<PAGE>
FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION STATEMENT NO. 333-82775
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus supplement. +
+This prospectus supplement and the accompanying prospectus are not offers to +
+sell these securities or our solicitation of your offer to buy these +
+securities in any jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- September 10, 1999
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Prospectus Supplement
, 1999
(To Prospectus--September 9, 1999)
[Metro-Goldwyn-Mayer Inc. LOGO APPEARS HERE]
METRO-GOLDWYN-MAYER INC.
36,036,036 Shares of Common Stock
- --------------------------------------------------------------------------------
The Company:
. We are a premier global entertainment content company.
. Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, California 90404
(310) 449-3000
. NYSE Symbol: MGM
The Offering:
. MGM is offering 36,036,036 shares.
. The underwriters have an option to purchase an additional 5,405,405 shares
from MGM to cover over-allotments.
. There is an existing trading market for these shares. The reported last
sales price on September 9, 1999 was $20 13/16 per share.
. We plan to use substantially all of the proceeds from this offering to repay
indebtedness and for general corporate purposes.
. Tracinda Corporation, MGM's principal stockholder, or one of its affiliates,
may purchase shares directly from MGM in this offering.
. Closing: , 1999.
<TABLE>
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<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to MGM:
-------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on Page S-9.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus supplement and the accompanying prospectus are truthful or complete.
Nor have they made, nor will they make, any determination as to whether anyone
should buy these securities. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
Joint Book-Running Managers
Banc of America Securities LLC Donaldson, Lufkin & Jenrette
----------
Credit Suisse First Boston
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
CIBC World Markets
ING Barings
The Seidler Companies Incorporated
DLJdirect Inc.
<PAGE>
<TABLE>
<S> <C>
Outside Gate [MGM 75th anniversary logo]
Inside Front Cover [compilation of MGM titles]
Inside Back Cover [James Bond library titles and depiction of upcoming James Bond Release]
</TABLE>
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
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Page
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Summary.................................................................. S-3
Risk Factors............................................................. S-9
Forward-Looking Statements............................................... S-14
Use of Proceeds.......................................................... S-15
Price Range of Common Stock.............................................. S-15
Dividend Policy.......................................................... S-15
Capitalization........................................................... S-16
Selected Consolidated Financial Information.............................. S-17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-19
</TABLE>
<TABLE>
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Page
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Business................................................................... S-36
Management................................................................. S-54
Certain Relationships and Related Transactions............................. S-60
Security Ownership of Certain Beneficial Owners and Management............. S-62
Underwriting............................................................... S-65
Legal Matters.............................................................. S-66
Experts.................................................................... S-67
Where You Can Find More Information........................................ S-67
Index to Financial Statements.............................................. F-1
</TABLE>
Prospectus
<TABLE>
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Page
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<S> <C>
About this Prospectus...................................................... 2
Forward-Looking Statements................................................. 2
Use of Proceeds............................................................ 3
Price Range of Common Stock................................................ 4
Dividend Policy............................................................ 4
The Company................................................................ 4
</TABLE>
<TABLE>
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Page
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<S> <C>
Plan of Distribution....................................................... 5
Description of Securities.................................................. 6
Legal Matters.............................................................. 7
Experts.................................................................... 7
Where You Can Find More Information........................................ 7
</TABLE>
<PAGE>
SUMMARY
This summary highlights information from this prospectus supplement. To
fully understand this offering and its consequences to you, you should also
read the more detailed information and consolidated financial statements
contained in this prospectus supplement and the accompanying prospectus and in
the documents we incorporate by reference into this prospectus supplement.
Unless otherwise indicated, all information in this prospectus supplement
assumes no exercise of the over-allotment option to purchase additional shares
of common stock granted to the underwriters. In this prospectus supplement,
except where the context otherwise requires, we will collectively refer to
Metro-Goldwyn-Mayer Inc. and its direct and indirect subsidiaries as "Metro-
Goldwyn-Mayer," "MGM," "we," "our" and "us."
Metro-Goldwyn-Mayer
Business
We are a premier global entertainment content company, one of only seven
major film and television studios worldwide. We develop, produce and distribute
theatrical motion pictures and television programs. Our principal subsidiaries
are Metro-Goldwyn-Mayer Studios Inc., United Artists Corporation, United
Artists Films Inc. and Orion Pictures Corporation.
Our library contains over 4,100 theatrically released feature film titles
and 8,900 television episodes and is the largest collection of post-1948
feature films in the world. Films in our library have won nearly 200 Academy
Awards, including the Best Picture Award for Annie Hall, The Apartment, The
Best Years of Our Lives, Dances with Wolves, Hamlet, In the Heat of the Night,
Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, Silence of the Lambs, Tom
Jones and West Side Story. We own the James Bond, Rocky and Pink Panther film
franchises. We intend to capitalize on the rising worldwide demand for content
by leveraging our library across a variety of products and distribution
channels, including branded satellite or cable channels, further digital video
disc releases and additional international ventures.
In the second quarter of 1999, we hired the following new members of our
management team to implement our strategic plan:
. Alex Yemenidjian, Chairman of the Board and Chief Executive Officer, has
served as the President of MGM Grand, Inc. since July 1995. He has also
served MGM Grand in other capacities such as Chief Operating Officer and
Chief Financial Officer;
. Chris McGurk, Vice Chairman of the Board and Chief Operating Officer,
was formerly President and Chief Operating Officer of Universal
Pictures, a division of Universal Studios. Prior to joining Universal,
Mr. McGurk spent eight years with the Walt Disney Company serving many
capacities such as President of the Motion Pictures Group and Executive
Vice President and Chief Financial Officer of Walt Disney Studios; and
. Jules Haimovitz, President of MGM Networks, was formerly President and
Chief Operating Officer of King World Productions, Inc. He also
previously served as President and Chief Executive Officer of ITC
Entertainment Group and as President and Chief Operating Officer of
Spelling Entertainment.
S-3
<PAGE>
Business Strategy
Our goal is to become a fully-integrated global entertainment content
company, thereby maximizing the value of our assets, including our film library
and our film and television production units. To achieve this goal, we seek to:
Build and Leverage Our Library. We plan to build and leverage our film and
television library by:
. Producing new motion pictures and television episodes;
. Aggressively marketing and repackaging our library's titles;
. Developing new distribution channels;
. Capitalizing on developments in technology;
. Further penetrating emerging international markets; and
. Incentivizing our employees to drive growth in sales of our library's
titles.
Create Branded Cable and Satellite Programming Channels. We believe we can
create significant value by utilizing our library and current production to
establish MGM branded cable and satellite channels. We have begun to explore
strategic alternatives to gain carriage for our proposed channels.
Increase Film and Television Production While Improving our Risk Profile. We
intend to increase production in a financially disciplined manner by:
. Tightly controlling development and production expenditures;
. Aggressively seeking production agreements and/or co-financing partners
for our pictures and television product;
. Entering into production agreements and joint ventures with several key
producers of motion pictures and television product;
. Increasing our focus on the production of commercially successful motion
pictures which appeal to a younger demographic; and
. Using our film library as an inexpensive source for sequels and remakes
and the expansion of certain well-tested, familiar film franchises.
We have, for example,
. Entered into an agreement with Miramax Films pursuant to which we will
jointly produce, finance and distribute up to eight motion pictures,
relying on our film library as a prominent source of material;
. Entered into a co-production/co-financing agreement with Universal
Studios; and
. Repositioned UA as a specialty film unit involved in production, sales
and acquisitions of specialized motion pictures.
We intend to produce or co-produce and distribute 10 to 15 motion pictures
annually through MGM Pictures across a variety of genres. Through UA Films, we
also intend to distribute annually an additional seven to 10 specialty motion
pictures that will have substantially lower average costs and will be produced
mainly by third parties.
We plan to develop, produce and distribute television programs focusing on
low financial risk formats, such as pre-clearing a television series for
distribution prior to committing to development expenditures, as well as joint
ventures, co-productions and other partnering arrangements for certain of our
series.
S-4
<PAGE>
Increase Distribution Revenues. We have taken steps to obtain greater
flexibility in distributing our own product to enable us to realize additional
revenue opportunities while reducing the costs associated with distribution. We
have terminated our agreement with Warner Home Video so that, on February 1,
2000, we will regain full control over the home video exploitation of our
films. We are actively planning the transition of our international
distribution from Warner Home Video and United International Pictures to
Twentieth Century Fox Film Corporation to gain more control over our
international distribution and to maximize our revenue opportunities.
We plan to increase distribution revenues by:
. Self-distributing in the U.S. and Canada our library as well as all
motion pictures produced by MGM Pictures and UA Films;
. Distributing films that we co-produce with a third party in those
territories where we have distribution rights and capabilities; and
. Distributing motion pictures produced by others.
Capitalize on a Well Recognized Brand Name. We believe that the MGM name and
lion logo are among the most recognized in the world. We intend to capitalize
on the value inherent in our name and logo through the distribution of branded
programming and the development of consumer products.
Streamline Operations. We have taken steps to make our operating process
more efficient in the following ways:
. Consolidating overhead across the MGM Pictures and UA production units;
and
. Consolidating and centralizing operating and corporate functions.
In conjunction with our recent operating initiatives, we incurred
$225.2 million in restructuring and other charges consisting of approximately
$140 million of unamortized film costs and $85.2 million in severance and other
personnel expenses, as well as anticipated costs of withdrawing from the UIP
partnership. In addition, we paid, and incurred a charge of, $225 million to
terminate our agreement with Warner Home Video.
