<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________________________
Commission file number 1-13481
-------------------------------------------------------
Metro-Goldwyn-Mayer Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4605850
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2500 Broadway Street
Santa Monica, California 90404
(Address of principal executive offices)
(Zip Code)
310-449-3000
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ____ No X
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at December 16, 1997
----- --------------------------------
Common Stock, $ .01 par value 65,765,655 Shares
<PAGE>
METRO-GOLDWYN-MAYER INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996............................ 3
Condensed Consolidated Statements of Operations -
Quarter and Nine Months Ended September 30, 1997 and 1996............5
Condensed Consolidated Statements of Stockholders'
Equity - September 30, 1997......................................... 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996....................... 7
Notes to Condensed Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................21
Item 2. Changes in Securities and Use of Proceeds ..........................21
Item 6. Exhibits and Reports on Form 8-K ...................................22
</TABLE>
2
<PAGE>
Item 1. Financial Statements
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 24,075 $ 16,381
Accounts and contracts receivable (net of allowance for
doubtful accounts of $24,658 and $11,728, respectively) 254,402 271,106
Film and television costs, net 1,787,482 1,099,201
Investments and advances to affiliates 9,378 16,107
Property and equipment, net 33,214 27,347
Excess of cost over net assets of acquired businesses, net 598,605 302,741
Other assets 41,528 41,785
--------------- ---------------
$ 2,748,684 $ 1,774,668
============== ==============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Liabilities:
Bank and other debt $ 957,830 $ 444,427
Accounts payable and accrued liabilities 134,505 90,933
Accrued participants' share 212,862 173,094
Income taxes payable 45,063 29,269
Advances and deferred revenues 149,079 104,516
Other liabilities 28,841 29,307
------------- --------------
Total liabilities 1,528,180 871,546
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 25,000,000 shares
authorized, 502,820 and 501,006 shares issued and outstanding 5 5
Common Stock, $.01 par value, 50,000,000 shares authorized,
31,760,921 and 16,700,342 shares issued and outstanding 318 167
Additional paid-in capital 1,264,753 901,639
Retained earnings (deficit) (45,399) 166
Cumulative translation adjustment 827 1,145
------------ -------------
Stockholders' equity 1,220,504 903,122
------------ -------------
$ 2,748,684 $ 1,774,668
============ =============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
(Successor) (Successor) (Predecessor) (Predecessor)
Quarter Nine Months Quarter Nine Months
Ended Ended Ended Ended
Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1996
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $221,068 $572,082 $291,274 $886,406
Expenses:
Film and television production
and distribution 191,163 509,075 311,289 919,197
General corporate administrative expenses 25,052 60,192 16,864 46,461
Goodwill amortization 3,599 7,420 3,720 11,157
-------- -------- -------- --------
Total expenses 219,814 576,687 331,873 976,815
-------- -------- -------- --------
Operating income (loss) 1,254 (4,605) (40,599) (90,409)
Other income (expense):
Interest expense, net of amounts capitalized (15,415) (36,014) (23,599) (68,685)
Interest and other income, net 133 1,521 1,991 2,865
--------- -------- -------- --------
Total other expense (15,282) (34,493) (21,608) (65,820)
--------- -------- -------- --------
Income (loss) from operations before provision for
income taxes (14,028) (39,098) (62,207) (156,229)
Income tax provision (2,532) (6,467) (4,507) (14,037)
--------- -------- -------- --------
Net income (loss) $ (16,560) $(45,565) $(66,714) (170,266)
========= ======== ======== ========
Pro forma net earnings (loss) per common $ (0.32) $ (1.08)
========= ========
Pro forma weighted average number
of common and common equivalent
shares outstanding 51,234,243 42,223,463
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------ --------------------------
No. of Par No. of Par
Shares Value Shares Value
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 501,006 $ 5 16,700,342 $ 167
Issuance of preferred and common stock 1,814 - 15,060,579 151
Foreign currency translation adjustment - - - -
Net loss - - - -
----------- ----------- -------------- ----------
BALANCE SEPTEMBER 30, 1997 (UNAUDITED) 502,820 $ 5 31,760,921 $ 318
