reason unavailable to or insufficient to hold harmless an indemnified
party in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the U.S. Underwriters on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the U.S.
Underwriters on the other hand in connection with the statements or omissions,
or in connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof, which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the U.S.
Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus.
24
<PAGE>
The relative fault of the Company on the one hand and the U.S. Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof.
The Company and the U.S. Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the U.S. Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the U.S. Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
U.S. Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
8. Representations, Warranties and Agreements to Survive Delivery. All
--------------------------------------------------------------
representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf
25
<PAGE>
of any U.S. Underwriter or controlling person, or by or on behalf of the
Company, and shall survive delivery of the Securities to the U.S. Underwriters,
provided that in no event shall this Section 9 be construed as a waiver by the
Company of any applicable statue of limitations.
9. Termination of Agreement.
------------------------
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, assets, properties, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the U.S. Representatives, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
10. Default by One or More of the Underwriters. If one or more of the
------------------------------------------
Underwriters shall fail at Closing Time or a Date of Delivery to purchase the
Securities which it or they are obligated to purchase under this Agreement (the
"Defaulted Securities"), the U.S. Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
U.S. Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and upon
the terms herein set forth; if, however, the U.S. Representatives shall not have
completed such arrangements within such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the non-
defaulting
26
<PAGE>
U.S. Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting U.S. Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number
of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell
the U.S. Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any non-
defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either the U.S. Representatives or the Company
shall have the right to postpone Closing Time or the relevant Date of Delivery,
as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "U.S. Underwriter" includes
any person substituted for an U.S. Underwriter under this Section 10.
11. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Underwriters shall be
directed to the U.S. Representatives at North Tower, World Financial Center, New
York, New York 10281-1201 and 10900 Wilshire Boulevard, Suite 900, Los Angeles,
California 90024, attention of Mr. John Curran and Ms. Cara Londin, with a copy
to O'Melveny & Myers LLP, 1999 Avenue of the Stars, Suite 700, Los Angeles,
California 90067, attention of Kendall Bishop, Esq.; and notices to the Company
shall be directed to it at 2500 Broadway Street, Santa Monica, California 90404,
attention of David Johnson, Esq., with a copy to Gibson, Dunn & Crutcher LLP,
333 South Grand Avenue, Los Angeles, California 90071, attention of Bruce Meyer,
Esq.
12. Parties. This Agreement shall each inure to the benefit of and be binding
-------
upon the U.S. Underwriters and the Company and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the U.S.
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit
27
<PAGE>
of the U.S. Underwriters and the Company and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Securities from any U.S. Underwriter shall be deemed to be a
successor by reason merely of such purchase.
13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
----------------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY
REFER TO NEW YORK CITY TIME.
14. Effect of Headings. The Article and Section headings herein and the Table
------------------
of Contents are for convenience only and shall not affect the construction
hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
METRO-GOLDWYN-MAYER INC.
By:
Title:
GOLDWYN ENTERTAINMENT COMPANY
By:____________________________
Title:___________________
METRO-GOLDWYN-MAYER STUDIOS INC.
By:____________________________
Title:___________________
ORION PICTURES CORPORATION
By:____________________________
Title:___________________
UNITED ARTISTS CORPORATION
By:____________________________
Title:___________________
29
<PAGE>
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J.P. MORGAN & CO.
BEAR, STEARNS & CO. INC.
FURMAN SELZ LLC
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:_________________________
Authorized Signatory
For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.
30
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
- ------------------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................................
J.P. Morgan & Co ..................................
Bear, Stearns & Co. Inc ...........................
Furman Selz LLC ...................................
---------
Total............................................. 7,200,000
=========
</TABLE>
Schedule A-1
<PAGE>
SCHEDULE B
METRO-GOLDWYN-MAYER INC.
7,200,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the U.S. Securities to be paid by the
several U.S. Underwriters shall be $., being an amount equal to the initial
public offering price set forth above less $. per share; provided that the
purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities.
Schedule B-1
<PAGE>
SCHEDULE C
Frank G. Mancuso
A. Robert Pisano
James D. Aljian
Michael R. Gleason
Kirk Kerkorian
Kerry M. Stokes
Jerome B. York
Michael G. Corrigan
David G. Johnson
William A. Jones
Tracinda Corporation
Miltonstar Property
Celsus Financial Corp.
John P. Symes
Lawrence D. Gleason
Richard B. Cohen
Schedule C-1
<PAGE>
Exhibit A1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
Section 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the ownership or
leasing of its property or the conduct of its business require such
qualification, except where the failure so to qualify or to be in good standing
would not result in a material adverse effect on the condition, financial or
otherwise, or on the earnings, assets, properties, or business of the Company
and its subsidiaries, considered as one enterprise (a "Material Adverse
Effect").
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectuses in the column entitled "Pro Forma" under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement, or
pursuant to reservations, agreements or employee benefit plans referred to in
the Prospectuses, or pursuant to the Tracinda Purchase, or pursuant to the
exercise of convertible securities or options referred to in the Prospectuses
and except for the "Series A Preferred Stock Conversion" and the "Stock Split"
(as such terms are defined in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; and none of the outstanding shares
of capital stock of the Company was issued in violation of any preemptive or
other similar rights of any securityholder of the Company which may exist under
the certificate of incorporation or bylaws of the Company or under the
agreements that have been filed as exhibits to the Registration Statement.
(v) The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement respectively, and, when issued and delivered by
the Company pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement respectively, against payment of the consideration set forth
in the U.S. Purchase Agreement and the International Purchase Agreement, will be
validly issued and fully paid and non-assessable and no holder of the Securities
is or will be subject to personal liability by reason of being such a holder.
A1-1
<PAGE>
(vi) The issuance of the Securities is not subject to any preemptive or
other similar rights of any securityholder of the Company which may exist under
the certificate of incorporation or bylaws of the Company or under the
agreements that have been filed as exhibits to the Registration Statement.
(vii) Each of the subsidiaries of the Company listed on Exhibit 21 to
Amendment No. 1 to the Registration Statement which have been incorporated under
the laws of Delaware or New York (the "U.S. Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectuses and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which the
ownership or leasing of its property or the conduct of its business require such
qualification, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; except as otherwise disclosed in
the Registration Statement, all of the issued and outstanding capital stock of
each U.S. Subsidiary has been duly authorized and validly issued, and is fully
paid, non-assessable and owned of record by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien or
encumbrance; none of the outstanding shares of capital stock of any U.S.
Subsidiary was issued in violation of any preemptive or similar rights of any
securityholder of such U.S. Subsidiary which may exist under the certificate of
incorporation or bylaws of such U.S. Subsidiary or under agreements that have
been filed as exhibits to the Registration Statement.
(viii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(ix) The Registration Statement[, including any Rule 462(b) Registration
Statement,] has been declared effective under the 1933 Act; any required filing
of the Prospectuses pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and, to the best of our
knowledge, no stop order suspending the effectiveness of the Registration
Statement [or any Rule 462(b) Registration Statement] has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission.
(x) The Registration Statement[, including any Rule 462(b) Registration
Statement,] and the Rule 430A Information[, as applicable], the Prospectuses
and each amendment or supplement to the Registration Statement and Prospectuses
as of their respective effective or issue dates (other than the financial
statements and supporting schedules and other financial data included therein or
omitted therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
A1-2
<PAGE>
(xi) To evidence the Common Stock complies in all material respects with
all applicable statutory requirements and with any applicable requirements of
the charter and by-laws of the Company.
(xii) Except for the matters described in the Prospectuses, to the best
of our knowledge, there is not pending or threatened any action, suit,
proceeding, inquiry or investigation, to which the Company or any subsidiary is
a party, or to which the property of the Company or any subsidiary is subject,
before or brought by any court or governmental agency or body, that is required
to be disclosed in the Prospectuses pursuant to the 1933 Act and the 1933 Act
Regulations or which might reasonably be expected to materially and adversely
affect the enforceability of the U.S. Purchase Agreement and the International
Purchase Agreement.
(xiii) The information in the Prospectuses under "Risk Factors - Ownership
and Control of Principal Stockholders," "Risk Factors - Possible Anti-Takeover
Effect of Certain Charter Provisions," "Risk Factors - Shares Eligible for
Future Sale," "Description of Capital Stock--Common Stock", "Management -
Limitation of Liability and Indemnification Matters," "Description of Capital
Stock," "Ownership of Voting Securities - Investors Shareholder Agreement,"
"Ownership of Voting Securities - Shareholders Agreement," and "Shares Eligible
for Future Sale" and in the Registration Statement under Item 14, to the extent
that it constitutes matters of law, summaries of legal matters, the Company's
charter and by-laws or legal conclusions, has been reviewed by us and is correct
in all material respects.
(xiv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectuses that are not described as
required.
(xv) To the best of our knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed as exhibits thereto, and the descriptions thereof or references thereto
are correct in all material respects.
(xvi) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and, except as described in
the Registration Statement and except for such defaults that would not result in
a Material Adverse Effect, no default by the Company or any Subsidiary exists in
the due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is filed as an
exhibit to the Registration Statement.
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency (other than under the 1933 Act and the 1933 Act Regulations,
which have been obtained, or as may be required under the securities or blue sky
laws of the various states, as to which we need express no opinion) is necessary
or required in connection with the due authorization,
A1-3
<PAGE>
execution and delivery of the U.S. Purchase Agreement and the International
Purchase Agreement or for the offering, issuance, sale or delivery of the
Securities.
(xviii) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement and the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of Proceeds")
and compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not, and (other than the
indemnification and contribution provisions thereof, as to which we express no
opinion) will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreements) under or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, that has been filed as an exhibit to the Registration
Statement and to which the Company or any subsidiary is a party or by which it
or any of them may be bound or to which any of the property or assets of the
Company or any subsidiary is subject (except for such conflicts, breaches or
defaults or Repayment Events or liens, charges or encumbrances that would not
have a Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any U.S. Subsidiary,
or (other than (a) the federal securities laws and regulations, except to the
extent specifically set forth herein, or (b) the securities or blue sky laws of
the various states of the United States of America, as to which we express no
opinion, and except for such violations that would not have a Material Adverse
Effect) any applicable law, statute, rule, regulation, judgment, order, writ or
decree, known to us, of any government, government instrumentality or court
having jurisdiction over the Company or any Subsidiary or any of their
respective properties, assets or operations.
(xix) Except as discussed in the Registration Statement, to the best of
our knowledge, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
(xx) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Such opinion shall also state as follows:
During the course of preparation of the Registration Statement and the
Prospectuses, we participated in conferences with representatives of the Company
and their independent accountants and your representatives and your counsel, at
which conferences the contents of the Registration Statement and the
Prospectuses and related matters were discussed. Except as specifically noted
herein, we are not passing upon and do not assume any
A1-4
<PAGE>
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or Prospectuses and we make no
representation, express or implied, that we have independently verified the
accuracy, completeness or fairness of such statements. However, based on and
subject to the foregoing, nothing has come to our attention that would lead us
to believe that the Registration Statement or any amendment thereto, including
the Rule 430A Information (if applicable), (except for financial statements,
schedules and other financial data included therein or omitted therefrom or
information derived from the foregoing, as to which we need make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectuses or any amendment or supplement thereto
(except for financial statements, schedules and other financial data included
therein or omitted therefrom or information derived from the foregoing, as to
which we need make no statement), at the time the Prospectuses were issued, at
the time any such amended or supplemented prospectus was issued or at the
Closing Time, included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
A1-5
<PAGE>
EXHIBIT A2
[ ], 1997
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
J.P. Morgan Securities Inc.
Bear, Stearns & Co. Inc.
Furman Selz LLC
as U.S. Representatives of the several
U.S. Underwriters listed on Schedule A
to the U.S. Purchase Agreement referred to below
Merrill Lynch International
J.P. Morgan Securities Ltd.
Bear, Stearns International Ltd.
Furman Selz LLC
as Lead Managers of the several International
Managers listed on Schedule A to the U.S.
Purchase Agreement referred to below
Re: Metro-Goldwyn-Mayer Inc. - Initial
Public Offering of Common Stock
----------------------------------
Ladies and Gentlemen:
This letter is being furnished to you pursuant to (1) Section [ ]
of the U.S. Purchase Agreement dated as of November [ ], 1997 (the "U.S.
Purchase Agreement") by and among Merrill Lynch, Pierce, Fenner & Smith
Incorporated, J.P. Morgan Securities Inc.
Bear, Stearns & Co. Inc., and Furman Selz LLC as U.S. Representatives of the
several U.S. Underwriters listed on Schedule A thereto ("the U.S.
Underwriters"), and Metro-Goldwyn-Mayer Inc., as issuer (the "Company"),
relating to the issuance and sale by the Company to the U.S. Underwriters today
of an aggregate of [ ] shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company, and (2) Section [ ] of the International
Purchase Agreement dated as of November [ ], 1997 (the "International
Purchase Agreement";
A2-1
<PAGE>
together with the U.S. Purchase Agreement, the "Purchase Agreements") by and
among Merrill Lynch, Pierce, Fenner & Smith International, J.P. Morgan
Securities Ltd., Bear, Stearns International Limited and Furman Selz LLC, as
Lead Managers of the International Managers listed on Schedule A thereto (the
"International Managers"), and the Company relating to the issuance and sale by
the Company to the International Managers today of an aggregate of [ ] shares
of Common Stock. Capitalized terms used herein without definition have the
meanings specified in the Purchase Agreements.
In connection with this letter, we have examined originals,
photocopies or conformed copies certified to our satisfaction of all such
agreements, instruments and documents of the Company and its subsidiaries as we
have deemed appropriate and have made such other investigations as we have
deemed appropriate in connection with the statements set forth herein. In our
examination, we have assumed (a) the authenticity of all documents submitted to
us as originals, (b) the conformity to the original documents of all documents
submitted to us as copies and (c) the genuineness of all signatures on all
documents submitted to us. We have relied, as to certain factual matters, on
certificates of officers of the Company and upon representations and warranties
set forth in the Purchase Agreements.
At your request, we have reviewed (a) that certain Video Rights
Agreement, dated November 1, 1990, by and among Pathe Communications
Corporation, MGM-Pathe Communications Corporations, MGM/UA Communications Co.,
and UA Pictures, Inc. and their affiliated entities, and Warner Home Video, Inc.
(collectively, the "Parties"), as amended by the First Audit Settlement
Agreement, dated April 1, 1995, between the Parties (or their successors-in-
interest), and the exhibits and schedules to each of the foregoing
(collectively, the "WHV Agreement"), and (b) the descriptions of the WHV
Agreement and any disputes relating thereto set forth in the Prospectuses and
the Registration Statement (collectively, the "Disclosures"). We have also
participated in telephonic conferences with certain officers and other
representatives of the Company having familiarity with the WHV Agreement and the
home video business of the Company and its subsidiaries to discuss the WHV
Agreement and related matters. Given the limitations inherent in the role of
outside counsel and the character of determinations involved in the preparation
of the Disclosures, we are not passing upon and do not assume any responsibility
for the accuracy, completeness or fairness of the Disclosures and have made no
independent check or verification thereof. Subject to the foregoing, no facts
have come to our attention that cause us to believe that the Disclosures in the
Registration Statement at the time it became effective or as of the Closing Time
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Disclosures in the Prospectuses as of their
respective dates or as of the Closing Time contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
Disclosures, in the light of the circumstances under which they were made, not
misleading (it being understood that we express no belief with respect to any
financial or statistical data found in or related to the Disclosures or as to
whether the WHV Agreement should or should not be filed as an exhibit to the
Registration Statement).
Neither this letter nor any part hereof may be delivered to, used or
relied upon by any person other than the U.S. Underwriters and the International
Managers without our prior written consent.
A2-2
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(I)]
Exhibit B
November ___, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
J.P. MORGAN & CO.
BEAR, STEARNS & CO. INC.
FURMAN SELZ LLC
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Metro-Goldwyn-Mayer Inc.
----------------------------------------------------
Dear Sirs:
The undersigned, a stockholder [an officer and/or director] of Metro-
Goldwyn-Mayer Inc., a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), J.P. Morgan & Co., Bear, Stearns & Co. Inc. and Furman Selz
LLC (collectively, the "U.S. Representatives") propose to enter into a Purchase
Agreement (the "U.S. Purchase Agreement") with the Company providing for the
public offering of shares (the "Securities") of the Company's common stock, par
value $.01 per share (the "Common Stock"). In recognition of the benefit that
such an offering will confer upon the undersigned as a stockholder [an officer
and/or director] of the Company, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the undersigned
agrees with each underwriter to be named in the U.S. Purchase Agreement that,
during a period of 180 days from the date of the U.S. Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, or file
B-1
<PAGE>
any registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise.
[insert in Tracinda lock-up: provided, however, that the U.S. Representatives
acknowledge that the undersigned has pledged and may pledge in the future any
such shares of the Company's Common Stock now or hereafter owned by the
undersigned pursuant to its existing and any future pledge or loan agreements.]
[insert in Tracinda and Seven lock-up: provided, however, that the undersigned
may transfer, or grant options to purchase, up to an aggregate of [145,834] of
such shares of Common Stock to the undersigned's directors, officers, employees
and affiliates so long as such transferee or optionee agrees in writing to be
bound by a letter agreement substantially in the form of this Letter Agreement.]
Very truly yours,
Signature:____________________________
Print Name:___________________________
B-2
<PAGE>
EXHIBIT 1.2
______________________________________________________________________________
______________________________________________________________________________
METRO-GOLDWYN-MAYER INC.
(a Delaware corporation)
1,800,000 Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: November , 1997
______________________________________________________________________________
______________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INTERNATIONAL PURCHASE AGREEMENT...................................... 1
SECTION 1. Representations and Warranties........................................ 3
(a) Representations and Warranties by the Company and Certain of its
Subsidiaries.......................................................... 3
(i) Compliance with Registration Requirements...................... 3
(ii) Independent Accountants........................................ 4
(iii) Financial Statements........................................... 4
(iv) No Material Adverse Change in Business......................... 5
(v) Good Standing of the Company................................... 5
(vi) Good Standing of Subsidiaries.................................. 5
(vii) Capitalization................................................. 6
(viii) Authorization of Agreement..................................... 6
(ix) Authorization and Description of Securities.................... 6
(x) Absence of Defaults and Conflicts.............................. 7
(xi) Absence of Labor Dispute....................................... 7
(xii) Absence of Proceedings......................................... 7
(xiii) Accuracy of Exhibits........................................... 8
(xiv) Possession of Intellectual Property............................ 8
(xv) Absence of Further Requirements................................ 8
(xvi) Possession of Licenses and Permits............................. 8
(xvii) Title to Property.............................................. 9
(xviii)Compliance with Cuba Act....................................... 9
(xix) Investment Company Act......................................... 9
(xx) Environmental Laws............................................. 9
(xxi) Registration Rights............................................ 10
(xxii) 1934 Act....................................................... 10
(xxiii)Amended Credit Facility........................................ 10
(xxiv) Insurance...................................................... 10
(b) Officer's Certificates................................................ 10
SECTION 2. Sale and Delivery to International Managers; Closing.................. 10
(a) Initial Securities.................................................... 10
(b) Option Securities..................................................... 10
(c) Payment............................................................... 11
(d) Denominations; Registration........................................... 12
(e) Appointment of Qualified Independent Underwriter...................... 12
SECTION 3. Covenants of the Company.............................................. 12
(a) Compliance with Securities Regulations and Commission Requests........ 12
(b) Filing of Amendments.................................................. 12
(c) Delivery of Registration Statements................................... 13
(d) Delivery of Prospectuses.............................................. 13
(e) Continued Compliance with Securities Laws............................. 13
(f) Blue Sky Qualifications............................................... 14
(g) Rule 158.............................................................. 14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(h) Use of Proceeds...................................................... 14
(i) Listing.............................................................. 14
(j) Restriction on Sale of Securities.................................... 14
(k) Reporting Requirements............................................... 15
(l) Compliance with NASD Rules........................................... 15
SECTION 4. Payment of Expenses.................................................. 15
(a) Expenses............................................................. 15
(b) Termination of Agreement............................................. 16
SECTION 5. Conditions of International Managers' Obligations.................... 16
(a) Effectiveness of Registration Statement.............................. 16
(b) Opinion of Counsel for Company....................................... 16
(c) Opinions of Counsel and Special Counsel for the Underwriters......... 16
(i) Opinion of Counsel for Underwriters........................... 16
(ii) Letter from Special Counsel for Underwriters.................. 17
(e) Officers' Certificate................................................ 17
(f) Accountant's Comfort Letter.......................................... 17
(g) Bring-down Comfort Letter............................................ 17
(h) Approval of Listing.................................................. 18
(i) No Objection......................................................... 18
(j) Lock-up Agreements................................................... 18
(k) Purchase of Initial U.S. Securities.................................. 18
(l) Tracinda Purchase.................................................... 18
(m) Conditions to Purchase of International Option Securities............ 18
(i) Officers' Certificate.......................................... 18
(ii) Opinion of Counsel for Company................................. 18
(iii) Opinion of Counsel for International Managers.................. 19
(iv) Bring-down Comfort Letter...................................... 19
(n) Additional Documents................................................. 19
(o) Termination of Agreement............................................. 19
SECTION 6. Indemnification...................................................... 19
(a) Indemnification of International Managers............................ 19
(b) Indemnification of Company, Directors and Officers................... 21
(c) Actions against Parties; Notification................................ 21
(d) Settlement without Consent if Failure to Reimburse................... 22
(e) Indemnification for Reserved Securities.............................. 22
SECTION 7. Contribution......................................................... 23
SECTION 8. Representations, Warranties and Agreements to Survive Delivery....... 24
SECTION 9. Termination of Agreement............................................. 24
(a) Termination; General................................................. 24
(b) Liabilities.......................................................... 25
SECTION 10. Default by One or More of the International Managers................. 25
SECTION 11. Notices.............................................................. 25
SECTION 12. Parties.............................................................. 26
SECTION 13. GOVERNING LAW AND TIME............................................... 26
SECTION 14. Effect of Headings................................................... 26
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SCHEDULES
Schedule A - List of Underwriters Sch A-1
Schedule B - Pricing Information Sch B-1
Schedule C - List of Persons Subject to Lock-up Sch C-1
EXHIBITS
Exhibit A1 - Form of Opinion of Company's Counsel A1-1
Exhibit A2 - Form of Opinion of Underwriter's Special Counsel A2-1
Exhibit B - Form of Lock-up Letter B-1
</TABLE>
iii
<PAGE>
Draft of November 3, 1997
METRO-GOLDWYN-MAYER INC.
(a Delaware corporation)
1,800,000 Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
November ___, 1997
MERRILL LYNCH INTERNATIONAL
J.P. MORGAN SECURITIES, LTD.
BEAR, STEARNS INTERNATIONAL LIMITED
FURMAN SELZ LLC
as Lead Managers of the several
International Managers
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Metro-Goldwyn-Mayer Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch International ("Merrill Lynch") and each of the
other international underwriters named in Schedule A hereto (collectively, the
"International Managers", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, J.P. Morgan Securities, Ltd., Bear Stearns International Limited, and
Furman Selz LLC are acting as lead managers (in such capacity, the "Lead
Managers"), with respect to the issue and sale by the Company and the purchase
by the International Managers, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the International Managers, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 216,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 1,800,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the
1
<PAGE>
216,000 shares of Common Stock subject to the option described in Section 2(b)
hereof (the "International Option Securities") are hereinafter called,
collectively, the "International Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of 7,200,000 shares of Common Stock
(the "Initial U.S. Securities") through arrangements with certain underwriters
in the United States and Canada (the "U.S. Underwriters") for which Merrill
Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Bear,
Stearns & Co., Inc. and Furman Selz LLC are acting as representatives (the "U.S.
Representatives") and the grant by the Company to the U.S. Underwriters, acting
severally and not jointly, of an option to purchase all or any part of the U.S.
Underwriters' pro rata portion of up to 864,000 additional shares of Common
Stock solely to cover overallotments, if any (the "U.S. Option Securities" and,
together with the International Option Securities, the "Option Securities").
The Initial U.S. Securities and the U.S. Option Securities are hereinafter
called the "U.S. Securities". It is understood that the Company is not
obligated to sell and the International Managers are not obligated to purchase,
any Initial International Securities unless all of the Initial U.S. Securities
are contemporaneously purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities, and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make a
public offering of the International Securities as soon as the Lead Managers
deem advisable after this Agreement has been executed and delivered.
The Company and the International Managers agree that up to _______ shares
of the Initial International Securities to be purchased by the International
Managers and that up to __________ shares of the Initial U.S. Securities to be
purchased by the U.S. Underwriters (collectively, the "Reserved Securities")
shall be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public as
part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-35411) covering the
registration of the Securities
2
<PAGE>
under the Securities Act of 1933, as amended (the "1933 Act"), including the
related preliminary prospectus or prospectuses. Promptly after execution and
delivery of this Agreement, the Company will prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations. Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the
Form of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting. The information included in any
such prospectus that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information." Each form of International Prospectus
and Form of U.S. Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information that was used after such effectiveness and prior to the execution
and delivery of this Agreement, is herein called a "preliminary prospectus."
Such registration statement, including the exhibits thereto and schedules
thereto at the time it became effective and including the Rule 430A Information
is herein called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the
"Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
The final Form of International Prospectus and the final Form of U.S. Prospectus
in the forms first furnished to the Underwriters for use in connection with the
offering of the Securities are herein called the "International Prospectus" and
the "U.S. Prospectus," respectively, and collectively, the "Prospectuses." For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the International Prospectus, the U.S. Prospectus or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company and Certain of its
Subsidiaries. The Company and each subsidiary of the Company named on the
signature pages hereto (the "Signatory Subsidiaries"), jointly and severally,
represents and warrants to each International Manager as of the date hereof, as
of the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each
International Manager, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company (which shall mean for all purposes in this Agreement the knowledge
of the senior executives of the Company and each of the Signatory
Subsidiaries, "knowledge of the Company") are
3
<PAGE>
contemplated by the Commission, and any request on the part of the
Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any International Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Prospectuses, any
preliminary prospectuses and any supplement thereto or prospectus wrapper
prepared in connection therewith, at their respective times of issuance and
at the Closing Time, complied and will comply in all material respects with
any applicable laws or regulations of foreign jurisdictions in which the
Prospectuses and such preliminary prospectuses, as amended or supplemented,
if applicable, are distributed in connection with the offer and sale of
Reserved Securities. Neither of the Prospectuses nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectuses or any amendments or supplements thereto were issued and at
the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
International Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any International
Manager through the Lead Managers expressly for use in the Registration
Statement or the International Prospectus.
The preliminary prospectus filed as part of Amendment No. 1 to the
Registration Statement, each subsequent preliminary prospectus, filed as a
part of an amendment to the Registration Statement, and the Prospectuses
included in the Registration Statement at the time it became effective or
filed pursuant to Rule 424 under the 1933 Act, complied as to form when the
Registration Statement became effective or when so filed, as applicable, in
all material respects with the 1933 Act Regulations and each preliminary
prospectus and the Prospectuses delivered to the Underwriters for use in
connection with this offering was substantially identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. Each of the accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly in all material respects the financial
position of the Company, its predecessors and their respective consolidated
subsidiaries at the dates indicated and the results of operations,
4
<PAGE>
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have been
prepared, in all material respects, in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules included in the Registration
Statement present fairly in all material respects in accordance with GAAP
the information required to be stated therein. The selected financial data
and the summary financial information included in the Prospectuses present
fairly in all material respects the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement and the Prospectuses present fairly in all material respects the
information shown therein, have been prepared in all material respects in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate in all material
respects to give effect to the transactions and circumstances referred to
therein.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, assets, properties, business affairs or, to the knowledge of the
Company, business prospects of the Company and its subsidiaries considered
as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in
the ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C) there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
the Company (as such term is defined in Rule 1-02 of Regulation S-X), each
Signatory Subsidiary (each a "Subsidiary" and, collectively, the
"Subsidiaries") and, to the Company's knowledge (without any obligation to
make any inquiries or any independent investigation), United International
Pictures ("UIP") has been duly organized and is validly existing as a
corporation or partnership, as the case may be, in good standing under the
laws of the jurisdiction of its formation, has the power and authority to
own, lease and operate its properties and to
5
<PAGE>
conduct its business as described in the Prospectuses and is duly qualified
as a foreign corporation or partnership, as the case may be, to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement, all of the
issued and outstanding capital stock of each corporate subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable; all
of the outstanding partnership interests in each partnership subsidiary
and, to the Company's knowledge (without any obligation to make any
inquiries or any independent investigation) UIP, have been duly authorized
by such partnership; and except as disclosed in the Prospectus, all of such
capital stock and partnership interests are owned by the Company, directly
or through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; none of the outstanding shares
of capital stock or partnership interests, as the case may be, of any
Subsidiary was issued in violation of the preemptive or similar rights of
any securityholder of such Subsidiary. All of the Subsidiaries of the
Company are listed on Exhibit 21 to the Registration Statement.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column
entitled "Pro Forma" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, or pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses, or pursuant to Tracinda Purchase (as defined in the
Registration Statement), or pursuant to the exercise of convertible
securities or options referred to in the Prospectuses and except for the
Series A Preferred Stock Conversion and the Stock Split, each as referred
to in the Prospectuses). The shares of issued and outstanding capital stock
of the Company have been duly authorized and validly issued and are fully
paid and non-assessable; none of the outstanding shares of capital stock of
the Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement and the U.S.
Purchase Agreement have been duly authorized, executed and delivered by the
Company and the Signatory Subsidiaries.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the International
Managers pursuant to this Agreement and the U.S. Underwriters pursuant to
the U.S. Purchase Agreement, respectively, and, when issued and delivered
by the Company pursuant to this Agreement and the U.S. Purchase Agreement,
respectively, against payment of the consideration set forth herein and the
U.S. Purchase Agreement, respectively, will be validly issued and fully
paid and non-assessable; the Common Stock conforms in all material respects
to all statements relating thereto contained in the Prospectuses and such
description conforms to any description thereof set forth in the stock
certificates evidencing the Common Stock, the Company's Restated
Certificate of Incorporation and bylaws; no holder of the Securities will
be subject to personal liability by reason of being such a holder; and the
issuance of the Securities in the Offering is not subject to the preemptive
or other similar rights of any securityholder of the Company.
6
<PAGE>
(x) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the U.S. Purchase Agreement and the consummation of the
transactions contemplated in this Agreement, the U.S. Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities, Metro-Goldwyn-Mayer Studios Inc.'s and Orion Pictures
Corporation's execution of the Amended Credit Facility (as defined in the
Registration Statement), and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use of
Proceeds") and compliance by the Company and the Signatory Subsidiaries
with their respective obligations hereunder and the U.S. Purchase Agreement
have been duly authorized by all necessary corporate and partnership action
and do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults, Repayment
Events or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any subsidiary or any of
their assets, properties or operations (except in the case of clause (ii)
for such violations that would not have a Material Adverse Effect). As
used herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any Subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
Subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which the Company believes is likely
to result in a Material Adverse Effect, or which the Company believes is
likely to materially and adversely affect the properties or assets thereof
or the consummation of the transactions contemplated in this Agreement and
the U.S. Purchase Agreement or the performance by the
7
<PAGE>
Company of its obligations hereunder or thereunder; the aggregate of all
pending legal or governmental proceedings to which the Company or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, is not reasonably expected to result in a Material Adverse
Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described or filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the U.S. Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement, except (i) such as have been already obtained or
as may be required under the 1933 Act or the 1933 Act Regulations or state
and foreign securities or blue sky laws and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in connection with the offering the Reserved Securities.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them except where lack of
such possession would not have a Material Adverse Effect; the Company and
its subsidiaries are in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would
not, singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of
8
<PAGE>
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xvii) Title to Property. Neither the Company nor any of its
subsidiaries own any real property and the Company and each of its
subsidiaries have good title to all properties owned by them, in each case,
free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind ("Encumbrances"), except
Encumbrances which (a) are described or referred to in the Prospectuses,
(b) do not, singly or in the aggregate, materially affect the value of such
property, or (c) do not materially interfere with the use made and proposed
to be made of such property by the Company or any of its subsidiaries; and
all of the leases and subleases material to the business of the Company and
its subsidiaries, considered as one enterprise, and under which the Company
or any of its subsidiaries holds properties described in the Prospectuses,
are in full force and effect, and neither the Company nor any subsidiary
has any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any of
the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease except where
the loss of possession of such leased or subleased premises would not have
a Material Adverse Effect.
(xviii) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
Subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its Subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their
9
<PAGE>
requirements, (C) there are no pending or, to the Company's knowledge,
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its Subsidiaries and (D) there are no events or
circumstances that could reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its Subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxi) Registration Rights. Other than as described in the
Prospectuses, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(xxii) 1934 Act. The Company has filed a registration statement
pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the "1934
Act"), to register the Common Stock, and such registration statement has
been declared effective.
(xxiii) Amended Credit Facility. The Company has delivered to Merrill
Lynch executed copies of the Amended Credit Facility Documents and there
have been no amendments to the Amended Credit Facility.
(xxiv) Insurance. Except as described in the Registration Statement,
the Company and each of its Subsidiaries maintains insurance of the types
and in the amounts generally deemed adequate for their respective
businesses, all of which insurance is in full force and effect.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by the Company to each International Manager as to
the matters covered thereby.
SECTION 2. Sale and Delivery to International Managers; Closing.
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each International Manager, severally and not jointly,
and each International Manager, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial International Securities set forth in Schedule A opposite the name of
such International Manager, plus any additional number of Initial International
Securities which such International Manager may become obligated to purchase
pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the International Managers,
severally and not jointly, to purchase up to an additional
10
<PAGE>
216,000 shares of Common Stock at the price per share set forth in Schedule B,
less an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial International Securities but not payable on
the International Option Securities. The option hereby granted will expire 30
days after the date hereof and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial International
Securities upon notice by the Global Coordinator to the Company setting forth
the number of International Option Securities as to which the several
International Managers are then exercising the option and the time and date of
payment and delivery for such International Option Securities. Any such time
and date of delivery for the International Option Securities (a "Date of
Delivery") shall be determined by the Global Coordinator, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the International Option Securities, each
of the International Managers, acting severally and not jointly, will purchase
that proportion of the total number of International Option Securities then
being purchased which the number of Initial International Securities set forth
in Schedule A opposite the name of such International Manager bears to the total
number of Initial International Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for the Initial Securities
shall be made at the offices of Gibson, Dunn & Crutcher LLP, Los Angeles, or at
such other place as shall be agreed to by the Global Coordinator and the
Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, if any or all of the International Option Securities are
purchased by the International Managers, payment of the purchase price for such
International Option Securities shall be made at the above-mentioned offices, or
at such other place as shall be agreed upon by the Global Coordinator and the
Company, on each Date of Delivery as specified in the notice from the Global
Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.
11
<PAGE>
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of Merrill Lynch as, and Merrill Lynch, hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") with respect to
the offering and sale of the International Securities. Merrill Lynch solely in
its capacity as qualified independent underwriter and not otherwise, is referred
to herein as the "Independent Underwriter". The Company and the Lead Managers
agree that Merrill Lynch will not receive any additional benefits hereunder for
serving as the Independent Underwriter in connection with the offering and sale
of the International Securities.
SECTION 3. Covenants of the Company. The Company covenants with each
International Manager as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A and will notify the Global Coordinator immediately, and confirm
the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectuses shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectuses or for additional information, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and,
if it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and,
if any stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the
Prospectuses, and will furnish the Global Coordinator with copies of any
such documents a reasonable
12
<PAGE>
amount of time prior to such proposed filing or use, as the case may be,
and will not file or use any such document to which the Global Coordinator
or counsel for the International Managers shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Lead Managers and counsel for the International
Managers, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the Lead
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the International Managers. The copies of the Registration Statement
and each amendment thereto furnished to the International Managers will be
substantially identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the
Company hereby consents to the use of such copies for purposes permitted by
the 1933 Act. The Company will furnish to each International Manager,
without charge, during the period when the International Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the International Prospectus (as amended or supplemented) as such
International Manager may reasonably request. The International Prospectus
and any amendments or supplements thereto furnished to the International
Managers will be substantially identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any
time when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of counsel
for the International Managers or for the Company, to amend the
Registration Statement or amend or supplement any Prospectus in order that
the Prospectus will not include any untrue statements of a material fact or
omit to state a material fact necessary in order to make the statements
therein not misleading in the light of the circumstances existing at the
time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration
Statement or amend or supplement any Prospectus in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Company will
promptly prepare and file with the Commission, subject to Section 3(b),
such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectuses
comply with such requirements, and the Company will furnish to the
International Managers such number of copies of such amendment or
supplement as the International Managers may reasonably request.
13
<PAGE>
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the International Managers, to qualify the Securities
for offering and sale under the applicable securities laws of such states
and other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the
listing of the Common Stock (including the Securities) on the New York
Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder or the U.S. Purchase Agreement,
(B) any shares of Common Stock issued by the Company upon the exercise of
an option or warrant or the conversion of a security outstanding on the
date hereof and referred to in the Prospectuses, or (C) any shares of
Common Stock issued or options to purchase Common Stock granted pursuant to
existing employee benefit plans of the Company referred to in the
Prospectuses. The Company also agrees not to accelerate the exercise
period of all or any portion of any option outstanding at the Closing Time
to a date less than
14
<PAGE>
180 days from the date of the Prospectuses without the prior written
consent of the Global Coordinator.
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the rules and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by
the NASD or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which persons
will need to be so restricted. At the request of the Underwriters, the
Company will direct the transfer agent to place a stop transfer restriction
upon such securities for such period of time. Should the Company release,
or seek to release, from such restrictions any of the Reserved Securities,
the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the fees and disbursements of counsel for the Underwriters in connection
therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriters of copies
of each preliminary prospectus and of the Prospectuses and any amendments or
supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the fees and disbursements of counsel to
the Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the listing of
the Securities on the New York Stock Exchange, (xi) the fees and disbursements
of O'Melveny & Myers LLP for legal due diligence with respect to Company's
Intellectual Property and contractual rights to films and television programs in
the Library (as defined in the Registration Statement), and (xii) all costs and
expenses of the Underwriters, including the fees
15
<PAGE>
and disbursements of counsel for the Underwriters, in connection with matters
related to the Reserved Securities which are designated by the Company for sale
to employees and others having a business relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the Lead
Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the International Managers for all of their
out-of-pocket expenses, including the fees and disbursements of counsel for the
International Managers.
SECTION 5. Conditions of International Managers' Obligations. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any
Subsidiary of the Company delivered pursuant to the provisions hereof, to the
performance by the Company of its covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
International Managers. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 424(b)
(or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule
430A).
(b) Opinion of Counsel for Company. At Closing Time, the Lead
Managers shall have received the favorable opinion, dated as of Closing
Time, of Gibson, Dunn & Crutcher LLP, counsel for the Company, in form and
substance satisfactory to counsel for the International Managers, together
with signed or reproduced copies of such letter for each of the other
International Managers to the effect set forth in Exhibit A hereto and to
such further effect as counsel to the International Managers may reasonably
request. In giving such opinion such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of
New York, the State of California, the federal law of the United States and
the General Corporation Law of the State of Delaware, upon the opinions of
counsel satisfactory to the U.S. Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of
the Company and its subsidiaries and certificates of public officials.
(c) Opinions of Counsel and Special Counsel for the Underwriters.
(i) Opinion of Counsel for Underwriters. At Closing Time, the
Lead Managers shall have received the favorable opinion, dated as
of Closing Time, of O'Melveny & Myers LLP, counsel for the
International Managers, together with signed or reproduced copies
of such letter for each of the other
16
<PAGE>
International Managers, with respect to the matters set forth in
clauses (i), (v), (vi) (solely as to preemptive or other similar
rights arising under the charter or bylaws of the Company),
(viii) through (xi), inclusive, (xiii) (solely as to the
information in the Prospectus under "Description of Capital
Stock--Common Stock") and the penultimate paragraph of Exhibit A
hereto (except with respect to any description or interpretation
of the WHV Agreement or any dispute relating thereto). In giving
such opinion such counsel may rely, as to all matters governed by
the laws of jurisdictions other than the law of the State of New
York, the State of California, the federal law of the United
States and the General Corporation Law of the State of Delaware,
upon the opinions of counsel satisfactory to the Lead Managers.
Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(ii) Letter from Special Counsel for Underwriters. At Closing
Time, the Lead Managers shall have received a letter, dated as of the
Closing Time, from Cahill Gordon & Reindel, special counsel for the
International Managers, together with signed or reproduced copies of
such letter for each of the other International Managers in the form
of Exhibit A2 hereto.
(e) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, assets,
properties, business affairs or, to the knowledge of the Company, business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Lead
Managers shall have received a certificate of the Vice Chairman or a Senior
Executive Vice President of the Company and of the Chief Financial Officer
of the Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force
and effect as though expressly made at and as of Closing Time, (iii) the
Company has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been instituted or
are pending or, to the knowledge of the Company, are contemplated by the
Commission.
(f) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Lead Managers shall have received from each of Arthur
Andersen LLP, Price Waterhouse LLP and KPMG Peat Marwick LLP a letter dated
such date, in form and substance satisfactory to the Lead Managers,
together with signed or reproduced copies of such letters for each of the
other International Managers containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectuses.
17
<PAGE>
(g) Bring-down Comfort Letter. At Closing Time, the Lead Managers
shall have received from each of Arthur Andersen LLP, Price Waterhouse LLP
and KPMG Peat Marwick LLP a letter, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letters furnished pursuant to
subsection (e) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to Closing Time.
(h) Approval of Listing. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(i) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(j) Lock-up Agreements. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(k) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.
(l) Tracinda Purchase. Contemporaneously with the purchase by the
International Managers of the Initial International Securities under this
Agreement, Tracinda shall have made the Tracinda Purchase and all executed
copies of all documents relating to the Tracinda Purchase shall have been
delivered to the Lead Managers.
(m) Conditions to Purchase of International Option Securities. If the
International Managers exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the International Option
Securities, the representations and warranties of the Company contained
herein and the statements in any certificates furnished by the Company or
any subsidiary of the Company hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the Lead
Managers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the Vice Chairman or a Senior Executive Vice President of
the Company and of the Chief Financial Officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
Gibson, Dunn & Crutcher LLP, counsel for the Company, in form and
substance satisfactory to counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(b) hereof.
(iii) Opinion of Counsel for International Managers. The
favorable opinion of O'Melveny & Myers LLP, counsel for the
International Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on
18
<PAGE>
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from each of Arthur
Andersen LLP, Price Waterhouse LLP and KPMG Peat Marwick LLP, in form
and substance satisfactory to the Lead Managers and dated such Date of
Delivery, substantially in the same form and substance as the letters
furnished to the Lead Managers pursuant to Section 5(f) hereof, except
that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date
of Delivery.
(n) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the International Managers shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection
with the issuance and sale of the Securities as herein contemplated shall
be satisfactory in form and substance to the Lead Managers and counsel for
the International Managers.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant Option Securities may be terminated by the Lead
Managers by notice to the Company at any time at or prior to Closing Time
or such Date of Delivery, as the case may be, and such termination shall
be without liability of any party to any other party except as provided in
Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such
termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers.
