<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission File No. 0-13481
METRO-GOLDWYN-MAYER INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 95-4605850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 Broadway Street 90404
Santa Monica, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 449-3000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
Common Stock, par value $0.01 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
----------------
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. [X] Yes [_] No
The number of shares of the Registrant's common stock outstanding as of July
31, 1999 was 151,452,986.
================================================================================
<PAGE>
METRO-GOLDWYN-MAYER INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<C> <S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998............................ 1
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Quarters and Six Months
ended June 30, 1999 and 1998 (unaudited)..................... 2
Condensed Consolidated Statements of Stockholders' Equity for
the Six Months ended June 30, 1999 (unaudited)............... 3
Condensed Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1999 and 1998 (unaudited).............. 4
Notes to Condensed Consolidated Financial Statements.......... 5
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 23
Part II. Other Information
Item 1. Legal Proceedings............................................. 24
Item 5. Other Information............................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................. 24
Signatures.............................................................. 25
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents............................. $ 9,965 $ 54,839
Accounts and contracts receivable (net of allowance
for doubtful accounts of $24,298 and $23,220,
respectively)........................................ 370,703 365,067
Film and television costs, net........................ 2,231,277 2,076,663
Investments and advances to affiliates................ 12,780 17,674
Property and equipment, net........................... 38,201 38,636
Excess of cost over net assets of acquired businesses,
net.................................................. 553,540 561,026
Other assets.......................................... 44,232 45,073
---------- ----------
$3,260,698 $3,158,978
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Bank and other debt................................. $1,189,836 $ 715,574
Contractual note payable............................ 112,500 --
Accounts payable and accrued liabilities............ 190,603 100,377
Accrued participants' share......................... 221,170 232,515
Income taxes payable................................ 32,871 34,869
Advances and deferred revenues...................... 120,399 130,664
Other liabilities................................... 24,209 25,322
---------- ----------
Total liabilities................................. 1,891,588 1,239,321
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 500,000,000 shares
authorized, 151,303,086 and 150,856,424 shares
issued and outstanding............................. 1,513 1,509
Additional paid-in capital.......................... 2,211,296 2,203,490
Deficit............................................. (842,023) (285,596)
Accumulated other comprehensive income.............. 258 254
Less: treasury stock, at cost, 132,253 shares....... (1,934) --
---------- ----------
Stockholders' equity.............................. 1,369,110 1,919,657
---------- ----------
$3,260,698 $3,158,978
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
1
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
----------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 212,274 $ 281,201 $ 470,917 $ 597,661
Expenses:
Film and television
production and
distribution......... 332,702 285,110 626,769 571,780
General and
administrative
expenses............. 27,074 26,029 49,129 50,651
Severance and related
costs................ 76,158 -- 76,158 --
Contract termination
fee.................. -- -- 225,000 --
Goodwill
amortization......... 3,803 3,683 7,486 6,922
----------- ---------- ------------- ------------
Total expenses...... 439,737 314,822 984,542 629,353
----------- ---------- ------------- ------------
Operating loss.......... (227,463) (33,621) (513,625) (31,692)
Other income (expense):
Interest expense, net
of amounts
capitalized.......... (22,219) (20,174) (41,238) (38,428)
Interest and other
income, net.......... 1,684 1,070 2,518 1,745
----------- ---------- ------------- ------------
Total other
expense............ (20,535) (19,104) (38,720) (36,683)
----------- ---------- ------------- ------------
Loss from operations
before provision for
income taxes........... (247,998) (52,725) (552,345) (68,375)
Income tax provision.... (1,809) (2,269) (4,082) (5,262)
----------- ---------- ------------- ------------
Net loss................ (249,807) (54,994) (556,427) (73,637)
Foreign currency
translation
adjustment............. 2 (36) 4 (84)
----------- ---------- ------------- ------------
Comprehensive loss...... $ (249,805) $ (55,030) $ (556,423) $ (73,721)
=========== ========== ============= ============
Basic and diluted loss
per share.............. $ (1.65) $ (0.84) $ (3.69) $ (1.12)
=========== ========== ============= ============
Weighted average number
of common shares
outstanding............ 151,021,396 65,790,698 150,945,857 65,781,329
=========== ========== ============= ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------
Add'l Accum. Other Less: Total
No. of Par Paid-in Comprehensive Treasury Stockholders'
Shares Value Capital Deficit Income Stock Equity
----------- ------ ---------- --------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1998................... 150,856,424 $1,509 $2,203,490 $(285,596) $254 $ -- $1,919,657
Acquisition of treasury
stock, at cost......... -- -- -- -- -- (2,040) (2,040)
Issuance of common
stock.................. 446,662 4 6,441 -- -- 106 6,551
Amortization of deferred
stock compensation..... -- -- 1,365 -- -- -- 1,365
Foreign currency
translation
adjustment............. -- -- -- -- 4 -- 4
Net loss................ -- -- -- (556,427) -- -- (556,427)
----------- ------ ---------- --------- ---- ------- ----------
Balance June 30, 1999... 151,303,086 $1,513 $2,211,296 $(842,023) $258 $(1,934) $1,369,110
=========== ====== ========== ========= ==== ======= ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by operating activities............... $ 92,176 $ 247,213
--------- ---------
Investing activities:
Acquisition of PFE Libraries.......................... (236,201) --
Additions to film costs, net.......................... (367,458) (477,558)
Additions to property and equipment................... (3,705) (7,119)
Other investing activities............................ (3,063) (10,672)
--------- ---------
Net cash used in investing activities................. (610,427) (495,349)
--------- ---------
Financing activities:
Additions to borrowed funds........................... 499,106 304,583
Repayments of borrowed funds.......................... (25,762) (36,789)
--------- ---------
Net cash provided by financing activities............. 473,344 267,794
--------- ---------
Net change in cash and cash equivalents from operating,
investing and financing activities..................... (44,907) 19,658
Net increase (decrease) in cash due to foreign currency
fluctuations........................................... 33 (124)
--------- ---------
Net change in cash and cash equivalents................. (44,874) 19,534
Cash and cash equivalents at beginning of the period.... 54,839 3,978
--------- ---------
Cash and cash equivalents at end of the period.......... $ 9,965 $ 23,512
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Note 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Metro-Goldwyn-Mayer Inc. ("MGM"), Metro-Goldwyn-Mayer
Studios Inc. and its majority owned subsidiaries ("MGM Studios") and Orion
Pictures Corporation and its majority owned subsidiaries ("Orion")
(collectively, the "Company"). MGM is a Delaware corporation formed on July
10, 1996 specifically to acquire MGM Studios, and is majority owned by an
investor group comprised of Tracinda Corporation and a corporation that is
principally owned by Tracinda (collectively, "Tracinda") and certain current
and former executive officers of the Company. The acquisition of MGM Studios
by MGM was completed on October 10, 1996, at which time MGM commenced
principal operations. The acquisition of Orion was completed on July 10, 1997.
The Company completed the acquisition of certain film libraries and film
related rights that were previously owned by PolyGram N.V. on January 7, 1999.
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 included in the Company's Form 10-K for the year ended December 31,
1998. 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--Restructuring and Other Charges
In the quarter ended June 30, 1999, the Company incurred certain
restructuring and other charges, in association with a change in senior
management and a corresponding review of the Company's operations, aggregating
$225.2 million, including (i) a $140.0 million reserve for write-downs and
certain other charges regarding a re-evaluation of film properties in various
stages of development and production, which has been included as a charge in
film and television production and distribution expenses, and (ii) $85.2
million of severance and other related costs, of which $9.0 million has been
classified in general and administrative expenses, as well as the estimated
costs of withdrawing from the Company's arrangements with United International
Pictures B.V. ("UIP").
Note 3--WHV Contract Settlement
On March 12, 1999, the Company agreed to accelerate the expiration of the
right of Warner Home Video ("WHV") to distribute the Company's product in the
home video marketplace under the agreement executed in 1990 (the "WHV
Agreement"). In consideration for the early expiration of the WHV Agreement,
the Company has agreed to pay WHV $225 million, of which $112.5 million was
paid on March 12, 1999 and the remaining $112.5 million of which is payable in
September 1999. The parties restructured the terms of the WHV Agreement, which
will function as an interim distribution agreement (the "Transitional Video
Agreement"), under which WHV will distribute certain of the Company's product
in the home video marketplace while the Company establishes its own domestic
home video distribution network. The Transitional Video Agreement expires on
January 31, 2000. Additionally, the Company reconveyed to Turner Entertainment
Co., Inc. ("Turner"), an affiliate of WHV, the right that the Company had to
distribute in the home video markets worldwide until June 2001, 2,950 Turner
titles that had been serviced under the WHV Agreement. The Company
5
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recorded a pre-tax contract termination charge in the six months ended June
30, 1999 for $225 million for costs in connection with the early expiration of
WHV's rights under the WHV Agreement. The Company's obligation to pay the
remaining $112.5 million installment (plus interest at the rate of eight
percent per year from March 1999) in September 1999 is secured by a standby
letter of credit issued by one of the Company's principal lenders.
Note 4--Film and Television Costs
Film and television costs, net of amortization, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Theatrical productions:
Released.......................................... $2,528,853 $2,116,007
Less: accumulated amortization.................... (981,031) (750,008)
---------- ----------
Released, net..................................... 1,547,822 1,365,999
Completed not released, net....................... 18,212 98,654
In process and development, net................... 319,421 283,242
---------- ----------
Subtotal: theatrical productions................ 1,885,455 1,747,895
---------- ----------
Television programming.............................. 652,678 567,138
Less: accumulated amortization.................... (306,856) (238,370)
---------- ----------
Subtotal: television programming................ 345,822 328,768
---------- ----------
$2,231,277 $2,076,663
========== ==========
</TABLE>
On January 7, 1999, the Company acquired certain film libraries and film
related rights (the "PFE Libraries") containing over 1,300 feature films that
were previously owned by PolyGram N.V. and its subsidiaries ("PolyGram") for
$235 million (the "PFE Library Acquisition"), plus acquisition related costs
of approximately $1.2 million. The Company funded the PFE Library Acquisition
through an advance on the Revolving Facility (as defined in Note 5) and
utilization of cash on hand.