=========== =========== ============== ==========
<CAPTION>
Retained Cumulative Total
Add'l Paid-in Earnings Translation Stockholders'
Capital (Deficit) Adjustment Equity
------------ ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 $ 901,639 $ 166 $ 1,145 $ 903,122
Issuance of preferred and common stock 363,114 - - 363,265
Foreign currency translation adjustment - - (318) (318)
Net loss - (45,565) - (45,565)
------------ --------------- ---------- ------------
BALANCE SEPTEMBER 30, 1997 (UNAUDITED) $ 1,264,753 $ (45,399) $ 827 $ 1,220,504
============ =============== ========== ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
(Successor) (Predecessor)
Nine Months Nine Months
Ended Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Net cash provided by operating activities $ 199,013 $ 333,174
Investing activities:
Acquisition of Orion Pictures Corporation (565,965) -
Additions to film costs, net (477,861) (365,554)
Additions to property and equipment (9,318) (6,503)
Other investing activities (9,127) (4,093)
--------------- ---------------
Net cash used in investing activities (1,062,271) (376,150)
--------------- ---------------
Financing activities:
Proceeds from issuance of preferred and common stock 363,265 -
Proceeds from debt issuance 200,000 -
Net bank advances 303,657 45,516
Dividends paid to parent - (6,160)
--------------- ---------------
Net cash provided by financing activities 866,922 39,356
--------------- --------------
Net change in cash and cash equivalents from operating,
investing and financing activities 3,664 (3,620)
Net increase (decrease) in cash due
to foreign currency fluctuations (318) (256)
--------------- ---------------
Net change in cash and cash equivalents 3,346 (3,876)
Cash and cash equivalents at beginning of period 16,381 17,128
Cash acquired from subsidiary 4,348 -
--------------- ---------------
Cash and cash equivalents at end of the period $ 24,075 $ 13,252
=============== ===============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
7
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed 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 Note
2), 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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and the instructions to Form 10-Q related to interim period
financial statements. Accordingly, these condensed consolidated financial
statements do not include certain information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary in order to make the financial
statements not misleading. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. The
Company's condensed consolidated financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
(the "Audited Financial Statements") included in the Company's Registration
Statement on Form S-1, as amended, (File No. 333-35411) (the "Registration
Statement") that became effective on November 10, 1997. 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 condensed consolidated balance sheets.
NOTE 2 - ACQUISITIONS
On October 10, 1996, the Company completed the acquisition of the common stock
of MGM Studios (the "MGM Acquisition") for a purchase price of $1,300,000,000 in
cash, plus payment of acquisition related costs of approximately $31,430,000.
The MGM 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>
8
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
On July 10, 1997, the Company acquired all the outstanding capital stock of
Orion Pictures Corporation ("Orion"), together with certain of its subsidiaries,
for an aggregate consideration of $573,000,000 (the "Orion Acquisition"). The
Company financed the Orion Acquisition through (i) the issuance of 13,375,107
and 1,625,013 shares of common stock of the Company (the "Common Stock") to
Tracinda Corporation ("Tracinda") and Seven Network Limited ("Seven"),
respectively, for an aggregate consideration of $360,000,000, (ii) borrowings by
Orion under a new $250,000,000 Orion credit facility ("Original Orion Credit
Facility"), which was subsequently amended (see Note 8), and (iii) assumption of
liabilities.
The Orion Acquisition has been accounted for as a purchase. Orion's 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 $ 51,015
Film and television costs 396,437
Other assets 14,953
Excess of cost over net assets of acquired businesses 303,280
Liabilities assumed (199,720)
--------------
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 finalizing valuations of individual
assets and the excess purchase price will be allocated accordingly. The excess
purchase price over the estimated fair value of the net assets acquired for both
acquisitions is being amortized on a straight-line basis over 40 years.