(1) The Company and each Signatory Subsidiary, jointly and severally,
agrees to indemnify and hold harmless each International Manager and each
person, if any, who controls any International Manager within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading
or arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectuses
(or any amendment or supplement thereto), or the omission
19
<PAGE>
or alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of foreign jurisdictions in connection with the offer
or sale of Reserved Securities and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in Australia, Canada, France, and
the United Kingdom in connection with the reservation and sale of the
Reserved Securities to eligible employees of, and persons having business
relationships with, the Company or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the Prospectuses or preliminary
prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation of
the nature referred to in Section 6(a)(1)(ii)(A) hereof; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission or in
connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, if applicable, or any preliminary prospectus or the International
Prospectus (or any amendment or supplement thereto) and provided further that
the Company will not be liable to a International Manager with respect to any
preliminary international prospectus or International Prospectus (or any
amendments or supplements thereto) to the extent that the Company shall sustain
the burden of proving that any such loss, liability, claim, damage or expense
resulted from the fact that such International Manager, in contravention of a
requirement of this Agreement or applicable law, sold International Securities
to a person to whom such International Manager failed to send or give, at or
prior to the written confirmation of the sale of such Securities to such person,
a copy of the applicable prospectus (as then amended or supplemented if the
Company has furnished any amendments or supplements thereto) if the Company has
previously furnished a copy of such prospectus (or amendment or supplement
thereto) to such International Manager sufficiently in
20
<PAGE>
advance of such confirmation date to allow for distribution by such date and the
loss, liability, claim, damage or expense of such International Manager resulted
from an untrue statement or omission or alleged untrue statement or omission of
a material fact contained in or omitted from any previously delivered
preliminary international prospectus or International Prospectus (or amendment
or supplement thereto) which was corrected in such prospectus as amended or
supplemented prior to such confirmation.
(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
NASD in connection with the offering of the International Securities except to
the extent resulting primarily from the bad faith or gross negligence of the
Independent Underwriter.
(b) Indemnification of Company, Directors and Officers. Each International
Manager severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a)(1) of this Section, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, if applicable, or any preliminary international prospectus or the
International Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by such
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the International Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances; provided, that, if
21
<PAGE>
indemnity is sought pursuant to Section 6(a)(2), then, in addition to the fees
and expenses of such counsel for the indemnified parties, the indemnifying party
shall be liable for the fees and expenses of not more than one counsel (in
addition to any local counsel) separate from its own counsel and that of the
other indemnified parties for the Independent Underwriter in its capacity as a
"qualified independent underwriter" and all persons, if any, who control the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of 1934 Act in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances if, in the reasonable judgment of the Independent
Underwriter, there may exist a conflict of interest between the Independent
Underwriter and the other indemnified parties. Any such separate counsel for
the Independent Underwriter and such control persons of the Independent
Underwriter shall be designated in writing by the Independent Underwriter. No
indemnifying party shall, without the prior written consent of the indemnified
parties (which consent shall not be unreasonably delayed or withheld), settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(ii) or Section 6(a)(1)(iii) effected without its written consent
if (i) such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 45 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement. Notwithstanding the immediately preceding
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, an indemnifying party shall not be liable for any settlement of the
nature contemplated by Section 6(a)(1)(ii) or Section 6(a)(1)(iii) effected
without its consent if such indemnifying party (i) reimburses such indemnified
party in accordance with such request to the extent it considers such request to
be reasonable and (ii) provides written notice to the indemnified party
substantiating the unpaid balance as unreasonable, in each case prior to the
date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of eligible employees of, and persons having business
relationships with, the Company to pay for and accept delivery of Reserved
Securities which, by the end of the first business day following the date of
this Agreement, were subject to a properly confirmed agreement to purchase.
22
<PAGE>
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the International Managers on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions or in connection with any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof, which resulted in such losses, liabilities,
claims, damages or expenses, as well as any other relevant equitable
considerations.
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus.
The relative fault of the Company on the one hand and the International
Managers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the International Managers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission or any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof.
The Company and the International Managers agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the International Managers were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Managers has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
23
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Managers within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any International Manager or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities to the International Managers, provided that in no
event shall this Section 9 be construed as a waiver by the Company of any
applicable statute of limitations.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this Agreement,
by notice to the Company, at any time at or prior to Closing Time (i) if there
has been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the International Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, assets, properties, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Lead Managers, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and
24
<PAGE>
provided further that Sections 1, 6, 7 and 8 shall survive such termination and
remain in full force and effect.
SECTION 10. Default by One or More of the International Managers. If one
or more of the International Managers shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Lead Managers shall have
the right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting International Managers, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the Lead
Managers shall not have completed such arrangements within such 24-hour period,
then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of
the non-defaulting International Managers shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the International Managers to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any non-
defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for an International Manager under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at North Tower,
World Financial Center, New York, New York 10281-1201, and 10900 Wilshire
Boulevard, Suite 900, Los Angeles, California 90024, attention of Mr. John
Curran and Ms. Cara Londin, with a copy to O'Melveny & Myers LLP, 1999 Avenue of
the Stars, Suite 700, Los Angeles, California 90067, attention of Kendall
Bishop, Esq.; and notices to the Company shall be directed to it at 2500
Broadway Street, Santa Monica, California 90404, attention of David Johnson,
25
<PAGE>
Esq., with a copy to Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los
Angeles, California 90071, attention of Bruce Meyer, Esq.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the International Managers and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the International Managers and the Company and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the International Managers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any International Manager shall be deemed to be a successor by reason
merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
26
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the International Managers and the Company in accordance with its terms.
<TABLE>
<S> <C>
Very truly yours,
METRO-GOLDWYN-MAYER INC.
By
Title:
GOLDWYN ENTERTAINMENT COMPANY
By
Title:
METRO-GOLDWYN-MAYER STUDIOS INC.
By
Title:
ORION PICTURES CORPORATION
By
Title:
UNITED ARTISTS CORPORATION
By
Title:
</TABLE>
27
<PAGE>
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
BEAR, STEARNS INTERNATIONAL LIMITED
FURMAN SELZ LLC
By
Authorized Signatory
For themselves and as Lead Managers of the
other International Managers named in Schedule A hereto.
28
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
International
Name of International Manager Securities
<S> <C>
Merrill Lynch International.................
J.P. Morgan Securities Ltd..................
Bear, Stearns International Limited.........
Furman Selz LLC.............................
Total ..................................... 1,800,000 [1]
</TABLE>
SCH A - 1
<PAGE>
SCHEDULE B
METRO-GOLDWYN-MAYER INC.
1,800,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the International Securities to
be paid by the several International Managers shall be $., being an amount
equal to the initial public offering price set forth above less $. per
share; provided that the purchase price per share for any International
Option Securities purchased upon the exercise of the over-allotment option
described in Section 2(b) shall be reduced by an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial International Securities but not payable on the International
Option Securities.
SCH B - 1
<PAGE>
SCHEDULE C
Frank G. Mancuso
A. Robert Pisano
James D. Aljian
Michael R. Gleason
Kirk Kerkorian
Kerry M. Stokes
Jerome B. York
Michael G. Corrigan
David G. Johnson
William A. Jones
Tracinda Corporation
Miltonstar Property
Celsus Financial Corp.
John P. Symes
Lawrence D. Gleason
Richard B. Cohen
SCH C - 1
<PAGE>
Exhibit A1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
Section 5(b)
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which the
ownership or leasing of its property or the conduct of its business require such
qualification, except where the failure so to qualify or to be in good standing
would not result in a material adverse effect on the condition, financial or
otherwise, or on the earnings, assets, properties, or business of the Company
and its subsidiaries, considered as one enterprise (a "Material Adverse
Effect").
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Pro Forma"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the U.S. Purchase Agreement and the International Purchase Agreement
or pursuant to reservations, agreements or employee benefit plans referred to in
the Prospectuses, or pursuant to the Tracinda Purchase, or pursuant to the
exercise of convertible securities or options referred to in the Prospectuses
and except for the "Series A Preferred Stock Conversion" and the "Stock Split"
(as such terms are defined in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid, non-assessable and owned of record by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien or encumbrance; and none of the outstanding shares of
capital stock of the Company was issued in violation of any preemptive or other
similar rights of any securityholder of the Company which may exist under the
certificate of incorporation or bylaws of the Company or under the agreements
that have been filed as exhibits to the Registration Statement.
(v) The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement respectively, and, when issued and delivered by
the Company pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement respectively, against payment of the consideration set forth
in the U.S. Purchase Agreement and the International Purchase Agreement, will be
validly issued and fully paid and non-assessable and no holder of the Securities
is or will be subject to personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to any preemptive
or other similar rights of any securityholder of the Company which may exist
under the certificate of incorporation or
A1-1
<PAGE>
bylaws of the Company or under the agreements that have been filed as exhibits
to the Registration Statement.
(vii) Each of the subsidiaries of the Company listed on Exhibit 21 to
Amendment No. 1 to the Registration Statement which have been incorporated under
the laws of Delaware or New York (the "U.S. Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectuses and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which the
ownership or leasing of its property or the conduct of its business require such
qualification, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; except as otherwise disclosed in
the Registration Statement, all of the issued and outstanding capital stock of
each U.S. Subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and, to the best of our knowledge, is owned of record by, and
to the best of our knowledge beneficially owned by, the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage, pledge,
lien or encumbrance; none of the outstanding shares of capital stock of any U.S.
Subsidiary was issued in violation of any preemptive or similar rights of any
securityholder of such U.S. Subsidiary which may exist under the certificate of
incorporation or bylaws of such U.S. Subsidiary or under agreements that have
been filed as exhibits to the Registration Statement.
(viii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(ix) The Registration Statement[, including any Rule 462(b)
Registration Statement,] has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, no stop order suspending the effectiveness of the Registration
Statement [or any Rule 462(b) Registration Statement] has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission.
(x) The Registration Statement[, including any Rule 462(b)
Registration Statement,] and the Rule 430A Information [, as applicable], the
Prospectuses and each amendment or supplement to the Registration Statement and
Prospectuses as of their respective effective or issue dates (other than the
financial statements and supporting schedules and other financial data included
therein or omitted therefrom, as to which we need express no opinion) complied
as to form in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations.
(xi) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements and
with any applicable requirements of the charter and by-laws of the Company.
(xii) Except for the matters described in the Prospectuses, to the
best of our knowledge, there is not pending or threatened any action, suit,
proceeding, inquiry or investigation, to which the Company or any subsidiary is
a party, or to which the property of the Company or any subsidiary is subject,
before or brought by any court or governmental agency or body, that is required
to be disclosed in the Prospectuses pursuant to the
A1-2
<PAGE>
1933 Act and the 1933 Act Regulations and that is not so disclosed or which
might reasonably be expected to materially and adversely affect the
enforceability of the U.S. Purchase Agreement and the International Purchase
Agreement.
(xiii) The information in the Prospectuses under "Risk Factors -
Ownership and Control of Principal Stockholders," "Risk Factors - Possible Anti-
Takeover Effect of Certain Charter Provisions," "Risk Factors - Shares Eligible
for Future Sale," "Description of Capital Stock--Common Stock", "Management -
Limitation of Liability and Indemnification Matters," "Description of Capital
Stock," "Ownership of Voting Securities - Investors Shareholder Agreement,"
"Ownership of Voting Securities - Shareholders Agreement," and "Shares Eligible
for Future Sale" and in the Registration Statement under Item 14, to the extent
that it constitutes matters of law, summaries of legal matters, the Company's
charter and by-laws or legal conclusions, has been reviewed by us and is correct
in all material respects.
(xiv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are not
described as required.
(xv) To the best of our knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed as exhibits thereto, and the descriptions thereof or references thereto
are correct in all material respects.
(xvi) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and, except as described in
the Registration Statement and except for such defaults that would not result in
a Material Adverse Effect, no default by the Company or any Subsidiary exists in
the due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is filed as an
exhibit to the Registration Statement.
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency (other than under the 1933 Act and the 1933 Act Regulations,
which have been obtained, or as may be required under the securities or blue sky
laws of the various states, as to which we need express no opinion) is necessary
or required in connection with the due authorization, execution and delivery of
the U.S. Purchase Agreement and the International Purchase Agreement or for the
offering, issuance, sale or delivery of the Securities.
(xviii) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement and the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of Proceeds")
and compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not, and (other than the
indemnification and contribution provisions thereof, as to which we express no
opinion) will not, whether with or without the giving of notice or lapse of time
or both,
A1-3
<PAGE>
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreements) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, that has been filed as an exhibit to the Registration
Statement and to which the Company or any subsidiary is a party or by which it
or any of them may be bound or to which any of the property or assets of the
Company or any subsidiary is subject (except for such conflicts, breaches or
defaults or Repayment Events or liens, charges or encumbrances that would not
have a Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any U.S. Subsidiary,
or (other than (a) the federal securities laws and regulations, except to the
extent specifically set forth herein, or (b) the securities or blue sky laws of
the various states of the United States of America, as to which we express no
opinion, and except for such violations that would not have a Material Adverse
Effect) any applicable law, statute, rule, regulation, judgment, order, writ or
decree, known to us, of any government, government instrumentality or court
having jurisdiction over the Company or any Subsidiary or any of their
respective properties, assets or operations.
(xix) Except as discussed in the Registration Statement, to the best
of our knowledge, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
(xx) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Such opinion shall also state as follows:
During the course of preparation of the Registration Statement and the
Prospectuses, we participated in conferences with representatives of the Company
and their independent accountants and your representatives and your counsel, at
which conferences the contents of the Registration Statement and the
Prospectuses and related matters were discussed. Except as specifically noted
herein, we are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectuses and we make no representation, express or
implied, that we have independently verified the accuracy, completeness or
fairness of such statements. However, based on and subject to the foregoing,
nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information (if applicable), (except for financial statements, schedules and
other financial data included therein or omitted therefrom or information
derived from the foregoing, as to which we need make no statement), at the time
such Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectuses or any amendment or supplement thereto (except for
financial statements, schedules and other financial data included therein or
omitted therefrom or information derived from the foregoing, as to which we need
make no statement), at the time the Prospectuses were issued, at the time any
such amended or supplemented prospectus was issued or at the Closing Time,
included or includes an untrue statement of a material fact or omitted or omits
to state a
A1-4
<PAGE>
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
A1-5
<PAGE>
Exhibit A2
[ ], 1997
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
J.P. Morgan Securities Inc.
Bear, Stearns & Co. Inc.
Furman Selz LLC
as U.S. Representatives of the several
U.S. Underwriters listed on Schedule A
to the U.S. Purchase Agreement referred to below
Merrill Lynch International
J.P. Morgan Securities Ltd.
Bear, Stearns International Ltd.
Furman Selz LLC
as Lead Managers of the several International
Managers listed on Schedule A to the U.S. Purchase
Agreement referred to below
Re: Metro-Goldwyn-Mayer Inc. - Initial
Public Offering of Common Stock
Ladies and Gentlemen:
This letter is being furnished to you pursuant to (1) Section [ ]
of the U.S. Purchase Agreement dated as of November [ ], 1997 (the "U.S.
Purchase Agreement") by and among Merrill Lynch, Pierce, Fenner & Smith
Incorporated, J.P. Morgan Securities Inc. Bear, Stearns & Co. Inc., and Furman
Selz LLC as U.S. Representatives of the several U.S. Underwriters listed on
Schedule A thereto ("the U.S. Underwriters"), and Metro-Goldwyn-Mayer Inc., as
issuer (the "Company"), relating to the issuance and sale by the Company to the
U.S. Underwriters today of an aggregate of [ ] shares of common stock, par value
$.01 per share (the "Common Stock"), of the Company, and (2) Section [ ] of the
International Purchase Agreement dated as of November [ ], 1997 (the
"International Purchase Agreement"; together with the U.S. Purchase Agreement,
the "Purchase Agreements") by and among Merrill Lynch, Pierce, Fenner & Smith
International, J.P. Morgan Securities Ltd., Bear, Stearns International Limited
and Furman Selz LLC, as Lead Managers of the International Managers listed on
Schedule A thereto (the "International Managers"), and the Company relating to
the issuance and sale by the Company to
<PAGE>
the International Managers today of an aggregate of [ ] shares of Common
Stock. Capitalized terms used herein without definition have the meanings
specified in the Purchase Agreements.
In connection with this letter, we have examined originals,
photocopies or conformed copies certified to our satisfaction of all such
agreements, instruments and documents of the Company and its subsidiaries as we
have deemed appropriate and have made such other investigations as we have
deemed appropriate in connection with the statements set forth herein. In our
examination, we have assumed (a) the authenticity of all documents submitted to
us as originals, (b) the conformity to the original documents of all documents
submitted to us as copies and (c) the genuineness of all signatures on all
documents submitted to us. We have relied, as to certain factual matters, on
certificates of officers of the Company and upon representations and warranties
set forth in the Purchase Agreements.
At your request, we have reviewed (a) that certain Video Rights
Agreement, dated November 1, 1990, by and among Pathe Communications
Corporation, MGM-Pathe Communications Corporations, MGM/UA Communications Co.,
and UA Pictures, Inc. and their affiliated entities, and Warner Home Video, Inc.
(collectively, the "Parties"), as amended by the First Audit Settlement
Agreement, dated April 1, 1995, between the Parties (or their successors-in-
interest), and the exhibits and schedules to each of the foregoing
(collectively, the "WHV Agreement"), and (b) the descriptions of the WHV
Agreement and any disputes relating thereto set forth in the Prospectuses and
the Registration Statement (collectively, the "Disclosures"). We have also
participated in telephonic conferences with certain officers and other
representatives of the Company having familiarity with the WHV Agreement and the
home video business of the Company and its subsidiaries to discuss the WHV
Agreement and related matters. Given the limitations inherent in the role of
outside counsel and the character of determinations involved in the preparation
of the Disclosures, we are not passing upon and do not assume any responsibility
for the accuracy, completeness or fairness of the Disclosures and have made no
independent check or verification thereof. Subject to the foregoing, no facts
have come to our attention that cause us to believe that the Disclosures in the
Registration Statement at the time it became effective or as of the Closing Time
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Disclosures in the Prospectuses as of their
respective dates or as of the Closing Time contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
Disclosures, in the light of the circumstances under which they were made, not
misleading (it being understood that we express no belief with respect to any
financial or statistical data found in or related to the Disclosures or as to
whether the WHV Agreement should or should not be filed as an exhibit to the
Registration Statement).
Neither this letter nor any part hereof may be delivered to, used or
relied upon by any person other than the U.S. Underwriters and the International
Managers without our prior written consent.
A2-2
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(i)]
Exhibit B
November __, 1997
MERRILL LYNCH INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
BEAR, STEARNS INTERNATIONAL LIMITED
FURMAN SELZ LLC
as Lead Managers of the several
International Managers to be
named in the within-mentioned
International Purchase Agreement
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC24 9L4
England
Re: Proposed Public Offering by Metro-Goldwyn-Mayer, Inc.
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of
Metro-Goldwyn-Mayer Inc., a Delaware corporation (the "Company"), understands
that Merrill Lynch International ("Merrill Lynch"), J.P. Morgan Securities,
Ltd., Bear, Stearns International Limited and Furman Selz LLC propose to enter
into a Purchase Agreement (the "International Purchase Agreement") with the
Company providing for the public offering of shares (the "Securities") of the
Company's common stock, par value $.01 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder [an officer and/or director] of the Company, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned agrees with each underwriter to be
named in the International Purchase Agreement that, during a period of 180 days
from the date of the International Purchase Agreement, the undersigned will not,
without the prior written consent of Merrill Lynch, directly or indirectly, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of
B-1
<PAGE>
the Common Stock, whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.
[Insert in Tracinda lock-up; provided, however, that the U.S. Representatives
acknowledge that the undersigned has pledged and may pledge in the future any
such shares of the Company's Common Stock now or hereafter owned by the
undersigned pursuant to its existing and any future pledge or loan agreements.
[Insert in Tracinda and Seven lock-up; provided, however, that the undersigned
may transfer, or grant options to purchase, up to an aggregate of [145,834] of
such shares of Common Stock to the undersigned's directors, officers, employees
and affiliates so long as such transferee or optionee agrees in writing to be
bound by a letter agreement substantially in the form of this Letter Agreement.]
Very truly yours,
Signature:
Print Name:
B-2
<PAGE>
EXHIBIT 5.1
November 7, 1997
60385-00023
Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, California 90404
Re: Metro-Goldwyn-Mayer Inc. - Registration Statement on Form S-1
(Registration No. 333-35411)
Gentlemen:
We have acted as counsel for Metro-Goldwyn-Mayer Inc., a Delaware
corporation (the "Company"), in connection with the registration by the Company
of shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), pursuant to the above-referenced Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Act). The Company proposes to issue and sell the Common Stock to a group of
underwriters (the "Underwriters") represented by Merrill Lynch & Co. and J.P.
Morgan & Co. for offering to the public.
On the basis of such investigation as we have deemed necessary, we are of
the opinion that (i) the Common Stock has been duly authorized and (ii) when
issued and sold in accordance with the terms of the Registration Statement and
the Purchase Agreements between the Company and the Underwriters, substantially
in the form filed as an exhibit to the Registration Statement, the Common Stock
will be legally issued, fully paid and nonassessable.
<PAGE>
Metro-Goldwyn-Mayer Inc.
November 7, 1997
Page 2
The Company is a Delaware corporation. We are not admitted to practice in
Delaware. However, we are familiar with the Delaware General Corporation Law and
have made such review thereof as we consider necessary for the purpose of this
opinion. Subject to the foregoing, this opinion is limited to the present laws
of the State of Delaware and the State of California, and to the present federal
laws of the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" contained in the prospectus that forms a part of the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Act or the General Rules and Regulations of the Securities and Exchange
Commission.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
PFZ:GLS:LMF
<PAGE>
EXHIBIT 10.4
MODIFICATION AND CANCELLATION AGREEMENT
This Modification and Cancellation Agreement (this "Agreement") is entered
into as of November 5, 1997 by Metro-Goldwyn-Mayer Inc., a Delaware corporation
formerly known as P&F Acquisition Corp. ("MGM"), Metro-Goldwyn-Mayer Studios
Inc., a Delaware corporation formerly known as Metro-Goldwyn-Mayer Inc.
("Studios" and, collectively with MGM, the Company), and the person whose name
appears on the signature page of this Agreement ("Participant").
SECTION 1. ORIGINAL PLAN
The Company has a 1996 Management Stock Option and Bonus Plan (the
"Original Plan"), with which Participant is familiar.
SECTION 2. CONTEMPLATED INITIAL PUBLIC OFFERING; OTHER CONDITIONS
(a) MGM is contemplating an initial public offering (the "IPO"). In
connection with the IPO, MGM believes it is advisable to (i) amend and restate
the Original Plan (the "Amendment and Restatement") so that it reads as set
forth in Attachment II to this Agreement (as so amended and restated, the
"Amended and Restated Plan") and (ii) effect the cancellations of Series A
Options, Series B Options and bonus interests issued to Participant under the
Original Plan pursuant to a Non-Qualified Stock Option and Bonus Agreement (the
"Non-Qualified Stock Option and Bonus Agreement") that are contemplated by this
Agreement and similar Modification and Cancellation Agreements.
(b) The Amendment and Restatement and the cancellation of Series A
Options, Series B Options and bonus interests provided for in this Agreement
will not become effective unless the following conditions (the "Conditions") are
satisfied on or before March 31, 1998:
(i) The holders of at least a majority in interest of the Series A
Options, Series B Options and bonus interests issued under the
Original Plan, MGM and Studios have entered into Modification
and Cancellation Agreements similar to this Agreement;
(ii) The Amendment and Restatement has been approved by the holders
of 75% of the outstanding shares of Common Stock (the "Common
Shares") of MGM;
(iii) Tracinda, Seven and MGM have entered into an Inducement
Agreement, in the form of Attachment I to this Agreement (the
"Inducement Agreement"), with Participant and the other holders
of Series A Options, Series B Options and bonus interests under
the Original Plan who have entered into Modification and
Cancellation Agreements similar to this Agreement; and
(iv) It is contemplated that an Underwriting Agreement (the
"Underwriting Agreement") for the IPO will be signed within one
day, such contemplation to be evidenced by a certificate signed
by Frank G. Mancuso or A. Robert Pisano and
<PAGE>
delivered to MGM, which certificate, when signed and delivered,
will conclusively evidence such approval and contemplation.
SECTION 3. PARTICIPANT'S SERIES A OPTIONS, SERIES B OPTIONS
AND BONUS INTERESTS UNDER THE ORIGINAL PLAN
(a) Participant represents and warrants to the Company that Participant
has not sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner any of the Series A Options, Series B Options or bonus
interests granted or issued to Participant under the Original Plan or any
interest therein. Participant agrees that the Company is relying on this
representation in entering into and effecting the agreements it is making in
this Agreement and in connection with the IPO.
(b) The Company represents and warrants to Participant that, subject to
the satisfaction of the Conditions and to the approval by the shareholders of
MGM of the Senior Management Bonus Plan, it has adopted a Senior Management
Bonus Plan, a copy of which is Attachment III to this Agreement (the "Bonus
Plan").
SECTION 4. CERTAIN AGREEMENTS
Subject to and effective upon fulfillment of the Conditions and prior to
the execution and delivery of the Underwriting Agreement:
(i) Participant and the Company agree to the Amendment and
Restatement and the Amended and Restated Plan will become
effective;
(ii) The Bonus Plan will become effective, subject to the approval of
the Bonus Plan by the shareholders of the MGM;
(iii) The Non-Qualified Stock Option and Bonus Agreement under the
Original Plan, entered into between the Company and Participant,
will terminate;
(iv) The Stock Option Agreement pursuant to the Amended and Restated
Plan, in the form of Attachment IV to this Agreement (the "Stock
Option Agreement"), will (x) be executed and delivered by
Participant and MGM and (y) provide for Participant to have,
under the Amended and Restated Plan and the Stock Option
Agreement, the Series A Option and Series B Option set forth in
Section 11 hereof; and
(v) The Bonus Interest Agreement, in the form of Attachment V to
this Agreement (the "Bonus Interest Agreement"), will (x) be
executed and delivered by Participant, MGM and Studios and (y)
subject to the approval of the Bonus Plan by the shareholders of
MGM, provide to Participant, under the Bonus Plan and the Bonus
Interest Agreement, the Bonus Interests set forth in Section 11
hereof.
2
<PAGE>
SECTION 5. ANTIDILUTION ADJUSTMENT
Prior to or concurrent with the consummation of the IPO, MGM will effect,
in one or more transactions, a net stock split of the Common Shares whereby each
Common Share will be divided into 41.667 Common Shares (the "Stock Split"). As
a result of the Stock Split, the following changes (the "Antidilution
Adjustment") will be made pursuant to the antidilution provisions of (x) the
Amended and Restated Plan and the Bonus Plan and (y) the Stock Option Agreement
and the Bonus Plan Agreement:
(i) Under the Amended and Restated Plan, the number of Common Shares
in Section 4 thereof, as in effect prior to the Antidilution
Adjustment, will be multiplied by the Stock Split, and by virtue
of the Antidilution Adjustment, the 195,000 number in Section 4
of the Amended and Restated Plan will become 8,125,065.
(ii) Under the Stock Option Agreement, the price at which Series A
Options and Series B Options thereunder (together, the
"Options") may be exercised will be divided by the Stock Split
and the number of Common Shares which may be purchased pursuant
to Options will be multiplied by the Stock Split. By way of
illustration, if, prior to the Antidilution Adjustment, a person
would have held Options to purchase 2,000 Common Shares for an
Option exercise price of $1,000 per share under the Stock Option
Agreement by virtue of the Antidilution Adjustment, those
Options will become Options under the Stock Option Agreement to
purchase 83,334 post-Stock Split Common Shares for an Option
exercise price of $24 per share;
(iii) Under the Bonus Plan, the $1,000 amount in Section 4 thereof, as
in effect prior to the Antidilution Adjustment, will be divided
by the Stock Split, and by virtue of the Antidilution
Adjustment, that $1,000 amount will become $24;
(iv) Under the Bonus Plan, the 58,095 Bonus Interests and 20,000
Bonus Interests referred to in Section 5 of the Bonus Plan will
be adjusted to 2,420,686 Bonus Interests and 833,340 Bonus
Interests, respectively; and
(v) Under the Bonus Interest Agreement, the $1,000 and $2,000
amounts in Section 5 thereof, the $1,000 amount in Section 7
thereof and each of the dollar amounts in Section 8 thereof, in
each case as in effect prior to the Antidilution Adjustment,
will be divided by the Stock Split, and by virtue of the
Antidilution Adjustment, the $1,000 and $2,000 amounts will
become $24 and $48, respectively, and the other dollar amounts
in Section 8 of the Bonus Plan Agreement will be divided by
41.667.
All dollar amounts changed as a result of the Antidilution Adjustment will be
rounded to the nearest penny. After the Antidilution Adjustment, all further
antidilution adjustments, if any, will be made in accordance with the terms of
the Amended and Restated Plan, Stock Option Agreement, Bonus Plan and Bonus
Interest Agreement, as applicable.
3
<PAGE>
SECTION 6. LIMITED POWER OF ATTORNEY
(a) Participant, MGM and Studios recognize the potential difficulties of
having the Stock Option Agreement and Bonus Interest Agreement signed by
Participant and similar agreements being signed by other persons in a relatively
short period of time. Accordingly, the limited power of attorney provided for
below is granted by Participant.
(b) Participant hereby appoints Frank G. Mancuso and A. Robert Pisano, or
either of them, with full power of substitution, as Participant's true and
lawful Attorney, for participant and in Participant's place and stead, to
execute and deliver, for Participant and in Participant's name -- but in each
case subject to the satisfaction of the Conditions and after the Antidilution
Adjustment and completion of the information specified in, and in accordance
with, the footnotes thereto -- the Inducement Agreement, Stock Option Agreement
and Bonus Interest Agreement.
(c) This limited power of attorney is coupled with an interest, is
irrevocable and will survive the death, incapacity or termination of employment
of Participant, provided that this limited power of attorney will terminate on
the earlier to occur of (x) the execution and delivery by Participant, including
pursuant to this limited power of attorney, of both the Stock Option Agreement
and Bonus Interest Agreement or (y) March 31, 1998.
SECTION 7. AGREEMENT NOT REVOCABLE; SUCCESSORS, SPECIFIC PERFORMANCE AND OTHER
EQUITABLE REMEDIES; NO OBLIGATION TO COMPLETE IPO
(a) None of MGM, Studios or Participant may revoke or rescind this
Agreement, which shall survive the death, incapacity or termination of
employment of Participant. This Agreement will be binding on MGM, Studios,
Participant and their respective successors and assigns, however such succession
or assignment is effected (including, without limitation, by the laws of
descent, distribution and conservatorship, sale, assignment, conveyance, gift,
pledge, hypothecation or otherwise).
(b) The parties to this Agreement will, in addition to damages or other
remedies at law for breach, default or misrepresentation, as appropriate, be
entitled to equitable remedies, including specific performance, for breach of
prospective breach of this Agreement.
(c) Notwithstanding anything to the contrary in this Agreement, MGM has no
obligation to effect or endeavor to effect the IPO.
SECTION 8. NO EMPLOYMENT RIGHTS
Subject to the provisions of any written employment agreement between
Participant and MGM, Studios or a subsidiary of either, no provision of this
Agreement or the Attachments to this Agreement (i) confers upon Participant any
right to continue in the employ of the Company or any of its subsidiaries, (ii)
affects the right of the Company and each of its subsidiaries to terminate the
employment of Participant, with or without "Cause" (as defined in the Stock
Option Agreement and the Bonus Interest Agreement) and for any reason or without
reason, or (iii) confers on Participant any right to participate in any employee
welfare or benefit plan or
4
<PAGE>
other program of the Company or any of its subsidiaries other than as explicitly
provided in this Agreement and the Attachments to this Agreement. Participant
acknowledges and agrees that, subject to any written employment agreement
between Participant and any of MGM, Studios or a subsidiary of MGM or Studios,
the Company and each of its subsidiaries may terminate the employment of
Participant at any time (x) with or without Cause and (y) for any reason or for
no reason.
SECTION 9. GOVERNING LAW
Except with respect to Section 6 hereof, which is governed by and is to be
construed and enforced in accordance with the internal laws, and not the laws
pertaining to choice of conflict of laws, of the State of California and to the
extent provided in Section 10(c) hereof, this Agreement is governed by and is to
be construed and enforced in accordance with the internal laws, and not the laws
pertaining to choice or conflict of laws, of the State of Delaware.
SECTION 10. ARBITRATION OF DISPUTES
(a) Except as provided in Section 7(b) hereof, all disputes between
Participant and the Company, however significant, arising out of, relating in
any way to, or in connection with, this Agreement (including the validity, scope
and enforceability of this Section 10) will be settled only by an arbitration
(x) conducted in accordance with the then rules of the American Arbitration
Association or any similar successor body and (y) held in Los Angeles,
California.
(b) The arbitration will be held before a single arbitrator mutually
agreed to by the parties to the arbitration, except that, if the parties fail to
agree to an arbitrator within 20 days from the date on which the claimant's
request for arbitration is delivered to the other party(ies) to the arbitration,
the arbitration shall be held before an arbitrator appointed by the American
Arbitration Association.
(c) Discovery will be available in the arbitration proceedings pursuant to
the provisions of California Code of Civil Procedure Section 1283.05, which are
incorporated herein by this reference and made applicable to any arbitration
held pursuant to this Section 10.
(d) The award of the arbitrator will be made within 90 days from the date
on which the arbitrator is selected. The award of the arbitrator will be final
and, to the greatest extent allowed by law, the parties waive their right to any
form of appeal. The arbitrator must award costs and fees, including the fees of
the arbitrator, to the prevailing party. Judgment on any award of the
arbitrator may be entered in any court having jurisdiction or application may be
made to such court for the judicial acceptance of the award and for one or more
orders of enforcement.
SECTION 11. PARTICIPANT'S SERIES A OPTIONS,
SERIES B OPTIONS AND BONUS INTERESTS
The following sets forth, as provided this Agreement and the Attachments
hereto, upon satisfaction of the Conditions, but subject to the Antidilution
Adjustment, the Series A Options, Series B Options and Bonus Interests that
Participant will have under the Amended and Restated Plan, Stock Option
Agreement, Bonus Plan and Bonus Interest Agreement:
5
<PAGE>
<TABLE>
<CAPTION>
Series A Options Series B Options Bonus Interests
------------------------- -------------------------- --------------------------
Number Number Maximum
of Common of Common Amount
Shares Shares Receivable
subject to Exercise Subject to Exercise per Bonus
Options Price Options Price Number Interest
---------- -------- ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Amended and
Restated Stock ______ $1,000 ______ $1,000 N/A N/A
Option Plan and
Stock Option
Agreement
thereunder
Bonus Plan and
Bonus Interest N/A N/A N/A N/A _____ $1,000
Agreement
thereunder
</TABLE>
PARTICIPANT
---------------------------------------
[Name of Participant]
METRO-GOLDWYN-MAYER INC.
By:
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
METRO-GOLDWYN-MAYER STUDIOS INC.
By:
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
6
<PAGE>
ATTACHMENTS
-----------
Description Number
Inducement Agreement I
Amended and Restated Plan II
Senior Management Bonus Plan III
Stock Option Agreement IV
Bonus Interest Agreement V
7
<PAGE>
EXHIBIT 10.5
METRO-GOLDWYN-MAYERINC.
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
This Amended and Restated Stock 1996 Incentive Plan (the "Plan") of Metro-
Goldwyn-Mayer Inc., a Delaware corporation formerly known as P&F Acquisition
Corp. ("MGM"), is an amendment and restatement of the 1996 Management Stock
Option and Bonus Plan of MGM and Metro-Goldwyn-Mayer Studios Inc., a Delaware
corporation formerly known as Metro-Goldwyn-Mayer Inc.
SECTION 1. PURPOSE OF PLAN
The purpose of this Plan is to enable MGM and its subsidiaries to attract,
retain and motivate its and its subsidiaries' employees by providing for or
increasing the proprietary interests of those employees in MGM.
SECTION 2. PERSONS ELIGIBLE UNDER THE PLAN
Any employee of MGM or any of its subsidiaries (a "Participant") is
eligible for the grant of "Awards" (defined below).
SECTION 3. AWARDS
(a) Subject to Section 3(e) hereof, the "Committee" (defined below), on
behalf of MGM, is authorized under this Plan to enter into any type of
arrangement with a Participant that is not inconsistent with the provisions of
this Plan (including, without limitation, Stock Option Agreements in the form of
Exhibit A (the "Series A Option and Series B Option Stock Option Agreement"))
and that, by its terms, involves or might involve the issuance of (i) shares of
Common Stock of the Company ("Common Shares") or (ii) a "Derivative Security"
(as that term is defined in Rule 16a-1 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or successor rule, in each case as
it may be amended from time to time) with an exercise or conversion privilege at
a price related to the Common Shares or with a value derived from the value of
the Common Shares. The entering into of any such arrangement is referred to
below as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and may
include, without limitation, sales or bonuses of stock, restricted stock, stock
options, reload stock options, stock purchase warrants, other rights to acquire
stock, securities convertible into or redeemable for stock, stock appreciation
rights, phantom stock, dividend equivalents, performance units or performance
shares, and an Award may consist of one such security or benefit or two or more
of them in tandem or in the alternative.
(c) Awards may be issued, and Common Shares may be issued pursuant to
Awards, for any lawful consideration, as determined by the Committee, including,
without limitation, services rendered or to be rendered by recipients of Awards.
<PAGE>
(d) Subject to the provisions of this Plan, the Committee, in its sole and
absolute discretion, is to determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may include, among
other things, provisions:
(i) permitting the recipient of the Award to pay the purchase
price of the Common Shares or other property issuable pursuant to the
Award, or the recipient's tax withholding obligation with respect to the
issuance, in whole or in part, by any one or more of the following:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock of
the Company; or
(D) a reduction in the amount of Common Shares or other property
otherwise issuable pursuant to the Award.
(ii) specifying the exercise or settlement price for any option,
stock appreciation right or similar Award, or specifying the method by
which the price is determined, provided that the exercise or settlement
price of any option, stock appreciation right or similar Award that is
intended to qualify as "performance based compensation" under Section
162(m) (or successor provision), as it may be amended from time to time
("Section 162(m)"), of the Internal Revenue Code of 1986, as amended (the
"Code"), will not be less than the Fair Market Value of a Common Share on
the date the Award is granted and that the exercise price of any option
intended to qualify as an "incentive stock option" ("Incentive Stock
Option") under Section 422 of the Code (or successor provision) as amended
from time to time will not be less than the Fair Market Value of a Common
Share on the date the option is granted;
(iii) relating to the exercisability and vesting of Awards, lapse
or non-lapse restrictions on the Common Shares obtainable under Awards and
the termination, expiration or forfeiture of Awards;
(iv) restricting the transferability of Awards or Common Shares
issuable under Awards;
(v) conditioning or accelerating the receipt of benefits pursuant
to Awards, either automatically or in the discretion of the Committee, upon
the occurrence of specified events, including, without limitation,
continued employment by the Company, a change of control of the Company (as
defined by the Committee), an acquisition of a specified percentage of the
voting power of the Company, the dissolution or liquidation of the Company,
a sale of substantially all of the property and assets of the Company or an
event of the type described in Section 7 of this Plan; or
2
<PAGE>
(vi) required in order for the Award to qualify as (x) an Incentive
Stock Option or (y) as "performance based compensation" under Section
162(m).
(e) Notwithstanding the foregoing, Series A Options in respect of an
aggregate of not greater than 62,468 Common Shares and Series B Options in
respect of an aggregate of not greater than 62,468 Common Shares will be granted
concurrent with the effectiveness of this Plan pursuant to option agreements in
the form of Exhibit A to this Plan. All other Awards must be granted pursuant
to an agreement containing such terms and conditions as the Committee
establishes; provided, however, that any other Awards granted prior to or
concurrent with the IPO (defined below) require the approval of a majority of
the members of the Board (defined below).
SECTION 4. STOCK SUBJECT TO PLAN
(a) The aggregate number of Common Shares that may be issued pursuant to
all Incentive Stock Options granted under this Plan may not exceed 195,000,
subject to adjustment as provided in Section 7 of this Plan.
(b) The aggregate number of Common Shares and Derivative Securities issued
and issuable pursuant to all Awards (including all Incentive Stock Options)
granted under this Plan may not at any time exceed 195,000, subject to
adjustment as provided in Section 7 of this Plan.
(c) For purposes of Section 4(b) of this Plan, the aggregate number of
Common Shares issued and issuable pursuant to Awards granted under this Plan at
any time will be deemed to be equal to the sum of the following:
(i) the number of Common Shares and Derivative Securities that were
issued prior to that time pursuant to Awards granted under this Plan
(including for this purpose the Original Plan), other than Common Shares
that were subsequently reacquired by the Company pursuant to the terms and
conditions of those Awards and with respect to which the holder thereof
received no benefits of ownership, such as dividends; plus
(ii) the number of Common Shares that were otherwise issuable prior
to that time pursuant to Awards granted under this Plan, but that were
withheld by the Company as payment of the purchase price of the Common
Shares issued pursuant to the Awards or as payment of the recipient's tax
withholding obligation with respect to the issuance; plus
(iii) the maximum number of Common Shares and Derivative Securities
that are or may be issuable at or after that time pursuant to Awards
granted under this Plan prior to that time.
SECTION 5. DURATION OF PLAN
No Awards may be made under this Plan after September 30, 2006. Although
Common Shares may be issued after September 30, 2006 pursuant to Awards made on
or prior to that date, no Common Shares shall be issued under this Plan after
September 29, 2016.
3
<PAGE>
SECTION 6. ADMINISTRATION OF PLAN
(a) This Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors of MGM (the "Board").
(b) Subject to the provisions of this Plan, the Committee is authorized
and empowered to do all things necessary or desirable in connection with the
administration of this Plan, including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons are Participants and to which of such
Participants, if any, Awards will be granted;
(iii) grant Awards to Participants and determine the terms and
conditions thereof, including the number of Common Shares issuable pursuant
thereto;
(iv) accelerate the exercisability of an Award or extend the period
during which an owner of an Award may exercise his or her rights under such
Award (but not beyond September 29, 2016);
(v) determine whether and the extent to which adjustments are
required pursuant to Section 7 of this Plan; and
(vi) interpret and construe this Plan and the terms and conditions
of any Award granted under this Plan.
SECTION 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of securities, or if cash, property or securities are
distributed in respect of those outstanding securities, in any case as a result
of a reorganization, merger, consolidation, recapitalization, restructuring,
reclassification, dividend (other than a regular quarterly cash dividend) or
other distribution, stock split, reverse stock split or the like, or if
substantially all of the property and assets of the Company are sold, then,
unless the terms of the transaction provide otherwise, the Committee will make
appropriate and proportionate adjustments in (a) the number and type of shares
or other securities or cash or other property that may be acquired pursuant to
Incentive Stock Options and other Awards previously granted under this Plan, (b)
the maximum number and type of shares or other securities that may be issued
pursuant to Incentive Stock Options and other Awards thereafter granted under
this Plan and (c) the maximum number of Common Shares for which Awards may be
granted during any one calendar year; provided, however, that no adjustment may
-------- -------
be made to the number of Common Shares that may be acquired pursuant to
outstanding Incentive Stock Options or the maximum number of Common Shares with
respect to which Incentive Stock Options may be granted under this Plan to the
extent the adjustment would result in those options being treated as other than
Incentive Stock Options; provided,
--------
4
<PAGE>
further, that, after the IPO, no adjustment will be made to the extent the
- -------
Committee determines that the adjustment would result in the disallowance of a
federal income tax deduction for compensation attributable to Awards by causing
the compensation to be other than "performance-based compensation" within the
meaning of Section 162(m)(4)(C); and, provided, further, that with respect to
-------- -------
the Series A Options and Series B Options subject to the Series A Option and
Series B Option Stock Option Agreement, the provisions of Section 8 of the
Series A Option and Series B Option Stock Option Agreement will govern the
antidilution and other adjustments provided for therein.