Interest costs capitalized to theatrical productions were $5,431,000 and
$9,938,000 during the quarter and six months ended June 30, 1999, and
$4,152,000 and $7,317,000 during the quarter and six months ended June 30,
1998, respectively.
Note 5--Bank and Other Debt
Bank and other debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Revolving Facility...... $ 476,000 $ --
Term Loans.............. 700,000 700,000
Capitalized lease
obligations and other
borrowings............. 13,836 15,574
---------- --------
$1,189,836 $715,574
========== ========
</TABLE>
6
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 15, 1997, the Company entered into an amended and restated credit
facility with a syndicate of banks aggregating $1.3 billion (the "Amended
Credit Facility") consisting of a six year $600 million revolving credit
facility (the "Revolving Facility"), a $400 million seven and one-half year
term loan ("Tranche A Loan") and a $300 million eight and one-half year term
loan ("Tranche B Loan") (collectively, the "Term Loans"). The Amended Credit
Facility contains provisions allowing, with the consent of the requisite
lenders and subject to syndication thereof, for an additional $200 million
tranche, raising the potential amount of Amended Credit Facility to $1.5
billion. The Revolving Facility and the Tranche A Loan bear interest at 2.50
percent over the Adjusted LIBOR rate, as defined (7.87 percent at June 30,
1999). The Tranche B Loan bears interest at 2.75 percent over the Adjusted
LIBOR rate (8.12 percent at June 30, 1999). Scheduled amortization of the Term
Loans under the Amended Credit Facility commences with $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 matures in October 2003, subject to extension under certain
conditions.
The Company has entered into three year fixed interest rate swap contracts
in relation to a portion of the Amended Credit Facility for a notional value
of $800 million at an average rate of approximately 7.50 percent, which expire
in various terms no later than December 2001.
The Company's borrowings under the Amended Credit Facility are secured by
substantially all the assets of the Company. The Amended Credit Facility
contains various covenants including limitations on dividends, capital
expenditures and indebtedness, and the maintenance of certain financial
ratios. In connection with the $225 million charge in the six months ended
June 30, 1999 that resulted from the early termination of the WHV Agreement,
the Company and its lenders amended the Amended Credit Facility, effective
April 30, 1999. As of June 30, 1999, the Company was in compliance with all
such covenants.
Note 6--Stockholders' Equity
Dilutive securities of 279,311 and 208,366 shares are not included in the
calculation of diluted earnings per share in the quarter and six months ended
June 30, 1999, and 618,547 and 439,264 shares are not included in the quarter
and six months ended June 30, 1998, respectively, because they are
antidilutive.
On July 13, 1999, the following measures, among others, were approved at the
Company's annual meeting of stockholders: (i) an amendment to the Company's
Amended and Restated Certificate of Incorporation to increase the total number
of shares of the Company's common stock authorized from 250,000,000 to
500,000,000, (ii) the repricing of stock options of the Company granted
pursuant to the Amended and Restated 1996 Stock Incentive Plan, (iii) an
increase in the aggregate number of shares of the common stock of the Company
issuable under the Amended and Restated 1996 Stock Incentive Plan, (iv) an
amendment to the Bonus Interest Agreements entered into pursuant to the Senior
Management Bonus Plan, and (v) the issuance of options to purchase shares of
the common stock of the Company to Alex Yemenidjian, Chairman of the Board of
Directors and Chief Executive Officer of the Company, and to Christopher J.
McGurk, Vice Chairman and Chief Operating Officer of the Company.
Note 7--Segment Information
The Company's business units have been aggregated into three reportable
operating segments: feature films, television programming and other. The
factors for determining the reportable segments were based on the distinct
nature of their operations. They are managed as separate business units
because each requires and is responsible for executing a unique business
strategy. Earnings of industry segments and geographic areas exclude interest
income, interest expense, goodwill amortization, income taxes and other
unallocated corporate expenses. Identifiable assets are those assets used in
the operations of the segments. Corporate assets consist of cash, certain
corporate receivables and intangibles.
7
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Company's reportable segments
is shown in the following tables (in thousands):
<TABLE>
<CAPTION>
Feature Television
Films Programs Other Total
--------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Quarter Ended June 30:
1999:
Revenues......................... $ 152,041 $ 40,873 $19,360 $ 212,274
Segment income (loss)............ $(133,762) $ 2,484 $10,850 $(120,428)
1998:
Revenues......................... $ 217,160 $ 47,093 $16,948 $ 281,201
Segment income (loss)............ $ (14,953) $ 4,572 $ 6,472 $ (3,909)
Six Months Ended June 30:
1999:
Revenues......................... $ 348,008 $ 93,018 $29,891 $ 470,917
Segment income (loss)............ $(177,273) $ 8,053 $13,368 $(155,852)
1998:
Revenues......................... $ 471,297 $105,839 $20,525 $ 597,661
Segment income (loss)............ $ 18,103 $ 9,417 $(1,639) $ 25,881
</TABLE>
The following is a reconciliation of the change in reportable segment assets:
<TABLE>
<CAPTION>
December 31, Increase June 30,
1998 (Decrease) 1999
------------ ---------- ----------
<S> <C> <C> <C>
Feature films............................ $2,096,092 $141,846 $2,237,938
Television programs...................... 400,646 22,647 423,293
Other.................................... 19,718 (5,712) 14,006
---------- -------- ----------
Total reportable segment assets........ $2,516,456 $158,781 $2,675,237
========== ======== ==========
</TABLE>
The following table presents the details of other operating segment income
(loss):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Licensing and merchandising........... $ 1,251 $ (263) $ 2,042 $ (510)
Interactive media..................... 769 (3,797) (1,067) (8,557)
Music................................. 3,252 1,706 3,718 1,906
Losses on equity investments.......... (1,658) (2,713) (4,938) (5,769)
Other................................. 7,236 11,539 13,613 11,291
------- ------- -------- --------
$10,850 $ 6,472 $ 13,368 $ (1,639)
======= ======= ======== ========
</TABLE>
8
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of reportable segment income to income
(loss) before provision for income taxes:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Segment income (loss)............ $(120,428) $ (3,909) $(155,852) $ 25,881
General and administrative
expenses........................ (27,074) (26,029) (49,129) (50,651)
Severance and related costs...... (76,158) -- (76,158) --
Contract termination fee......... -- -- (225,000) --
Goodwill amortization............ (3,803) (3,683) (7,486) (6,922)
--------- -------- --------- --------
Operating loss................... (227,463) (33,621) (513,625) (31,692)
Interest expense, net of amounts
capitalized..................... (22,219) (20,174) (41,238) (38,428)
Interest and other income, net... 1,684 1,070 2,518 1,745
--------- -------- --------- --------
Loss before provision for income
taxes........................... $(247,998) $(52,725) $(552,345) $(68,375)
========= ======== ========= ========
</TABLE>
The following is a reconciliation of reportable segment assets to
consolidated total assets:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Total assets for reportable segments............... $2,675,237 $2,516,456
Goodwill not allocated to segments................. 553,540 561,026
Other unallocated amounts.......................... 31,921 81,496
----------- -----------
Consolidated total assets.......................... $3,260,698 $3,158,978
=========== ===========
</TABLE>
Note 8--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,
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 likely to be not material in relation to the Company's financial condition
or results of operations.
Note 9--Supplementary Cash Flow Information
The Company paid interest, net of capitalized interest, of $30,655,000 and
$28,192,000 during the six months ended June 30, 1999 and 1998, respectively.
The Company paid income taxes of $5,622,000 and $4,051,000 during the six
months ended June 30, 1999 and 1998, respectively.
Included in net cash provided by operating activities for the six months
ended June 30, 1999 is a $112.5 million payment to WHV representing the
initial payment in consideration for the early expiration of the WHV Agreement
(see Note 3). The remaining $112.5 million payment due to WHV (plus interest
at the rate of eight percent per year) is payable in September 1999.
During the six months ended June 30, 1999 and 1998, the Company contributed
58,740 and 32,185 shares of common stock valued at $843,000 and $695,000,
respectively, to the Company's 401(k) Savings Plan. In the six months ended
June 30, 1999, the Company also contributed 2,184 shares of common stock
valued at $31,000 to non-employee directors of the Company.
9
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Subsequent Event
On July 13, 1999, the Company filed a Form S-3 registration statement with
the Securities and Exchange Commission indicating that the Company intends to
seek approximately $750 million in additional equity financing, which may be
in the form of a rights offering, a secondary offering of common stock, or a
combination thereof. If the proposed equity financing involves a rights
offering (as with the rights offering completed by the Company in 1998), the
Company would distribute to its stockholders transferable subscription rights,
allowing holders to purchase new shares of the Company's common stock at a
customary discount to the market price. If the equity financing involves a
secondary offering of common stock, the Company would sell such shares through
one or more underwritten offerings or direct placements. The Company has not
yet determined the terms of the equity financing, such as the timing, price,
the number of rights to be distributed in the event of a rights offering, or
the total number of shares to be offered. Tracinda Corporation and one of its
affiliates, MGM's principal shareholders, have confirmed to the Company that,
in the event of a rights offering, they intend to exercise all of the rights
distributed to them and subscribe for their pro rata share of the new shares
to be issued. In addition, they have also confirmed that, in the event of a
secondary offering, they are willing to purchase any shares not otherwise
purchased, and in the event of a rights offering, are willing to acquire any
shares not subscribed for by the other stockholders of the Company.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report includes forward-looking statements. Generally, the words
"believes," "anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents the Company
files with the Securities and Exchange Commission from time to time, which
could cause actual results or outcomes to differ materially from those
projected. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and the related Notes
thereto and other financial information contained elsewhere in this Form 10-Q.