The results of operations of MGM Studios have been included in the consolidated
financial statements from October 11, 1996, date of commencement of principal
operations. The results of operations of Orion have been included in the
consolidated financial statements from July 10, 1997. The pro forma results of
operations for the nine months ended September 30, 1997 as if the Orion
Acquisition had occurred on January 1, 1997 and the pro forma results of
operations for the nine months ended September 30, 1996 as if the Acquisition
and the Orion Acquisition had occurred on January 1, 1996 are as follows (in
thousands, except share data):
9
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
-------------------------- -------------------------
<S> <C> <C>
Revenues $ 642,863 $ 1,012,549
Operating Loss $ (19,446) $ (33,150)
Loss from Continuing
Operations $ (73,779) $ (95,092)
Pro Forma Loss Per Share $ (1.40) $ (1.81)
Pro Forma Weighted
Average Shares 52,663,106 52,564,171
</TABLE>
Note 3 - Film and Television Costs
Film and television costs, net of amortization, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------------- -----------------------
<S> <C> <C>
Theatrical productions:
Released $ 1,214,570 $ 912,216
Completed not released 8,822 -
In process and development 337,164 59,077
Television programming 226,926 127,908
----------------------- -----------------------
$ 1,787,482 $ 1,099,201
======================= =======================
</TABLE>
Interest costs capitalized to theatrical productions were $5,432,000 and
$9,673,000 during the quarter and nine months ended September 30, 1997,
respectively, and $613,000 and $4,050,000 during the quarter and nine months
ended September 30, 1996, respectively.
NOTE 4 - BANK AND OTHER DEBT
Bank and other debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------------ ---------------------
<S> <C> <C>
Revolving Facility $ 362,000 $ 94,000
Orion Credit Facility 36,000 -
Term Loans 549,000 349,750
Capitalized lease obligations and
other borrowings 10,830 677
------------------------ ---------------------
$ 957,830 $ 444,427
======================== =====================
</TABLE>
10
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
The Company's borrowings are secured by substantially all the assets of the
Company. The agreements related to the Company's borrowings contain various
covenants including limitations on dividends, capital expenditures and
indebtedness, and the maintenance of certain financial ratios.
On October 15, 1997, the Company refinanced its existing bank debt into the
Amended Credit Facility (as such term is defined in Note 8) aggregating $1.3
billion.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
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,
trademark and 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 such litigation is
likely to be not material in relation to the Company's financial condition.
NOTE 6 - SUPPLEMENTARY CASH FLOW INFORMATION
The Company paid interest, net of capitalized interest, of $23,191,000 and
$24,479,000 during the nine months ended September 30, 1997 and 1996,
respectively. The Company received net foreign remittance tax refunds of
$1,826,000 in the nine months ended September 30, 1997 and paid income taxes of
$17,585,000 in the nine months ended September 30, 1996.
NOTE 7 - RECAPITALIZATION
On November 18, 1997, the Company effected a recapitalization pursuant to which
the Company, immediately prior to the closing of the Offering and the Tracinda
Purchase (as such terms are defined in Note 8), (i) converted each share of its
Series A Cumulative Convertible Preferred Stock ("the Preferred Stock") into one
share of Common Stock, (ii) effected a 41.667 for 1 stock split and (iii)
increased the number of authorized shares of the Common Stock 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 51,234,243 and 42,223,463 in the
quarter and nine months ended September 30, 1997, respectively.
The per share computations for all periods presented reflect the conversion of
the Preferred Stock and the 41.667 for 1 stock split.