SECTION 8. AMENDMENT AND TERMINATION OF THE PLAN
The Board may amend or terminate this Plan at any time and in any manner,
subject to the following limitations:
(a) No amendment or termination may deprive the recipient of any
Award previously granted under this Plan, without the consent of the
recipient, of any of his or her rights thereunder or with respect thereto;
and
(b) Each amendment to this Plan will require approval by the
Company's shareholders, to the extent required to comply with Rule 16b-3
(if applicable), Sections 422 and 162(m) and other applicable provisions of
or rules under the Code, as amended from time to time, but only if the
Amendment would (a) increase the maximum number of Common Shares that may
be issued pursuant to (i) all Awards granted under this Plan, (ii) all
Incentive Stock Options granted under this Plan or (iii) Awards granted
under this Plan during any calendar year to any one Participant, (b) change
the class of persons eligible to receive Awards under this Plan, (c)
otherwise materially increase the benefits under this Plan accruing to
Participants who are subject to Section 16 of the Exchange Act as amended
from time to time (or successor provision) in a manner not specifically
contemplated by this Plan or (d) affect compliance of this Plan with Rule
16b-3 (if applicable) or applicable provisions of the Code, as amended from
time to time.
SECTION 9. EFFECTIVE DATE OF THE PLAN
All of the conditions to the effectiveness of this Plan have been
satisfied, and this Plan, as amended and restated hereby, became effective as of
November __, 1997./*/
- -----------------
/*/ This date will be the date on which the Conditions set forth in the
Modification and Cancellation Agreements have been satisfied.
5
<PAGE>
SECTION 10. DEFINITION OF "FAIR MARKET VALUE"
For purposes of this Plan, "Fair Market Value" means the fair market value
of the Common Shares. If the Common Shares are not publicly traded, fair market
value will be determined by the Board or the Committee and may be computed by
any method which the Board or the Committee in good faith believes will reflect
the fair market value of the Common Shares on the date of determination. If the
Common Shares are publicly traded, fair market value will be the closing sale
price per share of the Common Shares, for securities listed on a national
securities exchange, or the closing bid price per share of the Common Shares,
for securities quoted by NASDAQ, on the day in question (or, if such day is not
a trading day or if no sales of Common Shares were made on such day, on the
nearest preceding trading day on which sales of Common Shares were made), as
reported in The Wall Street Journal, Western Edition, or, if trading in the
----------------------------------------
Common Shares is not then reported in The Wall Street Journal, Western Edition,
----------------------------------------
at the closing sale or bid price as may then appear in what the Board or the
Committee in its judgment then deems to be the most nearly comparable listing or
reporting service.
<PAGE>
METRO-GOLDWYN-MAYER INC.
STOCK OPTION AGREEMENT
PURSUANT TO THE
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
This Stock Option Agreement (this "Agreement") is entered into as of
November __, 1997 by Metro-Goldwyn-Mayer Inc., a Delaware corporation formerly
known as P&F Acquisition Corp. ("MGM"), and the person named below as
Participant.
THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, AND
THEY MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE ACT AND REGISTERED OR QUALIFIED UNDER APPLICABLE
STATE SECURITIES LAW OR MGM HAS RECEIVED AN OPINION OF COUNSEL (WHICH
COUNSEL AND OPINION SHALL BE SATISFACTORY TO THE MGM'S COUNSEL) THAT
REGISTRATION UNDER THE ACT AND REGISTRATION OR QUALIFICATION UNDER
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
1. OPTIONS.
-------
(a) Pursuant to MGM's Amended and Restated 1996 Stock Incentive Plan (the
"Amended and Restated Plan") and a Modification and Cancellation Agreement,
dated as of November 5, 1997, among MGM, Metro-Goldwyn-Mayer Studios Inc., a
Delaware corporation formerly known as Metro-Goldwyn-Mayer Inc. ("Studios"), and
Participant (the "Modification and Cancellation Agreement"), Participant has
been granted the Series A Option (the "Series A Option") and the Series B Option
(the "Series B Option" and, collectively with the Series A Option, the
"Options") to purchase the number of Common Shares set forth for each Option
after Participant's signature below, on the terms and conditions set forth in
the Amended and Restated Plan, the Modification and Cancellation Agreement and
this Agreement.
(b) The Series A Option is not intended to be an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Series B Option is intended to be an "incentive stock
option" within the meaning of Section 422 of the Code to the maximum extent
permitted under Section 422(d) of the Code. The portion so qualifying is
referred below to as the "Series B ISO", and the portion not so qualifying is
referred below to as the "Series B Non-ISO".
(c) Participant acknowledges that, even though the Series B ISO is
intended to qualify as an "incentive stock option" under Section 422 of the
Code, there is no assurance that the Internal Revenue Service (the "Service")
will accept that treatment. If the Service successfully challenges
1
<PAGE>
the status of the Series B ISO as an "incentive stock option," MGM will have no
liability to Participant for any adverse tax consequences.
2. CERTAIN DEFINITIONS. The definitions in Schedule 1 hereto of the
-------------------
following terms are incorporated in, and used in, this Agreement: "Affiliate",
---------
"Cause", "Common Shares", "Control", "Designated Change in Control", "Good
----- ------------- ------- ---------------------------- ----
Reason", "Permanent Disability", "Seven" and "Tracinda". In addition, the
- ------ -------------------- ----- --------
definitions set forth below in this Section 2 are also used in this Agreement.
"Amended and Restated Shareholders Agreement" means the Amended and
-------------------------------------------
Restated Shareholders Agreement dated as of August 4, 1997 among MGM,
Studios, Seven, Tracinda and certain employees of MGM or one or more of its
subsidiaries.
"Date of Grant" means the first date that Participant was granted
-------------
options under the Original Plan.
"IPO" means the initial public offering of Common Shares of MGM.
---
"Majority in Interest" means, as of any date, the holders on that date
--------------------
of a majority of the Options (based on the number of Common Shares then
subject to all Series A Options and Series B Options) then outstanding,
whether or not vested.
"Original Plan" means the 1996 Management Stock Option and Bonus Plan
-------------
of MGM and Studios, before it was amended and restated to become the
Amended and Restated Plan.
"Permitted Transferee" means, with respect to Participant, (i) the
--------------------
successors in interest to Participant upon the death or incompetence of
Participant and (ii) Participant's spouse; provided that, in respect of any
--------
transfer by Participant to Participant's spouse during Participant's
lifetime pursuant to clause (ii) of this sentence, Participant must retain
power to make all decisions under this Agreement or otherwise with respect
to the Series A Option or Series B Option being transferred in whole or in
part; and, provided, further, that prior written notice of the transfer has
-------- -------
been given to MGM by Participant (except in the case of the death of
Participant) and that the Permitted Transferee agrees (in advance of the
transfer in any case other than the death of Participant) in a written
agreement reasonably satisfactory to MGM and Participant (except in the
case of the death of Participant), to be bound by the terms of this
Agreement and the Amended and Restated Shareholders Agreement. All
references to Participant in this Agreement will include Participant's
Permitted Transferees unless the context otherwise requires.
3. GENERAL VESTING PROVISIONS. Except as otherwise provided in Section 4
--------------------------
of this Agreement, the Series A Option and Series B Option that Participant has
been granted as of the date of this Agreement will vest or be vested as follows:
(a) if Section 3(a) is applicable to Participant (as set forth
following Participant's signature below), then on October 1, 1997
Participant became vested with respect to 20% of his or her Series A Option
and 20% of his or her Series B Option and thereafter will
2
<PAGE>
vest with respect to 1/60 of each of his or her Series A Option and Series
B Option on the first day of each month thereafter through and including
October 1, 2001, except to the extent the Series A Option or Series B
Option is earlier terminated in whole or in part; or
(b) if Section 3(b) is applicable to Participant (as set forth
following Participant's signature below), then Participant will vest with
respect to 20% of his or her Series A Option and 20% of his or her Series B
Option on the first anniversary of the Date of Grant of options to
Participant under the Original Plan, as set forth following Participant's
signature below, and thereafter will vest with respect to 1/60 of each of
his or her Series A Option and Series B Option on the first day of each
month thereafter through and including the fifth anniversary of that Date
of Grant, except to the extent the Series A Option or Series B Option is
earlier terminated in whole or in part.
The Series A Option and the Series B Option may be exercised only if (i)
the Option is, except as provided in Sections 5(b) and (d) hereof, vested with
respect to the number of Common Shares as to which it is then being exercised
and (ii) any other conditions to exercise are satisfied. By way of
illustration, if Participant has the Series A Option to purchase 1,000 Common
Shares, is 50% vested with respect to the Series A Option and all other
conditions to exercise of the Option are satisfied, then Participant may
exercise the Series A Option with respect to 500 of the Common Shares subject
thereto.
Except as provided in Section 4 hereof, vesting will cease at any time that
Participant ceases to be an employee of at least one of MGM, Studios or any
subsidiary of MGM or Studios.
4. ACCELERATION OF VESTING OF OPTIONS.
----------------------------------
(a) Termination of Employment.
-------------------------
(i) Death or Permanent Disability. If Participant ceases to be
-----------------------------
employed by at least one of MGM, Studios or any subsidiary of MGM or
Studios by reason of his or her death or Permanent Disability, then
(A) the portions of his or her Options that have not become vested on or
prior to the date of death or Permanent Disability will become fully vested
on that date and (B) Participant's Options will be exercisable on the dates
and subject to the conditions provided in Sections 5, 6 and 9 hereof.
(ii) Termination for Cause or Resignation without Good Reason. If
--------------------------------------------------------
Participant ceases to be employed by at least one of MGM, Studios or any
subsidiary of MGM or Studios due to termination of his or her employment
for Cause or Participant's resignation from his or her employment without
Good Reason, then (A) the portions of his or her Options that have not
become vested on or prior to the date of such termination or resignation
will terminate immediately without the payment of any consideration to
Participant and (B) the vested portions of all of Participant's Options
will be exercisable on the dates and subject to the conditions provided in
Sections 5, 6 and 9 hereof; provided, however, that no such Option will be
-------- -------
exercisable in whole or in part after the expiration of 90 days following
such termination or resignation.
5
<PAGE>
(iii) Termination without Cause or Resignation with Good Reason. If
---------------------------------------------------------
Participant ceases to be employed by at least one of MGM, Studios or any
subsidiary of MGM or Studios due to his or her termination without Cause or
his or her resignation from his or her employment for Good Reason, then (A)
the portions of his or her Options that have not become vested on or prior
to the date of such termination or resignation will become fully vested on
the date of such termination or resignation and (B) Participant's Options
will be exercisable on the dates and subject to the conditions provided in
Sections 5, 6 and 9 hereof.
(b) Designated Change in Control. Immediately prior to the occurrence of
----------------------------
a Designated Change in Control, (A) the portions of Participant's Options that
have not become vested on or prior to the Designated Change in Control will
become fully vested and (B) Participant's Options will be exercisable on the
dates and subject to the conditions provided in Sections 5, 6 and 9 hereof. MGM
will, not later than 15 business days after the occurrence of any Designated
Change in Control, provide Participant with written notice outlining the
transaction and Designated Change in Control in reasonable detail and describing
the arrangements, if any, made or proposed to be made so that prejudice to
Participant is avoided in connection with the transaction and Designated Change
in Control.
(c) Dissolution or Liquidation. Upon the taking of any action by the
--------------------------
Board of Directors or stockholders of MGM to authorize the dissolution or
liquidation of MGM, whichever occurs later, but subject to the dissolution or
liquidation occurring, (A) the portion of Participant's Options that have not
become vested will become fully vested, and (B) Participant's Options will be
exercisable on the date and subject to the conditions provided in Sections 5, 6
and 9 hereof and (C) Participant's Options will terminate upon the consummation
of the dissolution or liquidation of MGM. MGM will, no later than the earlier
to occur of (x) 15 days after the date the Board of Directors or stockholders of
MGM authorizes the dissolution or liquidation of MGM or (y) 15 business days
prior to the consummation of any dissolution or liquidation of MGM, provide
Participant with written notice outlining the transaction and the dissolution or
liquidation in reasonable detail and describing the arrangements, if any, made
or proposed to be made so that prejudice to Participant is avoided in connection
with the dissolution or liquidation.
5. EXERCISABILITY OF OPTIONS.
-------------------------
(a) Except as otherwise provided in this Section 5, (x) the Series A
Option, to the extent then vested, will become exercisable from and after
October 1, 2001 and (y) the Series B Option, to the extent then vested, will
become exercisable from and after December 31, 2001.
(b) If the IPO occurs prior to October 1, 2001, the Series A Option, to
the extent then or thereafter vested pursuant to Section 3 from time to time,
will become exercisable from and after the six month anniversary of the IPO.
(c) Options (all of which will then become fully vested as provided in
Sections 3 and 4 hereof) will be exercisable at any time or from time to time
following the death or Permanent Disability of Participant, termination of
Participant's employment by MGM, Studios or any subsidiary of MGM or Studios
without Cause or resignation of employment by Participant with Good Reason, a
Designated Change in Control or a dissolution or liquidation of MGM.
4
<PAGE>
(d) Without limiting the provisions of this Agreement that would result in
Options, to the extent vested, becoming exercisable prior to October 1, 2001 (as
to the Series A Option) or December 31, 2001 (as to the Series B Option),
Options (whether or not vested) will become exercisable to the extent necessary
to permit Participant to participate in a sale of securities pursuant to the
exercise of his or her rights under Article III of the Amended and Restated
Shareholders Agreement; provided that, in exercising these rights (w) to the
--------
extent the Series B Option is not then exercisable, the Series A Option must be
exercised, to the extent then vested, before the Series B Option, to the extent
vested, is exercised, (x) thereafter, the Series B Option, to the extent then
vested, must be exercised before the Series A Option, to the extent not vested,
is exercised, (y) then, the balance of the Series A Option must be exercised
before the balance of the Series B Option is exercised and (z) thereafter, the
balance of the Series B Option will be exercisable.
6. EXERCISE OF OPTIONS; FRACTIONAL INTERESTS.
-----------------------------------------
(a) The exercise price (the "Exercise Price") per Common Share of the
--------------
Series A Option and the Series B Option is $1,000.
(b) Options may be exercised (x) during Participant's lifetime only by
Participant personally or by his or her Permitted Transferees and (y) after
Participant's death only by a Permitted Transferee. Options that are
exercisable (as determined in accordance with Sections 3, 4 and 5 hereof) may
only be exercised by one of the methods set forth in Sections 6(c) hereof, which
method of exercise shall be selected by Participant or such Permitted Transferee
in his or her sole discretion.
(c) Participant may exercise Options by the delivery to MGM of a written
notice of exercise (the "Exercise Notice"), which notice must specify the number
---------------
of Common Shares as to which the Option is being exercised (the "Exercised
---------
Option Portion") and the aggregate Exercise Price for the Exercised Option
- --------------
Portion, together with payment in full of the aggregate Exercise Price in cash
or by check payable to MGM; provided, however, that payment of the aggregate
-------- -------
Exercise Price may instead be made, in whole or in part, by one or more of the
following means selected by Participant or such Permitted Transferee in his or
her sole discretion:
(i) the delivery to MGM of a certificate or certificates representing
Common Shares that are "mature" shares (as that term is used in Bulletin
No. 84-18 of the Emerging Issues Task Force of the Financial Accounting
Standards Board), duly endorsed or accompanied by duly executed stock
powers, which delivery effectively transfers to MGM good and valid title to
those Common Shares, free and clear of any pledge, commitment, lien, claim
or other encumbrance (such Common Shares to be valued on the basis of the
aggregate "Fair Market Value" (defined in Section 7 hereof) on the date
Participant delivers his or her Exercise Notice applicable to that exercise
to MGM (the "Option Determination Date")); or
-------------------------
(ii) the delivery, concurrently with the exercise and in accordance
with Section 220.3(e)(4) of Regulation T promulgated under the Securities
Exchange Act of 1934, as amended (or, if applicable, any successor
Section), of a properly executed exercise notice for the Exercised Options
and irrevocable instructions to a broker
5
<PAGE>
promptly to deliver to MGM a specified dollar amount of the proceeds of a
sale or a loan secured by the Common Shares issuable upon exercise of the
Exercised Option Portion.
(d) MGM is not required to issue fractional shares upon the exercise of
Options. If more than one Option is presented for exercise at the same time by
Participant, the number of full shares which are issuable upon the exercise of
the Option will be computed on the basis of the aggregate number of shares
purchasable on exercise of the Options so presented. If any fraction of a share
would, except for the provision of this Section 6(d), be issuable on the
exercise of any Option (or specified portions thereof), upon payment in full of
the Exercise Price with respect to such fraction of a share, MGM will pay an
amount in cash equal to the same fraction of the Fair Market Value of the share
on the day immediately preceding the date the Option is presented for exercise,
provided that, at the request of Participant, the Exercise Price with respect to
- --------
the fraction of a share may be netted against the cash to be paid by MGM under
this Section 6(d).
(e) To the extent otherwise exercisable, the Participant can exercise all
or a portion of the Series A Option or the Series B Option, and as to the Series
B Option can exercise all or a portion of the Series B ISO or the Series B Non-
ISO in any order or combination selected by the Participant.
7. FAIR MARKET VALUE. "Fair Market Value", with respect to a Common Share
----------------- -----------------
as of any Option Determination Date, means the fair market value of the Common
Shares. If the Common Shares are not publicly traded, fair market value will be
determined by the Board or the Committee and may be computed by any method which
the Board or the Committee in good faith believes will reflect the fair market
value of the Common Shares on the date of determination. If the Common Shares
are publicly traded, fair market value will be the closing sale price per share
of the Common Shares, for securities listed on a national securities exchange,
or the closing bid price per share of the Common Shares, for securities quoted
by NASDAQ, on the day in question (or, if such day is not a trading day or if no
sales of Common Shares were made on such day, on the nearest preceding trading
day on which sales of Common Shares were made), as reported in The Wall Street
---------------
Journal, Western Edition, or, if trading in the Common Shares is not then
- ------------------------
reported in The Wall Street Journal, Western Edition, at the closing sale or bid
----------------------------------------
price as may then appear in what the Board or the Committee in its judgment then
deems to be the most nearly comparable listing or reporting service.
8. ANTIDILUTION ADJUSTMENTS; CERTAIN ACQUISITION TRANSACTIONS.
----------------------------------------------------------
(a) If MGM
(i) pays a dividend or makes a distribution on its Common Shares in
shares of its Common Shares;
(ii) subdivides its outstanding shares of Common Shares into a
greater number of shares;
(iii) combines its outstanding shares of Common Shares into a
smaller number of shares; or
6
<PAGE>
(iv) issues by reclassification of its Common Shares any shares of
its capital stock;
then the $1,000 Exercise Price in Section 6(a) hereof and the number of Common
Shares issuable on exercise of the Options shall be appropriately adjusted or,
if the Exercise Price and number of Common Shares purchasable on exercise of the
Options have then been adjusted pursuant to this Section 8, the then Exercise
Price and number of Common Shares purchasable on exercise of the Options as so
adjusted shall be further appropriately adjusted.
By way of illustration, if the $1,000 per Common Share Exercise Price and
number of Common Shares purchasable on exercise of the Options have not then
been adjusted pursuant to this Section 8, the $1,000 per Common Share Exercise
Price and number of Common Shares purchasable on exercise of the Options would
become, if MGM (i) paid a dividend per Common Share of one-tenth of a Common
Share, $909.09, with the number of Common Shares purchasable on exercise of the
Options being increased by 10% (i.e., if 1,000 Common Shares were purchasable on
exercise before the stock dividend, 1,100 Common Shares would be purchasable on
exercise thereafter), (ii) subdivided each of its outstanding Common Shares into
1.3 Common Shares, $769.23, with the number of Common Shares purchasable on
exercise being increased by 30% (i.e., if 1,000 Common Shares were purchasable
on exercise before the subdivision, 1,300 Common Shares will be purchasable on
exercise thereafter), (iii) combined its outstanding Common Shares into 75% of
the number of Common Shares outstanding before the combination, $1,333.33, with
the number of Common Shares purchasable on exercise being decreased by 25%
(i.e., if 1,000 Common Shares were purchasable on exercise before the
subdivision, 750 Common Shares would be purchasable on exercise thereafter), or
(iv) reclassified its Common Shares so that each of its Common Shares becomes
1.5 Class A Common Shares, $666.67, with the number of Class A Common Shares
purchasable being increased by 50% (i.e., if 1,000 Common Shares were
purchasable on exercise before the reclassification, 1,500 Class A Common Shares
would be purchasable on exercise thereafter).
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
If in a reclassification a holder of Common Shares receives shares of two
or more classes of capital stock of the MGM, appropriate adjustments shall be
made in the shares of securities purchasable on exercise of Options.
(b) If MGM is acquired by another person, however the acquisition is
structured, or consolidates with another person, and in either case the holders
of Common Shares of MGM receive equity securities of the acquiring person or its
parent or Affiliate or, in the case of a consolidation, receive equity
securities of the consolidated person, appropriate adjustments shall be made in
the definition of Common Shares, the number of equity securities purchasable on
exercise of Options and the $1,000 per Common Share Exercise Price in Section
6(a) hereof, as they may have then been adjusted pursuant to this Section 8. By
way of illustration, if MGM is acquired by NewCo Inc. ("NewCo") and each Common
Share becomes, as part of the transaction, two shares of Common Stock of NewCo
plus the right to receive $300, then an Option to purchase Common Shares will be
deemed to be an Option to purchase two times as many shares of Common Stock of
NewCo, the $1,000 per Common Share Exercise Price, if not
7
<PAGE>
previously adjusted pursuant to this Section 8, will be deemed to be $350 (i.e.,
"x" divided by "y", where "x" is $1,000 minus $300 (or $700) and "y" is 2).
9. PAYMENT OF WITHHOLDING TAXES. If MGM becomes obligated to withhold an
----------------------------
amount on account of any tax imposed as a result of the exercise of Options,
including, without limitation, any federal, state, local or other income tax, or
any F.I.C.A., state disability insurance tax or other employment tax (each a
"Withholding Liability"), Participant shall, on the date of exercise of an
Option and as a condition to the issuance of the shares issuable upon exercise
of the Option, pay the Withholding Liability to MGM in cash, by check payable to
MGM, by the tendering of Common Shares with a Fair Market Value equal to the
amount of the Withholding Liability or by a reduction in the amount of Common
Shares or other securities or property otherwise issuable pursuant to the
exercise of the Option with a Fair Market Value equal to the amount of
Withholding Liability as of the Option Determination Date immediately preceding
the exercise of the Option. Participant consents to MGM, Studios and the
subsidiaries of each of them withholding the full amount of the Withholding
Liability from any compensation or other amounts otherwise payable to
Participant if Participant does not pay the Withholding Liability to MGM on the
date of exercise of the Options in the manner described in this Section 9.
Participant agrees that the withholding, and payment of any such amounts by MGM
(or Studios or a subsidiary of MGM or Studios) to the relevant taxing authority
will constitute full satisfaction of the obligation of any of them to pay such
compensation or other amounts to Participant. Participant will indemnify MGM
and hold it harmless from and against any federal, state or local withholding
tax liability (including interest and penalties) that results from the exercise
of Options, except to the extent that (i) any such penalties result from the
failure of MGM to make a good faith determination of the amounts to withhold
from Participant or (ii) any such liabilities, interest or penalties result from
the failure of MGM to pay over to the relevant taxing authorities any sums
withheld from, or paid to MGM by, Participant to satisfy any Withholding
Liability.
10. NOTICES. All notices and other communications required or permitted
-------
to be given pursuant to this Agreement must be in writing and will be deemed
given if delivered personally or five days after mailing by certified or
registered mail, postage prepaid, return receipt requested, to either MGM at
2500 Broadway Street, Santa Monica, CA 90404, Attention: Chief Executive and
Financial Officers, or to Participant at the address set forth beneath his or
her signature on the signature page hereto, or at such other addresses as MGM,
on the one hand, or Participant, on the other, may designate by written notice,
complying with this Section 10, to the other.
11. NONTRANSFERABILITY. No Options or any interest therein may be sold,
------------------
assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in
any manner other than to a Permitted Transferee except that the Series B ISO
will not be transferable other than by will or the laws of descent and
distribution and during the Participant's lifetime can only be exercised by
Participant.
12. AMENDED AND RESTATED PLAN. The Options are granted pursuant to, and
-------------------------
subject to the terms and conditions of, the Amended and Restated Plan, as it may
be amended from time to time in accordance with its terms, and the Modification
and Cancellation Agreement. Until the
8
<PAGE>
Options have been exercised in full or terminated or expired, MGM will, upon
written request, send a copy of the Amended and Restated Plan, in its then-
current form, to Participant or any other person or entity or any Permitted
Transferee who then holds the Series A Option, Series B Option or any portion of
either of them.
13. NO STOCKHOLDER RIGHTS. The Options are not considered to be equity
---------------------
securities of MGM and will not have any rights to vote or receive dividends.
14. NO EMPLOYMENT RIGHTS. Subject to the provisions of any written
--------------------
employment agreement between Participant and MGM, Studios or a subsidiary of
either, neither any provision of the Amended and Restated Plan or this Agreement
nor the holding of the Options (a) confers upon Participant any right to
continue in the employ of MGM, Studios or any of their subsidiaries, (b) affects
the right of MGM, Studios and each of their subsidiaries to terminate the
employment of Participant, with or without Cause and for any reason or without
reason, or (c) confers on Participant any right to participate in any employee
welfare or benefit plan or other program of MGM, STUDIOS OR ANY OF THEIR
SUBSIDIARIES OTHER THAN THE AMENDED AND RESTATED PLAN. PARTICIPANT ACKNOWLEDGES
AND AGREES THAT, SUBJECT TO ANY WRITTEN EMPLOYMENT AGREEMENT BETWEEN PARTICIPANT
AND ANY OF MGM, STUDIOS OR A SUBSIDIARY OF MGM OR STUDIOS, MGM, STUDIOS AND EACH
OF THEIR SUBSIDIARIES MAY TERMINATE THE EMPLOYMENT OF PARTICIPANT AT ANY TIME
(x) WITH OR WITHOUT CAUSE AND (y) FOR ANY REASON OR FOR NO REASON.
15. TERMINATION OF OPTIONS. Options will terminate (a) as provided in
----------------------
Section 4(a)(ii) hereof, (b) to the extent exercised and (c) upon the earlier to
occur of (x) the liquidation, dissolution and winding up of MGM, except as
provided in Section 8 hereof, or (y) the date specified after the signature of
Participant below.
16. ARBITRATION OF DISPUTES.
-----------------------
(a) The Fair Market Value of any Common Share (including the value of any
non-cash distributions and payments per Common Share) will be determined as
provided in Section 6(d).
(b) Except as provided in Sections 6(d) and 16(a) hereof, all disputes
between Participant and MGM, however significant, arising out of, relating in
any way to, or in connection with, this Agreement (including the validity, scope
and enforceability of this arbitration provision) will be settled only by an
arbitration (x) conducted in accordance with the then rules of the American
Arbitration Association or any similar successor body and (y) held in Los
Angeles, California.
(c) The arbitration will be held before a single arbitrator mutually
agreed to by the parties to the arbitration, except that, if the parties fail to
agree to an arbitrator within 20 days from the date on which the claimant's
request for arbitration is delivered to the other party to the arbitration, the
arbitration shall be held before an arbitrator appointed by the American
Arbitration Association.
(d) Discovery will be available in the arbitration proceedings pursuant to
the provisions of California Code of Civil Procedure Section 1283.05, which are
incorporated herein by reference and made applicable to any arbitration held
pursuant to this Section.
9
<PAGE>
(e) The award of the arbitrator will be made within 90 days from the date
on which the arbitrator is selected. The award of the arbitrator will be final
and, to the greatest extent allowed by law, the parties agree to waive their
right to any form of appeal. The arbitrator must award costs and fees,
including the fees of the arbitrator, to the prevailing party. Judgment on any
award of the arbitrator may be entered in any court having jurisdiction or
application may be made to such court for the judicial acceptance of the award
and for one or more orders of enforcement.
17. GOVERNING LAW. Except to the extent provided in Section 16(d) hereof,
-------------
this Agreement and the Options issued under this Agreement are governed by and
are to be construed and enforced in accordance with the internal laws, and not
the laws pertaining to choice or conflict of laws, of the State of Delaware.
18. SEVERABILITY; SUCCESSORS. If any provision or portion of this
------------------------
Agreement is illegal or unenforceable, the other portions of this Agreement will
not be affected by the illegality or unenforceability. This Agreement will be
binding on MGM and Participant and their respective successors and assigns,
however such succession or assignment is effected.
19. AMENDED AND RESTATED SHAREHOLDERS AGREEMENT. Participant and MGM
-------------------------------------------
agree that all Common Shares, and other securities issuable to Participant upon
the exercise of Options, will be subject to and entitled to the benefits of the
Amended and Restated Shareholders Agreement.
20. OPTIONS AND SHARES ISSUABLE UPON EXERCISE NOT REGISTERED.
--------------------------------------------------------
(a) Participant, by accepting the Options, acknowledges that the Options
are not, and the Common Shares and other securities issuable upon exercise of
the Options may not be, registered under the Securities Act, and represents that
he or she has acquired the Options for his or her own account and not with a
present view to, or in connection with, any distribution thereof in violation of
the Securities Act. Unless and until registered under the Securities Act, each
stock certificate representing the Common Shares and other securities purchased
upon exercise of one or more Options shall be stamped or otherwise imprinted
with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED (THE "ACT") AND
MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER ACT OR IF AN EXEMPTION
FROM REGISTRATION IS AVAILABLE. THESE SECURITIES ARE SUBJECT TO
CERTAIN LIMITATIONS ON TRANSFER AND CERTAIN AGREEMENTS WITH RESPECT TO
VOTING SET FORTH IN AN AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
DATED AS OF AUGUST 4, 1997 BY AND AMONG SEVEN NETWORK LIMITED,
TRACINDA CORPORATION, METRO-GOLDWYN-MAYER INC. METRO-GOLDWYN-MAYER
STUDIOS INC. AND CERTAIN OTHER PERSONS (THE "AGREEMENT"), INCLUDING,
BUT NOT LIMITED TO, RESTRICTIONS ON THEIR SALE, TRANSFER OR OTHER
10
<PAGE>
DISPOSITION. A COPY OF THE AGREEMENT IS ON FILE WITH THE SECRETARY OF
METRO-GOLDWYN-MAYER INC."
(b) MGM will, at its expense, use its best efforts to (x) within six
months after the IPO or, if earlier, within six months after MGM becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended, both file with the Securities and Exchange Commission and have declared
effective a registration statement covering the issuance and, to the extent
required for the public resale thereof, the sale by Participant of the Common
Shares or other securities issuable on exercise of the Options and (y) cause
that registration statement(s) to remain current and effective as long as the
Series A Option or the Series B Option is exercisable or, if longer, to the
extent required for the public resale by Participant of the Common Shares or
other equity securities acquired or that may be acquired on exercise of the
Series A Option or the Series B Option.
21. DISQUALIFYING DISPOSITION. If Participant makes a "disposition,"
-------------------------
within the meaning of Section 424(c) of the Code and the regulations promulgated
thereunder, of any Common Share or Common Shares issued to Participant pursuant
to any exercise of the Series B ISO within the two-year period commencing on the
day after the date hereof or within the one-year period commencing on the day
after the date of transfer of such Common Share or Common Shares to Participant
pursuant to such exercise, Participant must, within ten days of such
disposition, notify MGM thereof in accordance with Section 10 hereof.
METRO-GOLDWYN-MAYER INC. PARTICIPANT
By: ____________________________ ________________________________________
Name: __________________________ [Name of Participant], by ______________,
Title: _________________________ attorney-in-fact /1/
________________________________________
Street Address
________________________________________
City, State and Zip Code
________________________________________
Social Security Number
Number of Common Shares
subject to the Series A Option: _______ /2/
Number of Common Shares
subject to the Series B Option: _______ /3/
Expiration of Options: ________, 200_. /4/
Section 3(a) is applicable to Participant.
[Yes/No] /5/
11
<PAGE>
Section 3(b) is applicable to Participant:
[Yes/No] /6/ and Participant's Date of
Grant of options under the Original Plan
was ____________, 1997. /7/
___________________
Footnotes 1-7 are on the following page.
12
<PAGE>
___________________
[Footnotes for the prior page]
/1/ To be signed pursuant to the power of attorney provided for in Section 6
of Participant's Modification and Cancellation Agreement.
/2/ This will be the number of Common Shares set forth under the heading
"Series A Options" in Section 11 of Participant's Modification and
Cancellation Agreement, before the Antidilution Adjustment provided for
in the Modification and Cancellation Agreement.
/3/ This will be the number of Common Shares set forth under the heading
"Series B Options" in Section 11 of Participant's Modification and
Cancellation Agreement, before the Antidilution Adjustment provided for
in the Modification and Cancellation Agreement.
/4/ This date will be one day short of ten years after the date of grant of
options to Participant under the Original Plan.
/5/ Section 3(a) will be applicable to Participant if Participant was
employed by MGM or Studios on October 10, 1996 and the Date of Grant of
options to Participant under the Original Plan was before October 1,
1997.
/6/ Section 3(b) will be applicable to Participant if Participant was not
employed by MGM or Studios on October 10, 1996 or if the Date of Grant
of options to Participant under the Original Plan was on or after
October 1, 1997.
/7/ The date that Participant was granted options under the Original Plan
will be filled in here.
13
<PAGE>
Exhibit 10.6
METRO-GOLDWYN-MAYER INC.
AND
METRO-GOLDWYN-MAYER STUDIOS INC.
SENIOR MANAGEMENT BONUS PLAN
This is the Senior Management Bonus Plan (the "Bonus Plan") of Metro-
Goldwyn-Mayer Inc., a Delaware corporation formerly known as P&F Acquisition
Corp. ("MGM"), and Metro-Goldwyn-Mayer Studios Inc., a Delaware corporation
formerly known as Metro-Goldwyn-Mayer Inc. ("Studios" and, collectively with
MGM, the "Company").
SECTION 1. PURPOSE OF THE BONUS PLAN
The purpose of this Bonus Plan is to provide incentives to members of the
Company's senior management by providing them with an opportunity to receive
cash bonuses. The compensation payable pursuant to Bonus Interests granted
under this Bonus Plan is intended to qualify as "performance-based compensation"
under Section 162(m) of the Internal Revenue Code of 1986 as amended (the
"Code") and the regulations thereunder.
SECTION 2. PERSONS ELIGIBLE UNDER THE BONUS PLAN
The only persons eligible (each a "Participant") for the grant of Bonus
Interests ("Bonus Interests") under this Bonus Plan are persons who, (i)
immediately prior to the date the Underwriting Agreement referred to in Section
7 is signed, held bonus interests under the Company's 1996 Management Stock
Option and Bonus Plan (the "Original Plan"), prior to its amendment and
restatement (the "Amendment and Restatement") and (ii) agree to the Amendment
and Restatement and to the cancellation of their Series A Options, Series B
Options and bonus interests granted under the Original Plan pursuant to
Modification and Cancellation Agreements (the "Modification and Cancellation
Agreements").
SECTION 3. GRANT OF BONUS INTERESTS
Each Participant will receive Bonus Interests as determined by the "Bonus
Plan Committee" (defined in Section 6 hereof). The performance goal set forth
in Section 5 of the "Bonus Interest Agreements" (defined below) has been
preestablished by the Bonus Plan Committee.
SECTION 4. PAYMENTS IN RESPECT OF BONUS INTERESTS
(a) Each Bonus Interest will, subject to the terms and conditions of this
Bonus Plan and related Bonus Interest Agreement in the form of Exhibit A hereto
to be entered into by MGM, Studios and each Participant (the "Bonus Interest
Agreements"), entitle the Participant holding the Bonus Interest to receive up
to $1,000. The obligations to make all payments due from time to time in
respect of Bonus Interests are the joint and several obligations of MGM and
Studios.
(b) No payments shall be made pursuant to any Bonus Interest unless the
Bonus Plan Committee certifies that the performance goal condition to payment
(the "Condition") has been
<PAGE>
satisfied. The Condition is solely that set forth in Section 5 of the Bonus
Interest Agreement with respect to the "Fair Market Value per Common Share" as
of the "Determination Date" in question (the quoted terms in this sentence have
the meanings given to them in the Bonus Interest Agreement). The members of the
Bonus Plan Committee must timely make the certification required for payments
pursuant to the Bonus Interests, if the Condition to the payment in question is
met.
SECTION 5. MAXIMUM NUMBER OF BONUS INTERESTS;
NO ADDITIONAL BONUS INTERESTS
The maximum number of Bonus Interests that may initially be issued and that
may be outstanding at any time is 58,095 Bonus Interests (subject to adjustments
in the number of Bonus Interests outstanding pursuant to Section 8 of each
Participant's Bonus Interest Agreement). Subject to the same adjustment, the
maximum number of Bonus Interests that may be granted in any calendar year to
any person may not exceed 20,000 Bonus Interests. No Bonus Interests will be
issued except those as permitted by Section 3 and any Bonus Interests issued to
a "Permitted Transferee" (defined in Exhibit A hereto) in substitution for the
Bonus Interests issued to the transferor.
SECTION 6. ADMINISTRATION OF THE BONUS PLAN
(a) This Bonus Plan will be administered by a committee (the "Bonus Plan
Committee") appointed by the Board of Directors of MGM. The Bonus Plan
Committee will be comprised solely of two or more "outside directors" within the
meaning of Section 162(m) of the Code and the regulations thereunder.
(b) Subject to the provisions of this Bonus Plan, with the approval of (or
delegation of authority by) a majority of the then authorized number of members
of each of the Boards of Directors of MGM and Studios (other than any holder of
Bonus Interests who serves on either of those Board of Directors), the Committee
(or, if applicable, the Prior Committee) is authorized and empowered to do all
things necessary or desirable in connection with the administration of this
Bonus Plan, including, without limitation, to:
(i) adopt rules and regulations relating to this Bonus Plan that are
not inconsistent with this Bonus Plan and which do not adversely affect any
outstanding Bonus Interests, unless the holder of the Bonus Interest has
consented or is deemed to have consented to the rules and regulations
pursuant to the terms of the holder's Bonus Interest Agreement; and
(ii) interpret and construe this Bonus Plan and the terms and
conditions of all Bonus Interests granted under it.
SECTION 7. AMENDMENT AND EARLY TERMINATION OF THIS BONUS PLAN
This Bonus Plan may not be amended or terminated early without the consent
of (i) MGM and Studios (by vote of the Boards of Directors of each of MGM and
Studios,
2
<PAGE>
excluding any holder of Bonus Interests who then is a member of either Board),
and (ii) persons then holding a majority in interest of the outstanding Bonus
Interests; provided, however, that no amendment or early termination will
-----------------
deprive the holder of any Bonus Interest, without his or her consent, of any of
his or her rights under this Bonus Plan and the Bonus Interest Agreement to
which he or she is a party.
SECTION 8. EFFECTIVE DATE OF THE BONUS PLAN
All of the conditions to the effectiveness of this Bonus Plan have been
satisfied, and this Bonus Plan became effective as of November __, 1997./*/
SECTION 9. PAYMENTS IN RESPECT OF BONUS INTERESTS
No payments may be made with respect to any Bonus Interest until this Bonus
Plan has been approved by a majority of the shares of Common Stock of MGM, the
holders of which are present in person or by proxy at a meeting of shareholders
at which a quorum is present (or a majority of the outstanding shares of Common
Stock of MGM if approval is by written consent), provided that the Bonus Plan
and the Bonus Interests granted under this Bonus Plan will be null and void if
that approval is not received before December 31, 1998. If any payments become
due in respect of any Bonus Interests before shareholder approval is received,
those payments will be made (without interest) if, and within 30 days after,
shareholder approval is received, provided such approval is received on or
--------
before December 31, 1998.
SECTION 10. TERM
This Bonus Plan will terminate when no unexpired Bonus Interests remain
outstanding and no new Bonus Interests may be issued under this Bonus Plan.
METRO-GOLDWYN-MAYER INC.
By:________________________________________
Name:______________________________________
Title:_____________________________________
METRO-GOLDWYN-MAYER STUDIOS INC.
By:________________________________________
Name:______________________________________
Title:_____________________________________
- ------------------
/*/ This date will be the date on which the Conditions set forth in the
Modification and Cancellation Agreements have been satisfied.
3
<PAGE>
METRO-GOLDWYN-MAYER INC.
AND
METRO-GOLDWYN-MAYER STUDIOS INC.
BONUS INTEREST AGREEMENT
PURSUANT TO THE
SENIOR MANAGEMENT BONUS PLAN
This Bonus Interest Agreement (this "Agreement") is entered into as of
November __, 1997 by Metro-Goldwyn-Mayer Inc., a Delaware corporation formerly
known as P&F Acquisition Corp. ("MGM"), Metro-Goldwyn-Mayer Studios Inc., a
Delaware corporation formerly known as Metro-Goldwyn-Mayer Inc. ("Studios" and,
collectively with MGM, the "Company") and the person named below as Participant.
THE BONUS INTERESTS REPRESENTED BY THIS AGREEMENT MAY BE SECURITIES.
THE BONUS INTERESTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR REGISTERED OR QUALIFIED UNDER THE
SECURITIES LAWS OF ANY STATE, AND THEY MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE ACT AND REGISTERED
OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAW OR THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION SHALL BE
SATISFACTORY TO THE COMPANY'S COUNSEL) THAT REGISTRATION UNDER THE ACT
AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED.
1. BONUS INTERESTS. Pursuant to the Company's Senior Management Bonus
---------------
Plan (the "Bonus Plan") and a Modification and Cancellation Agreement, dated as
of November 5, 1997, among MGM, Studios and Participant (the "Modification and
Cancellation Agreement"), Participant has been granted the number of Bonus
Interests (as defined in the Bonus Plan) set forth after Participant's signature
below, on the terms and conditions set forth in the Bonus Plan, the Modification
and Cancellation Agreement and this Agreement.
2. CERTAIN DEFINITIONS. The definitions in Schedule 1 hereto of the
-------------------
following terms are incorporated in, and used in, this Agreement: "Affiliate",
---------
"Cause", "Common Shares", "Control", "Designated Change in Control", "Good
----- ------------- ------- ---------------------------- ----
Reason", "Permanent Disability", "Seven" and "Tracinda". In addition, the
- ------ -------------------- ----- --------
definitions set forth below in this Section 2 are also used in this Agreement.
"Amended and Restated Plan" means the Original Plan as it is amended
-------------------------
and restated as of the date of this Agreement.
"Date of Grant" means the first date under the Original Plan that
-------------
Participant was granted bonus interests under the Original Plan.