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
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 (i) the period from January 1996 (when a wholly-owned subsidiary of
Credit Lyonnais, S. A. announced its intention to sell MGM Studios) through
the sale of MGM Studios on October 10, 1996 and (ii) the Company's recent
management changes (see--"Liquidity and Capital Resources--Recent
Developments"), the Company expects to experience lower revenues at least
through the end of 2000, and thus the fluctuations caused by this accounting
method may have a greater impact than otherwise might be the case.
In October 1998, the Financial Accounting Standards Board issued an Exposure
Draft on a proposed Statement of Position (the "Proposed SOP") for "Accounting
By Producers and Distributors of Films." If adopted, the Proposed SOP would
establish new accounting and reporting standards for all producers and
distributors that own or hold the rights to distribute or exploit films. The
Proposed SOP provides that the cumulative effect of changes in accounting
principles caused by adoption of the provisions of the Proposed SOP should be
included in the determination of net income in conformity with Accounting
Principles Board Opinion No. 20, "Accounting Changes." The Company is not able
to quantify the effect, or the materiality, to the Company of adoption of the
Proposed SOP at this time. If adopted, the Proposed SOP, as currently drafted,
would be effective for financial statements for fiscal years beginning after
December 15, 1999, with earlier adoption encouraged.
11
<PAGE>
Results of Operations
Quarters and Six Months Ended June 30, 1999 and 1998
The following table sets forth the Company's operating results for the
quarters and six months ended June 30, 1999 and 1998. As stated in the
financial statements and related notes thereto, in the quarter ended June 30,
1999 the Company incurred certain restructuring and other charges aggregating
$225.2 million related to changes in senior management, a corresponding review
of the Company's operations and film projects in various stages of development
and production, and other related costs. Additionally, in March 1999 the
Company accelerated the expiration of the WHV Agreement, which resulted in a
$225 million charge included in operating results for the six months ended
June 30, 1999. The net operating results in the 1999 periods, therefore, are
not comparable to the operating results in the 1998 periods.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- --------
In thousands
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Feature films..................... $ 152,041 $217,160 $ 348,008 $471,297
Television programs............... 40,873 47,093 93,018 105,839
Other............................. 19,360 16,948 29,891 20,525
--------- -------- --------- --------
Total revenues.................. $ 212,274 $281,201 $ 470,917 $597,661
========= ======== ========= ========
Operating income (loss):
Feature films..................... $(133,762) $(14,953) $(177,273) $ 18,103
Television programs............... 2,484 4,572 8,053 9,417
Other............................. 10,850 6,472 13,368 (1,639)
General and administration
expenses......................... (27,074) (26,029) (49,129) (50,651)
Severance and related costs....... (76,158) -- (76,158) --
Contract termination fee.......... -- -- (225,000) --
Goodwill amortization............. (3,803) (3,683) (7,486) (6,922)
--------- -------- --------- --------
Operating loss...................... (227,463) (33,621) (513,625) (31,692)
Interest expense, net of amounts
capitalized........................ (22,219) (20,174) (41,238) (38,428)
Interest and other income........... 1,684 1,070 2,518 1,745
--------- -------- --------- --------
Loss before provision for income
taxes.............................. (247,998) (52,725) (552,345) (68,375)
Income tax provision................ (1,809) (2,269) (4,082) (5,262)
--------- -------- --------- --------
Net loss............................ $(249,807) $(54,994) $(556,427) $(73,637)
========= ======== ========= ========
</TABLE>
Quarters Ended June 30, 1999 and 1998
Feature Films. Feature film revenues decreased by $65.1 million, or 30
percent, to $152.0 million in the quarter ended June 30, 1999 (the "1999
Quarter") compared to the quarter ended June 30, 1998 (the "1998 Quarter").
Explanations for the changes in revenues are discussed in the following
paragraphs.
Worldwide theatrical revenues decreased by $54.8 million, or 77 percent, to
$16.6 million in the 1999 Quarter as compared to the 1998 Quarter. In the 1999
Quarter, the Company released Tea With Mussolini on a limited basis in the
domestic marketplace, as compared to the wider releases of Species 2 and Dirty
Work in the 1998 Quarter, as well as the limited release of The Hanging
Garden. Additionally, the 1998 Quarter benefited from the continued strong
worldwide theatrical performances of The Man In The Iron Mask and Tomorrow
Never Dies. There were no comparably performing films in worldwide theatrical
release in the 1999 Quarter. Overall, in the 1999 Quarter the Company released
one new film domestically, and in the 1998 Quarter released three new feature
films domestically and one new film internationally.
12
<PAGE>
Worldwide home video revenues decreased by $21.6 million, or 24 percent, to
$68.9 million in the 1999 Quarter, which included the release in the domestic
rental market of At First Sight and Just The Ticket, as compared to the more
significant releases of Tomorrow Never Dies and Red Corner in the domestic
rental market in the 1998 Quarter. International market releases in the 1999
Quarter included Species 2 and Ronin, as compared to the release of Tomorrow
Never Dies in the 1998 Quarter. Additionally, due to the early expiration of
the WHV Agreement, effective January 1, 1999, the Company no longer receives
revenue from the distribution of film product owned by Turner. In the 1998
Quarter, the Company generated $11.7 million in gross revenues from its
distribution of the Turner product. Partially offsetting the aforementioned
home video revenues decreases were increased library digital video disc sales,
which aggregated $11.8 million in the 1999 Quarter as compared to $7.5 million
in the 1998 Quarter.
Worldwide pay television revenues from feature films increased by $3.6
million, or 17 percent, to $25.2 million in the 1999 Quarter as compared to
the 1998 Quarter. In the 1999 Quarter, the Company benefited from the release
in the domestic pay television marketplace of Species 2 and Dirty Work, which
carried higher license fees than the release of Warriors of Virtue in the 1998
Quarter. Network television revenues from feature films decreased by $1.3
million, or 22 percent, to $4.5 million in the 1999 Quarter, principally due
to lower license fees earned from the delivery to network television of
Kingpin and Fled in the 1999 Quarter than the license fees for Rob Roy and
Fluke, which were delivered in the 1998 Quarter. Worldwide syndicated
television revenues from feature films increased by $10.8 million, or 43
percent, to $35.8 million in the 1999 Quarter, principally due to the release
in international markets of Tomorrow Never Dies. There were no comparably
performing releases in international syndication markets in the 1998 Quarter.
Other feature film revenues decreased $1.8 million in the 1999 Quarter due
to lower miscellaneous income collected than in the 1998 Quarter.
The Company recognized an operating loss from feature films of $133.8
million in the 1999 Quarter as compared to a loss of $15.0 million in the 1998
Quarter. Operating results in the 1999 Quarter reflected decreased revenues as
discussed above, as well as a reserve for write-downs and certain other
charges aggregating $140.0 million regarding a re-evaluation of several film
projects in various stages of development and production, as compared to lower
write-downs of $30.8 million in the 1998 Quarter. The 1998 Quarter also
benefited from profits realized from the successful worldwide performances of
Tomorrow Never Dies and The Man In The Iron Mask. There were no comparably
performing films in the 1999 Quarter.
Television Programming. Television programming revenues decreased by $6.2
million, or 13 percent, to $40.9 million in the 1999 Quarter as compared to
the 1998 Quarter. Network television revenues decreased by $7.9 million, or 75
percent, to $2.6 million, principally due to the delivery of only one
television movie in the 1999 Quarter, as compared to a higher license fee
earned on the delivery of the television mini-series Creature in the 1998
Quarter. Worldwide pay television revenues increased by $1.4 million, or 18
percent, to $9.3 million in the 1999 Quarter, due to higher international
license fees earned from the release of certain television movies than in the
1998 Quarter. The Company may generate lower pay television revenues in future
periods due to a reduction in the number of production commitments for
television series.
Domestic syndicated television programming revenues increased by $6.4
million, or 67 percent, to $15.9 million in the 1999 Quarter, primarily due to
the syndication of Stargate SG-1 and Flipper, as well as additional years of
the The Outer Limits and Poltergeist. International syndicated television
programming revenues, however, decreased by $5.2 million, or 34 percent, to
$10.0 million in the 1999 Quarter, due to a lack of new television movies or
mini-series licensed in international syndication markets, as compared to the
licensing of the international rights to Creature in the 1998 Quarter.
Worldwide home video revenues with respect to television programming decreased
by $0.2 million, or 7 percent, to $2.9 million in the 1999 Quarter, which
included the release in international markets of Stargate SG-1, Secret of Nimh
2 and one television movie. By comparison, international home video revenues
for television programming in the 1998 Quarter included Stargate SG-1 and
Babes In Toyland, as well as several television movies.
13
<PAGE>
Operating income from television programming decreased by $2.1 million, or
46 percent, to $2.5 million in the 1999 Quarter as compared to the 1998
Quarter. The decrease in operating results reflected the net reduction in
television programming revenues discussed above.