11
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
NOTE 8 - SUBSEQUENT EVENTS
On October 15, 1997, the Company and its principal lenders agreed to amend and
restate the Revolving Facility, the Orion Credit Facility and the Term Loans
(see Note 4) into a syndicated facility (the "Amended Credit Facility")
aggregating $1.3 billion, consisting of a six year $400 million revolving credit
facility, increasing to $600 million upon consummation of the Offering, 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 were
used to retire amounts outstanding under the Revolving Facility, Terms 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 November 18, 1997, the Company completed the issuance and sale of 9,000,000
new shares of the Common Stock at a price per share of $20, less an underwriting
discount and Offering expenses, for estimated net proceeds of $165,000,000, in
an initial public offering (the "Offering"). Concurrent with the consummation of
the Offering, Tracinda purchased directly from the Company 3,978,780 shares of
the Common Stock, at a price per share of $20 less an amount equal to the
underwriting discount per share for shares issued in the Offering, for an
aggregate purchase price of $75,000,000 (the "Tracinda Purchase"). Subsequently,
$190,000,000 of the net proceeds of the Offering and the Tracinda Purchase has
been used to repay existing bank debt and the remaining net proceeds were
retained and used for working capital purposes.
12
<PAGE>
ITEM 2.
METRO-GOLDWYN-MAYER INC.
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 as well as the Audited Financial Statements.
Information in this Item 2 and elsewhere herein contains forward-looking
statements, including statements containing forward-looking terminology such as
"may," "will," "should," "expect," "intend," "estimate," or "continue" or the
negative thereof or comparable terminology. The matters set forth in the
Registration Statement under the caption "Risk Factors" 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.
GENERAL
The Company is engaged primarily in the development, production and worldwide
distribution of theatrical motion pictures and television programming.
The commercial potential of individual motion pictures and television 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. As a result of the lack of movie production
and distribution during the period from CDR's announcement in January 1996 of
its intention to sell MGM Studios to the consummation of the sale, 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 - QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
In connection with the MGM Acquisition, all of the assets and liabilities of MGM
Studios, including its film and television library (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 generally accepted accounting principles.
In addition, the ultimate revenue projections for the Library were revised
accordingly, resulting in an amortization
13
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Furthermore, the Company completed the Orion Acquisition and has consolidated
its results of operations from the July 10, 1997 acquisition date. Consequently,
operating results for the quarter and nine months ended September 30, 1997 are
not comparable to the corresponding 1996 periods.
The following table sets forth EBITDA (defined as operating income (loss) before
depreciation and amortization principally of goodwill related to business
combinations) for the quarter and nine months ended September 30, 1997 and 1996.
While many in the financial community consider EBITDA to be an important measure
of comparative operating performance, it should be considered in addition to,
but not as a substitute for or superior to, operating income, net earnings, cash
flow and other measures of financial performance prepared in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
(Successor) (Predecessor) (Successor) (Predecessor)
------------------ --------------- ---------------- -------------------
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------------------- --------------------------------------
(Unaudited, In Thousands) (Unaudited, In Thousands)
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Feature films $ 185,813 $ 264,480 $ 482,011 $ 795,459
Television programs 32,201 24,297 80,115 76,771
Other 3,054 2,497 9,956 14,176
---------- ---------- ---------- ----------
Total 221,068 291,274 572,082 886,406
EBITDA:
Feature films 30,702 (25,618) 75,801 (56,918)
Television programs 6,224 4,041 3,010 12,234
Other (7,021) 1,562 (15,804) 11,893
---------- ---------- ---------- ----------
EBITDA before general
corporate administrative
expenses 29,905 (20,015) 63,007 (32,791)
General corporate
administrative expenses (23,283) (15,471) (55,187) (42,342)
---------- ---------- ---------- ----------
EBITDA 6,622 (35,486) 7,820 (75,133)
Depreciation and other
amortization (5,368) (5,113) (12,425) (15,276)
---------- ---------- ---------- ----------
Operating income (loss) $ 1,254 $ (40,599) $ (4,605) $ (90,409)
========== ========== ========== ==========
</TABLE>
14
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
FEATURE FILMS. Feature film revenues decreased by $78.7 million, or 30 percent,
to $185.8 million in the quarter ended September 30, 1997 (the "1997 Quarter")
compared to the quarter ended September 30, 1996 (the "1996 Quarter").