1
<PAGE>
"Determination Date" means June 30 and December 31 of each year,
------------------
commencing December 31, 2001 and ending December 31, 2006. In addition, in
the case of the death of Participant (as to Participant only and if the
date of death is before December 31, 2001), the Permanent Disability of
Participant (as to Participant only and if the date of Permanent Disability
is before December 31, 2001), the dissolution or liquidation of MGM or a
Designated Change in Control, a Determination Date will occur on the date
of death or Permanent Disability (as to Participant only), the later of the
dates the Board of Directors or stockholders of MGM takes any action
authorizing the dissolution or liquidation or the day before the Designated
Change in Control, respectively, in each case if on or prior to December
31, 2006. In addition, if Participant ceases to be employed by at least
one of MGM, Studios or any subsidiary of MGM or Studios due to termination
of his or her employment for Cause or Participant's resignation from his or
her employment without Good Reason, a Determination Date will occur on the
date that Participant so ceases to be employed. The effect of this
definition is that the only Determination Dates for determining Bonus
Amounts are those set forth in Sections 4(a)(ii) and 5(a), (b), (c) and
(d).
"Majority in Interest" means, as of any date, the holders on that date
--------------------
of a majority of the Bonus Interests then outstanding, whether or not
vested.
"Original Plan" means the 1996 Management Stock Option and Bonus Plan
-------------
of MGM and Studios, before it was amended and restated to become the
Amended and Restated Plan.
"Permitted Transferee" means, with respect to Participant, (i) the
--------------------
successors in interest to Participant upon the death or incompetence of
Participant and (ii) Participant's spouse; provided that, in respect of any
--------
transfer by Participant to Participant's spouse during Participant's
lifetime pursuant to clause (ii) of this sentence, Participant must retain
power to make all decisions under this Agreement or otherwise with respect
to the Bonus Interests being transferred; and, provided, further, that
-------- -------
prior written notice of any the transfer has been given to MGM by
Participant (except in the case of the death of Participant) and that the
Permitted Transferee agrees (in advance of the transfer in any case other
than the death of Participant), in a written agreement reasonably
satisfactory to MGM and Participant, to be bound by the terms of this
Agreement and the Amended and Restated Shareholders Agreement dated as of
August 4, 1997 among MGM, Studios, Seven, Tracinda and certain employees of
MGM or one or more of its subsidiaries. All references to Participant in
this Agreement will include Participant's Permitted Transferees unless the
context otherwise requires.
3. GENERAL VESTING PROVISIONS. Except as otherwise provided in Section 4
--------------------------
of this Agreement, the Bonus Interests that Participant has been granted as of
the date of this Agreement will vest or be vested as follows:
(a) if Section 3(a) is applicable to Participant (as set forth
following Participant's signature below), then on October 1, 1997
Participant became vested with respect to 20%
2
<PAGE>
of his or her Bonus Interests and thereafter will vest with respect to 1/60
of his or her Bonus Interests on the first day of each month thereafter
through and including October 1, 2001, except to the extent the Bonus
Interests are earlier terminated in whole or in part; or
(b) if Section 3(b) is applicable to Participant (as set forth
following Participant's signature below), then Participant will vest with
respect to 20% of his or her Bonus Interests on the first anniversary of
the Date of Grant of bonus interests to Participant under the Original
Plan, as set forth following Participant's signature below, and thereafter
will vest with respect to 1/60 of his or her Bonus Interests on the first
day of each month thereafter through and including the fifth anniversary of
that Date of Grant, except to the extent the Bonus Interests are earlier
terminated in whole or in part.
Except as provided in Section 4 hereof, vesting will cease at any time that
Participant ceases to be an employee of at least one of MGM, Studios or any
subsidiary of MGM or Studios.
4. ACCELERATION OF VESTING OF BONUS INTERESTS.
------------------------------------------
(a) Termination of Employment.
-------------------------
(i) Death or Permanent Disability. If Participant ceases to be
-----------------------------
employed by at least one of MGM, Studios or any subsidiary of MGM or
Studios by reason of his or her death or Permanent Disability, then (A) the
portion of his or her Bonus Interests that have not become vested on or
prior to the date of death or Permanent Disability will become fully vested
on that date and (B) Participant's Bonus Interests will be payable on the
dates and subject to the conditions provided in Sections 5 and 6 hereof.
(ii) Termination for Cause or Resignation without Good Reason. If
--------------------------------------------------------
Participant ceases to be employed by at least one of MGM, Studios or any
subsidiary of MGM or Studios due to termination of his or her employment
for Cause or Participant's resignation from his or her employment without
Good Reason, then (A) the portion of his or her Bonus Interests that have
not become vested on or prior to the date of such termination or
resignation will terminate immediately without the payment of any
consideration to Participant, (B) a Determination Date with respect to the
portion of his or her Bonus Interests that have become vested on or prior
to the date of such termination or resignation will occur on the date that
Participant so ceases to be employed and (C) if the Fair Market Value per
Common Share as of that Determination Date is greater than $1,000 but less
than $2,000, Participant will be entitled to receive payment (without
interest) on April 15, 2002 with respect to the portion of his or her Bonus
Interests that are vested on the date his or her employment so ceased, in
an amount equal to (x) the amount by which the Fair Market Value per Common
Share as of such Determination Date is less than $2,000 per share
multiplied by (y) the portion of the Bonus Interests that are vested on the
date his or her employment so ceased, expressed as a percentage. Except as
expressly provided in clause (C) of the immediately preceding sentence,
Participant will not be entitled to receive any payments in respect of the
vested or unvested portions of Participant's Bonus Interests on the date
Participant's employment so
3
<PAGE>
ceases due to termination of his or her employment for Cause or
Participant's resignation from his or her employment without Good Reason.
(iii) Termination without Cause or Resignation with Good Reason. If
---------------------------------------------------------
Participant ceases to be employed by at least one of MGM, Studios or any
subsidiary of MGM or Studios due to his or her termination without Cause or
his or her resignation from his or her employment for Good Reason, then (A)
the portion of his or her Bonus Interests that have not become vested on or
prior to the date of such termination or resignation will become fully
vested on the date of such termination and (B) Participant's Bonus
Interests will be payable on the dates and subject to the conditions
provided in Sections 5 and 6 hereof.
(b) Designated Change in Control. On the date of a Designated Change in
----------------------------
Control, (A) the portion of Participant's Bonus Interests that have not become
vested on or prior to the Designated Change in Control will become fully vested
and (B) Participant's Bonus Interests will be payable on the dates and subject
to the conditions provided in Sections 5 and 6 hereof. The Company will, not
later than 15 business days after the occurrence of any Designated Change in
Control, provide Participant with written notice outlining the transaction and
Designated Change in Control in reasonable detail and describing the
arrangements, if any, made or proposed to be made so that prejudice to
Participant is avoided in connection with the transaction and Designated Change
in Control.
(c) Dissolution or Liquidation. Upon the taking of any action by the
--------------------------
Board of Directors or stockholders of MGM to authorize the dissolution or
liquidation of MGM, whichever occurs later, but subject to the dissolution or
liquidation occurring, (A) the portion of Participant's Bonus Interests that
have not become vested will become fully vested, (B) Participant's Bonus
Interests will be payable on the date and subject to the conditions provided in
Sections 5 and 6 hereof and (C) Participant's Bonus Interests will terminate
upon the consummation of the dissolution or liquidation of MGM. MGM will, no
later than the earlier to occur of (x) 15 days after the date the Board of
Directors or stockholders of MGM authorizes the dissolution or liquidation of
MGM or (y) 15 business days prior to the consummation of any dissolution or
liquidation of MGM, provide Participant with written notice outlining the
transaction and the dissolution or liquidation in reasonable detail and
describing the arrangements, if any, made or proposed to be made so that
prejudice to the Participant is avoided in connection with the dissolution or
liquidation.
5. DETERMINATION OF BONUS AMOUNTS.
------------------------------
(a) Subject to Sections 5(e), 8 and 9 hereof and except as provided in
Sections 5(b), (c) and (d) hereof, on the first Determination Date, if any, that
the Fair Market Value per Common Share as of that Determination Date is greater
than $1,000 but less than $2,000, Participant will be paid, with respect to each
Bonus Interest held by the Participant, to the extent then vested, an amount
equal to (x) the amount by which the Fair Market Value per Common Share as of
that Determination Date is less than $2,000 per share multiplied by (y) the
portion of the Bonus Interest that is vested, expressed as a percentage.
4
<PAGE>
(b) Subject to the Sections 5(e), 8 and 9 hereof, if Participant dies or
becomes subject to a Permanent Disability before December 31, 2001, Participant
or Participant's estate will be paid, (i) if the Fair Market Value per Common
Share is greater than $1,000 but less than $2,000 as of the date of death or
Permanent Disability, the "Present Value" (determined as provided in Section
5(f) hereof) of each full Bonus Interest held by Participant on the date of
death or Permanent Disability (or a proportionate amount for fractions of a
Bonus Interest) or (ii) if no payment is due under clause (i) because the Fair
Market Value per Common Share is $1,000 or less as of the date of death or
Permanent Disability, the amount, if any, that is payable for the Bonus
Interests at any subsequent Determination Date.
(c) Subject to Sections 5(e), 8 and 9 hereof, if a Designated Change in
Control occurs before December 31, 2001, Participant will be paid, (i) if the
Fair Market Value per Common Share is greater than $1,000 but less than $2,000
as of the date of the Designated Change in Control, the "Present Value"
(determined as provided in Section 5(f) hereof) of each full Bonus Interest held
by Participant on the date of the Designated Change in Control (or a
proportionate amount for fractions of a Bonus Interest) or (ii) if no payment is
due under clause (i) because the Fair Market Value per share is $1,000 or less
as of the date of the Designated Change in Control, the amount, if any, that is
payable for those Bonus Interests at any subsequent Determination Date.
(d) Subject to Sections 5(e), 8 and 9 hereof, if any action is taken by
the Board of Directors or stockholders of MGM to authorize the dissolution or
liquidation of MGM, Participant will be paid, if the Fair Market Value per
Common Share is greater than $1,000 but less than $2,000 on the date of approval
of the dissolution or liquidation by the Board of Directors or stockholders of
MGM, whichever occurs later, for each full Bonus Interest he or she holds, the
amount by which the Fair Market Value per Common Share on that date is less than
$2,000 (or proportionate amount for fractions of a Bonus Interest), provided
that no amount will be due under this Section 5(d) if the dissolution or
liquidation does not occur.
(e) Subject to Section 5(e)(v) below, but notwithstanding anything else to
the contrary in this Agreement, the following provisions govern Sections 5(a),
(b), (c) and (d) hereof:
(i) If a payment is made in respect of the vested portion of a Bonus
Interest in accordance with Sections 5(a), (b), (c) or (d) and Section 6,
no payment will thereafter be due, or any refund required, in respect of
that vested portion and that vested portion will be terminated upon the
payment being indefeasibly made, regardless of the Fair Market Value per
Common Share at any subsequent Determination Date;
(ii) If the Fair Market Value per share of Common Stock is $1,000 or
less at any Determination Date, Bonus Interests in respect of which a
payment may be made will continue to be eligible to receive payment, if the
Fair Market Value per share of Common Stock is greater than $1,000 but less
than $2,000 at any subsequent Determination Date;
(iii) If at any Determination Date the Fair Market Value per Common
Share is $2,000 or greater, no payment will then or thereafter be due in
respect of the vested
5
<PAGE>
portions of Bonus Interests outstanding on that Determination Date and
those vested portions will be terminated; and
(iv) The payments to be made to Participant will be made as provided
in Section 6 hereof;
(v) The provisions of this Section 5 shall not be applicable if
Section 4(a)(ii) is applicable to Participant by reason of termination of
his or her employment for Cause or Participant's resignation from his or
her employment without Good Reason; and
(vi) No payments may be made with respect to any Bonus Interest until
the Bonus Plan has been approved by a majority of the shares of Common
Stock of MGM, the holders of which are present in person or by proxy at a
meeting of shareholders at which a quorum is present (or a majority of the
outstanding shares of Common Stock of MGM if approval is by written
consent), provided that the Bonus Plan and the Bonus Interests granted
--------
under this Bonus Plan will be null and void if that approval is not
received before December 31, 1998. If any payments become due in respect
of the Bonus Interests before shareholder approval is received, those
payments will be made (without interest) if, and within 30 days after,
shareholder approval is received; provided such approval is received on or
--------
before December 31, 1998.
(f) The "Present Value" of an amount payable prior to April 15, 2002 for
-------------
each full Bonus Interest pursuant to Sections 5(b) and 5(c) will be the amount
(a proportionate amount for fractions of a Bonus Interest) that, if invested at
the "Prime Rate" (defined below) on the date of death, Permanent Disability or
Designated Change in Control, as the case may be, would yield on April 15, 2002
an amount equal to the amount by which the Fair Market Value per Common Share on
the date of death, Permanent Disability or Designated Change in Control, as
applicable, was less than $2,000.
"Prime Rate" as used in the immediately preceding sentence means the rate
----------
published by Morgan Guaranty Trust Company of New York (or, if applicable, its
successor or, if a Prime Rate would not be so determinable, the then largest
United States state or national bank in terms of assets) as its prime commercial
lending rate seven days before the date of death, Permanent Disability or
Designated Change in Control, as applicable.
(g) The Bonus Interests hereunder are intended to qualify as "performance-
based compensation" under Section 162(m) of the Internal Revenue Code of 1986,
as amended, and the regulations thereunder.
6. PAYMENTS FOR BONUS INTERESTS.
----------------------------
(a) Except as provided in Sections 6(b), (c), (d) or (e) hereof, payments
due with respect to Bonus Interests are to be made, if the Determination Date is
a December 31 or June 30, not later than five business days after the latest to
occur of (i) the April 15 next following a Determination Date that is a December
31 or the October 15 next following a Determination
6
<PAGE>
Date that is June 30 or (ii) final determination of the Fair Market Value per
Common Share at the Determination Date in question.
(b) Payments due, as determined in Section 5(b) hereof, with respect to
the Bonus Interests of Participant who has died or become subject to a Permanent
Disability are to be made not later than five business days after final
determination of the Fair Market Value per Common Share at the Determination
Date in question.
(c) Payments due, as determined in Section 5(c)(A) hereof, with respect to
Participant's Bonus Interests in the event of a Designated Change in Control are
to be made not later than five business days after final determination of the
Fair Market Value per Common Share at the Determination Date for the Designated
Change in Control.
(d) Payments due, if any, as determined in Section 5(d) hereof, with
respect to Participant's Bonus Interests in the event of the taking of any
action by the Board of Directors or stockholders of MGM to authorize the
dissolution or liquidation of MGM are to be made by the earliest to occur of the
date and time of (x) any distributions in connection with the dissolution or
liquidation made to any creditors or holders of equity securities of MGM, (y)
the dissolution or (z) the liquidation.
(e) Any payments due, as determined in Section 4(a)(ii) hereof, with
respect to Bonus Interests of Participant following his or her termination of
employment for Cause or his or her resignation without Good Reason, are to be
made on April 15, 2002.
(f) All payments due under this Section 6 are to be made by delivery to
Participant, within the time period required, of a bank or cashier's check made
payable to Participant for the full amount due.
(g) The obligation to make payments due under this Section 6 are the joint
and several obligations of MGM and Studios.
(h) Payments in respect of Bonus Interests will be due and payable only at
the times specified in this Section 6 and in the amounts determined pursuant to
Section 5 hereof or Section 4(a)(ii) hereof, as applicable.
(i) No payment will be made with respect to a Bonus Interest unless the
Bonus Plan Committee provided for under the Bonus Plan (the "Bonus Plan
Committee") certifies that the performance goal condition to payment (the
"Condition") has been satisfied. The Condition is solely that set forth in
Section 5 of this Agreement with respect to the Fair Market Value per Common
Share as of the Determination Date in question. The members of the Bonus Plan
Committee must timely make the certification required for payments pursuant to
the Bonus Interests, if the Condition to the payment in question is met.
7. FAIR MARKET VALUE. "Fair Market Value", with respect to a Common Share
----------------- -----------------
as of any Determination Date, means an amount equal to:
7
<PAGE>
(i) the sum of (x) the Distributions per Common Share since the date
of this Agreement plus (y) the average of the closing prices per Common
Share, if traded on a national securities exchange, on the 20 business days
immediately preceding the Determination Date, as reported in The Wall
--------
Street Journal, Western Edition;
-------------------------------
(ii) if the Common Shares were not traded on a national securities
exchange during each of the 20 business days immediately preceding the
Determination Date, the sum of (x) the Distributions per Common Share since
the date of this Agreement plus (y) the average of the average of the high
bid and low asked prices per Common Share on each of the 20 business days
immediately preceding the Determination Date in the over-the-counter
market, as reported by NASDAQ or, if applicable, other system then in use,
provided that, if the Common Shares were traded on a national securities
--------
exchange for a portion of the 20-business day period referred to in clause
(i) and for the balance of the 20-business day period on NASDAQ or other
system referred to in clause (ii), then the closing prices determined for
each business day in question in clause (i) and the average of the high bid
and asked prices for each business day in question in clause (ii) will be
utilized for each of the 20 business days in question, as applicable, and
the prices so used for the 20 business days will be averaged; or
(iii) if the Common Shares were not traded on a national securities
exchange or in the over-the-counter market on those immediately preceding
20 business days, the Fair Market Value per Common Share will be equal to
the sum of (x) the Distributions per Common Share since the date of this
Agreement plus (y) the amount determined in good faith by the Boards of
Directors of each of MGM and Studios (excluding from the deliberations any
holder of Bonus Interests who is then a member of the Board of Directors of
MGM or Studios), as more fully described below in this Section 6, as being
the Fair Market Value per Common Share exclusive of those Distributions.
As used above in this definition of "Fair Market Value," (1) "Distributions per
-----------------
Common Share" means the sum of (A) the per Common Share cash dividends and per
- ------------
Common Share fair market value of other property paid as dividends and
distributions (except distributions of Common Shares or rights to purchase
Common Shares and ordinary quarterly cash dividends made by MGM out of the
cumulative consolidated net income of MGM and its consolidated subsidiaries
earned from continuing operations subsequent to September 30, 1997) made by MGM
after the date of this Agreement on or in respect of its Common Shares plus (B)
the amount obtained by dividing (x) the cash and fair market value of other
property paid by MGM or any of its subsidiaries for the repurchase or redemption
of any Common Shares by (y) the number of Common Shares outstanding after giving
effect to the repurchase or redemption, provided that dividends and
--------
distributions on securities other than Common Shares, to the extent in excess of
market rates, and amounts (whether in cash, other property or a combination of
both) paid to acquire such securities or provided as liquidation or similar
preferences thereon, in each case in excess of the amount paid therefor plus
unpaid dividends at not in excess of market rates, will be treated as
distributions on the Common Shares for the purposes of clause (1)(A) of this
sentence and, provided, further, that the fair market value of all non-cash
-------- -------
amounts distributed or paid, referred to above in this sentence, will be
determined in good faith by the Boards of Directors of
9
<PAGE>
MGM and Studios (excluding from the deliberations any holder of Bonus Interests
who is then a member of the Board of Directors of MGM or Studios), and (2)
"business day" means a day when the national securities exchange or over-the-
------------
counter market in question, as applicable, is open for trading. Notwithstanding
the foregoing provisions of this definition, if the Fair Market Value of the
Common Shares is to be determined pursuant to clause (iii) at any time on or
before the earlier to occur of the initial public offering of MGM or December
30, 1997 (other than in connection with a Designated Change in Control), the
Fair Market Value of a Common Share will be $1,000.
Each determination of the Fair Market Value pursuant to either clauses (i)
or (ii) of this definition of "Fair Market Value" must be in the form of a
certificate of the Boards of Directors of each of MGM and Studios, duly executed
by a member of each Board of Directors (other than any member thereof who holds
Bonus Interests) setting forth in reasonable detail the determination. Each
determination of Fair Market Value pursuant to clause (iii) of this definition
or of the value of non-cash distributions and payments per Common Share must be
made by a nationally recognized independent investment banking firm or other
valuation firm mutually acceptable to each of the Boards of Directors of MGM and
Studios and a Majority in Interest (a "Third Party Appraiser"). If the Boards
of Directors of MGM and Studios and a Majority in Interest fail to mutually
agree on a Third Party Appraiser with respect to the determination of Fair
Market Value (including with respect to the value of non-cash distributions and
payments per Common Share) as of any Determination Date within 20 days after
that Determination Date, the Boards of Directors of MGM and Studios or any
holder of Bonus Interests may request the American Arbitration Association, in
accordance with its then-established procedures, to promptly appoint a Third
Party Appraiser, provided that the Third Party Appraiser appointed must not have
(x) any direct or indirect beneficial ownership of any equity interests in the
Company or any of its Affiliates or (y) received, during the two years
preceding the Determination Date, fees, underwriting discounts, commissions or
other compensation from the Company and its Affiliates aggregating more than
$2,000,000.
In determining Fair Market Value, there shall not be taken into account any
(a) premiums for control, (b) discounts for minority interests, (c) restrictions
on transfer or other similar limitations imposed by applicable law, (d)
agreement to which the holder of any Common Shares is subject or (e) discounts
for any vesting schedules pertaining thereto. In determining Fair Market Value
of any Common Shares pursuant to clause (iii) of this definition of "Fair Market
Value," each outstanding option to acquire securities to be issued by MGM or
Studios will be deemed to have been exercised and the exercise price thereof to
have been received by the Company, if the Fair Market Value on the relevant
Determination Date would thereby be increased.
The Third Party Appraiser will be instructed to complete its determination
of the Fair Market Value of the Common Shares by no later than 30 days after its
appointment. Within 30 days after completion of the determination, either the
Company or a Majority in Interest may challenge the determination of the Third
Party Appraiser by delivery of notice to the Company, in the case of an
objection by a Majority in Interest, or to Participant and each other holder of
Bonus Interests, in the case of an objection by the Company. If the Company and
a Majority in
9
<PAGE>
Interest are unable to resolve the objections to the determination within 20
days after the date of delivery of the objection notice, the dispute will be
resolved by arbitration pursuant to Section 16 of this Agreement. If no
objection to the determination is made within the 30-day period, however, the
determination of the Third Party Appraiser will be conclusive and binding on the
Company, Participant and all other holders of Bonus Interests. The fees and
expenses of the Third Party Appraiser will be borne by the Company.
In connection with any determination of Fair Market Value of Common Shares
pursuant to clause (iii) of this definition of "Fair Market Value," the Company
will furnish to the Third Party Appraiser a consolidated balance sheet of MGM
and its subsidiaries as at the most recent December 31 and consolidated
statements of operations and stockholders' equity (deficit) and consolidated
statements of cash flow of MGM and its subsidiaries for the fiscal year ended on
that December 31, setting forth comparisons to the previous fiscal year, all in
reasonable detail and accompanied by an opinion thereon of independent public
accountants of national standing. That opinion may not be qualified as to scope
and must state that (A) the financial statements were prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
that of the previous fiscal year except to the extent stated or referred to in
the opinion, (B) the financial statements fairly present in all material
respects the consolidated financial condition, consolidated results of
operations and consolidated cash flows of MGM and its subsidiaries as of the
dates thereof and for the periods covered thereby and (C) the examination by the
accountants in connection with the financial statements was made in accordance
with generally accepted auditing standards. In addition, if the Determination
Date in question falls during the period from May 15 of any year through and
including December 30 of that year, the Company must furnish to the Third Party
Appraiser MGM's most recent unaudited consolidated quarter-end balance sheet and
statement of operations and statement of cash flows for the period commencing on
the first day of the year in question through the quarter end in question, along
with comparative unaudited data for the preceding year. The Company will use
its best efforts to cause the financial statements and opinion of independent
public accountants to be delivered within the time periods specified above. If
any of them nevertheless cannot be timely delivered, the Company will cause them
to be delivered as soon as reasonably practicable and the time in which the
Third Party Appraiser is required to complete its determination will be extended
by a reasonable amount of time, up to the number of days of delay in such timely
delivery.
In connection with any determination of Fair Market Value of Common Shares
by a Third Party Appraiser, the Company will also permit (and cause each of its
subsidiaries to permit) the Third Party Appraiser or its advisors to visit and
inspect any of the properties of the Company or any of its subsidiaries,
including its books of account (and to make copies thereof and to take extracts
therefrom), and to discuss its affairs, finances and accounts with its officers
or employees, all at such reasonable times and as often as may be reasonably
requested. Prior to providing any information that is confidential or access to
the books, records and properties of the Company or any of its subsidiaries,
persons to whom the information or access is to be furnished must execute and
deliver to the Company, upon the request of MGM, a Confidentiality Agreement in
a form reasonably approved by the Bonus Plan Committee.
10
<PAGE>
A copy of each determination of Fair Market Value by a Third Party
Appraiser will be delivered to Participant promptly (and in any event not later
than five days) after the determination is completed by the Third Party
Appraiser. The determination must be accompanied by a valuation report prepared
by the Third Party Appraiser with respect to the Common Shares and a certified
resolution of the Boards of Directors of each of MGM and Studios (in the form of
a certificate duly executed by a director of each of MGM and Studios (other than
any director who holds Bonus Interests)) setting forth the determination by the
Board of Fair Market Value. Each certification pertaining to a Determination
Date that is a December 31 Determination Date must be accompanied by a letter
from the accountants rendering the opinion referred to in this definition of
"Fair Market Value" for the fiscal year in question to the effect that, in
connection with their review and audit of the financial statements of the
Company and its consolidated subsidiaries for that fiscal year, they have
reviewed the calculations of the Boards of Directors of each of MGM and Studios
referred to in this definition and are in agreement with each of the
calculations and amounts referred to in that certificate. Those calculations
will then be conclusive and binding on Participant.
8. ANTIDILUTION ADJUSTMENTS; CERTAIN ACQUISITION TRANSACTIONS.
----------------------------------------------------------
(a) If MGM
(i) pays a dividend or makes a distribution on its Common Shares in
shares of its Common Shares;
(ii) subdivides its outstanding shares of Common Shares into a greater
number of shares;
(iii) combines its outstanding shares of Common Shares into a smaller
number of shares; or
(iv) issues by reclassification of its Common Shares any shares of its
capital stock;
then the number of Bonus Interests set forth after Participant's signature
hereto and the $1,000 and $2,000 amounts in Section 5 hereof and the $1,000
amount in Section 7 hereof or, if those amounts have then been adjusted pursuant
to this Section 8, the then amounts shall be appropriately adjusted. By way of
illustration, if a Participant was initially granted 10,000 Bonus Interests and
the $1,000 and $2,000 amounts have not then been adjusted pursuant to this
Section 8, 10,000 Bonus Interests and the $1,000 and $2,000 amounts would
become, if the Company (i) paid a dividend per Common Share of one-tenth of a
Common Share, 11,000 Bonus Interests, $909.09 and $1,818.18, respectively, (ii)
subdivides each of its outstanding Common Shares into 1.3 Common Shares, 13,000
Bonus Interests, $769.23 and $1,538.46, respectively, (iii) combined its
outstanding Common Shares into 75% of the number of Common Shares outstanding
before the combination, 7,500 Bonus Interests, $1,333.33 and $2,666.67,
respectively, or (iv) reclassified its Common Shares so that each of its Common
Shares becomes 1.5 Class A Common Shares, 15,000 Bonus Interests and $666.67 and
$1,333.33 per Class A Common Share, respectively.
11
<PAGE>
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
If in a reclassification a holder of Common Shares receives shares of two
or more classes of capital stock of the Company, appropriate adjustments shall
be made in Section 5.
(b) If MGM is acquired by another person, however the acquisition is
structured, or consolidates with another person, and in either case the holders
of Common Shares of MGM receive equity securities of the acquiring person or its
parent or Affiliate or, in the case of a consolidation, receive equity
securities of the consolidated person, (i) appropriate adjustments shall be made
in the definition of Common Shares and in the $1,000 and $2,000 amounts in
Section 5 hereof and the $1,000 amount in Section 7 hereof, as they may have
then been adjusted pursuant to this Section 8. By way of illustration, if MGM
is acquired by NewCo Inc. ("NewCo") and each Common Share becomes, as part of
the transaction, two shares of Common Stock of NewCo plus the right to receive
$500, then the number of Bonus Interests then outstanding under this Agreement
shall be multiplied by two, each Common Share will be deemed to be two shares of
Common Stock of NewCo, the $1,000 and $2,000 amounts, if not previously adjusted
pursuant to this Section 8, will be deemed to be $500 and $1,000 and, for the
purposes of determining Fair Market Value pursuant to Section 7, the acquisition
transaction will be deemed to have resulted in a distribution per one share of
NewCo Common Stock of $250.
9. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
----------------------------
withhold an amount on account of any tax imposed as a result of the exercise of
the payments on Bonus Interests pursuant to Section 6 hereof including, without
limitation, any federal, state, local or other income tax, or any F.I.C.A.,
state disability insurance tax or other employment tax (each a "Withholding
Liability"), the Company is authorized to withhold from the payments on the
Bonus Interests all Withholding Liability relating to the payment. Participant
agrees that the withholding, and payment of any such amounts by MGM (or Studios
or a subsidiary of MGM or Studios) to the relevant taxing authority will
constitute full satisfaction of the obligation of any of them to pay such
compensation or other amounts to Participant. Participant will indemnify the
Company and hold it harmless from and against any federal, state or local
withholding tax liability (including interest and penalties) that results from
the payments in respect of Bonus Interests to Participant, except to the extent
that (i) any such penalties result from the failure of the Company to make a
good faith determination of the amounts to withhold from Participant or (ii) any
such liabilities, interest or penalties result from the failure of the Company
to pay over to the relevant taxing authorities any sums withheld from, or paid
to the Company by, Participant to satisfy any Withholding Liability.
10. NOTICES. All notices and other communications required or permitted
-------
to be given pursuant to this Agreement must be in writing and will be deemed
given if delivered personally or five days after mailing by certified or
registered mail, postage prepaid, return receipt requested, to either MGM or
Studios at 2500 Broadway Street, Santa Monica, CA 90404, Attention: Chief
Executive and Financial Officers, or to Participant at the address set forth
beneath his or her signature on the signature page hereto, or at such other
addresses as MGM and
12
<PAGE>
Studios, on the one hand, or Participant, on the other, may designate by written
notice, complying with this Section 10, to the other.
11. NONTRANSFERABILITY. No Bonus Interest or any interest therein may be
------------------
sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred
in any manner other than to a Permitted Transferee.
12. BONUS PLAN. The Bonus Interests are granted pursuant to, and subject
----------
to the terms and conditions of, the Bonus Plan, as it may be amended from time
to time in accordance with its terms, and the Modification and Cancellation
Agreement. Until all amounts payable in respect of Participant's Bonus
Interests are paid, the Company will, upon written request, send a copy of the
Bonus Plan, in its then-current form, to Participant or any other person or
entity then entitled to receive payments in respect of Participant's Bonus
Interests.
13. NO STOCKHOLDER RIGHTS. The Bonus Interests are not considered to be
---------------------
equity securities of MGM or Studios and will not have any rights to vote or
receive dividends. The joint and several obligations of MGM and Studios to make
payments Bonus Amounts in respect of Bonus Interests is intended to be and
constitute general unsecured credit obligations of MGM and Studios.
14. NO EMPLOYMENT RIGHTS. Subject to the provisions of any written
--------------------
employment agreement between Participant and MGM, Studios or a subsidiary of
either, neither any provision of the Bonus Plan or this Agreement nor the
holding of the Bonus Interests (a) confers upon Participant any right to
continue in the employ of the Company or any of its subsidiaries, (b) affects
the right of the Company and each of its subsidiaries to terminate the
employment of Participant, with or without Cause and for any reason or without
reason, or (c) confers on Participant any right to participate in any employee
welfare or benefit plan or other program of the Company or any of its
subsidiaries other than the Bonus Plan. PARTICIPANT ACKNOWLEDGES AND AGREES
THAT, SUBJECT TO ANY WRITTEN EMPLOYMENT AGREEMENT BETWEEN PARTICIPANT AND ANY OF
MGM, STUDIOS OR A SUBSIDIARY OF MGM OR STUDIOS, MGM, STUDIOS AND EACH OF THEIR
SUBSIDIARIES MAY TERMINATE THE EMPLOYMENT OF PARTICIPANT AT ANY TIME (x) WITH OR
WITHOUT CAUSE AND (y) FOR ANY REASON OR FOR NO REASON.
15. TERMINATION OF BONUS INTERESTS. Bonus Interests will terminate (a) as
------------------------------
provided in Section 4(a)(ii), (b) to the extent no payment or further payment
may thereafter be made in respect of the Bonus Interests and (c) if no payment
is otherwise then due on the Bonus Interests, upon the earlier to occur of (x)
the liquidation, dissolution and winding up of MGM, except as provided in
Section 8, or (y) May 15, 2007.
16. ARBITRATION OF DISPUTES.
-----------------------
(a) The Fair Market Value of any Common Share (including the value of any
non-cash distributions and payments per Common Share) will be determined as
provided in Section 7.
(b) Except as provided in Sections 7 and 16(a) hereof, all disputes
between Participant and the Company, however significant, arising out of,
relating in any way to, or in connection
13
<PAGE>
with, this Agreement (including the validity, scope and enforceability of this
arbitration provision) will be settled only by an arbitration (x) conducted in
accordance with the then rules of the American Arbitration Association or any
similar successor body and (y) held in Los Angeles, California.
(c) The arbitration will be held before a single arbitrator mutually
agreed to by the parties to the arbitration, except that, if the parties fail to
agree to an arbitrator within 20 days from the date on which the claimant's
request for arbitration is delivered to the other party to the arbitration, the
arbitration shall be held before an arbitrator appointed by the American
Arbitration Association.
(d) Discovery will be available in the arbitration proceedings pursuant to
the provisions of California Code of Civil Procedure Section 1283.05, which are
incorporated herein by reference and made applicable to any arbitration held
pursuant to this Section.
(e) The award of the arbitrator will be made within 90 days from the date
on which the arbitrator is selected. The award of the arbitrator will be final
and, to the greatest extent allowed by law, the parties agree to waive their
right to any form of appeal. The arbitrator must award costs and fees,
including the fees of the arbitrator, to the prevailing party. Judgment on any
award of the arbitrator may be entered in any court having jurisdiction or
application may be made to such court for the judicial acceptance of the award
and for one or more orders of enforcement.
17. GOVERNING LAW. Except to the extent provided in Section 16(d) hereof,
-------------
this Agreement and the Bonus Interests issued under this Agreement are governed
by and are to be construed and enforced in accordance with the internal laws,
and not the laws pertaining to choice or conflict of laws, of the State of
Delaware.
18. SEVERABILITY; SUCCESSORS. If any provision or portion of this
------------------------
Agreement is illegal or unenforceable, the other portions of this Agreement will
not be affected by the illegality or unenforceability. This Agreement will be
binding on MGM, Studios and Participant and their respective successors and
assigns, however such succession or assignment is effected.
METRO-GOLDWYN-MAYER INC. PARTICIPANT
By: _____________________________ _____________________________
Name: ___________________________ [Name of Participant], by _______________
"attorney-in-fact"/1/
Title: __________________________
METRO-GOLDWYN-MAYER STUDIOS INC. _____________________________
Street Address
By: _____________________________
Name: ___________________________ _____________________________
City, State and Zip Code
Title: __________________________
_____________________________
Social Security Number
14
<PAGE>
Number of Bonus Interests: ________/2/
Section 3(a) is applicable to Participant. [Yes/No]/3/
Section 3(b) is applicable to Participant: [Yes/No]/4/ and
Participant's Date of Grant of bonus interests under the
Original Plan was ____________, 1997./5/
___________________
Footnotes 1-5 are on the following page.
15
<PAGE>
___________________
[Footnotes for prior page]
/1/ To be signed pursuant to the power of attorney provided for in Section 6
of Participant's Modification and Cancellation Agreement.
/2/ This will be the number set forth in Section 11 of Participant's
Modification and Cancellation Agreement, before the Antidilution
Adjustment provided for in the Modification and Cancellation Agreement.
/3/ Section 3(a) will be applicable to Participant if Participant was
employed by the Company on October 10, 1996 and the Date of Grant of
bonus interests to Participant under the Original Plan was before
October 1, 1997.
/4/ Section 3(b) will be applicable to Participant if Participant was not
employed by the Company on October 10, 1996 or if the Date of Grant of
bonus interests to Participant under the Original Plan was on or after
October 1, 1997.
/5/ The Date of Grant that Participant was granted bonus interests under the
Original Plan will be filled in here.
16
<PAGE>
EXHIBIT 10.7
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
entered into as of August __, 1997 among Metro-Goldwyn-Mayer Studios Inc., a
Delaware corporation ("MGM Studios"), Metro-Goldwyn-Mayer Inc., a Delaware
corporation and the corporate parent of MGM Studios (the "Company"), and Frank
G. Mancuso ("Executive").
W I T N E S S E T H:
WHEREAS, MGM Studios and the Company currently employ Executive as their
Chairman and Chief Executive Officer and wish to be assured of Executive's
continued services and loyalty as such on the terms and conditions hereinafter
set forth;
WHEREAS, the parties hereto are parties to an Employment Agreement (the
"Original Agreement") dated as of October 10, 1996 (the "Original Effective
Date"), and wish to amend and restate such employment agreement as herein set
forth;
WHEREAS, the Company plans to effect an initial public offering of its
stock (the "Offering");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein as well as the parties' rights pursuant to those documents
referred to in Section 11, the parties, intending to be legally bound, agree as
follows:
1. Employment and Title. Each of the Company and MGM Studios will
--------------------
continue to employ Executive as, and Executive agrees to continue to serve as,
Chairman and Chief Executive Officer of the Company, MGM Studios, and each
Subsidiary (as hereinafter defined) thereof, all upon the terms and conditions
set forth in this Agreement. In such capacities, Executive shall devote his
full and undivided business time and attention to his responsibilities as Chief
Executive Officer of the Company, MGM Studios and such Subsidiaries. During his
employment hereunder, Executive shall not engage in any other business activity;
provided, however, that so long as such activities do not interfere in any
- -------- -------
material respect with the performance of Executive's duties hereunder, nothing
in this Section 1 shall prevent Executive from engaging in civic and charitable
activities,
<PAGE>
serving on the board directors of a non-profit organization or managing his
personal investments (except that in managing his personal investments Executive
may not (x) invest in securities of any entity that Executive knows or has
reason to know competes with the Company, MGM Studios or any subsidiary of
either or (y) acquire in excess of one percent of the outstanding voting stock
of any company the securities of which are publicly traded; provided, however,
that nothing contained in this parenthetical shall (i) require Executive to
dispose of any securities beneficially owned by him on the Original Effective
Date, and Executive's continued holding of such securities shall not constitute
a breach of this Agreement or (ii) prevent Executive from investing in or
holding securities of an entity in which the business competing with the
Company, MGM Studios or any subsidiary of either of them, as applicable,
constitutes less than 5% of such entity's assets). With the consent and approval
of the Company's Board of Directors (the "Board"), Executive may serve on the
board of directors of (but in no other capacity with) other corporations or
business entities conducting businesses that do not compete with the businesses
conducted by the Company, MGM Studios or any of their subsidiaries.
2. Term. The term of Executive's employment hereunder (the "Term") shall
----
be for a period of five years commencing on the Original Effective Date and
ending, unless sooner terminated as provided herein below, on the fifth
anniversary of the Original Effective Date (the "Employment Period. ") Any
employment agreement, severance agreement or similar agreement or arrangement
(collectively, the "Existing Agreements") between MGM Studios and Executive in
effect on the Original Effective Date was terminated and is no longer in effect.
Shares of Company capital stock purchased by Executive pursuant to this
Agreement and/or the Original Agreement shall be issued promptly upon receipt by
the Company of payment therefor and shall be subject to the Amended and Restated
Investors Shareholder Agreement, dated as of August 4, 1997 between the parties
hereto and certain other parties, as amended from time to time (the "Investors
Shareholder Agreement") and the Amended and Restated Shareholders Agreement,
dated as of August 4, 1997, between the parties hereto and certain other
parties, as amended from time to time (the "Shareholders Agreement").
3. Powers and Authority.
--------------------
(a) Subject to the policies and directives of the Board (to the extent
consistent with the terms of this Agreement and applicable law) and except for
those actions requiring the approval of the Board and/or the MGM Studios Board
(as hereinafter defined) and except as required by law, during the Term,
Executive shall have full power and authority to operate the business, affairs
and operations of MGM Studios, the Company, and their respective Subsidiaries,
including, without limitation, the power to:
-2-
<PAGE>
(1) hire and enter into employment contracts on behalf of MGM
Studios, the Company and their respective Subsidiaries with officers and
employees of MGM Studios, the Company, and their respective Subsidiaries,
provided, however, that (x) with respect to employees or executives with a staff
- -------- -------
position of Executive Vice President or higher or any similar position or
positions with comparable responsibilities or (y) employees or officers having
an annual salary of $500,000 or more, the hiring of such employees and/or the
terms of any such employment contracts, including, without limitation, the
amount of compensation, will require Board approval.
(2) discharge any officer or employee of MGM Studios, the
Company or any of their respective Subsidiaries; provided, however, that
--------- -------
discharging any employee or officer which would result in such employee or
officer receiving an aggregate severance package, taking into account all
benefits due upon, or as a result of, such termination, including, without
limitation, the vesting of options, with a value of $500,000 or more, or any
settlement with respect therewith, shall require Board approval;
(3) greenlight any single film or other single production with
aggregate budgeted direct negative costs not greater than $85,000,000;
(4) incur Indebtedness (as hereinafter defined) not requiring
Board approval as specified herein; and
(5) acquire, sell, transfer, license or otherwise dispose of any
assets not requiring Board approval as specified herein.
(b) All employees of the Company MGM Studios and their Subsidiaries
shall report to, and only to, Executive (directly or through such channels as
Executive may designate) (except that this sentence shall not be construed as
limiting access by the Board to any officer or employee of the Company, MGM
Studios or their Subsidiaries). Executive shall report directly to, and only
to, the Board and the Board of Directors of MGM Studios (the "MGM Studios
Board") and neither MGM Studios nor the Company shall interpose any person
between either such Board and Executive nor shall any individual or individuals
be given power and authority in derogation of that given to Executive hereunder;
provided, however, that in the event Executive is incapacitated or otherwise
unavailable to act (after reasonable attempts to contact Executive in such
regard have been made), the Executive Committee of the Board and the MGM Studios
Board, as applicable, may act on Executive's behalf.