Other. Other revenues include distribution of consumer products, interactive
media and branded programming services, all of which constitute emerging
businesses for MGM Studios with relatively limited current operations, as well
as music soundtrack and royalty income and audit recoveries by the Company
from third parties. Operating income from other businesses increased by $4.4
million, or 68 percent, to $10.9 million in the 1999 Quarter as compared to
the 1998 Quarter. Operating results in the 1999 Quarter include consumer
products revenue of $2.5 million and music soundtrack and royalty revenue of
$3.9 million, as compared to consumer products revenue of $3.3 million and
music soundtrack and royalty revenue of $2.1 million in the 1998 Quarter.
Interactive media revenues were $4.6 million in the 1999 Quarter, which
included license fees collected for the rights to develop the next James Bond
interactive game as well as other games, as compared to only $0.4 million in
the 1998 Quarter which had no such licenses. Additionally, operating results
in the 1999 Quarter include the receipt of $8.0 million in third party audit
recoveries. There were no significant audit recoveries in the 1998 Quarter.
However, other revenues in the 1998 Quarter did include a $10.0 million
payment received in association with the Company's sale of a portion of its
investment in a Japanese pay television channel.
Expenses for other businesses in the 1999 Quarter include interactive
product and development costs of $3.6 million as compared to similar costs of
$3.9 million in the 1998 Quarter. Consumer products cost of sales were $0.6
million in the 1999 Quarter as compared to $2.2 million in the 1998 Quarter,
when the Company incurred certain start-up expenses associated with a newly
launched catalogue business. In addition, operating expenses for other
businesses in the 1999 Quarter included aggregate losses of $1.7 million on
the Company's equity investments, including its interest in the Company's
newly launched cable programming joint venture, MGM Networks Latin America, as
compared to $1.9 million for such start-up losses in the 1998 Quarter.
General and Administration Expenses. General and administration expenses
increased by $1.0 million, or 4 percent, to $27.1 million in the 1999 Quarter
as compared to the 1998 Quarter, primarily due to increased senior management
and employee incentive compensation of $10.3 million in 1999, partially offset
by certain litigation recoveries and additional cost savings associated with a
corporate restructuring program initiated in the third quarter of 1998. See
also "Severance and Related Costs" below.
Severance and Related Costs. As discussed in Note 2 to the Condensed
Consolidated Financial Statements, in the 1999 Quarter the Company incurred
executive severance and other related charges of $76.2 million attributable to
the changes in senior management and the estimated costs of withdrawing from
the Company's arrangements with UIP. There were no comparable charges in the
1998 Quarter.
Interest Expense, Net of Amounts Capitalized. Net interest expense increased
by $2.0 million, or 10 percent, to $22.2 million in the 1999 Quarter as
compared to the 1998 Quarter. Interest expense increased due to additional
borrowings for operating and production activities, as well as the financing
of the PFE Library Acquisition in January 1999 and the WHV Agreement
termination settlement in March 1999, partially offset by debt repayment
associated with proceeds received from the Company's rights offering completed
in November 1998.
Income Tax Provision. The income tax provision of $1.8 million in the 1999
Quarter and $2.3 million in the 1998 Quarter primarily reflect foreign
remittance taxes attributable to international distribution revenues.
Six Months Ended June 30, 1999 and 1998
Feature Films. Feature film revenues decreased by $123.3 million, or 26
percent, to $348.0 million in the six months ended June 30, 1999 (the "1999
Period") compared to the six months ended June 30, 1998 (the "1998 Period").
Explanations for the changes in revenues are discussed in the following
paragraphs.
14
<PAGE>
Worldwide theatrical revenues decreased by $134.3 million, or 73 percent, to
$49.9 million in the 1999 Period as compared to the 1998 Period. In the 1999
Period, the Company released in the domestic marketplace At First Sight, Just
The Ticket, The Rage: Carrie 2, The Mod Squad and Tea With Mussolini, as
compared to The Man In The Iron Mask, Species 2 and Dirty Work, among others,
in the 1998 Period. Additionally, the 1998 Period benefited from the strong
worldwide theatrical performances of The Man In The Iron Mask and Tomorrow
Never Dies. There were no comparably performing films in worldwide theatrical
release in the 1999 Period. Overall, in the 1999 Period the Company released
five new feature films domestically and one new film internationally, and in
the 1998 Period released eight new films domestically and three new films
internationally.
Worldwide home video revenues decreased by $9.7 million, or six percent, to
$167.4 million in the 1999 Period, which included the release in the domestic
rental market of Ronin, At First Sight, Disturbing Behavior and Just The
Ticket, as compared to the more significant releases of Tomorrow Never Dies
and Red Corner, as well as Hoodlum and Ulee's Gold, in the domestic rental
market in the 1998 Period. Additionally, due to the early expiration of the
WHV Agreement, effective January 1, 1999 the Company no longer receives
revenues from the distribution of film product owned by Turner. In the 1998
Period, the Company generated $26.3 million in gross revenues from its
distribution of the Turner product. Partially offsetting the decrease in
domestic home video revenue discussed above, were increased international home
video revenues from the release in the 1999 Period of The Man In The Iron
Mask, Species 2 and Ronin, as compared to the less significant releases of
Fled and Hoodlum in the 1998 Period. Additionally, library digital video disc
sales increased to $25.6 million in the 1999 Period from $11.2 million in the
1998 Period.
Worldwide pay television revenues from feature films increased by $6.6
million, or 15 percent, to $51.0 million in the 1999 Period as compared to the
1998 Period. In the 1999 Period, the Company benefited from the release in the
domestic pay television marketplace of The Man In The Iron Mask, Species 2 and
Dirty Work, as compared to lower license fees received for Warriors of Virtue
and Eight Heads In A Duffel Bag in the 1998 Period. Network television
revenues from feature films decreased by $2.0 million, or 22 percent, to
$7.3 million in the 1999 Period, principally due to lower license fees earned
from the delivery to network television of Mulholland Falls, Kingpin and Fled
in 1999 than the license fees for Rob Roy, Species and Fluke, which were
delivered in the 1998 Period. Worldwide syndicated television revenues from
feature films increased by $19.6 million, or 39 percent, to $70.1 million in
the 1999 Period, principally due to the release in international markets of
Tomorrow Never Dies, The Birdcage, GoldenEye and Get Shorty. There were no
comparably performing releases in international syndication markets in the
1998 Period.
Other feature film revenues decreased $3.5 million in the 1999 Period due to
lower miscellaneous income collected than in the 1998 Period.
The Company recognized an operating loss from feature films of $177.3
million in the 1999 Period as compared to a profit of $18.1 million in the
1998 Period. Operating results in the 1999 Period reflected the decreased
revenues discussed above, as well as feature film write-downs on current
period releases of $54.3 million and an additional reserve of $140.0 million
for write-downs and certain other charges regarding a re-evaluation of several
film projects in various stages of development and production, as compared to
lower write-downs of $33.6 million in the 1998 Period. The 1998 Period also
benefited from profits realized from the successful worldwide performances of
Tomorrow Never Dies and The Man In The Iron Mask. There were no comparably
performing films in the 1999 Period.
Television Programming. Television programming revenues decreased by $12.8
million, or 12 percent, to $93.0 million in the 1999 Period as compared to the
1998 Period. Network television revenues decreased by $15.9 million, or 65
percent, to $8.7 million, principally due to the timing of delivery of
episodes of The Magnificent Seven and the release of only one television movie
in the 1999 Period, as compared to higher license fees earned on the delivery
of the television mini-series Creature and additional episodes of The
Magnificent Seven in the 1998 Period. Worldwide pay television revenues
decreased by $4.7 million, or 27 percent, to $12.8 million in the 1999 Period
due to one fewer series in broadcast on domestic pay television than in the
1998 Period. The Company may generate lower pay television revenues in future
periods due to a reduction in the number of production commitments for
television series.
15
<PAGE>
Domestic syndicated television programming revenues increased by $21.0
million, or 112 percent, to $39.7 million in the 1999 Period, primarily due to
the syndication of Stargate SG-1 and Flipper, as well as additional years of
the The Outer Limits and Poltergeist, and the licensing in the domestic basic
cable market of the In The Heat Of The Night series. International syndicated
television programming revenues, however, decreased by $4.0 million, or 14
percent, to $23.8 million in the 1999 Period due to a lack of new television
movies or mini-series licensed in international syndication markets, as
compared to the licensing of the international rights to Creature in the 1998
Period. Worldwide home video revenues with respect to television programming
decreased by $1.4 million, or 16 percent, to $7.4 million in the 1999 Period,
primarily due to the release of fewer television movies in 1999. The 1998
Period also benefited from a third party payment of $7.0 million for the
rights to create new episodes of Hollywood Squares. There were no such
receipts in the 1999 Period.
Operating income from television programming decreased by $1.4 million, or
15 percent, to $8.0 million in the 1999 Period as compared to the 1998 Period.
The decrease in operating results reflected the reduction in revenues
discussed above, as well as the benefit in the 1998 Period of the rights
payment received for Hollywood Squares.
Other. Other revenues include distribution of consumer products, interactive
media and branded programming services, all of which constitute emerging
businesses for MGM Studios with relatively limited current operations, as well
as music soundtrack and royalty income and audit recoveries by the Company
from third parties. The Company recognized an operating profit from other
businesses of $13.4 million in the 1999 Period as compared to a loss of $1.6
million in the 1998 Period. Operating results in the 1999 Period include
consumer products revenue of $4.6 million and music soundtrack and royalty
revenue of $5.1 million, as compared to consumer products revenue of $5.6
million and music soundtrack and royalty revenue of $2.8 million in the 1998
Period. Interactive media revenues were $4.5 million in the 1999 Period, which
included license fees collected for the rights to develop the next James Bond
interactive game as well as other games, as compared to only $0.4 million in
the 1998 Period which had no such licenses. Additionally, operating results in
the 1999 Period include the receipt of $14.2 million in third party audit
recoveries. There were no significant audit recoveries in the 1998 Period.