S-5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by
MGM.................... 36,036,036 shares
Common stock to be
outstanding after the
offering............... 187,367,494 shares(1)
Use of proceeds......... Repayment of indebtedness and general corporate purposes
NYSE symbol............. MGM
</TABLE>
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(1) The number of shares outstanding after the offering includes 151,331,458
shares outstanding as of August 31, 1999 plus the 36,036,036 shares offered
by MGM, and excludes (a) 23,460,653 shares of common stock issuable upon
the exercise of our outstanding stock options and (b) any shares of common
stock that we may sell to the underwriters pursuant to the over-allotment
option.
Risk Factors
Investment in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page S-9.
S-6
<PAGE>
Summary Consolidated Financial Information
Our summary consolidated financial data (including that of our predecessor)
presented below as of the period from January 1 to October 10, 1996, the period
from October 11 to December 31, 1996 and the years ended December 31, 1997 and
1998 and each of the years or periods have been derived from our audited
consolidated financial statements. Our audited consolidated financial
statements for the years ended December 31, 1997 and 1998, and the period from
October 11 to December 31, 1996, and the audited financial statements of MGM
Studios for the period from January 1 to October 10, 1996 were audited by
Arthur Andersen LLP, independent public accountants.
The summary consolidated financial data as of and for the six months ended
June 30, 1998 and 1999 have been derived from our unaudited consolidated
financial statements and include all adjustments (consisting only of normal
recurring adjustments) which are, in our opinion, necessary for a fair
presentation of our financial position at such dates and results of operations
for such periods. The results of operations for the six months ended June 30,
1999 are not necessarily indicative of the results for the year.
<TABLE>
<CAPTION>
Predecessor Successor
----------- --------------------------------------------------------------
January 1 October 11 Six Months Ended
to to Year Ended Year Ended -----------------------
October 10, December 31, December 31, December 31, June 30, June 30,
1996 1996(1) 1997(1)(2) 1998(1)(2) 1998(1)(2) 1999(1)(2)
----------- ------------ ------------ ------------ ---------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 912,706 $ 228,686 $ 831,302 $1,240,723 $ 597,661 $ 470,917
Expenses................ 1,589,275 215,112 898,413 1,311,563 629,353 984,542
--------- ---------- ---------- ---------- ---------- -----------
Operating income
(loss)................. (676,569) 13,574 (67,111) (70,840) (31,692) (513,625)
Interest expense and
other income, net...... (68,196) (9,062) (50,658) (76,627) (36,683) (38,720)
--------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
income taxes........... (744,765) 4,512 (117,769) (147,467) (68,375) (552,345)
Provision for income
taxes.................. (273) (4,346) (10,345) (10,181) (5,262) (4,082)
--------- ---------- ---------- ---------- ---------- -----------
Net income (loss)....... $(745,038) $ 166 $ (128,114) $ (157,648) $ (73,637) $ (556,427)
========= ========== ========== ========== ========== ===========
Earnings (loss) per
share:
Basic................. $ .01 $ (4.47) $ (2.08) $ (1.12) $ (3.69)
Diluted............... $ .00 $ (4.47) $ (2.08) $ (1.12) $ (3.69)
Shares used in
computation of earnings
(loss) per share:
Basic................. 16,692,217 28,634,362 75,816,326 65,781,329 150,945,857
Diluted............... 37,796,672 28,634,362 75,816,326 65,781,329 150,945,857
Other Operating Data:
Cash flow from operating
activities............. $ 343,137 $ 61,328 $ 245,318 $ 433,543 $ 247,213 $ 92,176
Cash flow from investing
activities............. (380,142) (1,390,861) (1,285,674) (903,922) (495,349) (610,427)
Cash flow from financing
activities............. 44,852 1,345,394 1,028,784 521,566 267,794 473,344
EBITDA(3)(4)............ (87,289) 16,709 (49,098) (47,987) (20,848) (501,833)
Capital expenditures.... 6,901 2,079 9,555 14,005 7,119 3,705
Depreciation............ 4,645 1,418 6,783 8,564 3,922 4,306
</TABLE>
S-7
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 1999(1)(2)
----------------------------
As
Actual Adjusted(5)
------------ ---------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 9,965 $ 139,465
Film and television costs, net....................... 2,231,277 2,231,277
Total assets......................................... 3,260,698 3,390,198
Bank and other debt.................................. 1,189,836 713,836
Contractual note payable............................. 112,500 --
Stockholders' equity................................. 1,369,110 2,087,110
</TABLE>
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(1) Reflects the consolidated balance sheet and results of operations of the
combined entity resulting from our acquisition of MGM Studios.
(2) Reflects the consolidated balance sheet and results of operations of the
combined entity resulting from the acquisition of Orion.
(3) Reflects the effect of the $225 million contract termination settlement
with Warner Home Video and $225.2 million of restructuring and other charges
for the period ended June 30, 1999.
(4) "EBITDA" is defined as earnings before interest, taxes, depreciation and
non-film amortization. While management considers EBITDA to be an important
measure of comparative operating performance, it should not be construed as an
alternative to operating income or cash flows from operating activities (as
determined in accordance with generally accepted accounting principles). 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 our financial performance. Other
significant uses of cash flows are required before cash will be available to
us, including debt service, taxes and cash expenditures for various long-term
assets. Our calculation of EBITDA may be different from the calculation used by
other companies and, therefore, comparability may be limited.
(5) As adjusted to reflect the sale of 36,036,036 shares of common stock at an
assumed public offering price of $20 13/16 per share in this offering, after
deducting the estimated underwriting fees and estimated offering expenses
payable by us.
S-8
<PAGE>
RISK FACTORS
An investment in our common stock carries various risks, including those
described below. We urge you to carefully consider these risk factors, together
with all of the other information included in this prospectus supplement and
the accompanying prospectus or incorporated by reference in this prospectus
supplement and the accompanying prospectus, before you decide to invest in our
common stock.
We have had significant losses, and we expect future losses.
We have not reported an operating profit for any fiscal year since 1988, and
while controlled by former management in 1991, our subsidiary MGM Studios was
the subject of an involuntary bankruptcy. We do not expect to be profitable for
at least several years, and we cannot assure you when we will become
profitable, if ever.
We are adversely affected by gaps in our motion picture production schedule.
Our revenues and operating results have been and may continue to be
adversely affected by the change in ownership of MGM Studios in 1996 and by
recent management changes which have resulted and are expected in the next
several months to result in a lack of movie production and distribution. These
changes may result in a degree of uncertainty among top artistic and creative
talent about the viability of projects, which could result in projects first
being offered to our competitors.
We require outside financing to meet our anticipated cash requirements.
Our operations are capital intensive and we expect that our capacity to
generate cash from operations will be insufficient to meet our anticipated cash
requirements during the next 12 months. Accordingly, we must obtain substantial
sources of outside financing. Such financing may not be available in sufficient
amounts for us to implement our business plan or may be available only on terms
which are disadvantageous to our stockholders.
Our cash flow in 1999 was adversely affected by the following factors, among
others:
. Our slate of motion pictures released during the first six months of 1999
performed below expectations;
. In January 1999, we paid PolyGram N.V. $235 million, and we incurred
acquisition costs of $1.2 million, to acquire certain of the PolyGram
film libraries;
. In March and September 1999, we paid Warner Home Video a total of $225
million, plus interest, to terminate its right to distribute our product
in the home video market; and
. In June 1999, we incurred restructuring and other charges of $225.2
million.
Under our current strategy and business plan, we will continue to require a
substantial amount of cash for the following reasons:
. We will continue to make substantial investments in the production of new
feature films and television programs;
. We may make additional investments to develop new distribution channels
to further exploit our library; however, we will evaluate the level of
our investments in light of our available capital and changing market
conditions;
. We expect to incur approximately $11 million in costs in 1999 to
integrate the PolyGram library into our operations and transition to
domestic home video self-distribution; and
. We are contractually obligated to fund 50 percent of the expenses of MGM
Networks Latin America up to an additional $7.1 million, of which
approximately $1.5 million is expected to be funded during the remainder
of 1999.
S-9
<PAGE>
We may need additional financing beyond the proceeds of this offering.
Based in part on the assumption that our future releases will perform as
planned, we expect that our cash flow from operations, the amounts available to
us under our credit facility and the net proceeds of this offering will be
adequate to meet our commitments and allow us to continue to operate under our
current business plan for at least the next 12 months. However, we cannot
assure you that this is the case.
If there are cash shortfalls, cash conservation measures may adversely affect
our long-term prospects.
If necessary in order to manage our cash needs, we could reduce or delay
production or release schedules or reduce our aggregate investment in new film
and television production costs. We cannot assure you that any of these steps
would be adequate or timely, or that acceptable arrangements could be reached
with third parties if necessary. In addition, although these steps would
improve our short-term cash flow and, in the case of partnering, reduce our
exposure should a motion picture perform below expectations, these steps could
reduce our long-term cash flow and adversely affect our results of operations.
Our credit facility contains restrictions which limit our operating
flexibility.
Our credit facility contains various covenants, including limitations on
indebtedness, dividends and capital expenditures and maintenance of certain
financial ratios. We cannot assure you that we will be able to comply with
these or other covenants or conditions in the future, or that we will generate
sufficient cash flow to repay our indebtedness. We further cannot assure you
that, in the event the need arises, we will be able to obtain additional
financing or to refinance our indebtedness on terms acceptable to us, or at
all.
Our substantial leverage could adversely affect our financial health.
We are highly leveraged. Our substantial indebtedness could have important
adverse consequences to you. For example, it could:
. Require us to dedicate a substantial portion of our cash flow to the
repayment of our indebtedness, reducing the amount of cash flow available
to fund film and television production and other operating expenses;
. Limit our ability to obtain additional financing, if necessary, for
operating expenses;
. Place us at a competitive disadvantage compared to competitors with less
debt or greater financial resources;
. Limit our flexibility in planning for, or reacting to, downturns in our
business, in our industry or in the economy in general; and
. Limit our ability to pursue strategic acquisitions and other business
opportunities that may be in our best interests.