Explanations for the decrease in revenues are discussed in the following
paragraphs.
Worldwide theatrical revenues decreased by $17.0 million, or 56 percent, to
$13.4 million in the 1997 Quarter, due to relatively limited worldwide
theatrical distribution activity following the sale of MGM Studios on October
10, 1996. In the 1997 Quarter, the Company released four new feature films
domestically, including Hoodlum, as compared to seven films in release in the
1996 Quarter, which included significant revenues from Kingpin, Fled and The
Birdcage. There were no significant international theatrical revenues generated
in the 1997 Quarter, while international revenues in the 1996 Quarter included
contributions from The Birdcage and Get Shorty.
Worldwide home video revenues decreased by $91.4 million, or 49 percent, to
$94.5 million in the 1997 Quarter, which included the domestic release of
Warriors of Virtue in the rental market. The 1996 Quarter included significant
home video revenues from the releases of The Birdcage, Mulholland Falls and
Unforgettable in the rental market, and the release of All Dogs Go To Heaven 2
in the sell-through market.
Worldwide pay television revenues increased by $6.8 million, or 27 percent, to
$32.2 million in the 1997 Quarter, primarily due to the availability of Kingpin
and Fled in the domestic pay television market, as compared to the availability
of Species and Showgirls in the 1996 Quarter. In the international pay
television marketplace, the Company realized significant license fees in the
1997 Quarter from GoldenEye, Get Shorty and Species, as compared to Blown Away
and Speechless in the 1996 Quarter. Network revenues were $1.8 million in the
1997 Quarter, which included license fees recognized on the film Speechless.
There were no network license fees recognized in the 1996 Quarter. Worldwide
syndication revenues increased $21.1 million, or 92 percent, to $44.0 million in
the 1997 Quarter, principally due to the distribution of the Orion film library
from the July 10, 1997 acquisition date.
EBITDA from feature films was $30.7 million in the 1997 Quarter as compared to a
loss of $25.6 million in the 1996 Quarter. The 1997 Quarter results reflect a
higher operating margin on the Company's film library, which was revalued in
connection with the MGM Acquisition and yielded lower amortization rates than in
the 1996 Quarter. Additionally, there were feature film write-downs of only
$1.5 million in the 1997 Quarter with respect to theatrical releases in that
period as compared to $29.3 million in write-downs on certain theatrical
releases in the 1996 Quarter.
15
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TELEVISION PROGRAMMING. Television programming revenues increased by $7.9
million, or 33 percent, to $32.2 million in the 1997 Quarter as compared to the
1996 Quarter. Worldwide pay television revenues increased by $7.6 million, or
146 percent, to $12.8 million in the 1997 Quarter, primarily due to the delivery
of eight episodes of the new series Stargate SG-1 and delivery of the television
movie Twelve Angry Men in the domestic pay television market. Worldwide
syndication revenues increased by $1.8 million, or 12 percent, to $16.0 million
in the 1997 Quarter due to the addition of the series Poltergeist: The Legacy in
domestic syndication. These revenue increases were partially offset by a
decrease of $1.5 million in revenues in the 1997 Quarter principally related to
lower home video revenues earned on fewer television movies released in the
period.
EBITDA from television programming was $6.2 million in the 1997 Quarter as
compared to $4.0 million in the 1996 Quarter. The increase in EBITDA from
television programming was a result of the successful release of the new series
Stargate SG-1 and a general increase in television product in distribution.
OTHER. Other revenues include distribution of consumer products, interactive
products and branded programming services, all of which constitute emerging
businesses with relatively limited current operations. EBITDA from other
businesses decreased $8.6 million to a loss of $7.0 million in the 1997 Quarter
principally due to interactive product and development costs of $5.3 million and
start-up losses of $3.8 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 Quarter results did not include
comparable activity in these new businesses.