However, other revenues in the 1998 Period did include a $10.0 million payment
received in association with the Company's sale of a portion of its investment
in a Japanese pay television channel.
Expenses for other businesses in the 1999 Period include interactive product
and development costs of $5.3 million, as compared to similar costs of $8.2
million in the 1998 Period. Consumer products cost of sales were $1.1 million
in the 1999 Period as compared to $3.4 million in the 1998 Period, when the
Company incurred certain start-up expenses associated with a newly launched
catalogue business. In addition, operating expenses for other businesses in
the 1999 Period included aggregate losses of $4.9 million on the Company's
equity investments, including its interest in the Company's newly launched
cable programming joint venture, MGM Networks Latin America, as compared to
$5.6 million for such start-up losses in the 1998 Period.
General and Administration Expenses. General and administration expenses
decreased by $1.5 million, or 3 percent, to $49.1 million in the 1999 Period
as compared to the 1998 Period, primarily due to certain cost savings in 1999
associated with a corporate restructuring program initiated in the third
quarter of 1998 and certain litigation recoveries collected in the period,
partially offset by increased senior management and employee incentive
compensation of $10.3 million. See also "Severance and Related Costs" below.
Severance and Related Costs. As discussed in Note 2 to the Condensed
Consolidated Financial Statements, in the 1999 Period the Company incurred
executive severance and other related charges of $76.2 million attributable to
changes in senior management and the estimated costs of withdrawing from the
Company's arrangements with UIP. There were no comparable charges in the 1998
Period.
Contract Termination Fee. On March 12, 1999, the Company agreed to
accelerate the expiration of the right of WHV to distribute the Company's
product in the home video marketplace under the WHV Agreement. In
consideration for the early expiration of the WHV Agreement, the Company
agreed to pay WHV $225 million,
16
<PAGE>
of which $112.5 million was paid on March 12, 1999 and the remaining $112.5
million of which, plus interest, is payable in September 1999. The parties
restructured the terms of the WHV Agreement, which will function as the
Transitional Video Agreement, under which WHV will distribute certain of the
Company's product in the home video marketplace while the Company establishes
its own domestic home video distribution network. The Transitional Video
Agreement expires on January 31, 2000. Additionally, the Company reconveyed as
of January 1, 1999 to Turner the right that the Company had to distribute in
the home video markets worldwide until June 2001, 2,950 titles that had been
serviced under the WHV Agreement. Operating results in the 1999 Period include
a pre-tax contract termination charge of $225 million for costs in connection
with the early expiration of WHV's rights under the WHV Agreement.
Interest Expense, Net of Amounts Capitalized. Net interest expense increased
by $2.8 million, or 7 percent, to $41.2 million in the 1999 Period as compared
to the 1998 Period. Interest expense increased due to additional borrowings
for operating and production activities, as well as the financing of the PFE
Library Acquisition in January 1999 and the WHV Agreement termination
settlement (see above) in March 1999, partially offset by debt repayment
associated with proceeds received from the Company's rights offering completed
in November 1998.
Income Tax Provision. The income tax provision of $4.1 million in the 1999
Period and $5.3 million in the 1998 Period primarily reflect foreign
remittance taxes attributable to international distribution revenues.
17
<PAGE>
EBITDA
While many in the financial community consider earnings before interest,
taxes, depreciation and non-film amortization ("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. EBITDA does not
reflect cash 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.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- --------
In thousands
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Feature films..................... $ 152,041 $217,160 $ 348,008 $471,297
Television programs............... 40,873 47,093 93,018 105,839
Other............................. 19,360 16,948 29,891 20,525
--------- -------- --------- --------
Total revenues.................. $ 212,274 $281,201 $ 470,917 $597,661
========= ======== ========= ========
EBITDA:
Feature films..................... $(133,762) $(14,953) $(177,273) $ 18,103
Television programs............... 2,484 4,572 8,053 9,417
Other............................. 10,850 6,472 13,368 (1,639)
General and administration
expenses......................... (24,960) (24,081) (44,823) (46,729)
Severance and related costs....... (76,158) -- (76,158) --
Contract termination fee.......... -- -- (225,000) --
--------- -------- --------- --------
EBITDA.......................... (221,546) (27,990) (501,833) (20,848)
Depreciation and non-film
amortization....................... (5,917) (5,631) (11,792) (10,844)
--------- -------- --------- --------
Operating loss...................... (227,463) (33,621) (513,625) (31,692)
Interest expense, net of amounts
capitalized........................ (22,219) (20,174) (41,238) (38,428)
Interest and other income........... 1,684 1,070 2,518 1,745
--------- -------- --------- --------
Loss before provision for income
taxes.............................. (247,998) (52,725) (552,345) (68,375)
Income tax provision................ (1,809) (2,269) (4,082) (5,262)
--------- -------- --------- --------
Net loss........................ $(249,807) $(54,994) $(556,427) $(73,637)
========= ======== ========= ========
</TABLE>
Liquidity and Capital Resources
General. The Company's operations are capital intensive. In recent years the
Company has funded its operations primarily from proceeds from (i) the sale of
equity securities, (ii) bank borrowings and (iii) internally generated funds.
Sales of equity securities include proceeds from the Company's initial public
offering and Tracinda's concurrent purchase of the Company's common stock,
which were completed in November 1997, and the 1998 rights offering, which was
completed in November 1998. During the 1999 Period, the net cash provided by
operating activities was $92.2 million (which was reduced by the initial
payment of $112.5 million to WHV and film performance; see--"Capital
Requirements"), the net cash used in investing activities (primarily the
purchase of the PFE Libraries and additions to film and television costs) was
$610.4 million, and the net cash provided by financing activities (primarily
bank borrowings) was $473.3 million.
18
<PAGE>
Recent Developments. On March 12, 1999, the Company entered into an
agreement with WHV that, on January 31, 2000, will return to the Company full
control over the home video exploitation of the Company's films. For the
return of these rights, the Company agreed to pay WHV $225 million in two
equal payments. The first payment of $112.5 million was made on March 12,
1999. The second payment of $112.5 million, plus accrued interest, is due on
September 1, 1999.
On April 26, 1999, Frank G. Mancuso resigned from his position as Chairman
of the Board of Directors and Chief Executive Officer of the Company and A.
Robert Pisano resigned from his position as Vice Chairman of the Board of
Directors and as a director of the Company. Mr. Mancuso serves as a director
of the Company.
Also on April 26, 1999, Alex Yemenidjian was elected Chairman of the Board
of Directors and Chief Executive Officer of the Company. Mr. Yemenidjian has
been a director of the Company since 1997 and has served as Chairman of the
Executive Committee of the Board of Directors since 1998. Mr. Yemenidjian has
served as a director and senior executive at MGM Grand, Inc. since 1990, most
recently as President and Chief Operating Officer. After his appointment as
Chairman and Chief Executive Officer of the Company, Mr. Yemenidjian resigned
his position as Chief Operating Officer of MGM Grand, Inc. He is the President
and serves on the Board of Directors of MGM Grand, Inc.
On April 28, 1999, Christopher McGurk was named Vice Chairman of the Board
of Directors and Chief Operating Officer of the Company. Mr. McGurk had been
with Universal Pictures ("Universal"), a division of Universal City Studios,
Inc. since 1996, where he had most recently served as President and Chief
Operating Officer. Prior to joining Universal, Mr. McGurk worked for eight
years beginning in 1988 at The Walt Disney Company, most recently as
President, Motion Pictures Group, Walt Disney Studios.
On April 28, 1999, the Company entered into an agreement with Universal that
increased the Company's commitment under an existing co-production arrangement
with Universal by $100 million in production expenses. The motion pictures to
be co-produced under the arrangement will be selected over the next three
years, but the Company may incur the related production expenditures over a
longer period of time.
On June 7, 1999, the Company announced that the United Artists theatrical
production unit of the Company would be repositioned as a specialty film unit
involved in production, sales and acquisitions. As part of this repositioning,
United Artists will continue to support independent filmmakers, handle
international sales and complement the Company's existing international
distribution operations.
On June 21, 1999, the Company entered into agreements with Fox Filmed
Entertainment ("Fox") for Fox to provide distribution services for the
Company's films in the international theatrical and international home video
markets. The international theatrical agreement will take effect when the
Company's withdrawal from its present international distributor, UIP is
complete, no later than November 1, 2000. The international home video
agreement will take effect on February 1, 2000 following the expiration of the
Company's existing agreement with WHV. Although Fox will be servicing certain
distribution activities on the Company's behalf, the Company reserved broad
powers to direct and control the handling of its films.
On June 22, 1999, the Company announced a company-wide restructuring
consistent with its strategic plan for a more streamlined operation, new
initiatives regarding film and television development and production and the
expansion of domestic home entertainment, cable, satellite and internet
operations. As disclosed in Note 2 to the Condensed Consolidated Financial
Statements, the Company incurred restructuring and other charges in the
quarter ended June 30, 1999 of $225.2 million, of which $140.0 million is
film-related.
On June 24, 1999, the Company announced that Jules Haimovitz joined the
Company as President of MGM Networks Inc. to focus on establishing cable,
satellite and other channels to distribute the Company's film library. Mr.
Haimovitz' entertainment industry career spans 20 years with such companies as
Viacom, Spelling Entertainment, King World Productions and ITC Entertainment
Group.
19
<PAGE>
On July 6, 1999, the Company announced that it had entered into an agreement
with Miramax Films ("Miramax") pursuant to which the Company and Miramax will
jointly produce and distribute up to eight motion pictures, relying on the
Company's film library as a prominent source of material. Initial titles to be
produced include Cold Mountain, based on the best-selling novel, contributed
by the Company, and the remake of the comedy classic Harvey, contributed by
Miramax.