(c) Notwithstanding anything to the contrary in this Agreement, the
following actions shall require Board approval and, Executive shall not cause,
authorize or fail to take reasonable steps to prevent the Company, MGM Studios
-3-
<PAGE>
or any of their respective Subsidiaries to take any of the following actions, or
engage in any of the following transactions, without Board approval:
(1) incur any Indebtedness (other than (a) Film Financing
Indebtedness (as hereinafter defined) or (b) Indebtedness which is (x) incurred
under or permitted by the Credit Agreement (as hereinafter defined) and (y) is
within the limitations on Indebtedness set forth in a business plan approved by
the Board) if the amount of such Indebtedness is in an amount of $5,000,000 or
more or, if the amount of such Indebtedness (other than Indebtedness excluded by
reason of the immediately preceding parenthetical phrase), in the aggregate,
incurred by the Company and its Subsidiaries for the period from the Original
Effective Date until the fifth anniversary of the Original Effective Date
exceeds $25,000,000;
(2) incur any film financing indebtedness ("Film Financing
Indebtedness") as described in Section 5.10(h) of the Credit Agreement (as
hereinafter defined), as such provisions and the related definitions were in
effect on the Original Effective Date, in excess of $25 million at any one time
outstanding;
(3) issue or sell any capital stock or equity securities, or
securities convertible into capital stock or equity securities, or options,
warrants or stock appreciation rights or similar interests with respect to
capital stock or other equity securities, or other rights to acquire capital
stock or other equity securities, in each case, with respect to, or of, the
Company, MGM Studios or any of their respective Subsidiaries, other than (t) in
connection with the Offering, (u) the issuance of Common Stock upon the
conversion of the Preferred Stock (as defined in the Investors Shareholder
Agreement), (v) the issuance of shares upon exercise of options granted to
employees of the Company, MGM Studios and their subsidiaries pursuant to, the
Metro-Goldman-Mayer Inc. and Metro-Goldwyn-Mayer Studios Inc. Amended and
Restated 1996 Stock Option, Restricted Stock and Stock Appreciation Rights Plan,
as amended from time to time (the "Management Incentive Plan"), (w) the issuance
of shares to Executive pursuant to this Agreement or (x) the granting of options
pursuant to those certain stock option agreements dated as of October 10, 1996
relating to the purchase of up to 7,500 shares of Common Stock and the exercise
of such options;
(4) repurchase or redeem any of the capital stock of the
Company, except pursuant to the terms of the Management Incentive Plan and the
option agreements executed pursuant thereto or the Shareholders Agreement;
(5) Subject to the provisions of the Investors Shareholder
Agreement, enter into any transaction or take any action which would result in
the
-4-
<PAGE>
Company or any of its Subsidiaries conducting or engaging in any business that
is material to the Company and its Subsidiaries, taken as a whole, that is other
than (x) the business being conducted by MGM Studios and its Subsidiaries as of
the Original Effective Date or (y) as provided in a business plan approved by
the Board;
(6) approve an annual business plan and budget or such other
business plan or budget as the Board shall wish to adopt from time to time, or
any other business plan and budget approved by the Board and then in effect or
approve any material amendment or material change to such annual business plan
and budget, or approve any material variances from such annual business plan and
budget or any other business plan and budget approved by the Board and then in
effect;
(7) enter into any agreement or transaction, other than an
agreement or transaction entered into pursuant to the First Right of Negotiation
Agreement dated as of October 10, 1996, between MGM Studios and Amalgamated
Television Services Pty Limited, with any person known by Executive to be an
Affiliate (as defined in the Investors Shareholder Agreement) of MGM Studios or
the Company;
(8) enter into or extend any film library licensing arrangement
not contemplated by a business plan approved by the Board if such arrangement
together with related arrangements (x) in the case of a new licensing
arrangement, provides for payments to or by the Company, MGM Studios and their
respective Subsidiaries reasonably forecast by Executive to be more than $25
million or (y) in the case of an extension of an existing licensing arrangement,
provides for payments in respect of such extension to or by the Company, MGM
Studios and their respective Subsidiaries reasonably forecast by Executive to be
more than $25 million;
(9) amend, supplement, modify or waive (x) the provisions or
terms of any employment or other agreement between the Company and/or MGM
Studios, on the one hand, and Executive, on the other hand, including, this
Agreement or (y) the provisions or terms of any employment agreement with the
chief financial officer of the Company and/or MGM Studios;
(10) make any decisions required to be made by the boards of
directors of the Company and/or MGM Studios pursuant to the terms of the 1996
Management Incentive Plan or the Metro-Goldwyn-Mayer Inc. and Metro-Goldwyn-
Mayer Studios Inc. Senior Management Bonus Plan, as amended from time to time
(the "Bonus Plan"), including any decision relating to any amendment to the
Management Incentive Plan or the Bonus Plan or the waiver of any provision of
the Management Incentive Plan, or the Bonus Plan;
-5-
<PAGE>
(11) greenlight any single film or other single production with
aggregate budgeted direct negative costs greater than $85,000,000;
(12) enter into any agreement or transaction relating to the
acquisition or disposition or the purchase or sale of any asset having a value
reasonably forecast by Executive to be in excess of $25 million or involving a
purchase price reasonably forecast by Executive to be in excess of $25 million;
(13) enter into any agreement or transaction outside the
ordinary course of business relating to any joint venture or licensing agreement
not contemplated by a business plan approved by the Board if such joint venture
or licensing agreement provides for payments to or by the Company, MGM Studios
and their respective Subsidiaries reasonably forecast by Executive to be more
than $25 million; or
(14) establish committees of the Board of Directors of the
Company or MGM Studios.
(d) If, during the Term, (x) MGM Studios fails to satisfy any of the
covenants set forth in Sections 5.11, 5.12, 5.13, 5.15 and 5.25 of the Credit
Agreement dated as of October 10, 1996, among MGM Studios, the Lenders listed
therein and Morgan Guaranty Trust Company of New York, as Agent (the "Credit
Agreement") or comparable provisions in any replacement or amended credit
related agreement or (y) the Company and/or MGM Studios fails to satisfy (and
does not cure such failure within the grace period provided) any other covenant
set forth in the Credit Agreement or comparable provisions in any replacement or
amended credit related agreement, then Executive shall promptly prepare and
deliver to the Board a revised budget which takes into account the then
financial condition of the Company and MGM Studios and the applicable default.
Such business plan and budget, when approved by the Board, with such variations
as the Board shall determine, shall then become the business plan and budget of
the Company and MGM Studios.
(e) No less than 60 days prior to the commencement of each fiscal
year, Executive shall cause to be submitted to the respective boards of
directors of the Company and MGM Studios a proposed business plan and annual
budget for the ensuing calendar year for the Company and MGM, as applicable, and
their respective Subsidiaries. Each such business plan and annual budget shall
be subject to approval by the applicable board of directors. Such business plan
and budget, when approved by the Board and/or the MGM Studios Board, as
applicable, with such variations as the Board and the MGM Studios Board, as
-6-
<PAGE>
applicable, shall approve, shall be the business plan and budget of the Company
and MGM Studios, as applicable.
(f) As used in this Agreement, the following terms shall have the
following meanings:
"Guarantee": shall mean any obligation, contingent or otherwise, of
any Person (the "guarantor") guaranteeing or having the economic effect of
guaranteeing any Indebtedness or other obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, and including,
without limitation, any obligation of such guarantor, direct or indirect, (i) to
purchase or pay for (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of such Indebtedness or
other obligation, (ii) to purchase property, securities, or services for the
purpose of assuring the owner of such Indebtedness or other obligation of the
payment of such Indebtedness or other obligation, or (iii) to maintain working
capital, equity capital or other financial statement condition or liquidity of
the primary obligor so as to enable the primary obligor to pay such Indebtedness
or other obligation; provided that the term Guarantee shall not include
--------
endorsements for collection or deposit, in either case in the ordinary course of
business.
"Indebtedness": with respect to any Person, without duplication, (i)
all obligations of such Person for borrowed money, or with respect to deposits
or advances of any kind (including repurchase obligations), (ii) all obligations
of such person evidenced by bonds, debentures, notes or similar instruments,
(iii) all obligations of such Person upon which interest charge are customarily
paid, (iv) all obligations of such Person under any conditional sale or other
title retention agreement relating to property purchased by such Person, (v) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (other than accounts payable to suppliers incurred in the
ordinary course of business and paid when due), (vi) all capitalized lease
obligations (as determined in accordance with generally accepted accounting
principles in the United States) of such person, (vii) all obligations of others
secured by any lien on property or assets owned or acquired by such Person,
whether or not the obligations secured thereby have been assumed, (viii) all
Guarantees of such Person, (ix) all obligations of such Person as a counterparty
to any rate swap, currency hedge or other similar type agreement and (x) all
obligations of such Person as an account party in respect of letters of credit
and in respect of bankers' acceptances.
"Person": shall mean any natural person, corporation, partnership,
limited liability company, limited liability partnership, firm, association,
trust,
-7-
<PAGE>
government, governmental agency or other entity, whether acting in an
individual, fiduciary or other capacity.
"Subsidiary": of any Person shall mean any corporation or other legal
entity of which such Person (either alone or through or together with any other
Subsidiary) owns, directly or indirectly, 50% or more of the stock or other
equity interests, the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
4. Location. The location of Executive's principal place of employment
--------
and his office shall be in the greater Los Angeles, California area, provided,
however, that Executive shall perform such services outside of Los Angeles as
are, in his reasonable determination, reasonably required for the proper
performance of his duties under this Agreement.
5. Authority. Each party represents and warrants to the other that it has
---------
the full power and authority to enter into and perform its obligations under
this Agreement and that the execution of and performance of such party's
obligations under this Agreement shall not constitute a default under or breach
of the terms of any other agreement or order of any court or governmental
authority to which it is a party or under which it is bound. Each party shall
defend and hold harmless the other from and against any and all claims, demands,
losses or damages (including reasonable attorneys' fees) arising from any action
against such other party based on facts that are inconsistent with the
representation and warranty contained in this Section or based upon any
allegations of interference with contractual obligations or the like relating to
the negotiation or execution of this Agreement.
6. Compensation.
------------
(a) Salary. In full consideration for the services to be rendered by
------
Executive, and in full discharge of the salary obligations of the Company, MGM
Studios and their subsidiaries, MGM Studios shall pay to Executive and Executive
shall accept:
(1) An annual base salary of $2 million during each year of the
Term, payable monthly in equal installments of $166,667 each (reduced by the
amount of any federal, state and local income tax withholding contemplated by
Section 6(f) and other appropriate deductions) in arrears on the first day of
each month of the Term commencing with the second month of the Term (amounts
payable for less than a full month to be prorated based on the number of days in
such month included in the Term as a percentage of the total number of days in
such month).
-8-
<PAGE>
(2) A stock purchase payment in the amount of $3 million for
each Contract Year (as hereinafter defined) of the Term, payable in advance on
the IPO Closing Date (as defined in the Investors Shareholder Agreement) and
each annual anniversary thereof to occur during the Term (each a "Payment Date")
(reduced by the amount of any federal, state and local income tax withholding
contemplated by Section 6(f) and other appropriate deductions); provided,
--------
however, that the stock purchase payment payable for the last Contract Year of
- -------
the Term shall be reduced on a pro-rata basis to reflect the fact that the last
Contract Year of the Term is less than 365 days. As used herein, the term
"Contract Year" shall mean the period from the IPO Closing Date through the
close of business on the day immediately succeeding the first annual anniversary
of the IPO Closing Date and, thereafter, each period commencing with the annual
anniversary of the IPO Closing Date and ending with the close of business on the
day which is the last day prior to the next annual anniversary of the IPO
Closing Date, provided, that the last Contract Year of the Term shall commence
--------
with the last annual anniversary of the IPO Closing Date to occur during the
Term and end on the last day of the Term.
(3) During the Term, Executive shall apply on each Payment Date
the amount of the net stock purchase payments to be paid to him pursuant to
Clause (2) above (less the additional amount, if any, by which $3 million
multiplied by Executive's estimated marginal federal and state income tax rate
for the year in question (based on a certificate (including calculations)
prepared in good faith by Executive's tax advisor) exceeds the amount withheld
from clause (2) payments pursuant to Section 6(f)) to the purchase of Company
Common Stock, which the Company shall deliver on each such date to Executive
free and clear of all liens, other then the liens and restrictions specified in
the Shareholders Agreement and the Investor Shareholder Agreement (to which such
shares shall be subject). The purchase price for Company Common Stock purchased
by Executive pursuant to this Clause (3) shall be $1,000 per share of Common
Stock so purchased on the IPO Closing Date, and thereafter, the Fair Market
Value of a share of Common Stock determined as of the appropriate Determination
Date as specified below. The $1,000.00 purchase price specified in the
immediately preceding sentence shall be adjusted to reflect any stock split
since the Original Effective Date. As used in this Agreement "Fair Market Value"
of the Company Common Stock on any Determination Date shall be equal to (i) if
the Company Common Stock is then traded on a national security exchange, the
average of the closing prices per share
-9-
<PAGE>
of Company Common Stock on such national security exchange(s) on the twenty (20)
business days immediately preceding the Determination Date, as reported in the
Wall Street Journal, Western Edition, (ii) if the Company Common Stock is not
then traded on a national security exchange but the Company Common Stock is then
quoted in the over-the-counter market, the average of the average high bid and
low asked prices per share of Company Common Stock for the twenty (20) business
days immediately preceding the Determination Date in the over-the-counter
market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotations System or such other system then in use or (iii) if the
Company Common Stock is then neither traded on a national securities exchange or
quoted in the over-the-counter market, as determined pursuant to Section
[1.4(a)(iii)] of the Executive's stock option agreement entered into pursuant to
the Management Incentive Plan. If Fair Market Value is determined pursuant to
clause (iii) of the immediately preceding sentence, the Determination Date shall
be December 31 of the calendar year preceding the applicable Payment Date, and
if Fair Market Value is determined pursuant to clauses (i) or (ii) of the
immediately preceding sentence, the Determination Date shall be the applicable
Payment Date. If Fair Market Value is determined pursuant to clause (iii) of the
next preceding sentence, Executive shall have the independent right to arbitrate
the Fair Market Value determination in accordance with [Section 18] of
Executive's stock option agreement entered into pursuant to the Management
Incentive Plan if he disagrees with the appraised value set thereunder but only
if a Majority in Interest (as defined therein) does not seek such an arbitration
for purposes of the Management Incentive Plan.
(b) Management Incentive Plan. Executive shall be entitled to
-------------------------
participate in the Management Incentive Plan and the Bonus Plan.
(c) Other Benefits. The Company and/or MGM Studios will provide, or
--------------
pay or reimburse Executive for the reasonable costs of operating and
maintaining, an office, an executive assistant and the existing screening room
in Executive's residence, and will reimburse the reasonable travel expenses
incurred by Executive's spouse when accompanying Executive on travel to the
extent, in Executive's reasonable judgment, her presence is required or
advisable in the Company's and/or MGM Studios' interest in the discharge of
Executive's duties. Additionally, Executive shall be entitled to vacations,
sick leave and other benefits customarily afforded to executives of similar
stature in the motion picture industry.
(d) Business Expenses. During the Term, the Company and/or MGM
-----------------
Studios shall pay or reimburse Executive promptly for all reasonable and
documented business expenses incurred by Executive in the performance of his
duties under this Agreement.
(e) Insurance.
---------
(1) During the Term, Executive shall be entitled to and shall be
accorded all rights and benefits under any disability insurance, health and
major medical insurance policy or policies, which the Company and/or MGM Studios
provides for its senior officers. Nothing in this paragraph shall require the
-10-
<PAGE>
Company and/or MGM Studios to retain any particular policy or plan, but some
reasonable policy or plan shall be maintained.
(2) MGM Studios has purchased and, provided that Executive
continues to be medically and otherwise insurable at standard rates, shall
maintain until the end of the Term, a five year, reducing-term life insurance
policy on Executive's life in the initial face amount of $25 million, the
proceeds of which shall be payable to Executive's estate or such other person or
persons as Executive shall designate. In the event Executive becomes no longer
medically or otherwise insurable at standard rates, at Executive's election,
Executive may cause the Company and/or MGM Studios to obtain such insurance, in
which event Executive shall pay, at his sole cost and expense, the excess of the
rates being charged over standard rates, with MGM Studios and/or the Company
paying toward such insurance the standard rates therefor. The face amount of the
policy shall reduce from time to time while this Agreement is in effect by an
amount equal to the gross salary paid to Executive under Section 6(a)(1) above
(including any amounts withheld from such payments pursuant to Section 6(f)
hereof). The Company and/or MGM Studios shall not be required to maintain such
insurance after termination of Executive's employment.
(f) Tax Withholding. The Company and/or MGM Studios shall be
---------------
authorized to withhold from any payments made to Executive hereunder (including
by reason of the purchase of Company Common Stock) amounts the Company and/or
MGM Studios is required to withhold under any federal, state or local tax
statute, rule or regulation with respect to any compensation paid to Executive.
Executive agrees that the withholding and payment of any such amounts by the
Company and/or MGM Studios to the relevant taxing authority shall constitute
full satisfaction of the Company and/or MGM Studios' obligation to pay such
compensation or other amounts to Executive. Executive shall indemnify MGM
Studios and the Company and hold them harmless from and against any federal,
state or local withholding tax liability (including interest and penalties) that
results from any compensation paid to Executive, including the purchase of
Company Common Stock, except to the extent that (i) any such penalties result
from the failure of the Company and/or MGM Studios to make a good faith
determination of the amounts to withhold from Executive or (ii) any such
liabilities, interest or penalties result from the failure of the Company and/or
MGM Studios to pay over to the relevant taxing authorities any sums withheld
from, or paid to the Company and/or MGM Studios by, Executive to satisfy any
withholding liability.
7. Expiration/Termination of Employment.
------------------------------------
-11-
<PAGE>
(a) Expiration at End of Term. Unless the Term is extended by a
-------------------------
written instrument executed by both parties, Executive's employment and the
Employment Period shall expire at the end of the Term.
(b) Termination at Will. The parties acknowledge and agree that
-------------------
Executive's employment hereunder is an employment at will. Notwithstanding any
other provision contained in this Agreement, either Executive, the Company or
MGM Studios may terminate Executive's employment hereunder at any time with or
without Cause (as defined in Section 7(c)) or Good Reason (as defined in Section
7(c)) at his or its election upon not less than thirty (30) days prior written
notice (a "Termination Notice") to the other. A Termination Notice shall be
effective upon delivery to the other party and the termination shall be
effective as of the date set forth in such Termination Notice.
(c) Effect of Expiration or Termination. Upon the expiration or
-----------------------------------
termination of this Agreement pursuant to subsection 7(a) or 7(b) hereof or
otherwise, Executive shall be entitled to payment of: (i) the base salary set
forth in Section 6(a)(1) through such termination date and (ii) amounts accrued
under benefit plans in which Executive is participant as of such termination
date. In addition, to the extent provided in the Management Incentive Plan
and/or the Bonus Plan, Executive shall be entitled to his vested interest in
such plans at the date of termination, upon the terms and subject to the
conditions set forth in such plans. Executive's right and obligation to
purchase Company Common Stock pursuant to Section 6(a)(3) shall terminate
immediately prior to the termination of Executive's employment hereunder. Upon
the expiration or termination of this Agreement pursuant to subsection 7(b)
hereof or otherwise (other than a termination of this Agreement by Executive for
Good Reason or by the Company or MGM Studios without Cause or the expiration of
this Agreement at the end of the Term), Executive shall be required to promptly
repay MGM Studios a pro-rata portion (or in the case of death or disability 50%
of a pro-rata portion) of the gross stock purchase payment paid to Executive on
the Payment Date immediately preceding such date of termination, to reflect the
period from the date of termination through the end of the then applicable
Contract Year during which Executive will not be employed pursuant to this
Agreement.
If Executive's employment hereunder is terminated by the Company and/or MGM
Studios without Cause or if Executive terminates his employment hereunder for
Good Reason (which termination by Executive for Good Reason must occur within 90
days after he knows or should have known that Good Reason for termination
exists), the Company and/or MGM Studios shall in addition to the sums specified
in the preceding paragraph pay to Executive a lump sum amount equal to the
present value of the sum of (i) Executive's base salary specified in Section
6(a)(1) and (ii) the stock purchase payment amount specified in
-12-
<PAGE>
Section 6(a)(2) for the entire remaining Term, discounted at a rate per annum
equal to the Prime Rate (as hereinafter defined) as then in effect. In addition,
as provided in the Management Incentive Plan and the Bonus Plan, Executive's
account under such plans shall vest immediately with the effect therein
provided.
If Executive's employment is terminated as the result of his death or
disability (as hereinafter defined), in addition to the amounts specified in the
first paragraph of this Section 7(c), as provided in the Management Incentive
Plan and the Bonus Plan, Executive's account under such plans shall vest
immediately with the effect provided in such plans, and, in the case of
disability, Executive shall continue to receive 50% of the sum of (i) his base
salary specified in Section 6(a)(1) and (ii) the stock purchase payment amount
specified in section 6(a)(2) for the remainder of the Term. Disability shall
mean Executive's inability, due to a physical, mental or emotional illness or
injury, to substantially perform his duties hereunder for 90 consecutive days or
for 120 days in any 12 month period, whether or not consecutive.
If Executive's employment is terminated as a result of disability, by the
Company or MGM Studios without Cause or by Executive with Good Reason, the
Company and/or MGM Studios shall, during the remaining Term, continue to pay
premiums for health and disability insurance as was provided to Executive
immediately prior to such termination.
"Prime Rate" means the rate published from time to time by Morgan Guaranty
Trust Company of New York as its prime commercial lending rate.
As used in this Agreement, "Cause" shall mean (i) the failure of Executive
to substantially perform his duties with MGM Studios, the Company or any
Subsidiary of either of them (other than any such failure resulting from
illness, temporary absence, vacation, legal incapacity or disability), which
failure continues 30 days after a demand for substantial performance is
delivered in writing to Executive by the Board, which specifically identities
the manner in which Executive has not substantially performed his duties; (ii)
Executive's failure to follow reasonable and lawful directives (consistent with
the terms of this Agreement and the Investors Shareholder Agreement) of the
Board, which failure continues 30 days after a demand for Executive to follow
directives is delivered in writing to Executive by the Board, which specifically
identifies the manner in which Executive has not followed such directives, (iii)
the engaging by Executive in willful, reckless or grossly negligent misconduct
in connection with his employment, unless Executive ceases such misconduct
within 10 days, and remedies the adverse effect of such misconduct within 30
days, after a demand to cease engaging in such misconduct is delivered in
writing to Executive by the Board, which specifically identifies such
misconduct, (iv) Executive's conviction
-13-
<PAGE>
of an offense involving moral turpitude or a felony or (v) material breach by
Executive of this Agreement, and failure to cure such breach within 30 days of
delivery of a written notice to Executive by the Board, which notice
specifically identifies the breach. If Executive's failure under (i) or (ii)
above or his failure to cease misconduct under clause (iii) above would, if
continued unabated for the respective periods specified therein, be reasonably
expected to cause the Company and/or MGM Studios severe and irreparable harm,
and if the Company's said notice so specifies, the Company may shorten the
period within which such failure must cease to a reasonable period specified in
its notice, but not, in any event, less than 10 days in the case of clauses (i)
and (ii) or 5 days in the case of clause (iii). Except in the circumstances
described in the preceding sentence, if the remedy, cure or cessation of an act
or omission which is the subject of a notice under this paragraph would
reasonably require more than 30 days to complete and Executive commences such
remedy, cure or cessation within 30 days after receipt of such notice and
diligently pursues the same to completion, said act or omission shall not
constitute "Cause," unless said remedy, cure or cessation is not completed
within 60 days from the Company's notice. If any event, action or failure to act
specified in clauses (i) through (v) above shall occur, the Company's right to
terminate Executive for "Cause" as the result of such occurrence shall continue
for a period of 90 days after the date of such occurrence (or, if notice thereof
is required and is given within such 90-day period, 60 days after the expiration
of the cure period specified).
As used in this Agreement "Good Reason" shall mean
(i) a substantial and adverse change in Executive's status or
position as the Chief Executive Officer and a key employee of MGM Studios or the
Company, or a substantial reduction in the duties and responsibilities as
contemplated by this Agreement;
(ii) a reduction (other than for Cause) by the Company and/or MGM
Studios in Executive's compensation as provided in Section 6(a)(1) of this
Agreement, or any other material breach by MGM Studios or the Company of this
Agreement that is not cured within 30 days of written notice thereof to the
Company from Executive; or
(iii) the occurrence of a Designated Change of Control (as hereinafter
defined);
If any event, action or failure to act specified in clauses (i) through
(iii) above shall occur, Executive's right to terminate his employment hereunder
for "Good Reason" as the result of such occurrence shall continue for a period
of 90 days after the date of such occurrence (or, if notice thereof is required
and is given
-14-
<PAGE>
within such 90-day period, 60 days after the expiration of the cure period
specified).
Except as provided in this Section 7(c) and in Section 13, neither MGM
Studios, the Company nor any Subsidiary of either shall have any further
liability under this Agreement to Executive upon the expiration or termination
of Executive's employment, and no further payments shall be made to or for the
benefit of Executive under this Agreement.
As used in this Agreement, "designated Change of Control" shall mean if
there shall occur or there shall be consummated (i) any merger or consolidation
of the Company with or into any other person, as the result of which Tracinda
Corporation, a Nevada corporation ("Tracinda"), and Seven Network Limited, a
--------
corporation organized under the laws of the Commonwealth of Australia ("Seven")
beneficially own, in the aggregate, less than 50.1% of the combined voting power
of the then outstanding voting securities of the surviving corporation entitled
to vote generally in the election of directors of the surviving corporation
immediately upon completion of the transaction and any other person beneficially
owns 30.0% or more of the combined voting power of the then outstanding voting
securities of the surviving corporation entitled to vote generally in the
election of directors, (ii) any sale, transfer or other conveyance whether
direct or indirect, of all or substantially all of the property and assets of
the Company, on a consolidated basis, in one transaction or a series of related
transactions; provided, however, that this clause (ii) shall not apply to any
-----------------
sale, transfer or any other conveyance to the Company, by any wholly owned
direct or indirect subsidiary of the Company, by any wholly owned direct or
indirect subsidiary of the Company to any other such wholly owned direct or
indirect subsidiary of the Company or by the Company to one or more wholly owned
direct or indirect subsidiaries of the Company; or (iii) any transaction or
event that results in Tracinda and Seven ceasing, in the aggregate, to
beneficially own 50.1% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors and any other person beneficially owns 30.0% or more of
the combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors. As used herein
the terms "beneficial owner" and "beneficially owned" shall have the meanings
set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
whether or not applicable to the Company. Notwithstanding the foregoing, a
Designated Change in Control shall not be deemed to have occurred under clauses
(i) or (iii) if the acquirer, purchaser or 50.1% owner is an employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company.
8. Delegation of Duties and Assignment of Rights.
---------------------------------------------
-15-
<PAGE>
(a) Executive may not delegate the performance of any of his duties or
obligations as Chief Executive Officer hereunder, or assign any rights
hereunder, without the prior written consent of the Board. Any such purported
delegation or assignment in the absence of such written consent shall be null
and void with no force or effect.
(b) Neither the Company nor MGM Studios may assign this Agreement
except with the prior written consent of Executive, except that the Company and
MGM Studios, without such consent, may assign this Agreement to any person or
entity that acquires a majority of the capital stock or assets of MGM Studios or
the Company (by purchase, merger, consolidation or otherwise). In the event of
such an assignment by MGM Studios or the Company, each reference in this
Agreement to MGM Studios or the Company shall include the assignee from and
after the date of such assignment.
(c) In the event of a valid assignment pursuant to this Section 8,
this Agreement shall be binding on and inure to the benefit of the parties
hereto and their respective heirs, representatives, successors and permitted
assigns and any receiver, trustee in bankruptcy or representative of the
creditors of each such person.
9. Survival of Covenants. Notwithstanding anything contained in this
---------------------
Agreement, upon the expiration of the Term or in the event Executive's
employment is terminated for any reason whatsoever, the covenants and agreements
of Executive contained in Section 12 and the covenants of the Company and/or MGM
Studios contained in Sections 7(c), 13 and 14(e) hereof shall survive any such
expiration or termination and shall not lapse.
10. Warranty. Executive hereby represents and warrants that he has not
--------
taken any action, and covenants that during the Term of this Agreement he shall
take no such action, that constitutes or will constitute a breach of any
agreement concerning confidential information and trade secrets,
confidentiality, solicitation or non-competition to which he is bound as a party
where such action would have a material adverse effect on the Company, MGM
Studios or any Subsidiary of either of them. Executive hereby agrees to
indemnify and hold harmless MGM Studios and the Company from and against any
claim, loss, cost or expense (including reasonable attorneys' fees) incurred by
MGM Studios and/or the Company as a result of actions by Executive in violation
of the immediately preceding sentence.
11. Entire Agreement/amendment. This Agreement, the Investors Shareholder
--------------------------
Agreement, the Non-Competition Agreement, the Shareholders Agreement, the
agreements entered into pursuant to the Management Incentive
-16-
<PAGE>
Plan and/or the Bonus Plan, the Indemnity Agreement among Executive, the Company
and MGM Studios referred to in Section 14(e) hereof, the Management Incentive
Plan and the Bonus Plan contain the entire understanding and agreement between
the parties relating to the subject matter hereof. Neither this Agreement nor
any provisions hereof may be waived, modified, amended, changed, discharged or
terminated, except by an agreement in writing signed by the party against whom
enforcement of any waiver, modification, change, amendment, discharge or
termination is sought; provided, however, any such writing shall not be
enforceable against MGM Studios unless also signed by the Company.
12. No Mitigation. Without limiting any other provision hereof, any
-------------
income and any other employment benefits received by Executive from any and all
sources other than MGM Studios or the Company before or after the expiration or
termination of this Agreement for any reason whatsoever shall in no way reduce
or otherwise affect MGM Studios' or the Company's obligation to make payments
and afford benefits hereunder.
13. Insurance. To the extent available at a reasonable cost, the Company
---------
and/or MGM Studios shall procure and maintain a policy of officers' and
directors' insurance in a mutually acceptable amount with Executive as a named
insured thereunder. Such policy shall cover Executive during the Term and for
so long thereafter as he shall have liability for his actions or omissions
during the Term in his capacity as a director or officer of the Company and/or
MGM Studios, and their subsidiaries, but not longer than six years after the end
of the Term. Further, the Company and/or MGM Studios shall cause Executive to
be added as a named insured under any and all of their other liability policies,
to the extent such addition is customary in respect of such policies.
14. Miscellaneous.
-------------
(a) Certain Fees and Costs. The Company and/or MGM Studios shall
----------------------
reimburse Executive for the reasonable and documented fees and costs of his
legal counsel and tax accountants utilized in connection with the negotiation
and preparation of this Agreement.
(b) Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or any breach of this Agreement shall be settled by
arbitration. Any such arbitration shall be held in Los Angeles, California and
shall be conducted in accordance with the Commercial Arbitration rules of the
American Arbitration Association. The Special New Procedures for Large, Complex
Issues shall apply. The arbitration panel shall consist of three (3)
arbitrators to be selected pursuant to such Commercial Arbitration Rules.
-17-
<PAGE>
(c) Applicable Law and Venue. This Agreement and any disputes or
------------------------
claims arising hereunder shall be construed in accordance with, governed by and
enforced under the laws of the State of California without regard to any rules
of conflicts of law (except as to the corporate governance matters set forth in
Sections 3(a) and 3(c) and the indemnities provided Executive in Section 14(e),
which shall be subject to the laws of Delaware applicable to companies
incorporated therein). Except with respect to matters governed by Delaware law,
the state and federal courts (or arbitrators appointed as described herein)
located in Los Angeles, California shall be the sole and exclusive forum for any
action for relief arising out of or pursuant to, or to enforce or interpret,
this Agreement; provided, however, that actions in such state or federal courts
shall be limited to actions or petitions to confirm or set aside an arbitration
award. Each party to this Agreement consents to the personal jurisdiction and
arbitration in any such forum and each party hereto covenants not to, and waives
any right to, seek a transfer of venue from such jurisdiction on any grounds.
(d) Interpretation. The provisions of this Agreement were negotiated
--------------
by each of the parties hereto and this Agreement shall not be deemed to have
been drafted by either party.
(e) Indemnification. The Company and/or MGM Studios shall indemnify
---------------
Executive through their respective Certificate of Incorporation, By-laws, the
Indemnification Agreement entered into pursuant to Section 14(e) of the Original
Agreement or otherwise to the fullest extent permitted by the Delaware General
Corporation Law (including the reimbursement of defense costs as incurred), as
such law exists and may hereafter be amended. Such indemnification shall apply,
but not be limited to, any actions taken or omissions by Executive, including,
without limitation, furnishing information, during the period from and after
January 1, 1996 until the Original Effective Date in connection with the
potential sale of MGM Studios and Executive's efforts to assemble a bid group to
purchase MGM Studios. Such indemnification shall not apply to any matters
arising under (x) the Amended Agreement as of July 25, 1993 between Executive
and Credit Lyonnaise, S.A., (y) the Senior Executive Incentive Plan of MGM
Holdings Corporation adopted as of 16 December 1994 and (z) the Senior Executive
Pool Plan of MGM Holdings Corporation adopted as of 15 December 1995.
(f) Representations of MGM Studios and the Company. Each of the
----------------------------------------------
Company and MGM Studios represents and warrants that (1) this Agreement has been
approved by the Board and MGM Studios Board, as applicable and is binding on MGM
Studios and the Company, as applicable and (2) this Agreement will not violate
the corporate charter or bylaws of MGM Studios and/or the Company, as
applicable.
-18-
<PAGE>
(g) No Waivers. The failure of either party to enforce any provision
----------
of this Agreement shall not be construed as a waiver of any such provision, nor
prevent such party thereafter from enforcing such provision or any other
provision of this Agreement. Rights granted the parties hereto herein are
cumulative and the election of one shall not constitute a waiver of such party's
right to assert all other legal remedies available under the circumstances.
(h) Notices. Any notice to be given under the terms of this Agreement
-------
shall be in writing and may be delivered personally, by telecopy, telex or other
form of written electronic transmission, by overnight courier or by registered
or certified mail, postage prepaid, and shall be addressed as follows:
TO THE COMPANY OR MGM STUDIOS:
Board of Directors
c/o Jerome York
Tracinda Corporation
4835 Koval Lane
Las Vegas, Nevada 89109
Telecopier: (702) 737-1177
WITH A COPY TO:
Richard E. Sobelle
Tracinda Corporation
4835 Koval Lane
Las Vegas, Nevada 89109
Telecopier: (702) 737-1177
and
Michael R. Gleason
Culmen Group, L.P.
201 Main Street, Suite 1955
Fort Worth, Texas 76102
Telecopier: (817) 870-1384
-19-
<PAGE>
TO THE EXECUTIVE:
Mr. Frank G. Mancuso
1201 Bel Air Road
Los Angeles, California 90077
Telecopier: (310) 471-0175
WITH COPIES TO:
Bertram Fields, Esq.
Greenberg Glusker Fields Claman & Machtinger LLP
1900 Avenue of the Stars
Suite 2000
Los Angeles, California 90067
Telecopier: (310) 553-0687
Either party may hereafter notify the other in writing of any change in address.
Any notice hereunder shall be deemed duly given when received by the person to
whom it was sent.
(i) Severability. The provisions of this Agreement are severable and
------------
if any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts thereof, shall not be affected thereby unless as a result of
such severing the remaining provisions or enforceable parts do not substantially
reflect the intention of the parties in entering into this Agreement.
(j) Confidentiality and Publicity. This Agreement shall remain
-----------------------------
confidential and the terms shall not be divulged to any person except to the
extent required by law or legal process. Any press release or announcement of
or relating to this Agreement and the timing of any such announcement shall only
be made with the agreement of Executive and the Company.
(k) Attorneys' Fees and Costs. If any arbitration proceeding or any
-------------------------
action at law or in equity is commenced to enforce this Agreement, the
prevailing party shall receive its attorneys' fees, costs and disbursements in
addition to any other relief granted.
(l) Effective Date. This Agreement shall become effective on the IPO
--------------
Closing Date.
-20-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
METRO-GOLDWYN-MAYER INC.
By:
----------------------------------
Name:
Title:
METRO-GOLDWYN-MAYER
STUDIOS INC.
By:
----------------------------------
Name:
Title:
-------------------------------------
FRANK G. MANCUSO
-21-
<PAGE>
EXHIBIT 10.24
================================================================================
FORM OF
AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
by and among
METRO-GOLDWYN-MAYER INC.
SEVEN NETWORK LIMITED
TRACINDA CORPORATION
METRO-GOLDWYN-MAYER STUDIOS INC.
MR. FRANK G. MANCUSO
and
THE OTHER PARTIES SPECIFIED ON THE
SIGNATURE PAGES HERETO
Dated as of August 4, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS.............................................. 1
Section 1.1 Definitions.............................................. 1
ARTICLE II REPRESENTATIONS AND WARRANTIES........................... 4
Section 2.1 Representations and Warranties of the Company............ 4
Section 2.2 Representations and Warranties of Seven.................. 4
Section 2.3 Representations and Warranties of Tracinda............... 5
Section 2.4 Representations and Warranties of MGM Studios............ 5
Section 2.5 Representations and Warranties of the Executives......... 6
ARTICLE III LEGEND; TAG-ALONG RIGHTS................................. 6
Section 3.1 Legend................................................... 6
Section 3.2 "Tag-Along" Rights....................................... 7
ARTICLE IV REGISTRATION RIGHTS...................................... 10
Section 4.1 Demand Registrations..................................... 10
Section 4.2 Piggyback Registrations.................................. 11
Section 4.3 Holdback Agreements...................................... 11
Section 4.4 Registration Procedures.................................. 12
Section 4.5 Registration Expenses.................................... 15
Section 4.6 Indemnification.......................................... 15
Section 4.7 Participation in Underwritten Registrations.............. 17
Section 4.8 Current Public Information............................... 18
Section 4.9 Preparation; Reasonable Investigation.................... 18
Section 4.10 Certain Rights of Holders................................ 18
Section 4.11 Form S-8................................................. 19
ARTICLE V GENERAL PROVISIONS....................................... 19
Section 5.1 Notices.................................................. 19
Section 5.2 Assignment; Binding Effect; Benefit; Successors.......... 21
Section 5.3 Entire Agreement......................................... 21
Section 5.4 Amendment................................................ 21
Section 5.5 Governing Law; Effective Date............................ 22
Section 5.6 Counterparts............................................. 22
Section 5.7 Headings................................................. 22
Section 5.8 Interpretation........................................... 22
Section 5.9 Severability............................................. 23
Section 5.10 Enforcement of Agreement................................. 23
Section 5.11 Termination of Original Shareholders Agreement........... 23
Section 5.12 Antidilution Adjustment.................................. 23
</TABLE>
i
<PAGE>
FORM OF AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
---------------------------------------------------
THIS AMENDED AND RESTATED SHAREHOLDERS AGREEMENT, dated as of August
4, 1997 (this "Agreement"), by and among METRO-GOLDWYN-MAYER INC., a corporation
---------
organized under the laws of the State of Delaware and formerly known as P&F
Acquisition Corp. (the "Company"), SEVEN NETWORK LIMITED, a corporation
-------
organized under the laws of the Commonwealth of Australia ("Seven"); TRACINDA
-----
CORPORATION, a corporation organized under the laws of the State of Nevada
("Tracinda"); METRO-GOLDWYN-MAYER STUDIOS INC., a corporation organized under
- ----------
the laws of the State of Delaware ("MGM Studios") and formerly known as Metro-
-----------
Goldwyn-Mayer Inc.; Mr. Frank G. Mancuso ("Mr. Mancuso"), and the Persons listed
-----------
on the signature pages hereto (Mr. Mancuso and each such Person is herein
referred to as an "Executive" and together as the "Executives")/1/, amends and
--------- ----------
supersedes that certain Shareholders Agreement, dated as of October 10, 1996, by
and among MGM Studios, Seven, Tracinda, the Company, Mr. Mancuso and the other
parties thereto (the "Original Shareholders Agreement").
-------------------------------
A. The Executives will be granted options ("Options") to acquire
-------
shares of capital stock of the Company pursuant to the Plan (as defined below).
B. Mr. Mancuso executed an amended and restated employment agreement
with the Company and MGM Studios dated as of August 4, 1997 pursuant to which
Mr. Mancuso may acquire from time to time shares of capital stock of the
Company.
C. The Company intends to commence with an Approved Initial Public
Offering (as defined below) of the Common Stock (as defined below) of the
Company and to enter into certain related transactions.
D. The parties hereto have agreed to enter into this Agreement for
the purpose of amending and restating in its entirety the provisions of the
Original Shareholders Agreement as provided herein.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS.
-----------
"Affiliate": of any Person, means (i) any other Person controlling,
---------
controlled by or under common control with such Person, (ii) any director or
executive officer of such Person or of any Affiliate of such Person and (iii)
any family member of any director or executive officer of such Person or any
director or executive officer of any Affiliate of such Person.
"Agreement": as defined in the preamble to this Agreement.
---------
- ---------------
/1/ At the execution of this Agreement, the signature pages hereto will indicate
the names of the Executives, who shall not execeed 18 in number.
<PAGE>
"Antidilution Adjustment": as defined in Section 5.12.
-----------------------
"Approved Initial Public Offering": has the meaning set forth in the
--------------------------------
Investors Shareholder Agreement as the same may be amended from time to time in
accordance with the terms thereof.
"Commission": means the Securities and Exchange Commission or any other
----------
Federal agency at the time administering the Securities Act.
"Common Stock": means the common stock of the Company.
------------
"Company": as defined in the preamble to this Agreement.
-------
"Demand Registrations": as defined in Section 4.1(a).
--------------------
"Exchange Act": means the Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations of the Commission thereunder, all as the same shall be
in effect at the time.
"Executives": as defined in the preamble to this Agreement.
----------
"Investors Shareholder Agreement": the Amended and Restated Investors
-------------------------------
Shareholder Agreement dated as of August 4, 1997 by and among MGM Studios, the
Company, Tracinda, Seven and Mr. Mancuso.
"IPO Closing": means the closing of an Approved Initial Public Offering at
-----------
which the Company first receives the funds described in the definition of
"Approved Initial Public Offering," whether or not the underwriters have at such
time exercised any over-allotment option.
"IPO Closing Date": means the date of the IPO Closing.
----------------
"MGM Studios": as defined in the preamble to this Agreement.
-----------
"Notice Date": as defined in Section 3.2.
-----------
"Options": as defined in the preamble to this Agreement.
-------
"Original Shareholders Agreement": as defined in the preamble to this
-------------------------------
Agreement.
"Other Securityholders": as defined in Section 3.2.
---------------------
"Permitted Transferee": means:
--------------------
(a) (i) the successors in interest to such Executive, in the case of a
Transfer upon the death of such Executive, provided that each such successor in
interest would be a Permitted Transferee under clauses (a)(ii) or (a)(iv) of
this definition, (ii) such Executive's spouse, parents, grandparents, siblings
and descendants (whether by blood or adoption, and including stepchildren) and
the spouses of such persons, (iii) such Executive, with respect to the
disposition of the community property interest of such Executive's spouse in all
or any part of the Common Stock upon the dissolution of the marriage of the
Executive and his or her spouse or upon the
2
<PAGE>
death of such spouse, (iv) any transferee occasioned by the incompetence of such
Executive and (v) in the case of a Transfer during such Executive's lifetime,
any Person in which no Person has any interest (directly or indirectly) except
for any of such Executive, such Executive's spouse, parents, grandparents,
siblings and descendants (whether by blood or adoption, and including
stepchildren) and the spouses of such persons; and
(b) the beneficiaries or the grantor of any trust all the
beneficiaries of which are natural persons; provided, however, that each such
-------- -------
beneficiary or grantor of such trust is a Person who would be a Permitted
Transferee under clause (a) of this definition.