GENERAL CORPORATE ADMINISTRATIVE EXPENSES. General corporate administrative
expenses increased by $7.8 million, or 50 percent, to $23.3 million in the 1997
Quarter as compared to the 1996 Quarter primarily due to overhead costs of $3.8
million associated with Orion and the accrual of long-term management incentive
bonuses of $3.3 million established in connection with the MGM Acquisition.
INTEREST EXPENSE, NET OF AMOUNTS CAPITALIZED. Net interest expense was $15.4
million in the 1997 Quarter as compared to $23.6 million in the 1996 Quarter.
Net interest expense decreased in the 1997 Quarter due to the substantial equity
investment received by the Company in connection with the MGM Acquisition (see
"Liquidity and Capital Resources") as well as increased capitalized interest
associated with increased film production in the period.
PROVISIONS FOR INCOME TAXES. The income tax provision of $2.5 million in the
1997 Quarter and $4.5 million in the 1996 Quarter principally reflects foreign
remittance taxes on international distribution revenues, which decreased
substantially in the 1997 Quarter.
16
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
FEATURE FILMS. Feature film revenues decreased by $313.5 million, or 39
percent, to $482.0 million in the nine months ended September 30, 1997 (the
"1997 Period") compared to the nine months ended September 30, 1996 (the "1996
Period"). Explanations for the decrease in revenues are discussed in the
following paragraphs.
Worldwide theatrical revenues decreased by $209.9 million, or 89 percent, to
$27.0 million in the 1997 Period, due to relatively limited worldwide theatrical
distribution activity following the sale of the Company on October 10, 1996. In
the 1997 Period, the Company released nine new feature films domestically as
compared to sixteen films in release 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 seven feature films in release in the 1996 Period, which included
significant revenues from GoldenEye, The Birdcage and Get Shorty.
Worldwide home video revenues decreased by $168.6 million, or 38 percent, to
$273.8 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, The Birdcage,
Get Shorty, Leaving Las Vegas and Showgirls in the rental market, and promotions
of the James Bond and Rocky film series and the release of All Dogs Go To Heaven
2 in the sell-through market.
Worldwide pay television revenues increased by $28.4 million, or 36 percent, to
$81.8 million in the 1997 Period, primarily due to the availability of The
Birdcage, Kingpin, Fled and Biodome, among others, in the domestic pay
television market, as compared to the availability of Species, Showgirls and Rob
Roy in the 1996 Period. Network revenues increased $12.5 million to $14.0
million in the 1997 Period, which included license fees recognized on the films
Stargate, Blown Away, Getting Even With Dad, Speechless and Clean Slate. The
Company recognized network license fees only on Undercover Blues in the 1996
Period. Worldwide syndication revenues increased $24.1 million, or 39 percent,
to $85.5 million in the 1997 Period, principally due to the distribution of the
Orion film library from the July 10, 1997 acquisition date.
EBITDA from feature films was $75.8 million in the 1997 Period as compared to a
loss of $56.9 million in the 1996 Period. The 1997 Period results reflect a
higher operating margin on the Company's film library, which was revalued in
connection with the MGM Acquisition and yielded lower amortization rates than in
the 1996 Period. Additionally, there were feature film write-downs of only $1.5
million in the 1997 Period with respect to theatrical releases in that period,
compared to $81.5 million in write-downs on certain theatrical releases in the
1996 Period.
17
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TELEVISION PROGRAMMING. Television programming revenues increased by $3.3
million, or 4 percent, to $80.1 million in the 1997 Period as compared to the
1996 Period. Worldwide pay television revenues increased by $2.1 million, or 8
percent, to $27.8 million in the 1997 Period primarily due to increased domestic
revenues from the new series Stargate SG-1. Worldwide syndication revenues
increased by $3.0 million, or 8 percent, to $42.9 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. These revenue
increases were partially offset by a decrease of $1.8 million in revenues in the
1997 Period principally related to lower international home video revenues
earned on television movies.