Amended Credit Facility. The Company anticipates substantial continued
borrowing under its principal credit facility (the "Amended Credit Facility").
This $1.3 billion syndicated facility consists of (i) a six year $600 million
revolving credit facility (the "Revolving Facility"), (ii) a $400 million
seven and one-half year term loan ("Tranche A Loan") and (iii) a $300 million
eight and one-half year term loan ("Tranche B Loan" and, collectively with the
Tranche A Loan, the "Term Loans"). As of August 9, 1999, $124 million was
available under the Amended Credit Facility. The Amended Credit Facility also
contains provisions allowing, under certain circumstances, for an additional
$200 million tranche ("Tranche C Loan").
Currently, the Revolving Facility and Tranche A Loan bear interest at 2.50
percent over the Adjusted LIBOR rate, as defined therein, and the Tranche B
Loan bears interest at 2.75 percent over the Adjusted LIBOR rate. As of June
30, 1999, Adjusted LIBOR was approximately 5 percent. The Company has entered
into three year fixed interest rate swap contracts in relation to a portion of
the Amended Credit Facility for a notional value of $800 million at an average
rate of approximately 7.50 percent, which expire at various times no later
than December 2001. Scheduled amortization of the Term Loans under the Amended
Credit Facility commences with $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 was entered into in
October 1997 and 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. In connection with the $225 million
charge resulting from the early termination of the WHV Agreement, the Company
and its lenders amended the Amended Credit Facility, effective April 30, 1999.
As of June 30, 1999, the Company was in compliance with all such covenants.
There can be no assurances that the Company will remain in compliance with
such covenants or other conditions under the Amended Credit Facility in the
future.
Capital Requirements. The Company's current strategy and business plan call
for substantial on-going investments, at levels comparable to 1998, in the
production of new feature films and television programs. Furthermore, the
Company may wish to continue to make investments in new distribution channels
to further exploit the Company's motion picture and television library. The
Company plans to continue to evaluate the level of such investments in the
context of the capital available to the Company and changing market
conditions.
In January 1999, the Company acquired the PFE Libraries, containing over
1,300 feature films that were previously owned by PolyGram, for $235 million,
plus acquisition related costs of approximately $1.2 million. The purchase was
funded by borrowings under the Revolving Facility and utilization of cash on
hand.
In March 1999, in consideration for the early expiration of the WHV
Agreement, the Company agreed to pay WHV $225 million, of which $112.5 million
was paid in March 1999 and the remaining $112.5 million installment is payable
in September 1999. Additionally, the Company reconveyed to Turner the right
that the Company had to distribute in the home video markets worldwide until
June 1, 2001, approximately 2,950 titles in the Turner library that had been
serviced under the WHV Agreement. This reconveyance to Turner was made
effective as of January 1, 1999. The Company recorded a pre-tax contract
termination charge in the 1999 Period of $225 million for costs in connection
with terminating the WHV Agreement. The Company anticipates that the
reconveyance of the Turner rights will result in decreased cash flow to the
Company of approximately $10 million per year through June 2001.
The remaining $112.5 million installment (plus interest at the rate of eight
percent per year from March 1999) due to WHV in September 1999 is secured by a
standby letter of credit (the "Letter of Credit") issued by
20
<PAGE>
one of the Company's principal lenders under the Bridge Loan Facility
described below. If the Letter of Credit is drawn upon, the Company will be
deemed to have accessed a loan under the Bridge Loan Facility with a principal
amount equal to the amount drawn.
The Company is obligated to fund 50 percent of the expenses of MGM Networks
Latin America up to a maximum of approximately $24.0 million. The Company has
funded approximately $15.5 million under such obligation as of June 30, 1999.
The Company expects to incur approximately $11 million of additional costs
in 1999 in connection with the integration of the PFE Libraries and the
Company's transition to home video self-distribution in the U.S. and Canadian
markets. The Company's obligations for other capital requirements, including
the purchase of certain computer systems and equipment and other improvements,
are currently not expected to exceed $15 million per year.
In addition, the slate of films released by the Company in 1999 to date has
performed below expectations.
As a result of these various factors (including, in particular, the short-
term costs associated with the termination of the WHV Agreement), the Company
determined that cash flow from operations and the amounts available under the
existing tranches of the Amended Credit Facility may not be adequate to meet
the Company's obligations and commitments and to enable the Company to
continue to conduct its operations in accordance with its current business
plan through the end of 1999. Therefore, on July 13, 1999 the Company filed a
Form S-3 registration statement with the Securities and Exchange Commission,
indicating that the Company intends to seek approximately $750 million in
additional equity financing, which may be in the form of a rights offering, a
secondary offering of common stock, or a combination thereof. See Note 10 to
the Condensed Consolidated Financial Statements.
In addition, on May 14, 1999 the Company entered into an agreement with one
of its principal lenders that provides the Company with a $250 million bridge
loan facility (the "Bridge Loan Facility"). If the Letter of Credit is drawn
upon, the Company will be deemed to have accessed a loan under the Bridge Loan
Facility with a principal amount equal to the amount drawn. Additionally, the
Company may borrow remaining availabilities under the Bridge Loan Facility to
fund operations. Loans under the Bridge Loan Facility initially would bear
interest at 1.75 percent over the Adjusted LIBOR rate. Interest would be
payable quarterly in arrears and the principal of such loans would be due on
the earlier of maturity or any debt or equity issuance of the Company. The
Company expects to use substantially all of the net proceeds of the proposed
equity offering to repay any amounts that may be outstanding under the Bridge
Loan Facility and to reduce the amounts outstanding under the Revolving
Facility.
The Company believes that cash flow from operations, together with amounts
available under the Revolving Facility and the Bridge Loan Facility, and the
proceeds of the proposed equity financing will be adequate for the Company to
conduct its operations in accordance with its business plans through the end
of 2003. This belief is based in part on the assumption that the Company's
future releases will perform as planned. In addition to the foregoing sources
of liquidity, the Company is currently considering various film financing
alternatives.
While management of the Company believes that it will be able to obtain the
requisite funds, no assurance can be given that the Company will complete the
proposed equity financing or otherwise be able to obtain the requisite funds,
or that it will be able to do so on a timely basis and on terms acceptable to
the Company.
If necessary in order to manage its cash needs, the Company may also seek to
delay or alter production or release schedules or reduce its aggregate
investment in new film and television production costs. There can be no
assurance that any such steps by the Company would be adequate or timely, or
that acceptable arrangements could be reached with third parties if necessary.
In addition, although these steps would improve the Company's short-term cash
flow and, in the case of partnering, reduce the Company's exposure should a
motion picture perform below expectations, such steps could adversely affect
long term cash flow and results of operations in subsequent periods.
21
<PAGE>
The Company intends to continue to pursue its goal of becoming an integrated
global entertainment company. In connection with its pursuit of this goal, the
Company may consider various strategic alternatives, such as business
combinations with companies with strengths complementary to those of the
Company, other acquisitions and joint ventures, as opportunities arise. The
nature, size and structure of any such transaction could require the Company
to seek additional financing.
Year 2000 Data Conversion
Impact of the Year 2000 Issue Introduction. The term "Year 2000 issue" is a
general term used to describe the various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as the Year 2000 is approached and reached. These problems
generally arise from the fact that most of the world's computer hardware and
software have historically used only two digits to identify the year in a
date, often meaning that the computer will fail to distinguish dates in the
"2000's" from dates in the "1900's." These problems may also arise from other
sources as well, such as the use of special codes and conventions in software
that make use of the date field.
State of Readiness. To date, the Company has completed the Year 2000
conversion with respect to all of its computer systems and applications
(together with those systems containing embedded microprocessors or other
technology, "Systems"). The Company has completed remediation and testing of
its Systems with the exception of certain systems, which are scheduled to be
fully replaced by September 30, 1999. While the Company has completed all
required system remediation and testing for the Year 2000, it will continue
its testing efforts and make appropriate remediations as necessary through
January 1, 2000.
Because of the substantial progress made by the Company towards its Year
2000 conversion, the Company does not anticipate that any additional
significant changes will be required or that the Year 2000 issue will pose
significant operational problems for the Company. However, if any necessary
changes are not made or completed in a timely fashion or unanticipated
problems arise, the Year 2000 issue may take longer for the Company to address
and may have a material impact on the Company's financial condition and
results of operations.
In addition, the Company has had communications with certain of its
significant suppliers, distributors, financial institutions, lessors and
others with which it does business to evaluate their Year 2000 compliance
plans and state of readiness and to determine the extent to which the
Company's Systems may be affected by the failure of others to remediate their
own Year 2000 issues. The Company has also distributed a Year 2000 assessment
form to all critical vendors and certain other parties, in order to provide
the Company with further information as to their Year 2000 conversion
progress. To date, the Company has received feedback from certain but not all
such parties, and has not independently confirmed any information received
with respect to the Year 2000 issues. As such, there can be no assurance that
such other parties will complete their Year 2000 conversion in a timely
fashion or will not suffer a Year 2000 business disruption that may adversely
affect the Company's financial condition and results of operations.
Costs to Address the Year 2000 Issue. To date, the Company estimates that it
has spent approximately $1.0 million to address the Year 2000 issue, with the
majority of the work being performed by the Company's employees. The aggregate
cost to complete the Year 2000 conversion is estimated to be approximately
$1.1 million. The Company intends to fund such costs from its operations and
funds borrowed under the Amended Credit Facility. The Company believes such
costs will not have a material adverse effect on its liquidity or financial
condition. However, as the Company progresses with its Year 2000 conversion
and implements any necessary changes to its Systems, certain additional costs
may be identified. There can be no assurance that such additional costs will
not have a material adverse effect on the Company's financial condition and
results of operations.