Our revenues and results of operations may fluctuate significantly.
Our revenues and results of operations are dependent significantly upon the
commercial success of the motion pictures and television programming that we
distribute, which cannot be predicted with certainty, as well as the timing of
our releases. Accordingly, our revenues and results of operations may fluctuate
significantly from period to period, and the results of any one period may not
be indicative of the results for any future periods.
In addition, entertainment industry accounting practices may accentuate
fluctuations in our operating results. In accordance with generally accepted
accounting principles and industry practice, we amortize film and
S-10
<PAGE>
television programming costs using the "individual-film-forecast" method. Under
this accounting method, we amortize film and television programming costs for
each film or television program based on the following ratio:
Revenue earned by title in the current period
------------------------------------------------------
Estimated total revenues in all markets by title
We regularly review, and revise when necessary, our total revenue estimates
on a title-by-title basis. This may result in a change in the rate of
amortization and/or a write-down of the film or television asset to net
realizable value. Results of operations in future years depend upon our
amortization of our film and television costs. Periodic adjustments in
amortization rates may significantly affect these results. The likelihood of
our reporting of losses is increased because the industry's accounting method
requires the immediate recognition of the entire loss where it is expected that
a motion picture or television program will not recover our investment. On the
other hand, the profit of a successful motion picture or television program
must be recognized over the entire revenue stream expected to be generated by
the individual picture or television program.
We may have lower revenues as a result of our motion picture production
strategy.
Based on our current business plan, MGM's annual release slate may include
proportionately fewer large budget "event" motion pictures than the current
release slates of the other major studios. We also contemplate a stronger focus
on pictures which will appeal to a younger demographic and a greater number of
co-productions than our prior strategy. We cannot assure you that our strategic
approach will enable us to produce commercially successful motion pictures.
Additionally, our current motion picture strategy involves co-producing or co-
financing a substantial portion of our motion pictures. These co-production
arrangements could reduce our long-term cash flow from pictures which perform
above expectations.
We may not be able to meet our production goals and schedule.
The production, completion and distribution of motion pictures are subject
to numerous uncertainties, including financing requirements, the availability
of desired talent and quality material and the release schedule of the motion
pictures of competitors. We cannot assure you that any of the pictures
scheduled for release in the remainder of 1999 or future periods will be
completed or released on schedule or on budget, or at all.
We are limited in our ability to exploit our library.
Our rights to the titles in our library vary. In some cases we have only the
right to distribute the title in certain media and territories for a limited
term. Our rights in approximately 35 percent of our library are limited in
time. Our rights with respect to approximately half of that 35 percent will
expire before the end of the year 2008. While in the past we have generally
been able to renew expiring rights on acceptable terms, we cannot assure you
that we will continue to be able to do so in the future. In accordance with
industry practice, for purposes of calculating the size of our library, we
include any title in which we have any distribution rights.
Additionally, a prior management granted long-term domestic and major
international television licenses covering a substantial portion of our
library, in exchange for pre-paid fees. A cross-section of our library is
subject to one or more of these licenses, including substantially all of the
MGM/UA titles produced prior to 1990, which have been licensed in the U.S. and
Europe, and approximately 40 percent of the Orion and PolyGram titles, which
have been licensed in Europe. Until these agreements expire and the rights
revert to us, we expect contributions to earnings and cash flow from these
markets to continue to be below those of our competitors for similar products.
We cannot assure you that our sales or profitability will increase after these
agreements expire.
S-11
<PAGE>
Another party claims to have rights to produce and exploit James Bond films.
If another party were able to effectively make and exploit James Bond films,
it could have a material adverse effect on the profitability of our James Bond
franchise. We jointly own the copyright to the James Bond films with Danjaq
LLC. The movies are produced by Danjaq and distributed by us pursuant to a
series of agreements with MGM dating back to 1962. In 1997, MGM and Danjaq sued
Sony Corporation, Columbia and others following Sony's announcement that it
intended to produce a series of new James Bond feature motion pictures based on
rights it claimed it acquired from Kevin McClory, rights which we believe are
invalid. In July 1998, a Los Angeles Federal Court preliminarily enjoined Sony
and the other defendants from making or exploiting James Bond films in the U.S.
The lawsuit was recently settled with Sony and its related parties, who agreed
never to make or exploit any Bond films anywhere in the world. Mr. McClory did
not participate in the settlement and continues to allege that he has certain
rights in the Bond films. We contend that the only rights Mr. McClory ever had
were limited to remaking the movie Thunderball and that even those rights have
expired. We believe that a remake of Thunderball by Mr. McClory would not have
a material adverse effect on our business or results of operations. Although we
do not believe that the fact that we share the ownership and control of the
James Bond franchise with Danjaq will have any material adverse effect on us,
no such assurance can be given.
We may not be able to quickly or smoothly integrate or realize the anticipated
benefits of acquisitions or the early termination of the agreement with Warner
Home Video.
On January 10, 1999, we acquired over 1,300 feature film titles in the
PolyGram film library. In addition, we may consider strategic acquisitions as
opportunities arise, subject to obtaining any necessary financing. Acquisitions
involve numerous risks, including diversion of our management's attention away
from our operating activities. We cannot assure you that we will not encounter
unanticipated problems or liabilities relating to the acquisition of the
PolyGram film library or any other assets or company we may acquire, or with
the integration of an acquired company's operations, nor can we assure you that
we will realize the anticipated benefits of any past or future acquisitions.
Additionally, although we have experienced video distribution management, we
cannot assure you that we will not encounter unanticipated problems related to
the early termination of the Warner Home Video agreement or the establishment
of our own distribution infrastructure, nor can we assure you that we will
realize the anticipated benefits of self-distribution in the domestic home
video marketplace or distribution through Fox in the international home video
marketplace.
We face risks relating to the international distribution of our product.
Because we have historically derived approximately 40 percent of our
revenues from non-U.S. sources, our business is subject to risks inherent in
international trade, many of which are beyond our control. These risks include:
. changes in laws and policies affecting trade, investment and taxes,
including laws and policies relating to the repatriation of funds and to
withholding taxes;
. differing degrees of protection for intellectual property;
. the instability of foreign economies and governments; and
. fluctuating foreign exchange rates.
We currently distribute our motion pictures in European theatrical markets
through United International Pictures B.V., or "UIP," a partnership among MGM,
Paramount Pictures Corporation and Universal Studios, Inc. In June 1999, we
announced that we will exercise our right to withdraw from UIP effective
November 1, 2000, at which time our international distribution will be
conducted in conjunction with Fox.
S-12
<PAGE>
Production of first-run syndicated television programming may involve financial
risks.
First-run syndicated television programming is generally licensed based on a
pilot episode that we finance. If an insufficient number of stations license
the programming, our pilot costs will not be recouped. There is also financial
exposure to us after the programming is licensed to the extent that advertising
revenues and/or license fees we receive are not sufficient to cover production
costs. In addition, we may have certain financial obligations to the producer
of a first-run syndicated series if we cancel production prior to commencement
of production for any broadcast season for which the series was licensed.
Risks relating to implementing our branded cable and satellite programming
channel.
We may consider strategic opportunities to create branded cable and
satellite programming channels. We cannot assure you that we will have the
financing that may be necessary for such acquisitions or investments, that we
will consummate any such transactions or that we will be able to realize any
anticipated benefits from any such transactions.
Advances in technology may create alternate forms of entertainment.
The entertainment industry in general, and the motion picture industry in
particular, continue to undergo significant changes, primarily due to
technological developments. Due to this rapid growth of technology, and
shifting consumer tastes, we cannot accurately predict the overall effect that
such changes may have on the potential revenue from and profitability of
feature-length motion pictures and television programming.
Some of our competitors have greater financial resources than we do.
Most of the other major studios are part of large diversified corporate
groups with a variety of other operations, including television networks and
cable channels, that can provide both a means of distributing their products
and stable sources of earnings and cash flows that offset fluctuations in the
financial performance of their motion picture and television operations. The
number of films released by our competitors, particularly the other major film
studios, in any given period may create an oversupply of product in the market,
which may reduce our share of gross box office admissions and make it more
difficult for our films to succeed. In addition, television networks are now
producing more programs internally and thus may reduce their demand for outside
programming.
The Tracinda Group owns a majority of our common stock and has the power to
elect our Board of Directors and influence our affairs.
Tracinda and one of its affiliates, which we refer to as the Tracinda Group,
beneficially own 134,997,723 shares, approximately 89 percent of our
outstanding common stock. Assuming the Tracinda Group does not purchase any of
the offered shares, it would beneficially own approximately 72 percent of our
common stock, and the Tracinda Group, our directors and officers and their
affiliates will beneficially own at least 73 percent of our common stock after
completion of this offering. Our common stock does not have cumulative voting
rights and, since we anticipate that Tracinda will continue to own greater than
50 percent of our outstanding common stock for the foreseeable future, it will
have the ability to elect our entire board of directors and determine the
outcome of other matters submitted to our stockholders, such as the approval of
significant transactions, and otherwise to influence our affairs.
Our common stock has a relatively small public "float," a condition which may
continue following the offering.
Of the 151,331,458 shares of our outstanding common stock, only
approximately 15,435,000 shares are beneficially owned by persons other than
the Tracinda Group and our named executive officers and directors. While we
anticipate that the sale of the shares in this offering will substantially
increase our public float, to the
S-13
<PAGE>
extent that the Tracinda Group purchases in the offering, the increase in the
float will be reduced. Without a significantly larger public float than we now
have, our common stock will be less liquid than the common stock of companies
with broader public ownership, and as a result, the trading prices for our
common stock may be more volatile. Among other things, trading of a relatively
small volume of our common stock may have a greater impact on the trading price
for our stock than would be the case if our public float were larger.