EBITDA from television programming was $3.0 million in the 1997 Period as
compared to $12.2 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.
OTHER. Other revenues include distribution of consumer products, interactive
media and branded programming services, all of which constitute emerging
businesses with relatively limited current operations. EBITDA from other
businesses was a loss of $15.8 million in the 1997 Period as compared to a
profit of $11.9 million in the 1996 Period. The 1997 Period results included
interactive product and development costs of $12.6 million and start-up losses
of $9.5 million on the Company's investment in MGM Gold (Asia). The 1996 Period
results did not include comparable activity in these new businesses. EBITDA
from other businesses in the 1996 Period included payments received in
connection with an Australian pay television joint venture and an audit
settlement with a major distributor.
GENERAL CORPORATE ADMINISTRATIVE EXPENSES. General corporate administrative
expenses increased by $12.8 million, or 30 percent, to $55.2 million in the 1997
Period as compared to the 1996 Period primarily due to the accrual of long-term
management incentive bonuses of $9.8 million established in connection with the
MGM Acquisition and overhead costs of $3.8 million associated with Orion.
DEPRECIATION AND OTHER AMORTIZATION. Depreciation and other amortization
decreased by $2.9 million, or 19 percent, to $12.4 million in the 1997 Period.
The Company is carrying lower goodwill in the 1997 Period as a result of the
acquisitions of MGM Studios and Orion.
INTEREST EXPENSE, NET OF AMOUNTS CAPITALIZED. Net interest expense was $36.0
million in the 1997 Period as compared to $68.7 million in the 1996 Period. Net
interest expense decreased in the 1997 Period due to the substantial equity
investment received by the Company in connection with the MGM Acquisition (see
"Liquidity and Capital Resources") as well as increased capitalized interest
associated with increased film production in the period.
18
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PROVISIONS FOR INCOME TAXES. The income tax provision of $6.5 million in the
1997 Period and $14.0 million in the 1996 Period principally reflects foreign
remittance taxes on international distribution revenues, which decreased
substantially in the 1997 Period.
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 a credit facility
aggregating $800 million (the "Original MGM Credit Facility"), of which $450
million was used to fund the acquisition. As of September 30, 1997, MGM Studios
had $88 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 markets ("LIBOR") plus 2.75 percent.
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 Original Orion Credit
Facility was equal to LIBOR plus 2.50 percent.
In October 15, 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, which increased
to $600 million upon completion of the Offering and the Tracinda Purchase, 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.
19
<PAGE>
METRO-GOLDWYN-MAYER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On November 18, 1997, the Company completed the issuance and sale of 9,000,000
new shares of the Common Stock at a price per share of $20, less an underwriting
discount and Offering expenses, for estimated net proceeds of $165 million in
the Offering. Concurrent with the consummation of the Offering, Tracinda
purchased directly from the Company 3,978,780 shares of the Common Stock, at a
price per share of $20 less an amount equal to the underwriting discount per
share for shares issued in the Offering, for an aggregate purchase price of $75
million. Subsequently, $190 million of the net proceeds of the Offering and the
Tracinda Purchase were used to repay existing bank debt with the remaining net
proceeds retained and used for working capital purposes. Concurrent with the
Offering and the Tracinda Purchase, (i) all of the outstanding Preferred Stock
was converted into Common Stock, (ii) the Company effected a 41.667 for 1 stock
split of the Common Stock and (iii) the Company increased the number of
authorized shares of the Common Stock to 125,000,000.
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 its film library.
Consequently, the Company may make strategic acquisitions, including
acquisitions to obtain such distribution channels or to further expand its film
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 specific strategic and economic factors underlying such
opportunities. Although the Company recently considered the acquisition of a
1,000 title film library (as described in the Registration Statement),
discussions with the seller of this library have ceased and the Company does not
intend to further pursue this acquisition.