Risks of Year 2000 Issues. To date, the Company has not identified any
System which presents a material risk of not being Year 2000 ready in a timely
fashion or for which a suitable alternative cannot be implemented. However, as
the Company progresses with its Year 2000 testing, the Company may identify
Systems which do present a material risk of Year 2000 disruption. Such
disruption may include, among other things, the inability
22
<PAGE>
to process transactions or information, record and access data relating to the
availability of titles in the Company's library for licensing and
distribution, send invoices or engage in similar normal business activities.
The failure of the Company to identify Systems which require Year 2000
conversion that are critical to the Company's operations or the failure of the
Company or others with which the Company does business to become Year 2000
ready in a timely manner could have a material adverse effect on the Company's
financial condition and results of operations.
Contingency Plans. While the Company's Year 2000 conversion is expected to
be completed prior to any potential disruption to the Company's business, the
Company acknowledges the uncertainties involved in preparing its systems for
the Year 2000. As such, the Company has developed a comprehensive Year 2000
specific contingency plan that, when used in combination with the Company's
general disaster recovery plan, should provide for continued business
operations to the greatest extent possible in the unlikely event of the
Year 2000 failure of any of its Systems. As part of its Year 2000 contingency
effort, information received from external sources is examined for date
integrity before being brought into the Company's internal systems. If the
Company determines that its business or a segment thereof is at material risk
of disruption due to the Year 2000 issue, the Company will prepare to
implement all or part of its contingency plan.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion, the date which the Company has set to complete
such conversion and possible risks associated with the Year 2000 issue are
based on the Company's current estimates and are subject to various
uncertainties that could cause the actual results to differ materially from
the Company's expectations. Such uncertainties include, among others, the
success of the Company in identifying Systems that are not Year 2000
compliant, the nature and amount of programming required to upgrade or replace
each of the affected Systems, the availability of qualified personnel,
consultants and other resources, and the success of the Year 2000 conversion
efforts of others.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has only limited involvement in derivative financial instruments
and does not use them for trading purposes. Certain amounts borrowed under the
Amended Credit Facility are at variable interest rates and the Company is thus
subject to market risk resulting from interest rate fluctuations. The Company
enters into interest rate swaps in part to alter interest rate exposures.
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
amounts calculated by reference to an agreed notional principal amount.
The following table provides information about the Company's interest rate
swaps at June 30, 1999:
<TABLE>
<CAPTION>
Amounts scheduled for
maturity for the year
ending December 31, Estimated
---------------------------- fair value at
1999 2000 2001 June 30, 1999
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Interest Rate Swaps
Variable to fixed:
Notional value (in thousands)..... $150,000 $225,000 $575,000 $7,312
Average pay rate.................. 6.164% 6.127% 5.237%
Average receive rate.............. 5.000% 5.254% 5.027%
</TABLE>
Because approximately 25 percent of the Company's revenues are denominated,
and the Company incurs certain operating and production costs, in foreign
currencies, the Company is subject to market risks resulting from fluctuations
in foreign currency exchange rates. In certain instances, the Company 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. The Company
had no significant foreign currency exchange contracts outstanding at June 30,
1999.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 1, 1999, President Clinton asked the Department of Justice and the
Federal Trade Commission to study the extent to which the video game, music
and movie industries market violence to children and whether those industries
are abiding by their own voluntary systems of regulations (the "Study"). While
the Company has not been asked to provide any information to date, the Company
believes that it may receive a demand to provide information in connection
with the Study in the future. The Company suspects that similar demands may be
issued to other major studios. The Company believes that it is too early to
determine the federal government's intentions and whether the Company is a
target of the Study.
Reference is made to the Company's 1998 Form 10-K and Form 10-Q for the
quarter ended March 31, 1999 for a description of pending legal proceedings
involving the Company.
Item 5. Other Information
Reference is made to "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Recent Developments."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
3.1 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Company(1)
10.1 Amendment No. III to Amended and Restated Credit Agreement;
Amendment No. II to Amended and Restated Holdings Agreement dated
as of April 30, 1999, among the Company, MGM Studios, Orion,
certain lenders, Morgan Guaranty Trust Company of New York, as
agent and Bank of America National Trust and Savings Association,
as syndication agent.
27. Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-8 (File No. 333-83823), as filed with the Commission
on July 27, 1999.
(b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
METRO-GOLDWYN-MAYER INC.
August 13, 1999
/s/ Alex Yemenidjian
By: _________________________________
Alex Yemenidjian
Chairman of the Board of Directors
and Chief Executive Officer
/s/ Daniel J. Taylor
By: _________________________________
Daniel J. Taylor
Senior Executive Vice President
and Chief Financial Officer
25
<PAGE>
EXHIBIT 10.1
AMENDMENT No. III
TO AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT No. II
TO AMENDED AND RESTATED HOLDINGS AGREEMENT
AMENDMENT No. III dated as of April 30, 1999 to the Amended and Restated
Credit Agreement dated as of October 15, 1997 (as amended from time to time,
the "Credit Agreement") among METRO-GOLDWYN-MAYER STUDIOS INC. ("MGM Studios"),
ORION PICTURES CORPORATION ("Orion" and, together with MGM Studios, the
"Borrowers"), the LENDERS listed on the signature pages thereof, the L/C ISSUERS
named therein, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent")
and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Syndication
Agent; and AMENDMENT No. II dated as of April 30, 1999 to the Amended and
Restated Holdings Agreement dated as of October 15, 1997 (the "Holdings
Agreement") between METRO-GOLDWYN-MAYER INC. ("MGM") and the Agent
(collectively, this "Amendment").
The parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreement has the
meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement or the Holdings Agreement, as the case may be,
shall, from and after the date hereof, refer to the Credit Agreement or Holdings
Agreement, as relevant, as amended hereby.
SECTION 2. Amendments to Credit Agreement.
(a) Addition of Definition of Equity Bridge Financing. A new definition
of "Equity Bridge Financing" is added to Section 1.01 of the Credit Agreement,
immediately before the definition of "ERISA", to read in full as follows:
"Equity Bridge Financing" means at any time any MGM Debt Incurrence
that has been repaid or refinanced in full, prior to the end of the 18th
month after the incurrence thereof, with the proceeds of an issuance
<PAGE>
by MGM of capital stock or rights to acquire capital stock (other than
mandatorily redeemable preferred stock).
(b) Amendment to Definition of Reduction Amount. The definition of
"Reduction Amount" is amended by adding the words "net of the amount of any such
MGM Debt Incurrence that has become an Equity Bridge Financing" at the end of
clause (iii)(y)(I) of such definition, such that clause (iii)(y)(I) reads in
full as follows:
(I) the aggregate Net Cash Proceeds thereof and of all other MGM Debt
Incurrences consummated prior to or contemporaneously therewith and on or
after the Qualifying Equity Issuance Date, net of the amount of any such
MGM Debt Incurrence that has become an Equity Bridge Financing over
(c) Amendment to Library Cash Flows Definition. The definition of "Library
Cash Flows" is amended by replacing the words "July 31, 1998" in the fifth line
thereof with the words "December 31, 1998".
(d) Amendment to Combined Adjusted Net Worth Covenant. Section 5.15 of the
Credit Agreement is amended to read in full as follows:
SECTION 5.15. Minimum Combined Adjusted Net Worth. Combined Adjusted
Net Worth will at no time be less than an amount equal to the sum of (i)
$1,337,000,000 plus (ii) an amount equal to 50% of Combined Net Income for
each Fiscal Year ending on or after December 31, 1998 but prior to the date
of determination, in each case, for which such Combined Net Income is
positive (but with no deduction on account of negative Combined Net Income
for any Fiscal Year), plus (iii) 80 % of the aggregate net proceeds,
including the fair market value of property other than cash (as determined
in good faith by the Board of Directors of MGM) received by MGM from the
issuance and sale after March 31, 1999 of any capital stock of MGM or in
connection with the conversion or exchange of any Debt of MGM into capital
stock of MGM after March 31, 1999 (including without limitation any
contribution to capital).
SECTION 3. Amendment to Holdings Agreement. Section 2.1 of the Holdings
Agreement is amended by adding the words "and net of the amount of any such MGM
Debt Incurrence that has become an Equity Bridge Financing" at the end of the
second parenthetical of clause (b) thereof, such that clause (b) reads in full
as follows:
(b) at any time on or after the Qualifying Equity Issuance Date (if
2
<PAGE>
any), Debt in an aggregate principal amount (excluding original issue
discount and accretion to principal upon amortization thereof and net of
the amount of any such MGM Debt Incurrence that has become an Equity Bridge
Financing) not in excess of $250,000,000, which Debt has no Required
Payment prior to July 15, 2006; provided that (i) in determining the
Reduction Amount (if any) of any such Debt in respect of which MGM is a
guarantor or otherwise does not receive the cash proceeds, "Net Cash
Proceeds" shall be calculated by including all cash proceeds thereof
received by MGM and/or any issuer of such Debt and (ii) the Reduction
Amount (if any) with respect to such MGM Debt is applied in accordance with
Section 2.04(d) of the Credit Agreement;
SECTION 4. No Waiver. This Amendment shall not operate as a waiver of any
right, remedy, power or privilege of the Lenders under any Loan Document or of
any other term or condition thereof.
SECTION 5. Representations of Borrowers. Each of the Borrowers represents
and warrants that, on and as of the date hereof and after giving effect to this
Amendment, (i) the representations and warranties of the Obligors set forth in
the Loan Documents will be true and correct in all respects and (ii) no Default
will have occurred and be continuing.