Risks of the "Year 2000" Issue.
As we complete our Year 2000 conversion, we may identify microprocessor
systems which present a material risk of Year 2000 disruption. Such disruption
may include, among other things, the inability to process transactions or
information, record and access data relating to the licensing and distribution
availability of titles in our library, send invoices or engage in similar
normal business activities. Our failure to identify systems which require Year
2000 conversion that are critical to our operation or our failure or the
failure of others with which we do business to become Year 2000 ready in a
timely manner could have a material adverse effect on our financial condition
and results of operations.
Future sales of shares of the common stock could decrease its market price.
After this offering, we will have approximately 187,367,000 shares of our
common stock outstanding, of which approximately 135,897,000 are held by
directors, officers or holders of ten percent or more of our outstanding common
stock, assuming the Tracinda Group does not buy any shares in this offering. We
have also granted, as of August 31, 1999, options to purchase a total of
23,460,653 shares of our common stock. Furthermore, we have granted to
Tracinda, and certain other holders of our common stock or outstanding options
registration rights with respect to the shares they own or that we may issue to
them. Possible or actual sales of any of these shares, particularly by our
directors and officers, under Rule 144 or otherwise, may in the future decrease
the price of shares of our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus supplement contains or incorporates by reference forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements typically can be identified by the use of forward-looking words,
such as "may," "will," "could," "project," "believe," "anticipate," "expect,"
"estimate," "continue," "potential," "plan," "intend," "forecast," and the
like. These statements appear in a number of places in this prospectus
supplement and the information incorporated by reference and include statements
regarding our current intentions, plans, strategies, beliefs and expectations.
Forward-looking statements do not guarantee future performance and involve
risks and uncertainties that could cause actual results to differ materially
from those anticipated. The information contained in this prospectus
supplement, including the information contained in "Risk Factors" beginning on
p. S-9, or incorporated by reference, identifies important factors that could
cause such differences.
S-14
<PAGE>
USE OF PROCEEDS
We expect to raise approximately $718 million in this offering, after
deducting our expenses. We plan to use substantially all of these proceeds to
repay any outstanding amounts under our bridge loan and then to reduce amounts
that we owe under the revolving portion of our $1.3 billion credit facility. We
will use any remaining proceeds for general corporate purposes. Our business
plan calls for substantial continued borrowing under this facility, subject to
our compliance with its terms. For example, on September 1, 1999, we drew upon
funds from the facility to make the second payment to Warner Home Video of
$112.5 million, plus interest, in connection with the termination of our
distribution arrangement. As of September 9, 1999, we owed $250 million under
the bridge loan (which is required to be repaid out of the proceeds of this
offering) and $359 million under the revolving portion of our credit facility,
which bear interest at the rates of 7.08% and 8.02% per annum, respectively,
and are due (1) in the case of the bridge loan, upon the earlier of the receipt
of any net cash proceeds from this offering or July 2006 and (2) in the case of
the revolving portion of our credit facility, in October 2003, subject to
extension under certain conditions. During the past 12 months, borrowings under
the bridge loan and the credit facility were used to (a) fund the PolyGram
library acquisition, (b) make our payments to Warner Home Video and (c) provide
working capital for general corporate purposes.
PRICE RANGE OF COMMON STOCK
The common stock is listed on the NYSE and trades under the symbol "MGM."
The following table sets forth for the quarters indicated the high and low
composite per share closing sales prices as reported by the NYSE.
<TABLE>
<CAPTION>
1998 High Low
---- ---- ----
<S> <C> <C>
First Quarter.............................................. $24 1/2 $17 1/2
Second Quarter............................................. 27 21 1/2
Third Quarter.............................................. 22 3/16 13 7/8
Fourth Quarter............................................. 13 3/16 7 1/8
<CAPTION>
1999
----
<S> <C> <C>
First Quarter.............................................. $13 9/16 $10 3/8
Second Quarter............................................. 18 5/8 12 3/4
Third Quarter (through September 9)........................ 22 16 1/2
</TABLE>
The last reported sales price of the common stock on the NYSE on September
9, 1999 was $20 13/16 per share. As of June 30, 1999, there were more than
2,000 beneficial holders of our stock.
DIVIDEND POLICY
We have not paid any dividends since 1996. For the foreseeable future, we
intend to retain any earnings to fund the operation of our business and to
service and repay our debt rather than pay cash dividends to our stockholders.
Furthermore, as a holding company with no independent operations, our ability
to pay dividends will depend upon the receipt of dividends or other payments
from our subsidiaries. Finally, our credit facility contains financial
covenants that restrict our ability to pay dividends. Subject to the foregoing,
our board of directors has the sole discretion to pay cash dividends.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated cash and capitalization as
of June 30, 1999 (1) on a historical basis, and (2) as adjusted to give effect
to this offering and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds," as if all of the foregoing had occurred as
of June 30, 1999. As of September 9, 1999, the amount outstanding under the
revolving credit facility was $359 million. In addition, as of such date, $250
million was outstanding under the bridge loan, and the contractual note payable
was paid in full.
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------
Actual As Adjusted
---------- -----------
(in thousands)
<S> <C> <C>
Cash:.................................................. $ 9,965 $ 139,465
========== ==========
Debt:
Credit facility:
Term loans......................................... $ 700,000 $ 700,000
Revolving credit facility.......................... 476,000 --
Other borrowings..................................... 13,836 13,836
Contractual note payable............................. 112,500 --
---------- ----------
Total debt....................................... 1,302,336 713,836
---------- ----------
Stockholders' equity:
Common stock, $.01 par value per share, 500,000,000
shares authorized;
151,303,086 shares issued and outstanding;
187,339,122 shares issued and outstanding, as
adjusted ........................................... 1,513 1,873
Additional paid-in capital........................... 2,211,296 2,928,936
Deficit.............................................. (842,023) (842,023)
Accumulated other comprehensive income............... 258 258
Less: treasury stock, at cost, 132,253 shares........ (1,934) (1,934)
---------- ----------
Total stockholders' equity....................... 1,369,110 2,087,110
---------- ----------
Total capitalization............................. $2,671,446 $2,800,946
========== ==========
</TABLE>
The number of outstanding shares in the preceding table excludes an
aggregate of 23,460,653 shares of common stock comprised of the following:
312,502 shares of common stock issuable upon the exercise of the outstanding
stock option with an exercise price of $6.41 per share, 14,709,615 shares of
common stock issuable upon the exercise of outstanding stock options with an
exercise price of $14.90 per share (of which 1,745,680 were repriced to $14.90
subsequent to June 30, 1999), 688,536 shares of common stock issuable upon the
exercise of outstanding stock options with a weighted average exercise price of
$18.74 per share, 7,750,000 shares of common stock issuable upon exercise of
outstanding stock options with an exercise price of $30.00 per share, and
6,271,554 shares of common stock reserved for future issuance under our stock
option plans.
S-16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Our selected consolidated financial data (including that of our predecessor)
presented below as of the period from January 1 to October 10, 1996, the period
from October 11 to December 31, 1996 and the years ended December 31, 1997 and
1998 and each of the years or periods have been derived from our audited
consolidated financial statements. Our audited consolidated financial
statements for the years ended December 31, 1997 and 1998, and the period from
October 11 to December 31, 1996, and the audited consolidated financial
statements of MGM Studios for the period from January 1 to October 10, 1996
were audited by Arthur Andersen LLP, independent public accountants.
The selected consolidated financial data as of and for the six months ended
June 30, 1998 and 1999 have been derived from our unaudited consolidated
financial statements and include all adjustments (consisting only of normal
recurring adjustments) which are, in our opinion, necessary for a fair
presentation of our financial position at such dates and results of operations
for such periods. The results of operations for the six months ended June 30,
1999 are not necessarily indicative of the results for the year.