The Company believes that the available credit under the Amended Credit
Facility, giving effect to the use of 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 capital 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pursuant to the general instructions to Rule 305 of Regulation S-K, the
disclosures called for by Item 3 and Rule 305 of Regulation S-K are inapplicable
to the Company.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to the Registration Statement for a description of certain
pending legal proceedings involving the Company.
On November 17, 1997, the Company and Danjaq, LLC ("Danjaq") filed a complaint
for declaratory relief and damages against Sony Corporation, Sony Pictures
Entertainment Company ("Sony"), Columbia Pictures Industries, Inc., John Calley,
Kevin McClory and Spectre Associates, Inc. regarding the Company's and Danjaq's
ownership of the James Bond film franchise, and charges of copyright
infringement, trademark dilution, inducing breach of contract, aiding and
abetting, breach of fiduciary duty, unfair competition and misappropriation of
trade secrets based on Sony's publicized assertion on October 13, 1997 that it
had the right (together with Kevin McClory) to create its own James Bond film
franchise (as previously discussed in the Registration Statement). The
complaint seeks various forms of legal relief based on the Company's position
that the defendants do not have any legal right to produce or distribute a
franchise of James Bond films, or any James Bond films, in the United States.
The defendants have not yet responded to the complaint or provided discovery
responses. The Company and Danjaq intend to prosecute this litigation
vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 10, 1997 the Registration Statement became effective.
On November 18, 1997, the Company completed the issuance and sale of all of the
9,000,000 shares of the Common Stock, registered pursuant to the Registration
Statement, in the Offering. Concurrent with the consummation of the Offering,
(i) Tracinda purchased directly from the Company 3,978,780 shares of the Common
Stock at a price per share of $20 less an amount equal to the underwriting
discount per share for shares of the Common Stock issued in the Offering, for an
aggregate purchase price of $75 million, (ii) each share of the Company's
previously outstanding Preferred Stock was converted into one share of the
Common Stock, (iii) the Company effected a 41.667 for 1 stock split of the
Common Stock and (iv) the Company increased the number of authorized shares of
the Common Stock to 125,000,000.
The managing underwriters of the Offering were Merrill Lynch & Co. and J.P.
Morgan & Co. The total price to the public, underwriting discounts and
commissions and proceeds to the Company were $180 million, $10.35 million and
$169.65 million, respectively. The Company estimates that $4.65 million of
other expenses in connection with the Offering have been incurred. None of such
amounts were direct or indirect payments to directors or officers of the Company
or their associates, to persons owning 10 percent or more of any class of equity
securities of the Company or to affiliates of the Company except that, as part
of the Offering, Culmen Group L.P., of which Michael Gleason, a director of the
Company, serves as the President of the general partner, indirectly received,
out of the underwriting discounts and commissions, approximately $87,000,
representing the concession ($0.67 per share) on 130,000 shares which Culmen
Group is credited with selling.
21
<PAGE>
Upon consummation of the Offering and the Tracinda Purchase, the net proceeds
received from the Offering and the Tracinda Purchase were invested overnight in
a money market account. On November 19, 1997, $190 million of such proceeds
were used for repayment of amounts borrowed under the revolving portion of the
Company's Amended Credit Facility (as defined in Note 8 of the Condensed
Consolidated Financial Statements). The remaining proceeds of $54.65 million
were retained and used by the Company for working capital purposes. None of
such amounts were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning 10 percent or more of any class
of equity securities of the Company or to affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRO-GOLDWYN-MAYER INC.
DATE: 12/16/97 /s/ Michael Corrigan
___________________ ________________________________
Michael Corrigan
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
DATE: 12/16/97 /s/ Daniel J. Rosett
_____________________ _________________________________
Daniel J. Rosett
Senior Vice President
Financial Operations
(Principal Accounting Officer)
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