"Person": means any natural person, corporation, partnership, limited
------
liability company, firm, association, trust, government, governmental agency, or
other legal entity, whether acting in an individual, fiduciary or other
capacity.
"Piggyback Registration": as defined in Section 4.2(a).
----------------------
"Plan": means, collectively, the Stock Incentive Plan and the Stock Option
----
Agreement.
"Registrable Securities": means (i) any shares of Common Stock owned by,
----------------------
or otherwise hereafter acquired by, Tracinda, Seven or any Executive and (ii)
any securities issued as a dividend on or other distribution with respect to or
in exchange, replacement or in subdivision of, any such Common Stock. As to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities when (i) a registration statement with respect to the sale of such
securities shall have been declared effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement, or (ii) such securities shall have been sold (other than in a
privately negotiated sale) pursuant to Rule 144 (or any successor provision)
under the Securities Act and in compliance with the requirements of paragraphs
(c), (e), (f)and (g)of Rule 144.
"Registration Expenses": as defined in Section 4.5(a).
---------------------
"Securities Act": means the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the Commission thereunder, as the same shall be in
effect at the time.
"Series A Options": as defined in the Plan.
-----------------
"Series B Options": as defined in the Plan.
-----------------
"Seven": as defined in the preamble to this Agreement.
-----
"Short-Form Registrations": as defined in Section 4.1(a).
------------------------
"Stock Incentive Plan": means the Company's Amended and Restated 1996
--------------------
Stock Incentive Plan, in substantially the form attached hereto as Exhibit A.
"Stock Split": as defined in Section 5.12.
-----------
3
<PAGE>
"Stock Option Agreement": means the Company's several Stock Option
----------------------
Agreements, in substantially the form attached hereto as Exhibit B, entered into
pursuant to the Stock Incentive Plan.
"Subsidiary": of any Person means any corporation or other legal entity of
----------
which such Person (either alone or through or together with any other direct or
indirect Subsidiary) owns, directly or indirectly, 50% or more of the stock or
other equity interests, the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation or other legal entity.
"Tag-Along Notice": as defined in Section 3.2.
----------------
"Tag-Along Sale": as defined in Section 3.2.
--------------
"Tracinda": as defined in the preamble to this Agreement.
--------
"Transfer": as defined in Section 3.2.
--------
"Transferring Party": as defined in Section 3.2.
------------------
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company hereby represents and warrants to the other parties hereto as
follows: (i) the Company has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby; (ii) the execution and delivery by the Company of this Agreement, and
the consummation by the Company of the transactions contemplated hereby, have
been duly authorized by all necessary corporate action on the part of the
Company; (iii) this Agreement has been duly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally or general principles of equity and
except to the extent that the indemnity provisions set forth in Article IV may
not be valid under applicable securities laws or by reason of public policy;
(iv) no consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign, is
required by, or with respect to, the Company in connection with the execution
and delivery of this Agreement by the Company or the consummation by the Company
of the transactions contemplated hereby; and (v) the execution and delivery of
this Agreement by the Company and the consummation of the transactions
contemplated hereby by the Company does not conflict with, or result in a breach
of, any law or regulation of any governmental authority applicable to the
Company or any material agreement to which the Company is a party.
SECTION 2.2. REPRESENTATIONS AND WARRANTIES OF SEVEN.
---------------------------------------
Seven hereby represents and warrants to the other parties hereto as
follows: (i) Seven has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions
4
<PAGE>
contemplated hereby; (ii) the execution and delivery by Seven of this Agreement,
and the consummation by Seven of the transactions contemplated hereby, have been
duly authorized by all necessary corporate action on the part of Seven; (iii)
this Agreement has been duly executed and delivered by Seven and constitutes a
valid and binding obligation of Seven enforceable against Seven in accordance
with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally or general principles of equity and except to the extent that the
indemnity provisions set forth in Article IV may not be valid under applicable
securities laws or by reason of public policy; (iv) no consent, approval, order
or authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by, or with respect to, Seven
in connection with the execution and delivery by Seven of this Agreement or the
consummation by Seven of the transactions contemplated hereby; and (v) the
execution and delivery by Seven of this Agreement and the consummation by Seven
of the transactions contemplated hereby does not conflict with, or result in a
breach of, any law or regulation of any governmental authority applicable to
Seven or any material agreement to which Seven is a party.
SECTION 2.3. REPRESENTATIONS AND WARRANTIES OF TRACINDA.
------------------------------------------
Tracinda hereby represents and warrants to the other parties hereto as
follows: (i) Tracinda has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby; (ii)
the execution and delivery by Tracinda of this Agreement, and the consummation
by Tracinda of the transactions contemplated hereby, have been duly authorized
by all necessary corporate action on the part of Tracinda; (iii) this Agreement
has been duly executed and delivered by Tracinda and constitutes a valid and
binding obligation of Tracinda enforceable against Tracinda in accordance with
its terms, except as the enforceability hereof may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally or
general principles of equity and except to the extent that the indemnity
provisions set forth in Article IV may not be valid under applicable securities
laws or by reason of public policy; (iv) no consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by, or with respect to,
Tracinda in connection with the execution and delivery of this Agreement by
Tracinda or the consummation by Tracinda of the transactions contemplated
hereby; and (v) the execution and delivery of this Agreement by Tracinda and the
consummation by Tracinda of the transactions contemplated hereby does not
conflict with, or result in a breach of, any law or regulation of any
governmental authority applicable to Tracinda or any material agreement to which
Tracinda is a party.
SECTION 2.4. REPRESENTATIONS AND WARRANTIES OF MGM STUDIOS.
---------------------------------------------
MGM Studios hereby represents and warrants to the other parties hereto as
follows: (i) MGM Studios has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby; (ii) the execution and delivery by MGM Studios of this Agreement, and
the consummation by MGM Studios of the transactions contemplated hereby, have
been duly authorized by all necessary corporate action on the part of MGM
Studios; (iii) this Agreement has been duly executed and delivered by MGM
Studios and constitutes a valid and binding obligation of MGM Studios
enforceable against MGM Studios in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency or other
5
<PAGE>
similar laws affecting creditors' rights generally or general principles of
equity and except to the extent that the indemnity provisions set forth in
Article IV may not be valid under applicable securities laws or by reason of
public policy; (iv) no consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, is required by, or with respect to, MGM Studios in connection with the
execution and delivery of this Agreement by MGM Studios or the consummation by
MGM Studios of the transactions contemplated hereby; and (v) the execution and
delivery of this Agreement by MGM Studios and the consummation by MGM Studios of
the transactions contemplated hereby does not conflict with, or result in a
breach of, any law or regulation of any governmental authority applicable to MGM
Studios or any material agreement to which MGM Studios is a party.
SECTION 2.5. REPRESENTATIONS AND WARRANTIES OF THE EXECUTIVES.
------------------------------------------------
Each of the Executives (as to himself only) hereby represents and warrants
to the other parties hereto, as of the date of the execution of this Agreement
by such Executive, as follows: (i) such Executive has all requisite power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby; (ii) this Agreement has been duly executed and delivered by
such Executive and constitutes a valid and binding obligation of such Executive
enforceable against such Executive in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally or general principles of equity and
except to the extent that the indemnity provisions set forth in Article IV may
not be valid under applicable securities laws or by reason of public policy;
(iii) no consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign, is
required by, or with respect to, such Executive in connection with the execution
and delivery of this Agreement by such Executive or the consummation by
Executive of the transactions contemplated hereby; and (iv) the execution and
delivery of this Agreement by such Executive and the consummation by such
Executive of the transactions contemplated hereby does not conflict with, or
result in a breach of, any law or regulation of any governmental authority
applicable to such Executive or any material agreement to which such Executive
is a party.
ARTICLE III
LEGEND; TAG-ALONG RIGHTS
SECTION 3.1. LEGEND. Tracinda and Seven hereby acknowledge and agree
------
that each of the certificates representing the shares of Common Stock
beneficially owned by each of them shall include the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THESE
SHARES ARE SUBJECT TO CERTAIN LIMITATIONS ON TRANSFER AND CERTAIN OTHER MATTERS
SET FORTH IN AN AGREEMENT DATED AS OF AUGUST 4, 1997 BY AND AMONG SEVEN NETWORK
LIMITED, TRACINDA CORPORATION,
6
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC., METRO-GOLDWYN-MAYER INC., MR. FRANK G.
MANCUSO, AND CERTAIN OTHER PERSONS (THE "AGREEMENT"). A COPY OF THE AGREEMENT IS
ON FILE WITH THE SECRETARY OF METRO-GOLDWYN-MAYER INC.
SECTION 3.2. "TAG-ALONG" RIGHTS.
-----------------
(a) If either of Seven or Tracinda (a "Transferring Party") desires to
------------------
sell, transfer, assign, pledge or otherwise dispose of ("Transfer") directly or
--------
indirectly, in whole or in part, any shares of Common Stock beneficially owned
by it (a "Tag-Along Sale"), the Transferring Party shall provide the Company and
--------------
each of the Executives and Tracinda or Seven, as the case may be (the "Other
-----
Securityholders"), with written notice (the "Tag Along Notice") setting forth:
- --------------- ----------------
(i) the number of shares of Common Stock proposed to be
Transferred;
(ii) the name and address of the prospective purchaser;
(iii) all material terms and conditions of such proposed
transaction including the date of the proposed closing of such transaction
and the proposed amount and the form of consideration to be paid for such
Common Stock;
(iv) that the Transferring Party is offering each of the Other
Securityholders the right to participate in such Transfer on a pro rata
basis on the same terms and conditions as are applicable to the
Transferring Party;
(v) the aggregate number of shares of Common Stock beneficially
owned by such Transferring Party as of the date of the Tag Along Notice
(the "Notice Date") from the Transferring Party to the Company;
-----------
(vi) the Company's calculation of the maximum number of shares of
Common Stock that each such Other Securityholder is entitled to include in
the Tag-Along Sale (as computed in accordance with the equation set forth
in subsection (a) of this Section 3.2); and
(vii) a copy of the proposed agreements for the Tag-Along Sale.
The Company shall have the obligation to provide the calculation described
in clause (vi) above to the Transferring Party upon request by the Transferring
Party and shall take full and complete responsibility for the accuracy and
completeness of such calculation. Within 20 calendar days following the
delivery of the Tag Along Notice, each Other Securityholder, by notice in
writing to the Transferring Party, shall have (i) in the case of the Executives,
the right to exercise any Options held by such Executives to the extent required
to realize the rights of such Executives provided in this Section 3.2 and (ii)
the opportunity to sell to the prospective purchaser (upon the same terms and
conditions as the Transferring Party) on the proposed date of the closing of the
applicable transaction as specified in the applicable Tag Along Notice up to
that number of shares
7
<PAGE>
of Common Stock specified in the Tag Along Notice owned by such Other
Securityholder (excluding any shares of Common Stock acquired pursuant to open
market purchases) as shall equal the product of (x) a fraction, the numerator of
which is the number of shares of Common Stock specified in the Tag Along Notice
beneficially owned by such Other Securityholder as of the date of such proposed
sale (excluding any shares of Common Stock acquired pursuant to open market
purchases), and the denominator of which is the aggregate number of shares of
Common Stock specified in the Tag Along Notice beneficially owned as of the date
of such proposed sale by the Transferring Party and all of the Other
Securityholders (excluding any shares of Common Stock acquired pursuant to open
market purchases), and (y) the number of shares of Common Stock proposed to be
sold; provided, however, that to the extent the prospective purchaser agrees to
-------- -------
purchase Common Stock in excess of the amount specified in the Tag Along Notice,
such excess amount shall be allocated among the Transferring Party and the Other
Securityholders on a pro-rata basis based on the allocation procedures specified
above; provided further, however, that to the extent that one or more Other
-------- ------- ------- ----
Securityholders elect not to participate in such sale, the amount of Common
Stock which such Other Securityholder(s) would otherwise have been entitled to
sell in such sale shall not be reallocated to the remaining Other
Securityholders who elect to participate in such sale; and provided further,
-------- -------
however, that in exercising these rights with respect to an Executive's Series
- ------- ----
A Option or Series B Option (1) the Series A Option must be exercised, to the
extent then vested, before the Series B Option, to the extent then vested, is
exercised, (2) thereafter, the Series B Option, to the extent then vested, must
be exercised before the Series A Option, to the extent not vested, is
exercised, (3) then, the balance of the Series A Option must be exercised
before the balance of the Series B Option is exercised and (4) thereafter, the
balance of the Series B Option will be exercisable. The amount of shares of
Common Stock to be sold by the Transferring Party shall be reduced if and to the
extent necessary to provide for such sale of shares of Common Stock by the Other
Securityholders. If an Other Securityholder does not elect to participate in
such sale within the 20 calendar day period referred to above, the Transferring
Party shall be entitled to consummate such sale not later than 90 days after the
end of such 20 calendar day period on terms no more favorable to the
Transferring Party than those stated in the Tag Along Notice without the
participation of such Other Securityholder and all rights of such Other
Securityholder to exercise Options in connection with such sale shall terminate.
An Other Securityholder shall not be deemed to have entered into a legally
binding agreement to sell shares unless and until such Other Securityholder
shall have entered into a definitive purchase agreement with the prospective
transferee which shall include customary conditions precedent to such Other
Securityholder's obligations thereunder, including, without limitation, the
obtaining of all necessary regulatory approvals, and which shall provide for the
same terms and conditions applicable to the Transferring Party, including
(without limitation) representations, warranties and indemnities; provided that
-------------
the maximum indemnity obligation of the Other Securityholder under any such
agreement (in its capacity as a selling shareholder) shall be limited to the
purchase price received by such Other Securityholder in the applicable
transaction and the indemnity obligations of the Other Securityholder under any
such agreement (in its capacity as a selling shareholder) shall be several, and
not joint, with the other parties selling shares pursuant to the agreement. The
provisions of this Section 3.2 shall not inure to the benefit of or be binding
upon any transferee of Common Stock from Tracinda or Seven (except in connection
with any transfer by either of them
8
<PAGE>
to one or more of their Affiliates) or from any Executive (other than a
Permitted Transferee of an Executive).
(b) The provisions of this Section 3.2 shall not apply to:
(i) any transaction in which shares of Common Stock are proposed
to be sold publicly pursuant to a registration statement filed under the
Securities Act or pursuant to Rule 144 or Regulation S promulgated under
the Securities Act; or
(ii) any one transaction or series of related transactions
involving the transfer by the Transferring Party of less than 1% of the
then issued and outstanding shares of Common Stock; or
(iii) any bona fide pledge to a bank or other institutional
financial lender; or
(iv) any sale from one party to this Agreement to another party
to this Agreement.
(c) The obligations provided for in this Section 3.2 shall terminate
with respect to each Transferring Party at such time as such Transferring Party
beneficially owns less than 250,000 shares of Common Stock.
(d) If an Option held by an Executive has vested pursuant to the terms
of the Plan but is not exercisable pursuant to the terms of the Plan at the time
of a Tag-Along Sale pursuant to this Section 3.2, the Executive shall be
entitled to exercise such Option as described in subsection (a) of this Section
3.2.
(e) Notwithstanding anything contained herein to the contrary, the
provisions of this Section 3.2 shall not apply to, in the case of each of
Tracinda and Seven, (i) the transfer of, or the grant of options for the
acquisition of, up to 7,500 shares of Common Stock (such number to be
appropriately adjusted in the event that the Company should effect any stock
dividend, stock split, reverse stock split, or any similar transaction after the
date hereof) beneficially owned by it to officers, directors, employees,
consultants and affiliates so long as such transferee shall agree in writing to
be bound by all the terms of this Agreement applicable to its transferor as if
the transferee originally had been a party to this Agreement and (ii) the
transfer and assignment of all or any portion of the capital stock of the
Company beneficially owned by it to any direct or indirect wholly owned
subsidiary of such entity so long as (y) such transferee shall agree in writing
to be bound by all the terms of this Agreement applicable to its transferor as
if the transferee originally had been a party to this Agreement and (z) the
transferor agrees to cause such direct or indirect wholly owned subsidiary to
continue to be a direct or indirect wholly owned subsidiary of the transferor
for so long as such direct or indirect wholly owned subsidiary beneficially owns
any such capital stock of the Company.
9
<PAGE>
ARTICLE IV
REGISTRATION RIGHTS
SECTION 4.1. DEMAND REGISTRATIONS.
---------------------
(a) Requests for Registration. Subject to Sections 4.1(c) and 4.3
-------------------------
hereof, each of Seven, Tracinda and each Executive shall have the right to make
up to three requests, in the case of each of Seven and Tracinda, and up to two
requests with respect to all of the Executives, for registration under the
Securities Act of all or part of their Registrable Securities on Form S-1 or any
similar long-form registration or on Form S-3 or any similar short-form
registration ("Short-Form Registrations"); provided that no request for a Demand
------------------------ -------- ----
Registration may be made at anytime prior to 180 days after the IPO Closing
Date; and provided, further, that any request for a Demand Registration shall
-------- ------- ----
not be otherwise deemed to be effective unless such request includes Registrable
Securities which have an estimated value of no less than $50,000,000. Each
request for a Demand Registration shall specify the approximate number of
Registrable Securities requested to be registered and the anticipated per share
price range for such offering. All registrations requested pursuant to this
Section 4.1(a) are referred to herein as "Demand Registrations."
--------------------
(b) Short-Form Registrations. Demand Registrations will be Short-Form
------------------------
Registrations whenever the Company is permitted to use any applicable short
form, unless the party requesting such Demand Registration is entitled to
request, and agrees to bear the incremental Registration Expenses for,
registration on Form S-1 at a time when use of Short-Form Registration is
available. The Company will use its best efforts to make Short-Form
Registrations available for the sale of Registrable Securities. Demand
Registration requests may be for shelf registrations if the Company is then
eligible to effect shelf registrations.
(c) Restrictions on Demand Registrations. The Company will not be
------------------------------------
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration. During any two-year period,
the Company may make a one-time election to postpone the filing or the
effectiveness of a registration statement for a Demand Registration for up to
six months if the board of directors of the Company determines, in its good
faith judgment, that (i) such Demand Registration would reasonably be expected
to have a material adverse effect on, interfere with or delay any proposal or
plan by the Company or any of its subsidiaries to engage in any acquisition of
assets (other than in the ordinary course of business) or any merger,
consolidation, tender offer or similar transaction, (ii) the filing of a
registration statement or a sale of Registrable Securities pursuant thereto
would require disclosure of material information that the Company has a bona
fide business purpose for preserving as confidential or (iii) the Company is
unable to comply with the registration requirements of the Commission; provided
--------
that, in such event, the holders of Registrable Securities initially requesting
- ----
such Demand Registration will be entitled to withdraw such request and, if such
request is withdrawn, such request for Demand Registration will not count as a
request for Demand Registration hereunder and the Company will pay all
Registration Expenses in connection with such withdrawn registration request.
10
<PAGE>
(d) Selection of Underwriters. The party requesting a Demand
-------------------------
Registration will have the right to select the managing underwriters to
administer the offering, who shall be of national prominence and reasonably
acceptable to the Company.
SECTION 4.2. PIGGYBACK REGISTRATIONS.
-----------------------
(a) Right to Piggyback. Whenever at anytime after the IPO Closing
------------------
Date, the Company proposes to register any of its equity securities under the
Securities Act (other than a registration on Form S-4 or Form S-8 or any
successor or similar forms) and the registration form to be used may be used for
the registration of Registrable Securities (a "Piggyback Registration"), whether
----------------------
or not for sale for its own account, the Company will give prompt written notice
to each of Tracinda, Seven and the Executives of its intention to effect such a
registration and the class or classes of equity securities of the Company to be
registered and will include in such registration all Registrable Securities of
the same class or classes with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the notice
from the Company.
(b) Priority on Primary Registrations. If a Piggyback Registration is
---------------------------------
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering within a price range reasonably acceptable to
the Company, the Company will include in such registration (i) first, the
securities the Company proposes to sell and (ii) second, all other securities
(including the Registrable Securities) requested to be included in such
registration, pro rata among the respective holders thereof on the basis of the
number of securities owned by each such holder.
(c) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of securities of
the Company, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering within a
price range reasonably acceptable to such holders, the Company will include in
such registration the securities (including the Registrable Securities)
requested to be included in such registration, pro rata among the respective
holders thereof on the basis of the number of securities owned by each such
holder.
SECTION 4.3. HOLDBACK AGREEMENTS.
-------------------
(a) If requested in writing by the Company or the managing
underwriters, if any, of any registration effected pursuant to Section 4.1 or
4.2, each of Seven, Tracinda and the Executives agrees not to effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the time period reasonably requested by
the managing underwriters, not to exceed the period commencing with the date
seven days prior to and ending with the date 90 days, or such longer period, not
to exceed 180 days, as the applicable managing underwriter shall request, after
the effective date of any underwritten Demand Registration, any
11
<PAGE>
underwritten Piggyback Registration or other underwritten registration by the
Company of its securities (except as part of such underwritten registration).
(b) If requested in writing by the managing underwriters of any
registration effected pursuant to Section 4.1 or 4.2, the Company agrees (i) not
to effect any public sale or distribution of its equity securities, or any
securities convertible into or exchangeable or exercisable for such securities,
during the time period reasonably requested by the managing underwriters, not to
exceed the period commencing with the date seven days prior to and ending with
the date 90 days, or such longer period, not to exceed 180 days, as the
applicable managing underwriter shall request, after the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration or pursuant to registrations
on Form S-4 or Form S-8 or any successor forms), and (ii) to use its best
efforts to cause each holder of its capital stock, which such holder purchased
from the Company at any time after the date of this Agreement (other than in a
registered public offering), to so agree.
(c) If the Company has previously filed a registration statement with
respect to Registrable Securities pursuant to Section 4.1 or 4.2, and if such
previous registration has not been withdrawn or abandoned, the Company will not
file or cause to be effected any other registration of any of its equity
securities or securities convertible or exchangeable into or exercisable for its
equity securities under the Securities Act (except on Form S-4 or Form S-8 or
any successor forms), whether on its own behalf or at the request of any holder
or holders of such securities, until a period of at least 90 days, or such
longer period, not to exceed 180 days, as the applicable managing underwriter
shall request, has elapsed from the effective date of such previous
registration.
SECTION 4.4. REGISTRATION PROCEDURES. Whenever Tracinda, Seven or an
-----------------------
Executive has requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Securities and thereafter use its best efforts to
cause such registration statement to become effective (provided that, before
-------- ----
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company will furnish to the counsel selected by the holders of a
majority of the Registrable Securities covered by such registration statement
copies of all such documents proposed to be filed, which documents will be
subject to review of such counsel);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of either (i) not less than six months (subject to extension pursuant
to Section 4.7(b)) or, if such registration statement relates to an underwritten
offering, such longer period as in the opinion of counsel for the underwriters a
prospectus is required by law to be delivered in connection with sales of
Registrable Securities by an underwriter or dealer or (ii) such shorter period
as will terminate when all of the securities
12
<PAGE>
covered by such registration statement have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof set forth
in such registration statement (but in any event not before the expiration of
any longer period required under the Securities Act), and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of such Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
-------- ----
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the discovery of the happening of
any event as a result of which, the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and the Company will prepare and file
with the Commission and, at the request of any such seller, furnish to such
seller a reasonable number of copies of, a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue statement of
a material fact or omit to state any fact necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the Nasdaq National Market;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or
13
<PAGE>
facilitate the disposition of such Registrable Securities (including, without
limitation, effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the officers,
directors, employees and independent accountants of the Company to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, an earnings statement covering the period of
at least twelve months beginning with the first day of the first full calendar
quarter of the Company after the effective date of the registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(l) obtain a "cold comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants of the Company in
customary form and covering such matters of the type customarily covered by
"cold comfort" letters as the holders of a majority of the Registrable
Securities being sold reasonably request (provided that such Registrable
Securities constitute at least 10% of the securities covered by such
registration statement); and
(m) provide a legal opinion of the outside counsel of the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the date of the
closing under the underwriting agreement), with respect to the registration
statement, each amendment and supplement thereto, the prospectus included
therein (including the preliminary prospectus) and such other documents relating
thereto in customary form and covering such matters of the type customarily
covered by legal opinions of such nature. The Company may require each seller
of Registrable Securities as to which any registration is being effected to
furnish the Company such information regarding such seller and the distribution
of such securities as the Company may from time to time reasonably request in
writing.
14
<PAGE>
SECTION 4.5. REGISTRATION EXPENSES.
---------------------
(a) Except as provided in Section 4.1(b), the Company shall pay all
Registration Expenses relating to any registration of Registrable Securities
hereunder. "Registration Expenses" shall mean any and all fees and expenses
---------------------
incident to the Company's performance of or compliance with this Article IV,
including, without limitation: (i) Commission, stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees and all
listing fees and fees with respect to the inclusion of securities on the Nasdaq
National Market, (ii) fees and expenses of compliance with state securities or
"blue sky" laws and in connection with the preparation of a "blue sky" survey,
including, without limitation, reasonable fees and expenses of blue sky counsel,
(iii) printing expenses, (iv) messenger and delivery expenses, (v) fees and
disbursements of counsel for the Company, (vi) with respect to each
registration, reasonable fees and disbursements of one counsel for the selling
shareholders (other than the Company) (selected by the holders making the Demand
Registration request, in the case of a registration pursuant to Section 4.1, and
selected by the holders of a majority of the Registrable Securities included in
such registration, in the case of a registration pursuant to Section 4.2) as
well as of one local counsel, (vii) fees and disbursements of all independent
public accountants (including the expenses of any audit and/or "cold comfort"
letter) and fees and expenses of other persons, including special experts,
retained by the Company, and (viii) any other fees and disbursements of
underwriters, if any, customarily paid by issuers or sellers of securities.
(b) Notwithstanding the foregoing, (i) the provisions of this Section
4.5 shall be deemed amended to the extent necessary to cause these expense
provisions to comply with "blue sky" laws of each state in which the offering is
made and (ii) in connection with any registration hereunder, each holder of
Registrable Securities being registered shall pay all underwriting discounts and
commissions and transfer taxes, if any, attributable to the Registrable
Securities included in the offering by such holder.
SECTION 4.6. INDEMNIFICATION.
---------------
(a) The Company and MGM Studios jointly and severally agree to
indemnify and hold harmless, to the extent permitted by law, each holder of
Registrable Securities, its officers, directors, employees and agents and each
Person who controls such holder (within the meaning of the Securities Act)
against any losses, claims, damages or liabilities, joint or several, to which
such holder or any such director, officer, employee, agent or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon (i)
any untrue or alleged untrue statement of a material fact contained (A) in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or (B) in any application or other document or
communication (in this Section 4.6 collectively called an "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify any securities covered by such registration statement under the "blue
sky" or securities laws thereof, (ii) any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (iii) any violation by the Company of the Securities
Act or any state securities law, or any rule or regulation
15
<PAGE>
promulgated under the Securities Act or any state securities law, or any other
law applicable to the Company relating to any such registration or
qualification, and the Company will reimburse such holder and each such
director, officer and controlling person for any legal or any other expenses
incurred by them in connection with investigating or defending any such loss,
claim, liability, action or proceeding; provided that the Company shall not be
-------------
liable in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises out of
or is based upon an untrue statement or alleged untrue statement, or omission or
alleged omission, made in such registration statement, any such prospectus or
preliminary prospectus or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written information
prepared and furnished to the Company by such holder expressly for use therein
or by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies of the same. In
connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of Registrable
Securities.
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and documents concerning such holder as the
Company reasonably requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, will indemnify and
hold harmless the Company, MGM Studios, their respective directors and officers
and each other Person who controls or is controlled by the Company and the
directors and officers of each such controlling or controlled Person (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities,
joint or several, to which the Company or any such director or officer or
controlling or controlled Person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon (i) any untrue or alleged untrue statement of a material fact
contained in the registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or in any application or (ii) any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that such untrue statement or omission is made in such registration statement,
any such prospectus or preliminary prospectus or any amendment or supplement
thereto, or in any application, in reliance upon and in conformity with written
information concerning such holder prepared and furnished to the Company by such
holder in writing expressly for use therein, and such holder will reimburse the
Company and each such director, officer and controlling or controlled Person for
any legal or any other expenses incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided that the obligation to indemnify will be individual to each
-------- ----
holder and will be limited to the net amount of proceeds received by such holder
from the sale of Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks
16
<PAGE>
indemnification and (ii) unless in such indemnified party's reasonable judgment
a conflict of interest between such indemnified and indemnifying parties may
exist with respect to such claim, permit such indemnifying party to assume the
defense of such claim with counsel reasonably satisfactory to the indemnified
party. If such defense is assumed, the indemnified party will not be subject to
any liability for any settlement made by the indemnifying party without its
consent (but such consent will not be unreasonably withheld). An indemnifying
party who is not entitled to, or elects not to, assume the defense of a claim
will not be obligated to pay the fees and expenses of more than one counsel for
all parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim. If the indemnifying party
assumes the defense, the indemnified party may engage its own counsel at its own
sole cost and expense. All fees and expenses of counsel to any indemnified party
required to be paid by any indemnifying party shall be paid by such indemnifying
party as incurred by such indemnified party.
(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director, employee, agent or controlling
or controlled Person of such indemnified party and will survive the transfer of
securities by any holder thereof. If the indemnification provided for herein is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative fault of the indemnifying party or parties,
on the one hand, and the indemnified party or parties, on the other hand, in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations; provided, however, that in no event shall any contribution by
-------- ------- ----
any holder or any director, officer, employee, agent or controlling or
controlled Person thereof exceed the amount of the net proceeds received by such
holder from the sale of Registrable Securities pursuant to such registration
statement.
SECTION 4.7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS.
-------------------------------------------
(a) If requested by the underwriters for any underwritten offering
pursuant to a Demand Registration requested under Section 4.1, the Company shall
enter into a customary underwriting agreement with the underwriters. Such
underwriting agreement shall be satisfactory in form and substance to the Person
who requested such registration and shall contain such representations and
warranties by, and such other agreements on the part of, the Company and such
other terms as are generally prevailing in agreements of that type, including,
without limitation, indemnities and contribution agreements. Such underwriting
agreement shall also contain such representations, warranties, indemnities and
contributions by the participating holders as are customary in agreements of
that type. In the case of a registration pursuant to Section 4.2 hereof, if the
Company shall have determined to enter into any underwriting agreements in
connection therewith, all of the holders' Registrable Securities to be included
in such registration shall be subject to such underwriting agreement. Such
underwriting agreement
17
<PAGE>
shall also contain such representations, warranties, indemnities and
contributions by the participating holders as are customary in agreements of
that type.
(b) Each Person that is participating in any registration hereunder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 4.4(e) above, such Person will forthwith
discontinue the disposition of its Registrable Securities pursuant to the
registration statement until such Person's receipt of the copies of a
supplemented or amended prospectus as contemplated by such Section 4.4(e). In
the event the Company shall give any such notice, the applicable time period
mentioned in Section 4.4(b) during which a registration statement is to remain
effective shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to this paragraph to
and including the date when each seller of a Registrable Security covered by
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated by Section 4.4(e).
SECTION 4.8. CURRENT PUBLIC INFORMATION. At all times, the Company will
--------------------------
file all reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder,
and will take such further action as any holder or holders of Registrable
Securities may reasonably request, all to the extent required to enable such
holders to sell Registrable Securities pursuant to Rule 144.
SECTION 4.9. PREPARATION; REASONABLE INVESTIGATION. In connection with
-------------------------------------
the preparation and filing of each registration statement under the Securities
Act, the Company will give the holders of Registrable Securities registered
under such registration statement and their respective counsel, underwriters and
accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business, finances and accounts of the Company and its Subsidiaries with its
officers, directors and the independent public accountants who have certified
its financial statements as shall be necessary, in the opinion of such holders'
and such underwriters' respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
SECTION 4.10. CERTAIN RIGHTS OF HOLDERS. The Company will not file any
-------------------------
registration statement under the Securities Act which refers to any holder of
Registrable Securities by name or otherwise as the holder of any securities of
the Company, unless it shall first have given such holder the right to require:
(a) the insertion therein of language, in form and substance
satisfactory to such holder, to the effect that, in the opinion of such holder,
the holding of such holder of such securities does not make such holder a
"controlling person" of the Company within the meaning of the Securities Act and
is not to be construed as a recommendation by such holder of the investment
quality of the Company's securities covered thereby and that such holding does
not imply that such holder will assist in meeting any future financial
requirements of the Company, or
18
<PAGE>
(b) in the event that such reference to such holder by name or
otherwise is not required by the Securities Act or any rules and regulations
promulgated thereunder, the deletion of the reference to such holder.
SECTION 4.11. FORM S-8. The Company will, within 6 months following the
--------
IPO Closing Date, cause to become effective a registration statement on Form S-8
with the Commission with respect to shares of capital stock of the Company
subject to Options.
ARTICLE V
GENERAL PROVISIONS
SECTION 5.1. NOTICES. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
If to the Company or MGM Studios, to:
Metro-Goldwyn-Mayer Inc.
2500 Broadway
Fifth Floor
Santa Monica, CA 90404-3061
Attention: David Johnson
Telephone: (310) 449-3993
Telecopy: (310) 449-3011
with a copy to:
Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, CA 90071
Attention: Bruce D. Meyer
Telephone: (213) 229-7979
Telecopy: (213) 229-7520
If to Tracinda, to:
Tracinda Corporation
4835 Koval Lane
Las Vegas, NV 89109
Attention: Secretary / Treasurer
Telecopy: (702) 737-1177
19
<PAGE>
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Attention: Stephen Fraidin, P.C.
Telephone: (212) 859-8140
Telecopy: (212) 859-4000
If to Seven, to:
Seven Network Limited
c/o Culmen Group, L.P.
201 Main Street
Suite 1955
Fort Worth, TX 76102
Attention: Michael R. Gleason
Telephone: (817) 335-6999
Telecopy: (817) 870-1384
and:
ATN7
Mobbs Lane
Epping NSW 2121, Australia
Attention: Gary Rice, Managing Director
Telephone: (602) 877-7000
Telecopy: (612) 996-77191
with a copy to:
Kelly, Hart & Hallman
201 Main Street
Fort Worth, TX 76102
Attention: F. Richard Bernasek
Telephone: (817) 332-2500
Telecopy: (817) 878-9280
if to an Executive, to the address of such Executive set forth in the signature
pages hereof or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been delivered as of
the date so telecommunicated, personally delivered or mailed.
20
<PAGE>
SECTION 5.2. ASSIGNMENT; BINDING EFFECT; BENEFIT; SUCCESSORS.
-----------------------------------------------
(a) Except as otherwise expressly provided in this Agreement, neither
this Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any of the parties hereto (whether by operation of law or
otherwise); provided, however, that the registration and related rights
-------- ------- ----
specified in Article IV shall inure to the benefit of any transferee of
Registrable Securities pursuant to a Transfer permitted under the terms of this
Agreement; provided, further, however, that each of Tracinda and Seven may
-------- ------- ------- ----
assign its rights under this Agreement to any of their respective direct or
indirect wholly owned Subsidiaries so long as (i) such assignee agrees to be
bound by the terms of this Agreement to the same extent as the applicable
assignor, (ii) the applicable assignor continues to be bound by, and is not
released from, any of its obligations under this Agreement, and (iii) the
applicable assignor will cause the applicable direct or indirect wholly owned
Subsidiary to continue to be a direct or indirect wholly owned Subsidiary of the
applicable assignor for so long as such assignee shall have rights under this
Agreement. For the purpose of this Agreement, all capital stock of the Company
owned by any direct or indirect wholly owned Subsidiary of Tracinda or Seven, as
applicable, shall be deemed owned by Tracinda or Seven, as applicable. Subject
to the first sentence of this Section 5.2, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Except as expressly provided in this Agreement,
notwithstanding anything contained in this Agreement to the contrary, nothing in
this Agreement, express or implied, is intended to confer on any person other
than the parties hereto any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
(b) In the event that the Company shall enter into a merger,
consolidation or other similar type transaction, all of the terms of this
Agreement relating to the Company, as applicable, shall apply to the surviving
corporation.
SECTION 5.3. ENTIRE AGREEMENT. Upon the effectiveness hereof, this
----------------
Agreement and any certificate delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings (oral and
written) among the parties with respect thereto.
SECTION 5.4. AMENDMENT.
---------
(a) Subject to Section 5.4(b), this Agreement may not be amended or
modified except by an instrument in writing signed by or on behalf of each of
the parties hereto which, with respect to the Executives, shall refer to the
holders of a majority of shares of capital stock of the Company owned by the
Executives and subject to the terms of this Agreement.
(b) The provisions of Article IV of this Agreement which are solely
for the benefit of Tracinda, Seven and/or the Company may be amended without the
consent of the Executives. Any other provision of Article IV may be amended
without the consent of the Executives provided that, in the case of this
sentence, such amendment does not materially and adversely affect the rights of
the Executives under this Agreement.
21
<PAGE>
SECTION 5.5. GOVERNING LAW; EFFECTIVE DATE. This Agreement shall be
-----------------------------
governed by, and construed in accordance with, the internal laws of the State of
Delaware (without regard to conflict of laws principles which would require the
application of the laws of any other State). Each of the parties hereto agrees
that any legal action or proceeding with respect to this Agreement may be
brought in the Courts of the State of Delaware or the United States District
Court located in the State of Delaware and, by execution and delivery of this
Agreement, each party hereto hereby irrevocably submits itself in respect of its
property, generally and unconditionally to the non-exclusive jurisdiction of the
aforesaid courts in any legal action or proceeding arising out of this
Agreement. Each of the parties hereto hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Agreement brought in the courts referred to in the preceding sentence. Each
party hereto hereby consents to process being served in any such action or
proceeding by the mailing of a copy thereof to the address set forth in Section
5.1 hereof and agrees that such service upon receipt shall constitute good and
sufficient service of process or notice thereof. Nothing in this Section 5.5
shall affect or eliminate any right to serve process in any other manner
permitted by law. This Agreement shall become effective at the time of the IPO
Closing. Prior to the issuance of any Options or shares of capital stock of the
Company to any Executive of the Company, MGM Studios or any of their respective
Subsidiaries, the Company shall cause such Executive to become a party to this
Agreement.
SECTION 5.6. COUNTERPARTS. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies of
this Agreement, each of which may be signed by less than all of the parties
hereto, but together all such copies are signed by all of the parties hereto.
SECTION 5.7. HEADINGS. Headings of the Articles and Sections of this
--------
Agreement are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
SECTION 5.8. INTERPRETATION. In this Agreement, unless the context
--------------
otherwise requires, words describing the singular number shall include the
plural and vice versa, "including" shall mean including, without limitation, and
words denoting any gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice versa.
SECTION 5.9. SEVERABILITY. Any term or provision of this Agreement
------------
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or otherwise affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
SECTION 5.10. ENFORCEMENT OF AGREEMENT. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were
22
<PAGE>
not performed in accordance with its specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware court, this being in addition to
any other remedy to which they may be entitled at law or in equity.
SECTION 5.11. TERMINATION OF ORIGINAL SHAREHOLDERS AGREEMENT. Seven,
----------------------------------------------
Tracinda, the Company, MGM Studios, and Executives hereby mutually agree that,
effective as of the IPO Closing Date, the Original Shareholders Agreement shall
terminate and be of no further force or effect and none of them shall have any
further rights, duties or obligations thereunder from and after the effective
date of such termination. Until such time as the IPO Closing Date shall occur,
the Original Shareholders Agreement shall remain in full force and effect and
shall be unaffected hereby, except that no party hereto shall be entitled to
effect a Piggyback Registration pursuant to the Approved Initial Public
Offering.
SECTION 5.12. ANTIDILUTION ADJUSTMENT. Prior to or concurrent with the
-----------------------
consummation of the IPO Closing, the Company will effect, in one or more
transactions, a net stock split of the Common Stock (the "Stock Split"). As a
-----------
result of the Stock Split, before this Agreement becomes effective, the number
of shares of Common Stock in Section 3.2(c) will be multiplied by the Stock
Split (the "Antidilution Adjustment"). By way of illustration, if the Stock
-----------------------
Split is 50 for 1 by virtue of the Antidilution Adjustment, the 250,000 number
in Section 3.2(c) of this Agreement will become 12,500,000.
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf as of the day and year first written
above.
SEVEN NETWORK LIMITED
By:
-----------------------------------------------------
Name:
Title:
TRACINDA CORPORATION
By:
-----------------------------------------------------
Name:
Title:
METRO-GOLDWYN-MAYER STUDIOS INC.
By:
-----------------------------------------------------
Name:
Title:
METRO-GOLDWYN-MAYER INC.
By:
-----------------------------------------------------
Name:
Title:
-----------------------------------------------------
Frank G. Mancuso
-----------------------------------------------------
[Executive]
-----------------------------------------------------
[Executive]
-----------------------------------------------------
[Executive]
-----------------------------------------------------
[Executive]
<PAGE>
The undersigned, an indirect wholly owned subsidiary of Seven Network Limited,
hereby agrees to be bound by the terms of this Agreement to the same extent as
Seven Network Limited.
MILTONSTAR PTY LIMITED
By:
-----------------------------
Name:
Title:
<PAGE>
EXHIBIT A
SEE EXHIBIT 10.5
<PAGE>
EXHIBIT B
SEE EXHIBIT 10.5
<PAGE>
EXHIBIT 10.25
================================================================================
FORM OF
AMENDED AND RESTATED INVESTORS SHAREHOLDER AGREEMENT
by and among
SEVEN NETWORK LIMITED
TRACINDA CORPORATION
METRO-GOLDWYN-MAYER STUDIOS INC.
METRO-GOLDWYN-MAYER INC.
and
FRANK G. MANCUSO
Dated as of August 4, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS....................................................... 1
Section 1.1. Definitions......................................... 1
ARTICLE II REPRESENTATIONS AND WARRANTIES.................................... 4
Section 2.1. Representations and Warranties of the Company....... 4
Section 2.2. Representations and Warranties of Seven............. 4
Section 2.3. Representations and Warranties of Tracinda.......... 5
Section 2.4. Representations and Warranties of MGM Studios....... 5
ARTICLE III CORPORATE GOVERNANCE; CERTAIN CORPORATE ACTIONS................... 5
Section 3.1. Voting of Shares.................................... 5
Section 3.2. Composition of the Board of Directors of the
Company, MGM Studios, Orion and the Committees of
the Company......................................... 6
Section 3.3. Approval of Certain Matters......................... 11
ARTICLE IV FIRST REFUSAL..................................................... 11
Section 4.1. First Refusal....................................... 11
Section 4.2. Legend.............................................. 14
ARTICLE V PREEMPTIVE RIGHTS................................................. 14
Section 5.1. Certain Pre-emptive Rights.......................... 14
ARTICLE VI BUSINESS; CERTIFICATE OF INCORPORATION AND BYLAWS................. 15
Section 6.1. Entertainment Business.............................. 15
Section 6.2. Certificate of Incorporation and By-laws............ 16
Section 6.3. Conversion of Preferred Stock....................... 16
ARTICLE VII GENERAL PROVISIONS................................................ 16
Section 7.1. Notices............................................. 16
Section 7.2. Assignment; Binding Effect; Benefit; Successors..... 18
Section 7.3. Entire Agreement.................................... 18
Section 7.4. Amendment........................................... 19
Section 7.5. Governing Law....................................... 19
Section 7.6. Counterparts; Effective Date........................ 19
Section 7.7. Headings............................................ 19
Section 7.8. Interpretation...................................... 19
Section 7.9. Severability........................................ 19
Section 7.10. Enforcement of Agreement............................ 20
Section 7.11. Certain Rights...................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 7.12. Termination of Original Investors Shareholder
Agreement........................................... 20
Section 7.13. Antidilution Adjustment............................. 20
</TABLE>
ii
<PAGE>
FORM OF AMENDED AND RESTATED INVESTORS
--------------------------------------
SHAREHOLDER AGREEMENT
---------------------
THIS AMENDED AND RESTATED INVESTORS SHAREHOLDER AGREEMENT, dated as of
August 4, 1997 (this "Agreement"), by and among SEVEN NETWORK LIMITED, a
---------
corporation organized under the laws of the Commonwealth of Australia ("Seven");
-----
TRACINDA CORPORATION, a corporation organized under the laws of the State of
Nevada ("Tracinda"); METRO-GOLDWYN-MAYER INC., a corporation organized under the
--------
laws of the state of Delaware and formerly known as P&F Acquisition Corp. ( the
"Company"); METRO-GOLDWYN-MAYER STUDIOS INC., a corporation organized under the
-------
laws of the State of Delaware and formerly known as Metro-Goldwyn-Mayer Inc.