<TABLE>
<CAPTION>
Predecessor Successor
------------ --------------------------------------------------------------
October 11 Year Ended Six Months Ended
January 1 to to December 31, June 30,
October 10, December 31, ----------------------- -----------------------
1996 1996(1) 1997(1)(2) 1998(1)(2) 1998(1)(2) 1999(1)(2)
------------ ------------ ----------- ---------- ---------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 912,706 $ 228,686 $ 831,302 $1,240,723 $ 597,661 $ 470,917
Expenses:
Films and television
production and
distribution........... 953,820 195,076 799,539 1,191,848 571,780 626,769
General and
administration
expenses............... 60,056 18,319 87,644 92,244 50,651 49,129
Severance and related
costs.................. -- -- -- 13,182 -- 76,158
Contract termination
fee.................... -- -- -- -- -- 225,000
Goodwill amortization... 11,570 1,717 11,230 14,289 6,922 7,486
Provision for
impairment............. 563,829(4) -- -- -- -- --
---------- ----------- ----------- ---------- ---------- -----------
1,589,275 215,112 898,413 1,311,563 629,353 984,542
Operating income
(loss)................. (676,569) 13,574 (67,111) (70,840) (31,692) (513,625)
Interest expense, net of
amounts capitalized.... (71,375) (9,875) (53,105) (80,611) (38,428) (41,238)
Interest and other
income, net............ 3,179 813 2,447 3,984 1,745 2,518
---------- ----------- ----------- ---------- ---------- -----------
Income (loss) before
provision for income
taxes.................. (744,765) 4,512 (117,769) (147,467) (68,375) (552,345)
Income tax provision.... (273) (4,346) (10,345) (10,181) (5,262) (4,082)
---------- ----------- ----------- ---------- ---------- -----------
Net income (loss)....... $ (745,038) $ 166 $ (128,114) $ (157,648) $ (73,637) $ (556,427)
========== =========== =========== ========== ========== ===========
Earnings (loss) per
share:
Basic.................. $ 0.01 $ (4.47) $ (2.08) $ (1.12) $ (3.69)
Diluted................ $ 0.00 $ (4.47) $ (2.08) $ (1.12) $ (3.69)
Weighted average number
of common shares
outstanding
Basic.................. 16,692,217 28,634,362 75,816,326 65,781,329 150,945,857
Diluted................ 37,796,672 28,634,362 75,816,326 65,781,329 150,945,857
Other Operating Data
(unaudited):
Cash flow from operating
activities............. $ 343,137 $ 61,328 $ 245,318 $ 433,543 $ 247,213 $ 92,176
Cash flow from investing
activities............. (380,142) (1,390,861) (1,285,674) (903,922) (495,349) (610,427)
Cash flow from financing
activities............. 44,852 1,345,394 1,028,784 521,566 267,794 473,344
EBITDA(3)(5)............ (87,289) 16,709 (49,098) (47,987) (20,848) (501,833)
Capital expenditures.... 6,901 2,079 9,555 14,005 7,119 3,705
Depreciation expense.... 4,645 1,418 6,783 8,564 3,922 4,306
Balance Sheet Data:
Cash and cash
equivalents............ $ 24,717 $ 16,381 $ 3,978 $ 54,839 $ 23,512 $ 9,965
Film and television
costs, net 1,006,402 1,099,201 1,867,126 2,076,663 l,993,093 2,231,277
Total assets............ 1,744,234 1,774,668 2,822,654 3,158,978 2,947,816 3,260,698
Bank and other debt..... 1,229,499 444,427 890,508 715,574 1,158,304 1,189,836
Contractual note
payable................ -- -- -- -- -- 112,500
Stockholders' equity.... -- 903,122 1,378,555 1,919,657 1,306,299 1,369,110
Cash dividends.......... 3,995 -- -- -- -- --
</TABLE>
- --------
(1) Reflects the consolidated balance sheet and results of operations of the
combined entity resulting from our acquisition of MGM Studios.
(2) Reflects the consolidated balance sheet and results of operations of the
combined entity resulting from the acquisition of Orion.
(3) Reflects the effect of the $225 million contract termination settlement
with Warner Home Video and $225.2 million of restructuring and other
charges for the period ended June 30, 1999.
S-17
<PAGE>
(4) The proceeds from the sale of MGM Studios were insufficient to recover the
net asset value of MGM Studios on the date of the disposition by Consortium
de Realisation. Accordingly, MGM Studios recorded a provision for
impairment of intangible assets of $563.8 million.
(5) "EBITDA" is defined as earnings before interest, taxes, depreciation and
non-film amortization. While management considers EBITDA to be an important
measure of comparative operating performance, it should not be construed as
an alternative to operating income or cash flows from operating activities
(as determined in accordance with generally accepted accounting
principles); EBITDA does not reflect cash necessary or available to fund
cash requirements, and the items excluded from EBITDA, such as depreciation
and non-film amortization, are significant components in assessing our
financial performance. Other significant uses of cash flows are required
before cash will be available to us, including debt service, taxes and cash
expenditures for various long-term assets. Our calculation of EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
S-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this prospectus supplement.
General
We are engaged primarily in the development, production and worldwide
distribution of theatrical motion pictures and television programming.
Sources of Revenue
The principal sources of motion picture industry revenue are the domestic
and international distribution of motion pictures, including theatrical
exhibition, home video and television, which includes network, syndication,
basic cable, pay and pay-per-view. Over the last decade, the relative
contributions of these components of revenues have changed dramatically.
Although revenues from domestic theatrical distribution have increased, growth
in total motion picture industry revenues has resulted predominantly from
increased revenues derived from the distribution of motion pictures
internationally as well as from other media and distribution channels.
Our feature films are exploited through a series of sequential domestic and
international distribution channels, typically beginning with theatrical
exhibition. Thereafter, feature films are first made available for home video
generally six months after theatrical release; for pay television, one year
after theatrical release; and for syndication, approximately three to five
years after theatrical release. Our television programming is produced for
initial broadcast on either pay, syndicated or network television in the United
States, followed by international territories and, in some cases, worldwide
video markets.
We distribute our motion picture and television productions in foreign
countries and, in recent years, have derived approximately 40 percent of our
revenues from foreign sources. Approximately 25 percent of our revenues are
denominated in foreign currencies. In addition, we incur certain operating and
production costs in foreign currencies. As a result, fluctuations in foreign
currency exchange rates can adversely affect our business, results of
operations and cash flows. We sometimes enter into foreign currency exchange
contracts in order to reduce exposure to changes in foreign currency exchange
rates that affect the value of our firm commitments and certain anticipated
foreign currency cash flows. These contracts generally mature within one year.
We do not enter into foreign currency contracts for speculative purposes.
Realized gains and losses on contracts that hedge anticipated future cash flows
were not material in any of the periods presented herein. We had no significant
foreign currency exchange contracts outstanding at June 30, 1999.
Cost Structure
General. In the motion picture industry, the largest component of the cost
of producing a motion picture generally is the negative cost, which includes
the "above-the-line" and "below-the-line" costs of producing the film. Above-
the-line costs are costs related to the acquisition of picture rights and the
costs associated with the producer, the director, the writer and the principal
cast. Below-the-line costs are the remaining costs involved in producing the
picture, such as film studio rental, principal photography, sound and editing.
Distribution expenses consist primarily of the costs of advertising and
preparing release prints. The costs of advertising associated with a major
domestic theatrical motion picture release are significant and typically
involve national and target market media campaigns, as well as public
appearances of a film's stars. These advertising costs are separate from the
advertising costs associated with other domestic distribution channels and the
international market.
S-19
<PAGE>
The major studios generally fund production costs from cash flow generated
by motion picture and related distribution activities or bank and other
financing methods. Over the past decade, expenses in the motion picture
industry have increased rapidly as a result of increased production costs and
distribution expenses. Additionally, each of the major studios must fund
substantial overhead costs, consisting primarily of salaries and related costs
of production, distribution and administrative staffs, as well as facilities
costs and other recurring overhead.
Participations and Residuals. In connection with the production and
distribution of a motion picture, major studios generally grant contractual
rights to actors, directors, screenwriters, producers and other creative and
financial contributors to share in the gross receipts or contractually defined
net profits from a particular motion picture. Except for the most sought-after
talent, these third-party participations are generally payable after all
distribution fees, marketing expenses, direct production costs and financing
costs are recouped.
Major studios also typically incur obligations to pay residuals to various
guilds and unions including the Writers Guild of America, the Directors Guild
of America and the Screen Actors Guild. The residual payments are made on a
picture-by-picture basis with respect to the exploitation of a motion picture
in markets other than the primary intended markets for such picture and are
calculated as a percentage of the gross revenues derived from the exploitation
of the picture in these ancillary markets.
Our cost structure for motion pictures generally follows the industry
structure described above. For a discussion of television programming cost
structure, see "Business--The Motion Picture and Television Industry."
Industry Accounting Practices
Revenue Recognition. Revenues from theatrical distribution of feature motion
pictures are recognized on the dates of exhibition. Revenues from home video
distribution, together with related costs, are recognized in the period in
which the product is available (assuming it has been shipped) for sale at the
retail level. Under new revenue sharing agreements, we also participate in
consumer rental revenues generated in the home video market by rental
establishments. Revenues from television distribution are recognized when the
motion picture or television program is available to the licensee for
broadcast.
Accounting for Motion Picture and Television Costs. In accordance with
generally accepted accounting principles and industry practice, we amortize
film and television programming costs using the individual-film-forecast method
under which such costs are amortized for each film or television program in the
ratio that revenue earned in the current period for such title bears to
management's estimate of the total revenues to be realized from all media and
markets for such title. Management regularly reviews, and revises when
necessary, its total revenue estimates on a title-by-title basis, which may
result in a change in the rate of amortization and/or a write-down of the film
or television asset to net realizable value. A typical film or television
program recognizes a substantial portion of its ultimate revenues within the
first two years of release. By then, a film has been exploited in the domestic
and international theatrical markets and the domestic and international home
video markets, as well as the domestic and international pay television and
pay-per-view markets, and a television program has been exploited on network
television or in first-run syndication. A similar portion of the film's or
television program's capitalized costs should be expected to be amortized
accordingly, assuming the film or television program is profitable.
S-20
<PAGE>
The commercial potential of individual motion pictures and television
programming varies dramatically, and is not directly correlated with production
or acquisition costs. Therefore, it is difficult to predict or project a trend
of our income or loss. However, the likelihood that we report 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
that the ultimate revenues of a motion picture or television program will not
recover our 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 our release schedule and
the relative performance of individual motion pictures or television programs.
For films we released 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.
In October 1998, the Financial Accounting Standards Board issued an Exposure
Draft on a proposed statement of position for "Accounting By Producers and
Distributors of Films." If adopted, the proposed statement of position 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 statement of position provides that the cumulative effect of changes
in accounting principles caused by adoption of the provisions of the proposed
statement of position should be included in the determination of net income in
conformity with Accounting Principles Board Opinion No. 20, "Accounting
Changes." We are not able to quantify the effect or the materiality of adoption
of the proposed statement of position at this time. If adopted, the proposed
statement of position, as currently drafted, would be effective for financial
statements for fiscal years beginning after December 15, 1999, with earlier
adoption encouraged.