SECTION 6. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 8. Effectiveness. This Amendment shall become effective on the
date when the Agent shall have received from each of the Borrowers and the
Required Lenders a counterpart hereof signed by such party or facsimile or other
written confirmation (in form satisfactory to the Agent) that such party has
signed a counterpart hereof.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
METRO-GOLDWYN-MAYER
STUDIOS INC.
By: /s/ Daniel J. Taylor
---------------------
Title: Executive Vice President and
Chief Financial Officer
ORION PICTURES CORPORATION
By: /s/ Daniel J. Taylor
---------------------
Title: Executive Vice President and
Chief Financial Officer
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Agent and as Lender
By: /s/ Brian W. Carroll
---------------------
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Syndication Agent and as Lender
By: /s/ Matthew J. Koenig
----------------------
Title: Vice President
4
<PAGE>
THE CHASE MANHATTAN BANK
By: /s/ John W. Miller
-------------------
Title: Managing Director
SOCIETE GENERALE
By: /s/ Maureen E. Kelly
---------------------
Title: Director
VAN KAMPEN PRIME RATE INCOME
TRUST
By: /s/ Jeffrey W. Maillet
-----------------------
Title: Senior Vice President &
Director
VAN KAMPEN SENIOR INCOME TRUST
By: /s/ Jeffrey W. Maillet
-----------------------
Title: Senior Vice President &
Director
THE BANK OF NOVA SCOTIA
By: /s/ Alan W. Pendergast
-----------------------
Title: Relationship Manager
5
<PAGE>
FLEET NATIONAL BANK
By: /s/ Stephen J. Healey
----------------------
Title: Senior Vice President
ING (U.S.) CAPTIAL CORPORATION
By: /s/ William James
------------------
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Stephen M. Nettler
-----------------------
Title: Assistant Vice President
BANK OF SCOTLAND
By: /s/ Annie Chin Tat
-------------------
Title: Senior Vice President
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES
AGENCY
By: /s/ Shunji Sato
----------------
Title: Deputy General Manager
6
<PAGE>
UNION BANK OF CALIFORNIA
By: /s/ Thomas P. Garry, Jr.
-------------------------
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By: /s/ Steven Savoldelli
----------------------
Title: Vice President
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
SENIOR HIGH INCOME PORTFOLIO,
INC.
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
DEBT STRATEGIES FUND, INC.
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
7
<PAGE>
DEBT STRATEGIES FUND II, INC.
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
MERRILL LYNCH PRIME RATE
PORTFOLIO
By Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
MERRILL LYNCH GLOBAL INVESTMENT
SERIES: INCOME STRATEGIES PORTFOLIO
By Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ John M. Johnson
--------------------
Title: Authorized Signatory
8
<PAGE>
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ William E. Magee
---------------------
Title: Duly Authorized Signatory
PACIFIC CENTURY BANK N.A.
By: /s/ Jan Van Houdt
------------------
Title: Vice President
MORGAN STANLEY SENIOR
FUNDING, INC.
By: /s/ Christopher A. Pucillo
---------------------------
Title: Vice President
For ARAB BANKING CORPORATION
NEW YORK BRANCH
By: /s/ Richard B. Whelan
----------------------
Title: Chief Representative
FLEET BUSINESS CREDIT
CORPORATION (f/k/a Sanwa Business
Credit Corporation)
By: /s/ Carmen Caporrino
---------------------
Title: Vice President
9
<PAGE>
PAMCO CAYMAN LTD.
By Highland Capital Management L.P.,
as Collateral Manager
By:
---------------------
Title:
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (E)
By Highland Capital Management L.P.,
as Attorney-in-Fact
By:
---------------------
Title:
ML CBO IV (CAYMAN) LTD.
By Highland Capital Management L.P.,
as Collateral Manager
By:
---------------------
Title:
PAM CAPITAL FUNDING LP
By Highland Capital Management L.P.,
as Collateral Manager
By:
---------------------
Title:
10
<PAGE>
KZH PAMCO LLC
By:
---------------------
Title:
GULF INTERNATIONAL BANK B.S.C.
By:
---------------------
Title:
By:
---------------------
Title:
BANQUE WORMS CAPITAL
CORPORATION
By: /s/ Dominique Picon
--------------------
Title: Chief Executive Officer
By: /s/ Constance de Klerk
-----------------------
Title: Vice President
11
<PAGE>
CITY NATIONAL BANK, a National
Banking Association
By:
---------------------------------
Title:
FIRST HAWAIIAN BANK
By: /s/ Donald C. Young
---------------------------------
Title: Vice President
ING HIGH INCOME PRINCIPAL
PRESERVATION FUND HOLDINGS, LDC
By ING Capital Advisors LLC, as
Investment Advisor
By: /s/ Michael J. Campbell
---------------------------------
Title: Senior Vice President &
Portfolio Manager
THE ING CAPITAL SENIOR SECURED
HIGH INCOME FUND, L.P.
By ING Capital Advisors, LLC, as
Investment Advisor
By: /s/ Michael J. Campbell
---------------------------------
Title: Senior Vice President &
Portfolio Manager
12
<PAGE>
ARCHIMEDES FUNDING LLC
By ING Capital Advisors, LLC as
Collateral Manager
By: /s/ Michael J. Campbell
---------------------------------
Title: Senior Vice President &
Portfolio Manager
KZH ING-1 LLC
By: /s/ Virginia Conway
---------------------------------
Title: Authorized Agent
KZH ING-2 LLC
By: /s/ Virginia Conway
---------------------------------
Title: Authorized Agent
KZH ING-3 LLC
By: /s/ Virginia Conway
---------------------------------
Title: Authorized Agent
13
<PAGE>
PILGRIM PRIME RATE TRUST
By Pilgrim Investments, Inc., as its
investment manager
By: /s/ Charles E. LeMieux
---------------------------------
Title: Assistant Vice President
PILGRIM AMERICA HIGH INCOME
INVESTMENTS LTD.
By Pilgrim Investments, Inc., as its
investment manager
By: /s/ Charles E. LeMieux
---------------------------------
Title: Assistant Vice President
SENIOR DEBT PORTFOLIO
By Boston Management & Research, as
Investment Advisor
By:
---------------------------------
Title:
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By:
---------------------------------
Title:
14
<PAGE>
PFL LIFE INSURANCE COMPANY
By:
---------------------------------
Title:
CITIBANK, N.A.
By: /s/ Michael Regan
---------------------------------
Title:
CYPRESSTREE INVESTMENT
PARTNERS I, LTD.
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By: /s/ Jeffrey W. Heuer
---------------------------------
Title: Principal
CYPRESSTREE INVESTMENT
PARTNERS I, LTD.
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By: /s/ Jeffrey W. Heuer
---------------------------------
Title: Principal
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
By: /s/ Sheila Finnerty
---------------------------------
Title: Vice President
15
<PAGE>
PACIFIC LIFE INSURANCE COMPANY
By:
---------------------------------
Title:
By:
---------------------------------
Title:
PACIFIC LIFE CBO 1998-1 LTD
By:
---------------------------------
Title:
By:
---------------------------------
Title:
NATEXIS BANQUE - BFCE
By: /s/ Iain A. Whyte
---------------------------------
Title: Vice President
By: /s/ Daniel Touffu
---------------------------------
Title: Senior vice President and
Regional Manager
16
<PAGE>
THE FUJI BANK, LIMITED
By:
---------------------------------
Title:
ABN AMRO BANK N.V.
By: /s/ Frances O'R. Logan
---------------------------------
Title: Group Vice President
By: /s/ Ann Schwalbenberg
---------------------------------
Title: Vice President
FC CBO LIMITED
By: /s/ David Wales
---------------------------------
Title: Director
17
<PAGE>
THE TORONTO DOMINION BANK
By:
---------------------------------
Title:
FREMONT FINANCIAL CORPORATION
By:
---------------------------------
Title:
FIRST DOMINION FUNDING
By: /s/ Andrew H. Marshak
---------------------------------
Title: Authorized Signatory
KEYPORT LIFE INSURANCE COMPANY
By Stein Roe & Farnham Incorporated,
as its agent
By: /s/ Brian W. Good
---------------------------------
Title: Vice President &
Portfolio Manager
BANKBOSTON, N.A. as trust administrator
for Longlane Master Trust IV
By: /s/ Kevin Kearns
---------------------------------
Title: Managing Director
18
<PAGE>
BLACK DIAMOND CAPITAL FUNDING
By:
---------------------------------
Title:
KZH CYPRESSTREE-1 LLC
By: /s/ Virginia Conway
---------------------------------
Title: Authorized Agent
KZH IV LLC
By: /s/ Virginia Conway
---------------------------------
Title: Authorized Agent
KZH STERLING LLC
By:
---------------------------------
Title:
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,965
<SECURITIES> 0
<RECEIVABLES> 395,001
<ALLOWANCES> (24,298)
<INVENTORY> 2,231,277
<CURRENT-ASSETS> 0
<PP&E> 58,722
<DEPRECIATION> (20,521)
<TOTAL-ASSETS> 3,260,698
<CURRENT-LIABILITIES> 0
<BONDS> 1,189,836
0
0
<COMMON> 2,212,809
<OTHER-SE> (843,699)
<TOTAL-LIABILITY-AND-EQUITY> 3,260,698
<SALES> 470,917
<TOTAL-REVENUES> 470,917
<CGS> 626,646
<TOTAL-COSTS> 626,646
<OTHER-EXPENSES> 357,773
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 38,720
<INCOME-PRETAX> (552,345)
<INCOME-TAX> 4,082
<INCOME-CONTINUING> (556,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (556,427)
<EPS-BASIC> (3.69)
<EPS-DILUTED> (3.69)
</TABLE>