("MGM Studios"); and FRANK G. MANCUSO ("Mr. Mancuso"), amends and supersedes
- ------------- -----------
that certain Investors Shareholder Agreement, dated as of October 16, 1996, by
and among Seven, the Company, Tracinda, MGM Studios and Mr. Mancuso (the
"Original Investors Shareholder Agreement").
- -----------------------------------------
A. The Company intends to commence with an Approved Initial Public
Offering (as defined below) of the Common Stock (as defined below) of the
Company and to enter into certain related transactions.
B. The parties hereto have agreed to enter into this Agreement for the
purpose of amending and restating in its entirety the provisions of the Original
Investors Shareholder Agreement as provided herein.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions.
-----------
"Affiliate": of any Person, means (i) any other Person controlling,
---------
controlled by or under common control with such Person, (ii) any director or
executive officer of such Person or of any Affiliate of such Person and (iii)
any family member of any director or executive officer of such Person or any
director or executive officer of any Affiliate of such Person.
"Agreement": as defined in the preamble to this Agreement.
---------
"Antidilution Adjustment": as defined in Section 7.13.
-----------------------
"Approved Initial Public Offering": shall mean an offering of Common Stock
--------------------------------
of the Company to the public through a syndicate of underwriters co-managed by
Merrill Lynch Pierce Fenner & Smith, Inc. and J. P. Morgan Securities, Inc. and
others (with Merrill Lynch Pierce Fenner & Smith, Inc. acting as book running
manager) pursuant to an effective registration statement under the Securities
Act by the Company (other than in connection with any employee
<PAGE>
benefit plan maintained by the Company or any corporation controlled by it)
provided that the following conditions are met:
(i) the initial public offering price of such shares of Common
Stock (before deduction of underwriters' discounts and commissions and the
out-of-pocket expenses of the Company incurred in connection therewith)
shall be not less than $833.34 per share of Common Stock;
(ii) the aggregate initial offering price of all such shares so
sold in such public offering (before deduction of underwriters' discounts
and commissions and the out-of-pocket expenses of the Company incurred in
connection therewith) shall be not less than $175 million nor more than
$375 million;
(iii) the underwriters shall not have been granted an over-
allotment option to purchase more than 15% of the shares of Common Stock
initially sold to the underwriters at a price equal to the initial public
offering price and such over-allotment option shall only be exercisable
within 30 days after the IPO Closing; and
(iv) concurrently with the IPO Closing, the Company shall sell
to Tracinda shares of Common Stock in a private placement transaction
meeting the following conditions:
(A) the price per share of the Common Stock sold in such
private placement transaction to Tracinda shall be equal to the
initial public offering price of the Common Stock offered to the
public (net of deduction of underwriters' discounts and commissions);
(B) the aggregate price for all the shares of Common
Stock so sold in such private placement transaction to Tracinda shall
be equal to $75 million; and
(C) the number of shares of the Common Stock sold in such
private placement transaction to Tracinda shall be equal to $75
million divided by the initial public offering price of the Common
Stock offered to the public (net of deduction of underwriters'
discounts and commissions).
"Commission": the Securities and Exchange Commission or any other Federal
----------
agency at the time administering the Securities Act.
"Common Stock": the common stock of the Company.
------------
"Company": as defined in the preamble to this Agreement.
-------
"Employment Agreement": the Amended and Restated Employment Agreement by
--------------------
and among Mr. Mancuso, the Company and MGM Studios, dated as of August 4, 1997.
2
<PAGE>
"Exchange Act": the Securities Exchange Act of 1934, as amended, and the
------------
rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
"First Refusal Notice": as defined in Section 4.1(a).
--------------------
"HSR Act": the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
-------
amended.
"IPO Closing": shall mean the closing of an Approved Initial Public
-----------
Offering at which the Company first receives the funds described in the
definition of "Approved Initial Public Offering", whether or not the
underwriters have at such time exercised any over-allotment option.
"IPO Closing Date": shall mean the date of the IPO Closing.
----------------
"MGM Studios": as defined in the preamble to this Agreement.
-----------
"Non-Transferring Party": as defined in Section 4.1(a).
----------------------
"Original Investors Shareholder Agreement": as defined in the preamble to
----------------------------------------
this Agreement.
"Orion": Orion Pictures Corporation.
-----
"Person": any natural person, corporation, partnership, limited liability
------
company, firm, association, trust, government, governmental agency, or other
legal entity, whether acting in an individual, fiduciary or other capacity.
"Preferred Stock": shall mean the Series A Convertible Preferred Stock of
---------------
the Company.
"Response Period": as defined in Section 4.1(a).
---------------
"Securities Act": the Securities Act of 1933, as amended, and the rules
--------------
and regulations of the Commission thereunder, as the same shall be in effect at
the time.
"Seven": as defined in the preamble to this Agreement.
-----
"Shareholders Agreement": the Amended and Restated Shareholders Agreement
----------------------
dated as of August 4, 1997 among MGM Studios, the Company, Tracinda, Seven, Mr.
Mancuso and the other parties thereto.
"Stock Split": as defined in Section 7.13.
-----------
"Subsidiary": of any Person shall mean any corporation or other legal
----------
entity of which such Person (either alone or through or together with any other
direct or indirect Subsidiary) owns, directly or indirectly, 50% or more of the
stock or other equity interests, the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of such
corporation or other legal entity.
"Tracinda": as defined in the preamble to this Agreement.
--------
3
<PAGE>
"Transfer": as defined in Section 4.1(a).
--------
"Transferring Party": as defined in Section 4.1(a).
------------------
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to the other parties hereto as follows: (i) the
Company has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby; (ii) the
execution and delivery by the Company of this Agreement, and the consummation by
the Company of the transactions contemplated hereby, have been duly authorized
by all necessary corporate action on the part of the Company; (iii) this
Agreement has been duly executed and delivered by the Company and constitutes a
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally or general principles of equity; (iv) no consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by, or with respect to, the
Company in connection with the execution and delivery of this Agreement by the
Company or the consummation by the Company of the transactions contemplated
hereby; and (v) the execution and delivery of this Agreement by the Company and
the consummation of the transactions contemplated hereby by the Company does not
conflict with, or result in a breach of, any law or regulation of any
governmental authority applicable to the Company or any material agreement to
which the Company is a party.
Section 2.2. Representations and Warranties of Seven. Seven hereby
---------------------------------------
represents and warrants to the other parties hereto as follows: (i) Seven has
all requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby; (ii) the execution and delivery
by Seven of this Agreement, and the consummation by Seven of the transactions
contemplated hereby, have been duly authorized by all necessary corporate action
on the part of Seven; (iii) this Agreement has been duly executed and delivered
by Seven and constitutes a valid and binding obligation of Seven enforceable
against Seven in accordance with its terms, except as the enforceability hereof
may be limited by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally or general principles of equity; (iv) no consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, is required by, or with
respect to, Seven in connection with the execution and delivery by Seven of this
Agreement or the consummation by Seven of the transactions contemplated hereby;
and (v) the execution and delivery by Seven of this Agreement and the
consummation by Seven of the transactions contemplated hereby does not conflict
with, or result in a breach of, any law or regulation of any governmental
authority applicable to Seven or any material agreement to which Seven is a
party.
Section 2.3. Representations and Warranties of Tracinda. Tracinda hereby
------------------------------------------
represents and warrants to the other parties hereto as follows: (i) Tracinda
has all requisite corporate power
4
<PAGE>
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby; (ii) the execution and delivery by Tracinda of this
Agreement, and the consummation by Tracinda of the transactions contemplated
hereby, have been duly authorized by all necessary corporate action on the part
of Tracinda; (iii) this Agreement has been duly executed and delivered by
Tracinda and constitutes a valid and binding obligation of Tracinda enforceable
against Tracinda in accordance with its terms, except as the enforceability
hereof may be limited by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally or general principles of equity; (iv) no consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, is required by, or with
respect to, Tracinda in connection with the execution and delivery of this
Agreement by Tracinda or the consummation by Tracinda of the transactions
contemplated hereby; and (v) the execution and delivery of this Agreement by
Tracinda and the consummation by Tracinda of the transactions contemplated
hereby does not conflict with, or result in a breach of, any law or regulation
of any governmental authority applicable to Tracinda or any material agreement
to which Tracinda is a party.
Section 2.4. Representations and Warranties of MGM Studios. MGM Studios
---------------------------------------------
hereby represents and warrants to the other parties hereto as follows: (i) MGM
Studios has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby; (ii) the
execution and delivery by MGM Studios of this Agreement, and the consummation by
MGM Studios of the transactions contemplated hereby, have been duly authorized
by all necessary corporate action on the part of MGM Studios; (iii) this
Agreement has been duly executed and delivered by MGM Studios and constitutes a
valid and binding obligation of MGM Studios enforceable against MGM Studios in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally or general principles of equity; (iv) no consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by, or with respect to, MGM
Studios in connection with the execution and delivery of this Agreement by MGM
Studios or the consummation by MGM Studios of the transactions contemplated
hereby; and (v) the execution and delivery of this Agreement by MGM Studios and
the consummation by MGM Studios of the transactions contemplated hereby does not
conflict with, or result in a breach of, any law or regulation of any
governmental authority applicable to MGM Studios or any material agreement to
which MGM Studios is a party.
ARTICLE III
CORPORATE GOVERNANCE; CERTAIN CORPORATE ACTIONS
Section 3.1. Voting of Shares.
----------------
(a) Until the fifteenth anniversary of the IPO Closing Date, Seven
shall (i) vote all of the shares of capital stock of the Company beneficially
owned by Seven, and shall take all other necessary or desirable actions within
its control (including, without limitation, by attendance at meetings in person
or by proxy for the purpose of obtaining a quorum and execution of written
consents in lieu of meetings), to effectuate the provisions of this Agreement
and (ii) use its best efforts to cause the Persons designated by it to serve on
the Company's, MGM Studios' and
5
<PAGE>
Orion's boards of directors pursuant to this Article III to take all actions
necessary to effectuate the terms of this Agreement.
(b) Until the fifteenth anniversary of the IPO Closing Date, Tracinda
shall (i) vote all of the shares of capital stock of the Company beneficially
owned by Tracinda, and shall take all other necessary or desirable action within
its control (including, without limitation, by attendance at meetings in person
or by proxy for the purpose of obtaining a quorum and execution of written
consents in lieu of meetings) to effectuate the provisions of this Agreement and
(ii) use its best efforts to cause the Persons designated by it to serve on the
Company's, MGM Studios' and Orion's boards of directors pursuant to this Article
III to take all actions necessary to effectuate the terms of this Agreement.
(c) Until the fifteenth anniversary of the IPO Closing Date, each of
the Company and MGM Studios shall take all necessary or desirable actions within
its respective control (including, without limitation, by calling special board
and stockholder meetings) to effectuate the provisions of this Agreement.
(d) Until the fifteenth anniversary of the IPO Closing Date,
Mr. Mancuso shall vote all of the shares of capital stock of the Company
beneficially owned by him, and shall take all other necessary and desirable
action within his control (including, without limitation, by attendance at
meetings in person or by proxy for the purpose of obtaining a quorum and
execution of written consents in lieu of meetings) to effectuate the provisions
of this Agreement.
Section 3.2. Composition of the Board of Directors of the Company, MGM
---------------------------------------------------------
Studios, Orion and the Committees of the Company.
- ------------------------------------------------
(a) Until the fifteenth anniversary of the IPO Closing Date, Seven
shall vote all of the shares of capital stock of the Company from time to time
beneficially owned by Seven, and shall take all necessary or desirable action
within its control, Tracinda shall vote all of the shares of capital stock of
the Company from time to time beneficially owned by Tracinda, and shall take all
necessary or desirable actions within its control, the Company shall vote all
shares of capital stock of MGM Studios beneficially owned by it, and shall take
all necessary or desirable action within its control, Mr. Mancuso shall vote all
shares of capital stock of the Company from time to time owned by him and shall
take all necessary or desirable action, and MGM Studios shall take all necessary
or desirable action within its control, in each case, so that the composition of
the boards of directors of each of the Company, MGM Studios, Orion and the
committees of the Company shall be as follows:
(i) The authorized board of directors of the Company shall
consist of eleven members (subject to the provisions set forth in clause
(D) below) and the members of such board of directors shall be determined
as follows:
(A) four persons shall be nominated by Tracinda so long as
Tracinda beneficially owns 400,000 or more shares of Common Stock or
two persons shall be nominated by Tracinda so long as Tracinda
beneficially owns less than 400,000, but at least 250,000, shares of
Common Stock; provided, however,
6
<PAGE>
that Tracinda's right to nominate persons to the board of directors of
the Company pursuant to this clause (A) shall expire on the date that
Tracinda no longer beneficially owns at least 250,000 shares of Common
Stock; provided, further, that if at any time Tracinda is entitled to
nominate less than four directors pursuant to this clause (A), a
majority of the remaining directors of the Company shall be entitled
to nominate a number of directors (who need not qualify as
"independent directors" as specified in clause (D) of this Section
3.2(a)(i)) equal to the amount of such reduction in directors that
Tracinda may nominate; and provided, further, that so long as Tracinda
owns at least 250,000 shares of Common Stock, for each selection by
the board of directors of the Company pursuant to the immediately
preceding proviso of a person who is affiliated with or an associate
of Seven (as such terms are defined in the rules promulgated under the
Exchange Act), a person who is affiliated with or associated with
Tracinda shall be selected by the board of directors to serve as a
director of the Company;
(B) two persons shall be nominated by Seven; provided,
however, that Seven's right to nominate two persons to the board of
directors of the Company shall expire on the date that Seven no longer
beneficially owns at least 250,000 shares of Common Stock and
thereafter such number of directors (who need not qualify as
"independent directors" as specified in clause (D) of this Section
3.2(a)(i)) shall be nominated by a majority of the remaining directors
of the Company;
(C) two persons shall be nominated by the Chairman and
Chief Executive Officer of the Company (one of which persons shall be
Mr. Mancuso so long as he serves as Chief Executive Officer of the
Company); and
(D) three persons who are not affiliated or associated with
either Tracinda or Seven and who otherwise meet the requirements of
the New York Stock Exchange for serving as "independent directors"
shall be nominated and selected by a majority of the members of the
board of directors of the Company, which majority, so long as Tracinda
beneficially owns at least 400,000 shares of Common Stock, must
include Tracinda's nominees on the board of directors of the Company;
provided, however, that notwithstanding anything to the contrary in
this Agreement, each of Tracinda and Seven shall only be obligated to
vote the shares of capital stock from time to time beneficially owned
by them for nominees selected pursuant to this clause (D) if such
nominee(s) are acceptable to Tracinda or Seven, as the case may be,
and shall have the right to vote against such nominee(s) if such
nominee(s) are not acceptable to Tracinda or Seven, as the case may
be; provided further, however, that the number of "independent
directors" on the board of directors shall be subject to reduction
from three persons to two persons if a majority of the existing board
of directors so determines.
(ii) The compensation committee of the board of directors of the
Company shall include members to be determined as follows:
7
<PAGE>
(A) one person nominated to the board of directors of the
Company by Tracinda, so long as Tracinda beneficially owns 250,000 or
more shares of Common Stock; provided, however, that Tracinda's right
to include in the compensation committee of the board of directors of
the Company a person Tracinda has nominated to the board of directors
of the Company pursuant to this clause (A) shall expire on the date
that Tracinda no longer beneficially owns at least 250,000 shares of
Common Stock; provided, further, that if at any time Tracinda does not
have the right to include its nominee on the compensation committee of
the board of directors of the Company pursuant to this clause (A), the
member of the compensation committee of the board of directors of the
Company shall be a director (who need not qualify as an "independent
director" as specified in clause (C) of this Section 3.2(a)(ii))
nominated by a majority of the remaining directors of the Company;
(B) one person nominated to the board of directors of the
Company by Seven; provided, however, that Seven's right to include in
the compensation committee of the board of directors of the Company
one person nominated by it to the board of directors of the Company
shall expire on the date that Seven no longer beneficially owns at
least 250,000 shares of Common Stock and thereafter such member of the
compensation committee of the board of directors of the Company shall
be a director (who need not qualify as an "independent director" as
specified in clause (C) of this Section 3.2(a)(ii)) nominated by a
majority of the remaining directors of the Company; and
(C) one person who is not affiliated or associated with
either Tracinda or Seven and who otherwise meets the requirements of
the New York Stock Exchange for serving as an "independent director"
and who was nominated and selected as a director by a majority of the
members of the board of directors of the Company, which majority, so
long as Tracinda beneficially owns at least 400,000 shares of Common
Stock, must include Tracinda's nominees to the board of directors of
the Company.
(iii) The executive committee of the board of directors of the
Company shall consist of six members to be determined as follows:
(A) three persons nominated to the board of directors of
the Company by Tracinda, so long as Tracinda beneficially owns 400,000
or more shares of Common Stock or two persons nominated to the board
of directors of the Company by Tracinda, so long as Tracinda
beneficially owns less than 400,000, but at least 250,000, shares of
Common Stock; provided, however, that Tracinda's right to include in
the executive committee of the board of directors of the Company
persons Tracinda has nominated to the board of directors of the
Company pursuant to this clause (A) shall expire on the date that
Tracinda no longer beneficially owns at least 250,000 shares of Common
Stock; provided, further, that if at any time Tracinda is entitled to
include in the executive committee of the board of directors of the
Company less than three persons
8
<PAGE>
Tracinda has nominated to the board of directors of the Company
pursuant to this clause (A), a majority of the directors of the
Company shall be entitled to select a number of members of the
executive committee of the board of directors of the Company equal to
the amount of such reduction in members of the executive committee of
the board of directors of the Company that Tracinda may select;
(B) one person nominated to the board of directors of the
Company by Seven; provided, however, that Seven's right to include in
the executive committee of the board of directors of the Company a
person nominated by it to the board of directors of the Company shall
expire on the date that Seven no longer beneficially owns at least
250,000 shares of Common Stock and thereafter such number of members
of the executive committee of the board of directors of the Company
shall be selected by a majority of the directors of the Company; and
(C) two persons nominated to the board of directors of the
Company by the Chairman and Chief Executive Officer of the Company
(one of which persons shall be Mr. Mancuso so long as he serves as
Chief Executive Officer of the Company).
(iv) The authorized boards of directors of each of MGM Studios
and Orion shall consist of six members (all of whom shall be directors of
the Company) and the members of such boards of directors shall be
determined as follows:
(A) three persons shall be selected by Tracinda so long as
Tracinda beneficially owns 400,000 or more shares of Common Stock or
two persons shall be selected by Tracinda so long as Tracinda
beneficially owns less than 400,000, but at least 250,000, shares of
Common Stock; provided, however, that Tracinda's right to select
persons for the boards of directors of each of MGM Studios and Orion
pursuant to this clause (A) shall expire on the date that Tracinda no
longer beneficially owns at least 250,000 shares of Common Stock;
provided, further, that if at any time Tracinda is entitled to select
less than three directors pursuant to this clause (A), a majority of
the directors of the Company shall be entitled to select a number of
directors equal to the amount of such reduction in directors Tracinda
may select;
(B) one person shall be selected by Seven; provided,
however, that Seven's right to select one person for the boards of
directors of each of MGM Studios and Orion shall expire on the date
that Seven no longer beneficially owns at least 250,000 shares of
Common Stock and thereafter such number of directors shall be selected
by a majority of the directors of the Company; and
(C) two persons shall be selected by the Chairman and Chief
Executive Officer of the Company (one of which persons shall be Mr.
Mancuso so long as he serves as Chief Executive Officer of the
Company).
9
<PAGE>
(b) Each of Seven and Tracinda, respectively, shall have the
exclusive right (which, to the extent the same may be required by law, may only
be exercised indirectly, through the parties hereto voting at meetings of the
stockholders of the Company and/or through the calling of a special meeting of
the stockholders of the Company) (i) to remove, with or without cause, any
director designated by it in accordance with this Section 3.2 and (ii) to
designate and elect any replacement for a director designated by it in
accordance with this Section 3.2, upon the death, resignation, retirement,
disqualification or removal from office of such director. The board of
directors of the Company shall have the right to remove Mr. Mancuso as a
director of the Company, with or without cause, upon the termination of his
employment as Chief Executive Officer of MGM Studios subject to the terms of Mr.
Mancuso's employment agreement which shall remain in effect following execution
hereof. Except as specified in the immediately preceding sentence, the board of
directors of the Company shall not have the right to remove Mr. Mancuso as a
director of the Company. Except consistent with the terms of this Agreement,
the board of directors of the Company shall not be authorized to fill a vacancy
on the board of directors of the Company caused by the death, resignation,
retirement, disqualification or removal of a director designated pursuant to
this Section 3.2. To the extent, that at any time, the composition of the board
of directors of the Company is not consistent with provisions of this Section
3.2, each of the parties hereto shall take all necessary or desirable action,
including by calling a special meeting of the stockholders of the Company, to
give effect to the provisions of this Section 3.2. In the event that Mr.
Mancuso shall cease to act as Chief Executive Officer of the Company, promptly
thereafter the parties hereto shall take all necessary or desirable actions,
including a calling of a special meeting of the stockholders of the Company, to
remove the other person then serving as a director of the Company, MGM Studios
and Orion pursuant to Section 3.2(a)(i)(C) and Section 3.2(a)(iv)(C) and then
serving as a member of the executive committee of the board of directors of the
Company pursuant to Section 3.2(a)(iii)(C) unless such other person is
acceptable to the new Chief Executive Officer of the Company.
(c) If Mr. Mancuso shall cease to act as Chief Executive Officer of
the Company, Mr. Mancuso hereby agrees to his resignation as a director of both
the Company and MGM Studios and all other positions held by Mr. Mancuso at MGM
Studios, the Company and their respective Subsidiaries, effective as of the time
he ceases to act as chief executive officer of the Company. For so long as Mr.
Mancuso shall serve as a member of the board of directors of the Company and MGM
Studios, Mr. Mancuso shall act as the chairman of the board of directors of both
the Company and MGM Studios. It shall be a condition precedent to the
nomination by Mr. Mancuso pursuant to Section 3.2(a)(i)(C) and Section
3.2(a)(iv)(C) of a person to serve as a director of the Company, MGM Studios and
Orion and the selection by Mr. Mancuso pursuant to Section 3.2(a)(iii)(C) of a
person to serve on the executive committee of the board of directors of the
Company that such person shall have agreed to his resignation as a director of
the Company, MGM Studios and Orion and a member of the executive committee of
the board of directors of the Company (but not any other positions with the
Company or MGM Studios) at such time as Mr. Mancuso shall no longer serve as the
Chief Executive Officer of the Company.
(d) Each of the parties hereto shall take all such action, and
execute all such documents, as is necessary or desirable to effect the
provisions of this Section 3.2. Each of Tracinda and Seven agrees to use its
best efforts to obtain the resignation from the boards of directors of the
Company, MGM Studios and Orion of the requisite number of persons nominated
10
<PAGE>
by it in order to accomplish any reduction in the number of directors
contemplated by clauses (A) and (B), respectively, of Section 3.2(a)(i) and
Section 3.2(a)(iv) and in the number of members of the compensation and
executive committees of the board of directors contemplated by clauses (A) and
(B), respectively, of Section 3.2(a)(ii) and Section 3.2(a)(iii).
(e) Until October 10, 2001, the obligations imposed by this Article
III shall be binding upon any transferee of Seven or Tracinda except that the
provisions of this Article III shall not be binding on:
(i) any person (other than an Affiliate of Tracinda or Seven)
who acquires shares of Common Stock from Tracinda or Seven pursuant to a
public offering registered under the Securities Act or pursuant to Rule 144
or Regulation S promulgated thereunder; or
(ii) any person (other than an Affiliate of Tracinda or Seven)
who acquires not more than 100,000 shares of Common Stock from Tracinda or
Seven, as the case may be, in one transaction or a series of related
transactions.
Section 3.3. Approval of Certain Matters. Until the earlier to
---------------------------
occur of (i) the fifteenth anniversary of the IPO Closing Date and (ii) the
date that Seven no longer beneficially owns at least 250,000 shares of
Common Stock, neither the Company nor MGM Studios nor any of their
Subsidiaries shall (A) sell or agree to sell or (B) license or agree to
license for a period of more than three years in substantially all major
territories of the world in one transaction or a series of related
transactions all or 85% or more of the films then in the library of the
Company, MGM Studios and their Subsidiaries unless such sale, license or
agreement shall have been unanimously approved by the board of directors of
the Company. Thereafter, any such sale, license or agreement shall only
require the approval of a majority of a quorum of directors at a duly
called meeting of the board of directors of the Company.
ARTICLE IV
FIRST REFUSAL
Section 4.1. First Refusal.
-------------
(a) If prior to October 10, 2001, either Tracinda or Seven (as
appropriate in this Article IV, the "Transferring Party"), desires to sell,
------------------
transfer, assign, pledge or otherwise dispose of (a "Transfer"), directly or
--------
indirectly, in whole or part, all or any portion of the shares of capital stock
of the Company beneficially owned by it, the Transferring Party shall provide
the other party (the "Non-Transferring Party") with a written notice (the "First
---------------------- -----
Refusal Notice") (which First Refusal Notice may be sent concurrently with the
- --------------
Tag-Along Notice which may be required to be sent with respect to such
transaction pursuant to Section 3.2 of the Shareholders Agreement) setting
forth:
(i) the number and class of shares of capital stock of the
Company proposed to be Transferred;
11
<PAGE>
(ii) that the Transferring Party has received a bona fide
written offer from a prospective purchaser of said shares of capital stock
of the Company;
(iii) the name and address of the prospective purchaser;
(iv) the material terms and conditions of such proposed
transaction; and
(v) that the Transferring Party is offering to Transfer such
shares of capital stock of the Company to the Non-Transferring Party on the
same terms and conditions as contained in the bona fide offer.
The Non-Transferring Party shall have 20 calendar days following the receipt of
the First Refusal Notice to respond as to whether it desires to purchase the
shares of capital stock of the Company specified in the First Refusal Notice.
Such 20 calendar day period shall be referred to as the "Response Period."
---------------
Within the Response Period, the Non-Transferring Party shall, by notice in
writing to the Transferring Party, have the opportunity and right to purchase
(on the terms and conditions specified in the First Refusal Notice) the shares
of capital stock of the Company specified in the First Refusal Notice. If the
Non-Transferring Party shall not respond within the Response Period, then such
party shall be deemed to have waived its right to purchase the shares of capital
stock of the Company specified in the First Refusal Notice. If the Non-
Transferring Party fails to exercise or waives its right to purchase the shares
of capital stock of the Company referred to in the First Refusal Notice, then
the Transferring Party shall be free, for a six-month period, to enter into a
definitive agreement to Transfer such shares of capital stock of the Company to
such third party on terms equivalent to or better than the terms specified in
the First Refusal Notice without restriction under this Agreement; it being
understood, however, that if the Transferring Party does not enter into such
definitive agreement within such six-month period, or such definitive agreement
is subsequently terminated, the Transferring Party shall once again be subject
to all the provisions of this Section 4.1.
(b) Each acceptance made hereunder shall constitute a separate and
binding contract obligating the Transferring Party to sell, and the Non-
Transferring Party to purchase, the shares of capital stock of the Company
accepted at the price and upon the terms and conditions as set forth in the
First Refusal Notice. The parties agree to negotiate in good faith to
consummate the transaction as soon as possible, but in no event later than the
date 30 calendar days after the appropriate Response Period has elapsed (as such
period may be extended up to a maximum period of two months (unless further
extension is agreed to by the Transferring Party) by any applicable waiting
period required under the HSR Act or any other applicable law). At the closing,
the Transferring Party shall deliver the certificate or certificates
representing the shares of capital stock of the Company to be sold, duly
endorsed for transfer or accompanied by duly executed stock powers, against
receipt from the Non-Transferring Party of the purchase price for such shares of
capital stock of the Company, in cash by wire transfer of immediately available
funds or certified check, at the option of the Transferring Party, all in
accordance with the terms and conditions set forth in the First Refusal Notice.
Notwithstanding any provision of this Agreement to the contrary, in the event of
failure by the Non-Transferring Party to close said transaction within the
required time periods, the Transferring Party shall be entitled, in addition to
all other available remedies, to treat such failure as a waiver under Section
4.1(a) of this
12
<PAGE>
Agreement by the Non-Transferring Party, entitling the Transferring Party to
take the action specified in Section 4.1(a) of this Agreement pursuant to such
waiver.
(c) If the purchase price specified in the First Refusal Notice
includes any property other than cash, the First Refusal Notice shall state how
the non-cash property was valued, unless the Transferring Party and the proposed
transferee expressly agree otherwise as stated in the First Refusal Notice and,
the Non-Transferring Party may pay cash in an amount equal to the fair market
value of any non-cash property determined in the following manner:
(i) The fair market value of securities which are publicly
traded shall be deemed to be the average of the daily closing prices (or,
if no closing price is available, the average of the last bid and ask
prices) of such securities for the five consecutive trading days
immediately prior to the date of the First Refusal Notice; and
(ii) The fair market value of any other property shall be
determined by the good faith agreement of the parties or, if the parties
are unable to agree, by an appropriate expert mutually selected by the
parties.
(d) The provisions of this Section 4.1 shall terminate, with respect
to such capital stock of the Company, upon the transfer, in compliance with this
Section 4.1, by Tracinda or Seven of such capital stock to any Person other than
Tracinda or Seven or their respective Affiliates.
(e) Nothing contained in the provisions of this Section 4.1 shall
affect the tag-along rights of any party pursuant to Section 3.2 of the
Shareholders Agreement.
(f) The provisions of this Section 4.1 shall not apply to any bona
fide pledge to a bank or other institutional financial lender.
(g) Notwithstanding anything contained herein to the contrary, the
provisions of this Section 4.1 shall not apply to, in the case of each of
Tracinda and Seven, (i) the transfer of, or the grant of options for the
acquisition of, up to 7,500 shares of Common Stock (such number to be
appropriately adjusted in the event that the Company should effect any stock
dividend, stock split, reverse stock split, or any similar transaction after the
date hereof) beneficially owned by it to officers, directors, employees,
consultants and affiliates so long as such transferee shall agree in writing to
be bound by all the terms of this Agreement applicable to its transferor as if
the transferee originally had been a party to this Agreement and (ii) the
transfer and assignment of all or any portion of the capital stock of the
Company beneficially owned by it to any direct or indirect wholly owned
subsidiary of such entity so long as (y) such transferee shall agree in writing
to be bound by all the terms of this Agreement applicable to its transferor as
if the transferee originally had been a party to this Agreement and (z) the
transferor agrees to cause such direct or indirect wholly owned subsidiary to
continue to be a direct or indirect wholly owned subsidiary of the transferor
for so long as such direct or indirect wholly owned subsidiary beneficially owns
any such capital stock of the Company.
13
<PAGE>
Section 4.2. Legend. The parties hereby acknowledge and agree that each
------
of the certificates representing the Common Stock shall include the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY BE OFFERED OR SOLD ONLY IF REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR IF AN EXEMPTION FROM REGISTRATION IS
AVAILABLE. THESE SHARES ARE SUBJECT TO CERTAIN LIMITATIONS ON SALE,
TRANSFER OR OTHER DISPOSITION AND CERTAIN AGREEMENTS WITH RESPECT TO VOTING
SET FORTH IN AN AMENDED AND RESTATED INVESTORS SHAREHOLDER AGREEMENT DATED
AS OF AUGUST 4, 1997 BY AND AMONG SEVEN NETWORK LIMITED, TRACINDA
CORPORATION, METRO-GOLDWYN-MAYER STUDIOS INC., METRO-GOLDWYN-MAYER INC. AND
MR. FRANK G. MANCUSO (THE "AGREEMENT"). A COPY OF THE AGREEMENT IS ON FILE
WITH THE SECRETARY OF METRO-GOLDWYN-MAYER INC.
ARTICLE V
PREEMPTIVE RIGHTS
Section 5.1. Certain Pre-emptive Rights. If at any time prior to the
--------------------------
fifteenth anniversary of the IPO Closing Date, the Company shall propose to
issue to any Person any shares of its Common Stock or any securities exercisable
for the purchase of or convertible into Common Stock (other than (i) the
issuance of Common Stock or securities exercisable for the purchase of or
convertible into Common Stock pursuant to a firm commitment underwritten public
offering or pursuant to Rule 144A or Regulation S promulgated under the
Securities Act, (ii) the issuance of Common Stock or securities exercisable for
the purchase of or convertible into Common Stock pursuant to a registration
statement directly or indirectly to the holders of the outstanding capital stock
of a corporation or other business entity with a class of equity securities
registered under the Exchange Act in connection with the Company's acquisition
of such corporation or other business or substantially all of its assets
(whether by merger, consolidation, purchase of stock or assets or otherwise),
(iii) the grant of stock options to officers, directors or employees of the
Company or any of its Subsidiaries pursuant to stock option plans approved by
the board of directors of the Company or the issuance of Common Stock upon the
exercise of any such stock option, or (iv) the issuance of Common Stock to
officers, directors or employees of the Company or any of its Subsidiaries to
fulfill the Company's obligations pursuant to any savings plans or retirement
plans approved by the board of directors of the Company), Seven, Tracinda and
Mr. Mancuso shall have the right to elect at any time within 10 days after
receipt of notice from the Company, as applicable:
(a) if such issuance is of Common Stock, to subscribe for and
purchase for cash a number of shares of Common Stock such that after giving
effect to such issuance to such other Person and such purchase by any one or
more of Seven, Tracinda and Mr. Mancuso, as the case may be, each party so
electing shall continue to beneficially own the same percentage of outstanding
Common Stock that such electing party beneficially owned prior to such issuance
to
14
<PAGE>
such other Person and such purchase by any one or more of Seven, Tracinda and
Mr. Mancuso, as the case may be; and
(b) if such issuance is of securities exercisable for the purchase of
or convertible into Common Stock, to subscribe for and purchase for cash a
number of such securities equal to the product of the aggregate number of such
securities to be issued (including pursuant to this Section 5.1) multiplied by
the percentage of the then outstanding Common Stock that is beneficially owned
by Seven, Tracinda or Mr. Mancuso, as the case may be.
The price to be paid in any such purchase by any one or more of Seven, Tracinda
and Mr. Mancuso and the other terms of purchase shall be the same as applicable
to the purchase of Common Stock or such other securities by such other Person,
except that in all cases the price to be paid by Seven, Tracinda and Mr. Mancuso
shall be paid in cash. In the event that such shares of Common Stock or such
other securities are to be issued to such other Person for property or services,
the price per share or other security to be paid by Seven, Tracinda and Mr.
Mancuso shall be equal to the fair market value per share or other security of
the property or services to be received by the Company from such other Person,
as such fair market value is determined by the "independent directors" of the
Company elected to the board of directors of the Company pursuant to the
provisions of clause (D) Section 3.2(a)(i) of this Agreement. The rights of
Seven and Tracinda set forth in this Section 5.1 shall terminate with respect to
each such party at such time as such party beneficially owns less than 250,000
shares of Common Stock. The rights of Mr. Mancuso set forth in this Section 5.1
shall terminate at such time as Mr. Mancuso is no longer the Chief Executive
Officer of the Company.
ARTICLE VI
BUSINESS; CERTIFICATE OF INCORPORATION AND BYLAWS
Section 6.1. Entertainment Business. The parties hereto agree to use
----------------------
their best efforts to ensure that neither the Company nor any of its
Subsidiaries shall engage in any business activity except the entertainment
business unless (i) all directors of the board of directors shall have approved
such engagement in other business activities or (ii) a majority of the board of
directors shall have approved such engagement in other business activities and
such engagement in other business activities shall have been approved by the
stockholders of the Company in accordance with the applicable provisions of the
Delaware General Corporation Law; provided, however, that the obligations of the
parties hereto provided for in this sentence shall terminate on the fifteenth
anniversary of the IPO Closing Date. As used in this Section 6.1 the
"entertainment business" shall include the acquisition, development, production,
marketing, distribution, exhibition, publication or use of intellectual property
for purposes of providing entertainment, education or information and all
services and activities reasonably related thereto, including the services and
activities currently provided or conducted by the Company and its Subsidiaries.
The parties hereto may amend or terminate this Section 6.1 by mutual agreement
except that no such amendment or termination shall require (i) the approval of
Seven at any time when it beneficially owns less than 250,000 shares of Common
Stock, (ii) the approval of Tracinda at any time when it beneficially owns less
than 250,000 shares of Common Stock or (iii) the approval of Mr. Mancuso after
such time as he shall no longer serve as the Chief Executive Officer of the
Company.
15
<PAGE>
Section 6.2. Certificate of Incorporation and By-laws. Each of the
----------------------------------------
parties hereto will take all necessary actions, including, if necessary, by
amending the Certificate of Incorporation and By-laws of the Company and/or MGM
Studios, to assure that the Certificate of Incorporation and By-laws of each of
the Company and MGM Studios do not contain any provision which is inconsistent
with the terms of this Agreement.
Section 6.3. Conversion of Preferred Stock. Each of Seven, Tracinda and
-----------------------------
Mr. Mancuso agrees to convert, on the IPO Closing Date, all shares of Preferred
Stock beneficially owned (as determined in accordance with the rules promulgated
under Section 13 of the Exchange Act) by such holder on the date hereof, which
conversions shall be effected in accordance with the terms of the certificate of
designations establishing such Preferred Stock. Each of the parties hereto
shall use its best efforts to cause each person who beneficially owns Preferred
Stock but who is not a party hereto to convert the same to Common Stock on the
IPO Closing Date.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1. Notices. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
If to the Company or MGM Studios, to:
Metro-Goldwyn-Mayer Inc.
2500 Broadway, Fifth Floor
Santa Monica, CA 90404-3061
Attention: David Johnson
Telephone: (310) 449-3993
Telecopy: (310) 449-3011
with a copy to:
Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, CA 90071
Attention: Bruce D. Meyer
Telephone: (213) 229-7979
Telecopy: (213) 229-7520
If to Tracinda, to:
Tracinda Corporation
4835 Koval Lane
Las Vegas, NV 89109
Attention: Secretary / Treasurer
Telecopy: (702) 737-1177
16
<PAGE>
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Attention: Stephen Fraidin, P.C.
Telephone: (212) 859-8140
Telecopy: (212) 859-4000
If to Seven, to:
Seven Network Limited
c/o Culmen Group, L.P.
201 Main Street
Suite 1955
Fort Worth, TX 76102
Attention: Michael R. Gleason
Telephone: (817) 335-6999
Telecopy: (817) 870-1384
and:
ATN7
Mobbs Lane
Epping NSW 2121, Australia
Attention: Gary Rice, Managing Director
Telephone: (602) 877-7000
Telecopy: (612) 996-77191
with a copy to:
Kelly, Hart & Hallman
201 Main Street
Fort Worth, TX 76102
Attention: F. Richard Bernasek
Telephone: (817) 332-2500
Telecopy: (817) 878-9280
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
Section 7.2. Assignment; Binding Effect; Benefit; Successors.
-----------------------------------------------
(a) Except as otherwise expressly provided in this Agreement, neither
this Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any of the parties hereto (whether by operation of law or
otherwise); provided, however, that each of
17
<PAGE>
Tracinda and Seven may assign its rights under this Agreement to any of their
respective direct or indirect wholly owned Subsidiaries so long as (i) such
assignee agrees to be bound by the terms of this Agreement to the same extent as
the applicable assignor pursuant to a written agreement with the Company and MGM
Studios that is reasonably acceptable to each of them, (ii) the applicable
assignor continues to be bound by, and is not released from, any of its
obligations under this Agreement and (iii) the applicable assignor will cause
the applicable direct or indirect wholly owned subsidiary to continue to be a
direct or indirect wholly owned subsidiary of the applicable assignor for so
long as such assignee shall have any rights under this Agreement. For the
purpose of this Agreement, all capital stock of the Company owned by any direct
or indirect wholly owned Subsidiary of Tracinda or Seven, as applicable, shall
be deemed owned by Tracinda or Seven, as applicable. Subject to the first
sentence of this Section 7.2(a), this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns. Except as expressly provided in this Agreement, notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
express or implied, is intended to confer on any person other than the parties
hereto any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
(b) In the event that the Company or MGM Studios shall enter into a
merger, consolidation or other similar type transaction, all of the terms of
this Agreement relating to the Company and MGM Studios, as applicable, shall
apply to the surviving corporation.
Section 7.3. Entire Agreement. Upon the effectiveness hereof, this
----------------
Agreement, the Shareholders Agreement, the Employment Agreement and any
certificate delivered by the parties in connection herewith constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings (oral and written) among the
parties with respect thereto.
Section 7.4. Amendment. This Agreement may not be amended or modified
---------
except by an instrument in writing signed by or on behalf of each of the parties
hereto, except as otherwise provided in Section 6.1 hereof.
Section 7.5. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the internal laws of the State of Delaware
(without regard to conflict of laws principles which would require the
application of the laws of any other State). Each of the parties hereto agrees
that any legal action or proceeding with respect to this Agreement may be
brought in the Courts of the State of Delaware or the United States District
Court located in the State of Delaware and, by execution and delivery of this
Agreement, each party hereto hereby irrevocably submits itself in respect of its
property, generally and unconditionally to the non-exclusive jurisdiction of the
aforesaid courts in any legal action or proceeding arising out of this
Agreement. Each of the parties hereto hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Agreement brought in the courts referred to in the preceding sentence. Each
party hereto hereby consents to process being served in any such action or
proceeding by the mailing of a copy thereof to the address set forth in Section
7.1 hereof and agrees that such service upon receipt shall constitute good and
sufficient service of process or notice thereof.
18
<PAGE>
Nothing in this Section 7.5 shall affect or eliminate any right to serve process
in any other matter permitted by law.
Section 7.6. Counterparts; Effective Date. This Agreement may be
----------------------------
executed by the parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such counterparts shall
together constitute one and the same instrument. Each counterpart may consist
of a number of copies of this Agreement, each of which may be signed by less
than all of the parties hereto, but together all such copies are signed by all
of the parties hereto. This Agreement shall become effective at the time of the
IPO Closing.