S-21
<PAGE>
Results of Operations
Six Months Ended June 30, 1999 and 1998
The following table sets forth our operating results for the six months
ended June 30, 1999 and 1998. As stated in the financial statements and related
notes thereto, in the six months ended June 30, 1999 we incurred certain
restructuring and other charges aggregating $225.2 million related to changes
in senior management, a corresponding review of our operations and film
projects in various stages of development and production, and other related
costs. Additionally, in March 1999 we accelerated the termination of the Warner
Home Video agreement, which resulted in a $225.0 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>
Six Months Ended
June 30,
-------------------
1999 1998
--------- --------
(in thousands,
unaudited)
<S> <C> <C>
Revenues:
Feature films........................................... $ 348,008 $471,297
Television programs..................................... 93,018 105,839
Other................................................... 29,891 20,525
--------- --------
Total revenues........................................ 470,917 597,661
Operating income (loss):
Feature films........................................... (177,273) 18,103
Television programs..................................... 8,053 9,417
Other................................................... 13,368 (1,639)
General and administration expenses..................... (49,129) (50,651)
Severance and related costs............................. (76,158) --
Contract termination fee................................ (225,000) --
Goodwill amortization................................... (7,486) (6,922)
--------- --------
Operating loss............................................ (513,625) (31,692)
Interest expense, net of amounts capitalized.............. (41,238) (38,428)
Interest and other income................................. 2,518 1,745
--------- --------
Loss before provision for income taxes.................... (552,345) (68,375)
Income tax provision...................................... (4,082) (5,262)
--------- --------
Net loss.................................................. $(556,427) $(73,637)
========= ========
</TABLE>
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 compared to
the six months ended June 30, 1998. Explanations for the changes in revenues
are discussed in the following paragraphs.
Worldwide theatrical revenues decreased by $134.3 million, or 73 percent, to
$49.9 million in the 1999 six-month period as compared to the 1998 six-month
period. In the 1999 period, we 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. The slate of films we released through
the first six months of 1999 has performed below expectations. Overall, in the
1999 period we 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.
S-22
<PAGE>
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 increased home video units shipped in the 1998 period
upon the successful release of Tomorrow Never Dies, as well as Red Corner,
Hoodlum and Ulee's Gold, in the domestic rental market. Additionally, due to
the early expiration of the Warner Home Video agreement, effective January 1,
1999, we no longer receive revenues from the distribution of film product owned
by Turner Entertainment Co., Inc. In the 1998 period, we generated $26.3
million in gross revenues from the 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 successful releases of Fled and Hoodlum in the 1998 period.
Additionally, library DVD 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, we 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.
We 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. We 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 $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: The Legacy, 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
S-23
<PAGE>
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 the 1999 period. 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 comparable 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 from third parties.
We 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 connection with our sale of a
portion of our 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 we
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 our equity investments,
including our interest in our 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. In the 1999 period we incurred executive
severance and other related charges of $76.2 million attributable to changes in
senior management and the estimated costs of withdrawing from our arrangements
with UIP. There were no comparable charges in the 1998 period.
Contract Termination Fee. On March 12, 1999, we agreed to accelerate the
termination of the right of Warner Home Video to distribute our product in the
home video market. In consideration for the early termination of the Warner
Home Video agreement, we agreed to pay Warner Home Video $225.0 million, of
which $112.5 million was paid on March 12, 1999 and the remaining $112.5
million of which, plus interest, was paid on September 1, 1999. The parties
restructured the terms of the Warner Home Video agreement, which will function
as the transitional video agreement, under which Warner Home Video will
distribute certain of our product in the home video marketplace while we
establish our own domestic home video distribution network. The transitional
video agreement expires on January 31, 2000. Additionally, we reconveyed as of
January 1, 1999 to Turner the right that we had to distribute in the home video
markets worldwide until June 2001, 2,950 titles that had been serviced under
the Warner Home Video agreement.
S-24
<PAGE>
Operating results in the 1999 period include a pre-tax contract termination
charge of $225.0 million for costs in connection with the early termination of
Warner Home Video's rights under the Warner Home Video 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 PolyGram
library acquisition in January 1999 and the Warner Home Video agreement
termination settlement in March 1999, partially offset by debt repayment
associated with proceeds received from our 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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following table sets forth our operating results for the year ended
December 31, 1998 and 1997. The 1997 results are not comparable to results in
1998 due to the acquisition of Orion on July 10, 1997.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
---------- ---------
(in thousands)
<S> <C> <C>
Revenues:
Feature films......................................... $1,005,747 $ 699,219
Television programs................................... 197,759 114,200
Other................................................. 37,217 17,883
---------- ---------
Total revenues...................................... 1,240,723 831,302
Operating income (loss):
Feature films......................................... 39,748 65,509
Television programs................................... 12,885 (7,201)
Other................................................. (3,758) (26,545)
General and administration expenses................... (92,244) (87,644)
Severance and related costs........................... (13,182) --
Goodwill amortization................................. (14,289) (11,230)
---------- ---------
Operating loss.......................................... (70,840) (67,111)
Interest expense, net of amounts capitalized............ (80,611) (53,105)
Interest and other income (expense), net................ 3,984 2,447
---------- ---------
Loss before provision for income taxes.................. (147,467) (117,769)
Income tax provision.................................... (10,181) (10,345)
---------- ---------
Net loss................................................ $ (157,648) $(128,114)
========== =========
</TABLE>
Feature Films. Feature film revenues increased by $306.5 million, or 44
percent, to $1,005.7 million in the year ended December 31, 1998 compared to
the year ended December 31, 1997. Explanations for the changes in revenues are
discussed in the following paragraphs.
Worldwide theatrical revenues increased by $139.3 million, or 135 percent,
to $242.2 million in 1998 due to significant worldwide theatrical revenues
earned by Tomorrow Never Dies, The Man In The Iron Mask and Ronin, as well as
the release in the domestic theatrical marketplace of Disturbing Behavior and
Dirty Work, among others. In 1997 we initially released Tomorrow Never Dies in
worldwide theatrical markets (in December 1997), and in the domestic theatrical
marketplace released Hoodlum and Red Corner, among others. Overall, in 1998 we
released 12 new feature films domestically and four new films internationally,
as compared to 15 films released domestically and two new films internationally
in 1997. Of the films released in 1997, seven films were produced by Orion and
six of these were released in limited distribution only, as compared to three
films produced by Orion and released in limited distribution only in 1998.
S-25
<PAGE>
Worldwide home video revenues increased by $140.8 million, or 40 percent, to
$491.2 million in 1998, which included the release in the domestic rental
market of Tomorrow Never Dies, The Man In The Iron Mask, Red Corner, Species 2
and Hoodlum, among others, as compared to the release of Kingpin and Fled in
the domestic rental market in 1997. In 1998 we also re-released in the sell-
through market Gone With The Wind, as compared to the sell-through releases of
Larger Than Life, The Birdcage and Warriors of Virtue in 1997. Significant
international home video releases in 1998 included Tomorrow Never Dies and The
Man In The Iron Mask, as compared to GoldenEye, Get Shorty, The Birdcage and
Fled, in 1997. Additionally, in 1998 we distributed the Orion library for the
entire year as compared to a shorter period in 1997, from the acquisition date
of July 10, 1997.
Worldwide pay television revenues from feature films decreased by $11.1
million, or 10 percent, to $96.5 million in 1998, primarily due to a lack of
significant new releases in international pay television markets in 1998 as
compared to 1997, which 1997 period included GoldenEye, Get Shorty, Species and
The Birdcage. In the domestic pay television market, in 1998 we released
Tomorrow Never Dies, Red Corner and Hoodlum, as compared to The Birdcage and
Kingpin, among others, in 1997. Network television revenues from feature films
increased by $30.6 million, or 208 percent, to $45.3 million in 1998,
principally due to the delivery of eight new films to network television in
1998, including The Birdcage and GoldenEye, as compared to seven new films
delivered in 1997. Worldwide syndicated television revenues from feature films
decreased by $2.4 million, or two percent, to $121.2 million in 1998
principally due to lower international sales from library films, partially
offset by the distribution of the Orion film library for the entire year in
1998 as compared to the shorter period from acquisition in 1997.
Other feature film revenues increased $9.3 million in 1998 due to certain
audit recoveries, miscellaneous rebates and other income collected in the
period.
Operating income from feature films decreased by $25.8 million, or 39
percent, to $39.7 million in 1998 as compared to 1997. The decrease in
operating results in 1998 reflects increased amortization expense, in addition
to feature film write-downs which aggregated $80.0 million on certain releases,
partially offset by profit realized from the films Tomorrow Never Dies and The
Man In The Iron Mask. Feature film write-downs were $38.1 million in 1997.
Television Programming. Television programming revenues increased by $83.6
million, or 73 percent, to $197.8 million in 1998 as compared to 1997. Network
television revenues were $31.3 million in 1998, consisting of the deliveries of
the new series The Magnificent Seven, the television miniseries Creature and
one made-for-television movie. There were no series, mini-series or television
movies on network television in 1997. Worldwide pay television revenues
decreased by $2.0 million, or six percent, to $30.3 million in 1998. Pay
television revenues in both years included three series in broadcast on
domestic pay television, The Outer Limits, Poltergeist: The Legacy, and
Stargate SG-1, and three made-for-television movies delivered in each year. The
decrease in worldwide pay television revenues in 1998 was due to lower
international library sales. Worldwide syndicated television revenues increased
by $41.1 million, or 67 percent, to $101.9 million in 1998, primarily due to
the addition of the new series Stargate SG-1 and Fame LA in worldwide
syndication, as well as additional years of the ongoing series The Outer Limits
and Poltergeist: The Legacy, the delivery of the new series Flipper in domestic
syndication, and the licensing of the international rights to the television
mini-series Creature. Worldwide home video revenues with respect to television
programming increased by $5.7 million, or 34 percent, to $22.7 million in 1998
due to the domestic home video releases of An All Dogs Christmas Carol, Secret
of NIMH 2, Garth Brooks Live In Concert and the television movie Twelve Angry
Men, as compared to the home video release of Babes In Toyland in 1997. The
remaining television programming revenue increase of $7.5 million was
principally related to a payment received from a third party for the rights to
create new episodes of Hollywood Squares.
Operating income from television programming increased by $20.1 million to
$12.9 million in 1998 as compared to a loss of $7.2 million in 1997. The
increase in operating results in 1998 was principally a result of the
aforementioned increase in revenues and the receipt of the Hollywood Squares
remake rights payment.
S-26
<PAGE>
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. We recognized an operating loss from
other businessess of $3.8 million in 1998 as compared to an operating loss of
$26.5 million in 1997. Operating results in 1998 include interactive revenue of
$7.6 million, consumer products revenue of $10.3 million and music soundtrack
and royalty revenue of $6.6 million, as compared to interactive revenue of $3.0
million, consumer products revenue of $8.7 million and music soundtrack and
royalty revenue of $4.1 million in 1997. Interactive revenues in 1998 were
principally derived from the release of the interactive game Wargames. There
were no significant new interactive games released in 1997. Additionally,
operating results in 1998 include the receipt of a $10.0 million payment
associated with our sale of a portion of our investment in a Japanese pay
television channel to a new partner. Expenses for other businesses in 1998
include interactive product and development costs of $16.5 million, as compared
to similar costs of $16.8 million in 1997. In addition, operating results for
other businesses in 1998 include aggregate losses of $12.5 million on our
equity investments, including our interest in MGM Gold (Asia), a satellite and
cable delivered channel based in Asia whose operations were terminated in April
1998, and our cable programming joint venture, MGM Networks Latin America, as
compared to $14.2 million for such start-up losses in 1997.
General and Administration Expenses. General and administration expenses
increased by $4.6 million, or five percent, to $92.2 million in 1998 as
compared to 1997, primarily due to increased legal and professional fees of
$2.4 million, executive severance charges (incurred prior to implementation of
the restructuring program noted below) of $2.6 million, and increased rent and
depreciation expense of $4.3 million. Additionally, in 1997 we benefited from
certain insurance recoveries of $5.7 million. There were no such recoveries in
1998. In 1997, long-term incentive and other bonuses were $15.5 million as
compared to $3.2 million in 1998. We also achieved certain cost savings in 1998
from a restructuring program initiated in the period (see "--Severance and
Related Costs").
Severance and Related Costs. We incurred severance and related costs of
$13.2 million in 1998, due to an overhead restructuring program initiated by
management in the third quarter of 1998.
Goodwill Amortization. Goodwill amortization increased by $3.1 million, or
27 percent, to $14.3 million in 1998 as compared to 1997 as a result of higher
goodwill due to the Orion acquisition.
Interest Expense, Net of Amounts Capitalized. Net interest expense increased
by $27.5 million, or 52 percent, to $80.6 million in 1998 as compared to 1997,
primarily due to higher debt levels associated with the financing of the Orion
acquisition, as well as borrowings for increased operating and production
activities.
Income Tax Provision. The income tax provision of $10.2 million in 1998 and
$10.3 million in 1997 primarily reflect foreign remittance taxes attributable
to international distribution revenues.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
In connection with the MGM acquisition, all of the assets and liabilities of
MGM Studios, including the library as it then existed, were revalued as of
October 10, 1996 under purchase accounting. The revaluation of the library was
based upon projected future discounted net cash flows from the underlying
assets, in accordance with GAAP. In addition, the ultimate revenue projections
for the library were revised accordingly, resulting in an amortization period
not to exceed 20 years. The combined effect of the library revaluation and the
revision of the ultimate revenue projections resulted in a reduction in the
amortization rate in the periods following the MGM acquisition. Furthermore, we
completed the Orion acquisition and have consolidated our results of operations
from the July 10, 1997 acquisition date. Consequently, operating results for
the year ended December 31, 1997 are not comparable to the corresponding 1996
period. For purposes of presentation and management's discussion and analysis
of the changes in financial condition and results of operations for the above
periods, the following table combines the January 1, 1996 to October 10, 1996
pre-MGM acquisition
S-27
<PAGE>
period with the October 11, 1996 to December 31, 1996 post-MGM acquisition
period for comparison to the year-ended December 31, 1997.
The following table sets forth our operating results for the year ended
December 31, 1997 and the periods from January 1, 1996 to October 10, 1996 and
from October 11, 1996 to December 31, 1996.
<TABLE>
<CAPTION>
Successor Successor Predecessor Combined
------------ ------------- ------------ ------------
Year Ended October 11 to January 1 to Year Ended
December 31, December 31, October 10, December 31,
1997 1996 1996 1996
------------ ------------- ------------ ------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Feature films.......... $ 699,219 $209,354 $ 815,460 $1,024,814
Television programs.... 114,200 14,413 82,315 96,728
Other.................. 17,883 4,919 14,931 19,850
--------- -------- --------- ----------
Total revenues....... 831,302 228,686 912,706 1,141,392
Operating income (loss):
Feature films.......... 65,509 37,140 (54,268) (17,128)
Television programs.... (7,201) (4,062) 11,412 7,350
Other.................. (26,545) 532 1,742 2,274
General and
administration
expenses.............. (87,644) (18,319) (60,056) (78,375)
Goodwill amortization.. (11,230) (1,717) (11,570) (13,287)
Provision for
impairment............ -- -- (563,829) (563,829)
--------- -------- --------- ----------
Operating income (loss).. (67,111) 13,574 (676,569) (662,995)
Interest expense, net of
amounts capitalized..... (53,105) (9,875) (71,375) (81,250)
Interest and other
income, net............. 2,447 813 3,179 3,992
--------- -------- --------- ----------
Income (loss) before
provision for income
taxes................... (117,769) 4,512 (744,765) (740,253)
Income tax provision..... (10,345) (4,346) (273) (4,619)
--------- -------- --------- ----------
Net income (loss)........ $(128,114) $ 166 $(745,038) $ (744,872)
========= ======== ========= ==========
</TABLE>
Feature Films. Feature film revenues decreased by $325.6 million, or 32
percent, to $699.2 million in the year ended December 31, 1997 compared to the
year ended December 31, 1996. Explanations for the decrease in revenues are
discussed in the following paragraphs.
Worldwide theatrical revenues decreased by $149.5 million, or 59 percent, to
$102.9 million in 1997 due to relatively limited worldwide theatrical
distribution activity following our sale on October 10, 1996. In 1997, we
released 15 new feature films domestically and two films internationally, as
compared to 13 films released domestically and eight films internationally in
1996. In 1997 we released Hoodlum, Red Corner and Tomorrow Never Dies. Tomorrow
Never Dies was initially released in December 1997 and earned a significant
portion of its theatrical revenues in 1998. Of the remaining 1997 releases,
seven films were produced by Orion and six of these were released in limited
distribution only. In 1996, we earned significantly higher worldwide theatrical
revenues from GoldenEye, The Birdcage, Leaving Las Vegas and Get Shorty.
Worldwide home video revenues decreased by $244.6 million, or 41 percent, to
$350.4 million in 1997, which included the domestic releases of Kingpin and
Fled in the rental market, as well as the releases of Larger Than Life, The
Birdcage and Warriors of Virtue in the sell-through markets. In 1996
significant home video revenues were realized from the releases of GoldenEye,
The Birdcage, Get Shorty, Leaving Las Vegas and Showgirls in the rental market,
as well as the release of All Dogs Go To Heaven 2 and promotions of the James
Bond and Rocky film series in the sell-through market.
Worldwide pay television revenues increased by $13.5 million, or 14 percent,
to $107.6 million in 1997, primarily due to the availability of The Birdcage,
Kingpin and Fled, among other films, in the domestic pay
S-28
<PAGE>
television market as well as significant international pay television license
fees recognized for GoldenEye, The Birdcage and Species. In 1996, we realized
domestic pay television revenues for GoldenEye, Get Shorty and Species, among
others, but earned significantly less in international pay television markets
than in 1997. Network television revenues increased $13.2 million to $14.7
million in 1997, which included license fees recognized on the films Stargate,
Blown Away, Getting Even With Dad and Speechless. Worldwide syndicated
television revenues increased $41.8 million, or 51 percent, to $123.6 million
in 1997 principally due to the acquisition of the Orion film library on July
10, 1997, which contributed syndication revenues of $22.7 million in the
period, as well as international syndication license fees recognized for Blown
Away, Getting Even With Dad and Rob Roy, among others.
Operating income from feature films was $65.5 million in 1997 as compared to
a loss of $17.1 million in 1996. The 1997 results reflect a higher operating
margin on the library, which was revalued pursuant to purchase accounting in
connection with the MGM acquisition and yielded lower amortization rates than
in 1996. Additionally, there were feature film write-downs of $38.1 million in
1997 with respect to certain theatrical releases in that period as compared to
$82.5 million in write-downs on certain theatrical releases in 1996.
Television Programming. Television programming revenues increased by $17.5
million, or 18 percent, to $114.2 million in 1997 as compared to 1996.
Worldwide pay television revenues increased by $6.4 million, or 25 percent, to
$32.3 million in 1997 due to the delivery of the new series Stargate SG-1 and
the television movie Twelve Angry Men. Worldwide syndicated television revenues
increased by $4.0 million, or 7 percent, to $60.9 million in 1997 due to
additional episodes of The Outer Limits and Poltergeist: The Legacy in domestic
syndication, and the release of the new series Fame LA. Worldwide home video
revenues with respect to television programming increased in 1997 by $4.9
million, or 40 percent, to $16.9 million due to the release of Babes in Toyland
in the domestic home video marketplace, partially offset by generally reduced
video revenues from other television movies in the period. The remaining
revenue increase in 1997 of $2.2 million principally related to higher network
and licensing income.