Section 7.7. Headings. Headings of the Articles and Sections of this
--------
Agreement are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
Section 7.8. Interpretation. In this Agreement, unless the context
--------------
otherwise requires, words describing the singular number shall include the
plural and vice versa, "including" shall mean including, without limitation, and
words denoting any gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice versa.
Section 7.9. Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
Section 7.10. Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware court, this
being in addition to any other remedy to which they may be entitled at law or in
equity.
Section 7.11. Certain Rights. If either Seven or Tracinda shall violate
--------------
or breach the terms of this Agreement or the Shareholders Agreement (the
"breaching party") then, notwithstanding anything to the contrary in this
Agreement or the Shareholders Agreement, upon written notice provided to the
breaching party and, upon the running of a 30-day cure period after the delivery
of such written notice during which the breaching party fails to cure such
violation or breach, the rights (but not the obligations) of the breaching party
under the terms of this Agreement and the Shareholders Agreement shall terminate
(but such termination shall not affect the rights of any other party under this
Agreement or the Shareholders Agreement). This Section 7.11 is not intended for
the benefit of, or to give rights to, any party other than Tracinda or Seven.
19
<PAGE>
Section 7.12. Termination of Original Investors Shareholder Agreement.
-------------------------------------------------------
Seven, Tracinda, the Company, MGM Studios and Mr. Mancuso hereby mutually agree
that, effective as of the IPO Closing Date, the Original Investors Shareholder
Agreement and that certain Letter Agreement dated as of August 4, 1997 among the
parties hereto shall terminate and be of no further force or effect, and none of
them shall have any further rights, duties or obligations thereunder from and
after the effective date of such termination. Until such time as the IPO
Closing Date shall occur, the Original Investors Shareholder Agreement shall
remain in full force and effect and shall be unaffected hereby.
Section 7.13. Antidilution Adjustment. Prior to or concurrent with the
-----------------------
consummation of the IPO Closing, the Company will effect, in one or more
transactions, a net stock split of the Common Stock (the "Stock Split"). As a
-----------
result of the Stock Split, the following changes will be made in this Agreement,
before it becomes effective (the "Antidilution Adjustment"):
-----------------------
(a) The number of shares of Common Stock in Sections 3.2(a)(i)(A), 3.2
(a)(i)(B), 3.2(a)(i)(D), 3.2(e)(ii), 3.3, 5.1, and 6.1 hereof, prior
to the Antidilution Adjustment, will be multiplied by the Stock Split;
and
(b) The $833.34 amount in the definition of Approved Initial Public
Offering, prior to the Antidilution Adjustment, will be divided by the
Stock Split.
Except as otherwise provided herein, all dollar amounts changed as a result of
the Antidilution Adjustment will be rounded to the nearest penny.
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf as of the day and year first written
above.
SEVEN NETWORK LIMITED
By:______________________________________
Name:
Title:
TRACINDA CORPORATION
By:______________________________________
Name:
Title:
METRO-GOLDWYN-MAYER STUDIOS INC.
By:______________________________________
Name:
Title:
METRO-GOLDWYN-MAYER INC.
By:______________________________________
Name:
Title:
_________________________________________
MR. FRANK G. MANCUSO
21
<PAGE>
The undersigned, an indirect wholly
owned subsidiary of Seven Network
Limited, hereby agrees to be bound
by the terms of this Agreement to
the same extent as Seven Network
Limited.
MILTONSTAR PTY LIMITED
By:_______________________________
Name:
Title:
22
<PAGE>
Exhibit 10.26
FORM OF AMENDED AND RESTATED STOCK OPTION AGREEMENT
This Amended and Restated Stock Option Agreement (this "Agreement") is
---------
made and entered into as of August 4, 1997 ("Date of Grant"), by and between
-------------
Metro-Goldwyn-Mayer Inc., a Delaware corporation formerly known as P&F
Acquisition Corp. (the "Company") and Tracinda Corporation, a Nevada corporation
-------
("Optionee"), and amends and supersedes that certain Stock Option Agreement,
--------
dated as of October 10, 1996, by and among the Company and the Optionee (the
"Original Stock Option Agreement").
- --------------------------------
THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THAT ACT OR THE COMPANY SHALL HAVE RECEIVED AN OPINION OF
COUNSEL (WHICH COUNSEL AND OPINION SHALL BE SATISFACTORY TO THE COMPANY'S
COUNSEL) THAT REGISTRATION OF SUCH SECURITIES UNDER THAT ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
WHEREAS, Optionee provided certain services in connection with the
formation of the Company and the acquisition by the Company of the outstanding
stock of Metro-Goldwyn-Mayer Studios Inc., a Delaware corporation formerly known
as Metro-Goldwyn-Mayer Inc. ("MGM Studios");
-----------
WHEREAS, as consideration for such services, the Company granted to
Optionee, and desires to restate the grant to Optionee of, an option to purchase
shares of the Common Stock, par value $.01 per share, of the Company ("Common
------
Shares");
- ------
WHEREAS, the Company intends to commence with an Approved Initial
Public Offering of the Common Shares and to enter into certain related
transactions; and
WHEREAS, the parties hereto have agreed to enter into this Agreement
for the purpose of amending and restating in its entirety the provisions of the
Original Stock Option Agreement as provided herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. Terms not otherwise defined elsewhere in
-------------------
this Agreement shall be as defined below:
1.1 "Investors Shareholder Agreement" means that certain Amended and
-------------------------------
Restated Investors Shareholder Agreement dated as of August 4, 1997, by and
among the Company, MGM Studios, Tracinda Corporation ("Tracinda"), Seven Network
--------
Limited ("Seven") and Mr. Frank G. Mancuso.
-----
<PAGE>
2. GRANT OF OPTION; CERTAIN TERMS AND CONDITIONS. The Company hereby
---------------------------------------------
grants to Optionee, and Optionee hereby accepts, as of the Date of Grant, an
option to purchase 3,750 Common Shares (the "Option") at a price per share equal
------
to $267.00 (the "Exercise Price"), subject to adjustment as provided in Section
--------------
5 of this Agreement. The Option shall expire at 5:00 p.m., Pacific Standard (or
Daylight Savings, if applicable) Time, on October 10, 2002 (the "Option
------
Expiration Date"), and shall be subject to all of the terms and conditions set
- ---------------
forth in this Agreement.
3. EXERCISABILITY OF OPTION. The Option shall become exercisable in
------------------------
whole or in part at any time on or after October 10, 1997.
4. EXERCISE OF OPTION. Optionee may exercise the Option by the
------------------
delivery to the Company of a written notice of such exercise (the "Exercise
--------
Notice"), which Exercise Notice shall specify the number of Common Shares to be
- ------
purchased pursuant to such Exercise Notice (the "Exercised Shares") and the
----------------
aggregate Exercise Price for such Exercised Shares, together with payment in
full of such aggregate Exercise Price in cash or by check payable to the
Company.
5. ADJUSTMENTS. The number of Common Shares to be issued pursuant to
-----------
the Option and the Exercise Price thereof shall be adjusted from time to time as
follows:
(a) If the Company shall at any time or from time to time declare or
pay a dividend, or make a distribution, on the outstanding Common Shares in
shares of capital stock of the Company or subdivide the outstanding Common
Shares into a greater number of Common Shares or combine the outstanding
Common Shares into a smaller number of Common Shares, or issue by
reclassification of its Common Shares any shares of its capital stock,
then, in each such case:
(i) the number of Common Shares for which the Option is
exercisable shall be adjusted so that the Optionee shall be entitled
to receive, upon exercise thereof, the number of shares of capital
stock of the Company that the Optionee would have been entitled to
receive after the happening of any of the events described above had
the Option been exercised in full immediately prior to the happening
of such event or the record date thereof, whichever is earlier; and
(ii) an adjustment made pursuant to this Section 5(a) shall
become effective for purposes of subclause (i) of this Section 5(a),
(A) in the case of any such dividend or distribution, immediately
after the close of business on the record date for the determination
of holders of Common Shares entitled to receive such dividend or
distribution, or (B) in the case of any subdivision, combination or
reclassification, at the close of business on the day upon which such
corporate action becomes effective.
(b) If at any time or from time to time the Company shall declare,
order, pay or make, in respect of its capital stock, a dividend or other
distribution (including, without limitation, any cash dividend,
distribution of stock or other securities or property or rights, options or
warrants to subscribe for securities of the Company or any of its
subsidiaries,
2
<PAGE>
but excluding capital stock of the Company the issuance of which is subject
to Section 5(a)), then, and in each such case, the Optionee shall be
entitled to receive, upon the exercise thereof, for each Common Share
issuable upon the exercise thereof, such additional stock or other
securities or property, cash, rights, options or warrants to subscribe for
securities of the Company or any of its subsidiaries per Common Share as if
such Common Share had been issued prior to the record date for such
dividend or distribution. An adjustment made pursuant to this Section 5(b)
shall become effective immediately after the close of business on the
record date fixed for the determination of stockholders entitled to receive
such dividend or distribution. The provisions of this Section 5(b) shall
not apply to payment of regular quarterly cash dividends on Common Shares
after October 1, 2001.
(c) In the event of any adjustment provided for in this Section 5 in
the number of Common Shares to be issued pursuant to the Option, the
Exercise Price payable upon exercise of the Option shall be adjusted such
that the adjustment to the Exercise Price payable upon the exercise of the
Option shall be inversely proportionate to the adjustment in the number of
Common Shares to be issued pursuant to the Option.
(d) The number of Common Shares into which the Option is exercisable
and the Exercise Price, in each case as adjusted as herein provided, shall
remain in effect until further adjustment as required herein.
6. NOTICES. All notices and other communications required or
-------
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, addressed as
follows:
If to the Company, to:
Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, CA 90404
Attention: Chief Executive and Financial Officers
If to Optionee, to:
Tracinda Corporation
4835 Koval Lane
Las Vegas, Nevada 89109
Attention: Secretary/Treasurer
with a copy to:
3
<PAGE>
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Stephen Fraidin, P.C.
or at such other address as either shall specify by written notice so given, and
such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
7. NONTRANSFERABILITY. Neither the Option nor any interest therein
------------------
may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner.
8. STOCKHOLDER RIGHTS. Optionee shall not be entitled to vote,
------------------
receive dividends or be deemed for any purpose the holder of any Common Shares
(or any other securities issuable upon the exercise of the Option) until the
Option shall have been duly exercised, either in whole or in part, to purchase
Common Shares in accordance with the provisions of this Agreement.
9. OTHER AGREEMENTS. Optionee and the Company hereby acknowledge
----------------
that all Common Shares of the Company are subject to and entitled to the
benefits of (i) that certain Amended and Restated Shareholders Agreement dated
as of August 4, 1997 (the "Shareholders Agreement") by and among the Company,
----------------------
MGM Studios, Tracinda, Seven, Mr. Frank G. Mancuso and certain other persons and
(ii) the Investors Shareholder Agreement.
10. OPTION AND SHARES ISSUABLE UPON EXERCISE NOT REGISTERED.
-------------------------------------------------------
Optionee, by accepting the Option, acknowledges that the Option is not, and the
Common Shares and other securities issuable upon exercise thereof may not be,
registered under the Securities Act of 1933 (the "Securities Act"), and
represents that it has acquired the Option for its own account and not with a
present view to, or in connection with, any distribution thereof in violation of
the Securities Act. Unless and until registered under the Securities Act, each
stock certificate representing the Common Shares and other securities purchased
upon exercise of the Option shall be stamped or otherwise imprinted with the
following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY BE OFFERED OR SOLD ONLY IF
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR IF AN EXEMPTION FROM
REGISTRATION IS AVAILABLE. THESE SHARES ARE SUBJECT TO CERTAIN
LIMITATIONS ON TRANSFER AND CERTAIN OTHER MATTERS SET FORTH IN AN
AGREEMENT DATED AS OF AUGUST 4, 1997 BY AND AMONG SEVEN NETWORK
LIMITED, TRACINDA CORPORATION, METRO-GOLDWYN-MAYER STUDIOS INC.,
METRO-GOLDWYN-MAYER INC., MR. FRANK G. MANCUSO, AND CERTAIN OTHER
PERSONS (THE "AGREEMENT"). A COPY OF THE AGREEMENT IS ON FILE WITH THE
SECRETARY OF METRO-GOLDWYN-MAYER INC."
4
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY BE OFFERED OR SOLD ONLY IF
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR IF AN EXEMPTION FROM
REGISTRATION IS AVAILABLE. THESE SHARES ARE SUBJECT TO CERTAIN
LIMITATIONS ON SALE, TRANSFER OR OTHER DISPOSITION AND CERTAIN
AGREEMENTS WITH RESPECT TO VOTING SET FORTH IN AN AMENDED AND RESTATED
INVESTORS SHAREHOLDER AGREEMENT DATED AS OF AUGUST 4, 1997 BY AND
AMONG SEVEN NETWORK LIMITED, TRACINDA CORPORATION, METRO-GOLDWYN-MAYER
STUDIOS INC., METRO-GOLDWYN-MAYER INC. AND MR. FRANK G. MANCUSO (THE
"AGREEMENT"). A COPY OF THE AGREEMENT IS ON FILE WITH THE SECRETARY OF
METRO-GOLDWYN-MAYER INC.
11. GOVERNING LAW. This Agreement and the Option granted hereunder
-------------
shall be governed by and construed and enforced in accordance with the laws of
the State of Delaware.
12. EFFECTIVE DATE. This Agreement shall become effective at the
--------------
time of the execution hereof.
13. TERMINATION OF ORIGINAL STOCK OPTION AGREEMENT. Optionee and the
----------------------------------------------
Company hereby mutually agree that, effective as of the execution hereof, the
Original Stock Option Agreement shall terminate and be of no further force or
effect, and neither of them shall have any further rights, duties or obligations
thereunder from and after the effective date of such termination. Until such
time as this Agreement is executed, the Original Stock Option Agreement shall
remain in full force and effect and shall be unaffected hereby.
IN WITNESS WHEREOF, the Company and Optionee have duly executed this
Agreement as of the Date of Grant.
METRO-GOLDWYN-MAYER INC.
By: _____________________________
Title: _____________________________
TRACINDA CORPORATION
By: _____________________________
Title: _____________________________
5
<PAGE>
Exhibit 10.27
FORM OF AMENDED AND RESTATED STOCK OPTION AGREEMENT
This Amended and Restated Stock Option Agreement (this "Agreement") is
---------
made and entered into as of August 4, 1997 ("Date of Grant"), by and between
-------------
Metro-Goldwyn-Mayer Inc., a Delaware corporation formerly known as P&F
Acquisition Corp. (the "Company") and Celsus Financial Corp., a Delaware
-------
corporation ("Optionee"), and amends and supersedes that certain Stock Option
--------
Agreement, dated as of October 10, 1996, by and among the Company and the
Optionee (the "Original Stock Option Agreement").
-------------------------------
THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THAT ACT OR THE COMPANY SHALL HAVE RECEIVED AN OPINION OF
COUNSEL (WHICH COUNSEL AND OPINION SHALL BE SATISFACTORY TO THE COMPANY'S
COUNSEL) THAT REGISTRATION OF SUCH SECURITIES UNDER THAT ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
WHEREAS, Optionee provided certain services in connection with the
formation of the Company and the acquisition by the Company of the outstanding
stock of Metro-Goldwyn-Mayer Studios Inc., a Delaware corporation formerly known
as Metro-Goldwyn-Mayer Inc. ("MGM Studios");
-----------
WHEREAS, as consideration for such services, the Company granted to
Optionee, and desires to restate the grant to Optionee of, an option to purchase
shares of the Common Stock, par value $.01 per share, of the Company ("Common
------
Shares");
- ------
WHEREAS, the parties hereto have agreed to enter into this Agreement
for the purpose of amending and restating in its entirety the provisions of the
Original Stock Option Agreement as provided herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. Terms not otherwise defined elsewhere in
-------------------
this Agreement shall be as defined below:
1.1 "Investors Shareholder Agreement" means that certain Amended and
-------------------------------
Restated Investors Shareholder Agreement dated as of August 4, 1997, by and
among the Company, MGM Studios, Tracinda Corporation ("Tracinda"), Seven Network
--------
Limited ("Seven") and Mr. Frank G. Mancuso.
-----
2. GRANT OF OPTION; CERTAIN TERMS AND CONDITIONS. The Company
---------------------------------------------
hereby grants to Optionee, and Optionee hereby accepts, as of the Date of Grant,
an option to purchase 3,750 Common Shares (the "Option") at a price per share
------
equal to $267.00 (the "Exercise Price"),
--------------
<PAGE>
subject to adjustment as provided in Section 5 of this Agreement. The Option
shall expire at 5:00 p.m., Pacific Standard (or Daylight Savings, if applicable)
Time, on October 10, 2002 (the "Option Expiration Date"), and shall be subject
----------------------
to all of the terms and conditions set forth in this Agreement.
3. EXERCISABILITY OF OPTION. The Option shall become exercisable in
------------------------
whole or in part at any time on or after October 10, 1997.
4. EXERCISE OF OPTION. Optionee may exercise the Option by the
------------------
delivery to the Company of a written notice of such exercise (the "Exercise
--------
Notice"), which Exercise Notice shall specify the number of Common Shares to be
- ------
purchased pursuant to such Exercise Notice (the "Exercised Shares") and the
----------------
aggregate Exercise Price for such Exercised Shares, together with payment in
full of such aggregate Exercise Price in cash or by check payable to the
Company.
5. ADJUSTMENTS. The number of Common Shares to be issued pursuant
-----------
to the Option and the Exercise Price thereof shall be adjusted from time to time
as follows:
(a) If the Company shall at any time or from time to time declare or
pay a dividend, or make a distribution, on the outstanding Common Shares in
shares of capital stock of the Company or subdivide the outstanding Common
Shares into a greater number of Common Shares, or combine the outstanding
Common Shares into a smaller number of Common Shares, or issue by
reclassification of its Common Shares any shares of its capital stock,
then, in each such case:
(i) the number of Common Shares for which the Option is
exercisable shall be adjusted so that the Optionee shall be entitled
to receive, upon exercise thereof, the number of shares of capital
stock of the Company that the Optionee would have been entitled to
receive after the happening of any of the events described above had
the Option been exercised in full immediately prior to the happening
of such event or the record date thereof, whichever is earlier; and
(ii) an adjustment made pursuant to this Section 5(a)
shall become effective for purposes of subclause (i) of this Section
5(a), (A) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
determination of holders of Common Shares entitled to receive such
dividend or distribution, or (B) in the case of any subdivision,
combination or reclassification, at the close of business on the day
upon which such corporate action becomes effective.
(b) If at any time or from time to time the Company shall declare,
order, pay or make, in respect of its capital stock, a dividend or other
distribution (including, without limitation, any cash dividend,
distribution of stock or other securities or property or rights, options or
warrants to subscribe for securities of the Company or any of its
subsidiaries, but excluding capital stock of the Company the issuance of
which is subject to Section 5(a)), then, and in each such case, the
Optionee shall be entitled to receive, upon the exercise thereof, for each
Common Share issuable upon the exercise thereof, such
2
<PAGE>
additional stock or other securities or property, cash, rights, options or
warrants to subscribe for securities of the Company or any of its
subsidiaries per Common Share as if such Common Share had been issued prior
to the record date for such dividend or distribution. An adjustment made
pursuant to this Section 5(b) shall become effective immediately after the
close of business on the record date fixed for the determination of
stockholders entitled to receive such dividend or distribution. The
provisions of this Section 5(b) shall not apply to payment of regular
quarterly cash dividends on Common Shares after October 1, 2001.
(c) In the event of any adjustment provided for in this Section 5 in
the number of Common Shares to be issued pursuant to the Option, the
Exercise Price payable upon exercise of the Option shall be adjusted such
that the adjustment to the Exercise Price payable upon the exercise of the
Option shall be inversely proportionate to the adjustment in the number of
Common Shares to be issued pursuant to the Option.
(d) The number of Common Shares into which the Option is exercisable
and the Exercise Price, in each case adjusted as herein provided, shall
remain in effect until further adjustment as required herein.
6. NOTICES. All notices and other communications required or
-------
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, addressed as
follows:
If to the Company, to:
Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, CA 90404
Attention: Chief Executive and Financial Officers
If to Optionee, to:
Celsus Financial Corp.
c/o KPMG Peat Marwick
1201 Market Street, Suite 1400
Wilmington, Delaware 19801
Attention: Bob Bush
with a copy to:
Culmen Group, L.P.
201 Main Street, Suite 1955
Fort Worth, Texas 76207
Attention: Michael R. Gleason
3
<PAGE>
or at such other address as either shall specify by written notice so given, and
such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
7. NONTRANSFERABILITY. Neither the Option nor any interest therein
------------------
may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner.
8. STOCKHOLDER RIGHTS. Optionee shall not be entitled to vote,
------------------
receive dividends or be deemed for any purpose the holder of any Common Shares
(or any other securities issuable upon the exercise of the Option) until the
Option shall have been duly exercised, either in whole or in part, to purchase
Common Shares in accordance with the provisions of this Agreement.
9. OTHER AGREEMENTS. Optionee and the Company hereby acknowledge
----------------
that all Common Shares of the Company are subject to and entitled to the
benefits of (i) that certain Amended and Restated Shareholders Agreement dated
as of August 4, 1997 (the "Shareholders Agreement") by and among the Company,
----------------------
MGM Studios, Tracinda, Seven, Mr. Frank G. Mancuso and certain other persons and
(ii) the Investors Shareholder Agreement.
10. OPTION AND SHARES ISSUABLE UPON EXERCISE NOT REGISTERED.
-------------------------------------------------------
Optionee, by accepting the Option, acknowledges that the Option is not, and the
Common Shares and other securities issuable upon exercise thereof may not be,
registered under the Securities Act of 1933 (the "Securities Act"), and
represents that it has acquired the Option for its own account and not with a
present view to, or in connection with, any distribution thereof in violation of
the Securities Act. Unless and until registered under the Securities Act, each
stock certificate representing the Common Shares and other securities purchased
upon exercise of the Option shall be stamped or otherwise imprinted with the
following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY BE OFFERED OR SOLD ONLY IF
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR IF AN EXEMPTION FROM
REGISTRATION IS AVAILABLE. THESE SHARES ARE SUBJECT TO CERTAIN
LIMITATIONS ON TRANSFER AND CERTAIN OTHER MATTERS SET FORTH IN AN
AGREEMENT DATED AS OF AUGUST 4, 1997 BY AND AMONG SEVEN NETWORK
LIMITED, TRACINDA CORPORATION, METRO-GOLDWYN-MAYER STUDIOS INC.,
METRO-GOLDWYN-MAYER INC., MR. FRANK G. MANCUSO, AND CERTAIN OTHER
PERSONS (THE "AGREEMENT"). A COPY OF THE AGREEMENT IS ON FILE WITH THE
SECRETARY OF METRO-GOLDWYN-MAYER INC."
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY BE OFFERED OR SOLD ONLY IF
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR IF AN EXEMPTION FROM
REGISTRATION IS AVAILABLE. THESE SHARES ARE SUBJECT TO CERTAIN
LIMITATIONS ON SALE, TRANSFER OR OTHER DISPOSITION AND
4
<PAGE>
CERTAIN AGREEMENTS WITH RESPECT TO VOTING SET FORTH IN AN AMENDED AND
RESTATED INVESTORS SHAREHOLDER AGREEMENT DATED AS OF AUGUST 4, 1997 BY
AND AMONG SEVEN NETWORK LIMITED, TRACINDA CORPORATION, METRO-GOLDWYN-
MAYER STUDIOS INC., METRO-GOLDWYN-MAYER INC. AND MR. FRANK G. MANCUSO
(THE "AGREEMENT"). A COPY OF THE AGREEMENT IS ON FILE WITH THE
SECRETARY OF METRO-GOLDWYN-MAYER INC.
11. GOVERNING LAW. This Agreement and the Option granted hereunder
-------------
shall be governed by and construed and enforced in accordance with the laws of
the State of Delaware.
12. EFFECTIVE DATE. This Agreement shall become effective at the
--------------
time of the execution hereof.
13. TERMINATION OF ORIGINAL STOCK OPTION AGREEMENT. Optionee and the
----------------------------------------------
Company hereby mutually agree that, effective as of the execution hereof, the
Original Stock Option Agreement shall terminate and be of no further force or
effect, and neither of them shall have any further rights, duties or obligations
thereunder from and after the effective date of such termination. Until such
time as this Agreement is executed, the Original Stock Option Agreement shall
remain in full force and effect and shall be unaffected hereby.
IN WITNESS WHEREOF, the Company and Optionee have duly executed this
Agreement as of the Date of Grant.
METRO-GOLDWYN-MAYER INC.
By: _____________________________
Title: _____________________________
CELSUS FINANCIAL CORP.
By: _____________________________
Title: _____________________________
5
<PAGE>
EXHIBIT 10.28
INDUCEMENT AGREEMENT
This Inducement Agreement (the "Agreement"), dated as of November 5, 1997,
is entered into by Tracinda Corporation ("Tracinda"), Seven Network Limited
("Seven") and Metro-Goldwyn-Mayer Inc. (formerly known as P&F Acquisition Corp.)
("MGM") with the individuals (each, an "Executive") listed on Schedule A to this
Agreement, in order to induce the Executives to enter into Modification and
Cancellation Agreements in the form of Schedule B to this Agreement (but without
certain attachments and exhibits (the "Modification and Cancellation
Agreements")).
1. Representations and Warranties Concerning Ownership of MGM Common Stock
-----------------------------------------------------------------------
(a) Tracinda and MGM jointly and severally represent and warrant to each
Executive that Tracinda owns 871,000 shares of the Common Stock (approximately
68.87% of the outstanding Common Stock) of MGM.
(b) Seven and MGM jointly and severally represent and warrant to each
Executive that Seven owns 389,000 shares of the Common Stock (approximately
30.76% of the outstanding Common Stock) of MGM.
2. Shareholder Approval of Senior Management Bonus Plan
----------------------------------------------------
(a) The Senior Management Bonus Plan (the "Bonus Plan") and Bonus Interest
Agreements to be entered into pursuant to the Modification and Cancellation
Agreements require, as a condition to payments in respect of the Bonus
Interests, that the Bonus Plan be approved by a majority of the shares of Common
Stock of MGM prior to December 31, 1998.
(b) Following the earliest to occur of: (i) the initial public offering
contemplated in the Modification and Cancellation Agreements; and (ii) December
15, 1998 (or such earlier date to which MGM, Tracinda and Seven agree), and in
no case later than December 31, 1998, MGM will cause to be held a meeting of its
shareholders at which a quorum is to be present in person or by proxy, at which
the approval of the Bonus Plan will be considered, or will complete a
solicitation of consents, complying with the proxy rules under the Securities
Exchange Act of 1934, as amended (the "Proxy Rules"), of its shareholders with
respect to the approval of the Bonus Plan. At the meeting of shareholders or by
a written consent of a majority of the outstanding shares of Common Stock of
MGM, as applicable, each of Tracinda and Seven will vote all of the shares of
Common Stock of MGM then owned by it in favor of the approval of the Bonus Plan;
provided, however, that if the shareholder approval is obtained by written
consent, the consent will be executed not less than 20 days following the
distribution of an information statement satisfying the requirements of the
Proxy Rules.
(c) Prior to the earlier of December 31, 1998 and the approval of the Bonus
Plan by the shareholders of MGM in accordance with Section 2(b) hereof: (i) MGM
will not issue any shares of securities if, as a result of its doing so,
Tracinda and Seven would not, after giving effect to the issuance, own a
sufficient number of shares of Common Stock so that, by the vote of those
shares, the Bonus Plan will be approved; and (ii) neither Tracinda nor Seven
will sell, assign or otherwise transfer any shares of the Common Stock of MGM
owned by it, if the transfer would cause MGM and Seven to own less than a
majority of the voting securities of MGM, unless the purchaser, assignee or
transferee of the shares agrees, for the benefit of each of the Executives, to
vote the shares of Common Stock of MGM received from Tracinda or Seven, as the
case may be, in favor of approval of the Bonus Plan.
<PAGE>
(d) Section 2(a), (b) and (c) above will be of no force or effect if the
conditions set forth in Section 2(b) of the Modification and Cancellation
Agreements have not been satisfied on or before March 31, 1998.
3. Equitable Remedies; Applicable Law
----------------------------------
(a) The parties to this Agreement will, in addition to damages or other
remedies at law for breach, default or misrepresentation, as appropriate, be
entitled to equitable remedies, including specific performance, for breach or
prospective breach of this Agreement.
(b) Except as provided in Section 4(c) of this Agreement, this Agreement
is governed by and is to be construed and enforced in accordance with the
internal laws, and not the laws pertaining to choice or conflict of laws, of the
State of Delaware.
4. Arbitration of Disputes
-----------------------
(a) Except as provided in Section 3(b) of this Agreement, all disputes
among the parties to this Agreement, however significant, arising out of,
relating in any way to, or in connection with, this Agreement (including the
validity, scope and enforceability of this Section 4) will be settled only by
an arbitration (i) conducted in accordance with the then rules of the American
Arbitration Association or any similar successor body and (ii) held in Los
Angeles, California.
(b) The arbitration will be held before a single arbitrator mutually
agreed to by the parties to the arbitration, except that, if the parties fail to
agree to an arbitrator within 20 days from the date on which the claimant's
request for arbitration is delivered to the other party(ies) to the arbitration,
the arbitration shall be held before an arbitrator appointed by the American
Arbitration Association.
(c) Discovery will be available in the arbitration proceedings pursuant to
the provisions of California Code of Civil Procedure Section 1283.05, which are
incorporated here by this reference and made applicable to any arbitration held
pursuant to this Section 4.
(d) The award of the arbitrator will be made within 90 days from the date
on which the arbitrator is selected. The award of the arbitrator will be final
and, to the greatest extent allowed by law, the parties waive their right to any
form of appeal. The arbitrator must award costs and fees, including the fees of
the arbitrator, to the prevailing party. Judgment on any award of the
arbitrator may be entered in any court having jurisdiction or application may be
made to such court for the judicial acceptance of the award and for one or more
orders of enforcement.
TRACINDA CORPORATION THE INDIVIDUALS LISTED ON
SCHEDULE A TO THIS AGREEMENT
By ______________________________
Name:_________________________ By_______________________________________
Title:________________________ A. Robert Pisano, Attorney-in-Fact
SEVEN NETWORK LIMITED METRO-GOLDWYN-MAYER INC.
By ______________________________ By ______________________________________
Name:_________________________ A. Robert Pisano, Vice Chairman
Title:________________________
2
<PAGE>
EXHIBIT 10.29
FORM OF
INVESTMENT AGREEMENT
--------------------
THIS INVESTMENT AGREEMENT, dated as of November ___, 1997 (this
"Agreement") is by and between TRACINDA CORPORATION, a corporation organized
---------
under the laws of the State of Nevada ("Tracinda") and METRO-GOLDWYN-MAYER INC.,
--------
a corporation organized under the laws of the State of Delaware ("MGM").
---
A. The Company intends to commence with an Approved Initial Public
Offering (as defined below) of the Common Stock (as defined below) of MGM and to
enter into certain related transactions.
B. Concurrently with the IPO Closing (as defined below), the parties
hereto have agreed to enter into an agreement embodying the terms specified
herein.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1. The following terms, as used herein, have the following meanings:
"Additional Shares" has the meaning given in Section 2.1.
-----------------
"Approved Initial Public Offering" has the meaning set forth in the
--------------------------------
Investors Shareholder Agreement as the same may be amended from time to time.
"Business Day" means a day other than a Saturday, Sunday or other day on
------------
which commercial banks in New York, New York are authorized or required by law
to close.
"Common Stock" means the common stock, par value $.01 per share, of MGM.
------------
"Investors Shareholder Agreement" means the Amended and Restated Investors
-------------------------------
Shareholder Agreement, dated as of August 4, 1997, by and among Seven, Tracinda,
MGM, MGM Studios and Mr. Mancuso.
"IPO Closing" has the meaning set forth in the Investors Shareholder
-----------
Agreement as the same may be amended from time to time.
"MGM Studios" means Metro-Goldwyn-Mayer Studios Inc., a corporation
-----------
organized under the laws of the State of Delaware.
"Mr. Mancuso" means Frank G. Mancuso.
-----------
"Purchase Price" has the meaning given in Section 2.1.
--------------
<PAGE>
"Seven" means Seven Network Limited.
-----
"Shareholders Agreement" means the Amended and Restated Shareholders
----------------------
Agreement, dated as of August 4, 1997, by and among Seven, Tracinda, MGM, MGM
Studios, Mr. Mancuso, and the other parties thereto.
ARTICLE II
ACQUISITION OF ADDITIONAL SHARES OF COMMON STOCK
2.1. Simultaneously with the IPO Closing, Tracinda shall purchase from
MGM, and MGM shall issue and sell to Tracinda, ________/1/ shares of Common
Stock (the "Additional Shares") for a purchase price of $_____/2/ per share, or
-----------------
an aggregate purchase price of $75 million (the "Purchase Price").
--------------
2.2. Tracinda shall pay the Purchase Price for the Additional Shares to be
purchased by it, simultaneously with the IPO Closing, by wire transfer of
immediately available funds to an account or accounts of MGM designated in
writing by MGM to Tracinda at least three Business Days before the IPO Closing.
2.3. At the IPO Closing, MGM shall deliver to Tracinda a certificate
representing the shares of Common Stock being issued to such purchaser, with
such legends affixed to the reverse thereof as are required by Section 3.1 of
the Shareholders Agreement and Section 4.2 of the Investors Shareholder
Agreement. Each of the parties hereto acknowledges and agrees that the
Additional Shares are subject to the terms of the Shareholders Agreement and the
Investors Shareholder Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1. Representations and Warranties of MGM. MGM hereby represents and
-------------------------------------
warrants to the other party hereto as follows: (i) MGM has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions set forth in Article II hereof; (ii) the execution and delivery by
MGM of this Agreement, and the consummation by MGM of the transactions set forth
in Article II hereof, have been duly authorized by all necessary corporate
- --------------
/1/ The number of shares of Common Stock constituting the Additional Shares
shall be determined at the pricing of the Approved Initial Public Offering and
shall equal (i) $75 million divided by (ii) the initial public offering price of
the shares sold to the public in the Approved Initial Public Offering, net of
underwriting discounts and commissions.
/2/ The purchase price per share shall be determined at the pricing of the
Approved Initial Public Offering and shall equal the initial public offering
price of the shares sold to the public in the Approved Initial Public Offering,
net of underwriting discounts and commissions.
2
<PAGE>
action on the part of MGM; (iii) this Agreement has been duly executed and
delivered by MGM and constitutes a valid and binding obligation of MGM
enforceable against MGM in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally or general principles of equity; (iv)
no consent, approval, order or authorization of, or registration, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, is required by,
or with respect to, MGM in connection with the execution and delivery of this
Agreement by MGM or the consummation by MGM of the transactions set forth in
Article II hereof; (v) the execution and delivery of this Agreement by MGM and
the consummation of the transactions set forth in Article II hereof by MGM does
not conflict with, or result in a breach of, any law or regulation of any
governmental authority applicable to MGM or any material agreement to which MGM
is a party; and (vi) when issued and paid for in accordance with the provisions
of Article II hereof, the shares of Common Stock sold to Tracinda pursuant to
Article II hereof shall be duly authorized, validly issued, fully paid,
nonassessable, and free of any claims or encumbrances, other than (a) any claims
or encumbrances resulting from actions taken by Tracinda with respect to the
shares to be received by it hereunder, or (b) pursuant to the Investors
Shareholder Agreement or the Shareholders Agreement.
3.2. Representations and Warranties of Tracinda. Tracinda hereby
------------------------------------------
represents and warrants to the other party hereto as follows: (i) Tracinda has
all requisite corporate power and authority to enter into this Agreement and to
consummate the transactions set forth in Article II hereof; (ii) the execution
and delivery by Tracinda of this Agreement, and the consummation by Tracinda of
the transactions set forth in Article II hereof, have been duly authorized by
all necessary corporate action on the part of Tracinda; (iii) this Agreement has
been duly executed and delivered by Tracinda and constitutes a valid and binding
obligation of Tracinda enforceable against Tracinda in accordance with its
terms, except as the enforceability hereof may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally or
general principles of equity; (iv) no consent, approval, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission or other governmental authority or instrumentality,
domestic or foreign, is required by, or with respect to, Tracinda in connection
with the execution and delivery of this Agreement by Tracinda or the
consummation by Tracinda of the transactions set forth in Article II hereof; and
(v) the execution and delivery of this Agreement by Tracinda and the
consummation by Tracinda of the transactions set forth in Article II hereof does
not conflict with, or result in a breach of, any law or regulation of any
governmental authority applicable to Tracinda or any material agreement to which
Tracinda is a party.
ARTICLE IV
COVENANTS
4.1. Subject to the terms and conditions of this Agreement, each party
hereto will use its best efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things reasonably necessary or reasonably
desirable to consummate the transactions contemplated by this Agreement.
3
<PAGE>
ARTICLE V
CONDITIONS TO CLOSING
The obligations of each of Tracinda and MGM to consummate its obligations
pursuant to Article II hereof are subject to the satisfaction on or prior to the
IPO Closing of each of the following conditions:
5.1. All of the conditions to be performed at or prior to the IPO Closing
shall have been satisfied or waived, and the IPO Closing shall occur
simultaneously with the consummation of the transactions set forth in Article II
hereof.
5.2. (a) The other party hereto shall have performed and satisfied each of
its obligations hereunder required to be performed or satisfied hereunder at or
prior to the IPO Closing, (b) each of the representations and warranties of the
other party hereto contained in this Agreement shall be true and correct, at and
as of the date of the IPO Closing, with the same force and effect as if made on
the date of the IPO Closing, and (c) each party hereto shall have received a
certificate of an officer of each other party hereto, that the foregoing is true
and correct as to such party.
ARTICLE VI
GENERAL PROVISIONS
6.1. Notices. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
If to MGM, to:
Metro-Goldwyn-Mayer Inc.
2500 Broadway
Fifth Floor
Santa Monica, CA 90404-3061
Attention: David Johnson
Telephone: (310) 449-3993
Telecopy: (310) 449-3011
with a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
Attention: Bruce Meyer
Telephone: (213) 229-7979
Telecopy: (213) 229-7520
4
<PAGE>
Tracinda Corporation
4835 Koval Lane
Las Vegas, NV 89109
Attention: Richard E. Sobelle
Telephone: (702) 737-8060
Telecopy: (702) 737-1177
If to Tracinda, to:
Tracinda Corporation
4835 Koval Lane
Las Vegas, NV 89109
Attention: Secretary/Treasurer
Telecopy: (702) 737-1177
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Attention: Stephen Fraidin, P.C.
Telephone: (212) 859-8140
Telecopy: (212) 859-4000
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
6.2. Expenses. Subject to the occurrence of the IPO Closing, MGM shall
--------
pay all out-of-pocket expenses (including, but not limited to, attorneys' fees
and expenses) incurred by Tracinda in connection with the transactions
contemplated by this Agreement, promptly upon the delivery to MGM of
documentation thereof.
6.3. Assignment; Binding Effect; Benefit; Successors. (a) Except as
-----------------------------------------------
otherwise expressly provided in this Agreement, neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise); provided,
--------
however, that Tracinda may assign its rights under this Agreement to any of its
- -------
direct or indirect wholly owned subsidiaries so long as (i) such assignee agrees
to be bound by the terms of this Agreement to the same extent as the applicable
assignor, pursuant to a written agreement with MGM that is reasonably acceptable
to it, (ii) the applicable assignor continues to be bound by, and is not
released from, any of its obligations under this Agreement and (iii) the
applicable assignor will cause the applicable direct or indirect wholly owned
subsidiary to continue to be a direct or indirect wholly owned subsidiary of the
applicable assignor for so long as such assignee shall have any rights under
this Agreement. For the purpose of this Agreement, all capital stock of MGM
owned by any direct or indirect wholly owned subsidiary of Tracinda shall be
deemed owned by Tracinda. Subject to the first sentence of this Section 6.3(a),
this
5
<PAGE>
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Except as expressly provided
in this Agreement, notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, express or implied, is intended to confer
on any person other than the parties hereto any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
(b) In the event that MGM shall enter into a merger, consolidation
or other similar type transaction, all of the terms of this Agreement relating
to MGM shall apply to the surviving corporation.
6.4. Entire Agreement. This Agreement and any certificate delivered by
----------------
the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersedes all prior
agreements and understandings (oral or written) among the parties with respect
thereto.
6.5. Termination. Except as expressly provided in this Section 6.5, this
-----------
Agreement shall only be terminable upon the written agreement of all parties
hereto.
6.6. Amendment. This Agreement may not be amended or modified except by
---------
an instrument in writing signed by or on behalf of each of the parties hereto.
6.7. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware (without regard to conflict
of laws principles which would require the application of the laws of any other
State). Each party hereto hereby consents to process being served in any action
or proceeding in respect of this Agreement by the mailing of a copy thereof to
the address set forth in Section 6.1 hereof and agrees that such service upon
receipt shall constitute good and sufficient service of process or notice
thereof. Nothing in this Section 6.7 shall affect or eliminate any right to
serve process in any other manner permitted by law.
6.8. Counterparts. This Agreement may be executed by the parties hereto
------------
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies of this
Agreement, each of which may be signed by less than all of the parties hereto,
but together all such copies are signed by all of the parties hereto.
6.9. Headings. Headings of the Articles and Sections of this Agreement
--------
are for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
6.10. Interpretation. In this Agreement unless the context otherwise
--------------
requires, words describing the singular number shall include the plural and vice
versa, "including" shall mean including, without limitation, and words denoting
any gender shall include all genders and words denoting natural persons shall
include corporations and partnerships and vice versa.
6.11. Severability. Any term or provisions of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and
6
<PAGE>
provisions of this Agreement or otherwise affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
6.12. Enforcement of Agreement. The parties hereto agree that irreparable
------------------------
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Delaware court, this being
in addition to any other remedy to which they may be entitled at law or in
equity.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf as of the day and year first written
above.
TRACINDA CORPORATION
By:
---------------------------
Name:
Title:
METRO-GOLDWYN-MAYER INC.
By:
---------------------------
Name:
Title:
LC973110.086/5+
7
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Inc.:
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Form S-1 registration statement.
Arthur Andersen LLP
Los Angeles, California
November 7, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 29, 1996,
except for the restatement described in Note 12 as to which the date is July
31, 1996, relating to the financial statements of Metro-Goldwyn-Mayer Studios
Inc. (formerly known as Metro-Goldwyn-Mayer Inc.) for the years ended December
31, 1995 and 1994, which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedules for the two
years ended December 31, 1995 listed under Item 16(b) of this Registration
Statement when such schedules are read in conjunction with the financial
statements referred to in our report. We also consent to the references to us
under the heading "Experts" and "Selected Consolidated Financial Data" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
Price Waterhouse LLP
Century City, California
November 7, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Orion Pictures Corporation
We consent to the inclusion of our report dated March 31, 1997, with respect
to the consolidated balance sheet of Orion Pictures Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements
of operations, stockholders' equity (capital deficiency), and cash flows for
the year then ended, which report appears in the Amendment No. 2 to Form S-1
of Metro-Goldwyn-Mayer, Inc. dated November 7, 1997 and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
November 7, 1997