We recognized an operating loss from television programming of $7.2 million
in 1997 as compared to operating income of $7.4 million in 1996. Amortization
expense on current series increased in 1997 due to loss reserves recognized on
The Bradshaw Difference, which has been canceled, and on the new series Fame
LA.
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. We recognized an operating loss from
other businesses of $26.5 million in 1997 as compared to operating income of
$2.3 million in 1996. Operating results in 1997 include interactive revenues of
$3.0 million, consumer products revenue of $8.7 million and music soundtrack
and royalty revenue of $4.1 million, as compared to interactive revenue of $1.8
million, consumer products revenue of $8.3 million and music soundtrack and
royalty revenue of $5.6 million in 1996. The 1997 results included interactive
product and development costs of $16.8 million, as compared to interactive
costs of only $9.1 million in 1996. In addition, the 1997 results include
start-up losses of $11.8 million on the company's investment in MGM Gold
(Asia), a satellite and cable delivered channel based in Asia whose operations
were terminated in April 1998, and $2.4 million of start-up costs associated
with our cable programming joint venture, MGM Networks Latin America. There
were no such start-up losses or costs in 1996.
General and Administration Expenses. General and administration expenses
increased by $9.3 million, or 12 percent, to $87.6 million in 1997 as compared
to 1996, primarily as a result of the Orion acquisition, which added overhead
charges of $6.7 million, including non-recurring overhead of approximately $4.0
million, from the July 10, 1997 acquisition date, and the accrual of long-term
management incentive and other bonuses of $15.5 million. In 1996 the company
accrued long-term management incentive bonuses of $12.6 million.
Goodwill Amortization. Goodwill amortization decreased by $2.1 million, or
15 percent, to $11.2 million in 1997 compared to 1996 due to the revaluation of
our assets and liabilities pursuant to purchase accounting in
S-29
<PAGE>
connection with the MGM acquisition on October 10, 1996, which resulted in
lower goodwill than previously carried in the balance sheet.
Provision for Impairment. In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," MGM Studios, the
predecessor company, recorded a charge of $563.8 million during 1996 to write-
off certain intangible assets in connection with the disposition by Consortium
de Realisation of its ownership interest, including $404.4 million to write-off
its remaining investment in the film distribution organization and a charge of
$159.4 million to reduce its investment in goodwill to net realizable value.
Interest Expense, Net of Amounts Capitalized. Net interest expense was $53.1
million in 1997 as compared to $81.3 million in 1996. Net interest expense
decreased in 1997 due to the substantial equity investments we received in
connection with the MGM acquisition, our initial public offering and the
Tracinda purchase, and correspondingly lower debt levels, as well as increased
capitalization associated with increased film production in the period.
Income Tax Provision. The income tax provision of $10.3 million in 1997
reflects primarily foreign remittance taxes attributable to international
distribution revenues. The income tax provision of $4.6 million in 1996
reflects foreign remittance taxes attributable to international distribution
revenues, net of the reversal of certain tax reserves of approximately $14.0
million no longer required, and tax expense on net profits in the post-MGM
acquisition period. We do not anticipate any further substantial reversals of
tax reserves.
EBITDA
While management considers earnings before interest, taxes, depreciation and
non-film amortization 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 our financial
performance. Other significant uses of cash flows are required before cash will
be available to us, including debt service, taxes and cash expenditures for
various long-term assets. Our calculation of EBITDA may be different from the
calculation used by other companies and, therefore, comparability may be
limited.
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The following table sets forth EBITDA for the six months ended June 30, 1999
and 1998, the years ended December 31, 1998 and 1997, the period from October
11, 1996 to December 31, 1996, and the period from January 1, 1996 to October
10, 1996:
<TABLE>
<CAPTION>
Successor Predecessor
---------------------------------------------------------- ------------
Six Months Ended
June 30, Year Ended October 11 to January 1 to
------------------- December 31, December 31, October 10,
1999 1998 1998 1997 1996 1996
--------- -------- ---------- --------- -------------- ------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Feature films.................................... $ 348,008 $471,297 $1,005,747 $ 699,219 $209,354 $ 815,460
Television programs.............................. 93,018 105,839 197,759 114,200 14,413 82,315
Other............................................ 29,891 20,525 37,217 17,883 4,919 14,931
--------- -------- ---------- --------- -------- ---------
Total revenues................................. 470,917 597,661 1,240,723 831,302 228,686 912,706
EBITDA:
Feature films.................................... (177,273) 18,103 39,748 65,509 37,140 (45,032)
Television programs.............................. 8,053 9,417 12,885 (7,201) (4,062) 11,412
Other............................................ 13,368 (1,639) (3,758) (26,545) 532 1,742
General and administration expenses.............. (44,823) (46,729) (83,680) (80,861) (16,901) (55,411)
Severance and related costs...................... (76,158) -- (13,182) -- -- --
Contract termination fee......................... (225,000) -- -- -- -- --
--------- -------- ---------- --------- -------- ---------
EBITDA........................................... (501,833) (20,848) (47,987) (49,098) 16,709 (87,289)
Depreciation and non-film amortization............. (11,792) (10,844) (22,853) (18,013) (3,135) (25,451)
Provision for impairment........................... -- -- -- -- -- (563,829)
--------- -------- ---------- --------- -------- ---------
Operating income (loss)............................ (513,625) (31,692) (70,840) (67,111) 13,574 (676,569)
Interest expense, net of amounts capitalized....... (41,238) (38,428) (80,611) (53,105) (9,875) (71,375)
Interest and other income, net..................... 2,518 1,745 3,984 2,447 813 3,179
--------- -------- ---------- --------- -------- ---------
Income (loss) before provision for income taxes.... (552,345) (68,375) (147,467) (117,769) 4,512 (744,765)
Income tax provision............................... (4,082) (5,262) (10,181) (10,345) (4,346) (273)
--------- -------- ---------- --------- -------- ---------
Net income (loss).................................. $(556,427) $(73,637) $ (157,648) $(128,114) $ 166 $(745,038)
========= ======== ========== ========= ======== =========
</TABLE>
Liquidity and Capital Resources
General. Our operations are capital intensive. In recent years we have
funded our operations primarily from (a) the sale of equity securities, (b)
bank borrowings and (c) internally generated funds. During the first six months
of 1999, net cash provided by operating activities was $92.2 million; net cash
used in investing activities (primarily the purchase of the PolyGram library
and additions to film and television costs) was $610.4 million; and net cash
provided by financing activities (primarily bank borrowings) was $473.3
million.
Sales of Equity Securities. Sales of equity securities include proceeds from
our initial public offering and Tracinda's concurrent purchase of our common
stock, which were completed in November 1997, and the 1998 rights offering,
which was completed in November 1998.
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Our cash flow in 1998 was adversely affected by, and we determined to
undertake the 1998 rights offering as a result of, (a) lower than expected
performance of our theatrical releases in 1998, other than the releases
Tomorrow Never Dies and The Man In The Iron Mask, (b) more substantial
investments in new television programming than we previously anticipated, (c)
cash from certain revenue sources being realized over a longer period than
originally anticipated, and (d) other factors, including accelerated motion
picture production and increased marketing and distribution expenses. We
consummated the 1998 rights offering in November 1998 by issuing a total of
84,848,485 shares of our common stock for $8.25 per share, and thereby raising
net proceeds of $696.5 million. The proceeds were used to reduce bank
borrowings.
Bank Borrowings.
Bridge Loan Facility. On May 14, 1999, we entered into an agreement with
one of our principal lenders that provides us with a $250.0 million bridge
loan facility. As of September 1, 1999, we had borrowed the entire $250.0
million under this facility in part to fund the payment of the second
installment due to Warner Home Video of $112.5 million, plus interest. We used
the remaining balance to fund operations. Loans under this facility bear
interest at 1.75 percent over the Adjusted LIBOR rate (approximately 7.1
percent at September 1, 1999). Interest is payable quarterly in arrears and
the principal is due on the earlier of any debt or equity issuance by us or
maturity, July 15, 2006. We will use a portion of the net proceeds of this
offering to repay all amounts outstanding under, and terminate, the bridge
loan facility.
Credit Facility. Our credit facility is a $1.3 billion syndicated facility
that consists of (a) a six year $600.0 million revolving credit facility, (b)
a $400.0 million seven and one-half year term loan, and (c) a $300.0 million
eight and one-half year term loan. As of September 9, 1999, $241.0 million was
available under our credit facility, which also contains provisions allowing,
under certain circumstances, for an additional $200.0 million tranche.
Currently, the revolving facility and $400.0 million term loan bear
interest at 2.50 percent over the Adjusted LIBOR rate, as defined therein
(approximately 8.0 percent at September 1, 1999), and the $300.0 million term
loan bears interest at 2.75 percent over the Adjusted LIBOR rate
(approximately 8.3 percent at September 1, 1999). We have entered into three
year fixed interest rate swap contracts in relation to a portion of our credit
facility for a notional value of $800.0 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 our principal
credit facility commences with $33.0 million in 2001, $73.0 million in 2002,
$103.0 million in 2003, $103.0 million in 2004, and $103.0 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.
Our credit facility contains various covenants, including limitations on
indebtedness, dividends and capital expenditures, and maintenance of certain
financial ratios. In connection with the $225.0 million charge resulting from
the early termination of the Warner Home Video agreement, our credit facility
was amended, effective April 30, 1999. As of June 30, 1999, we were in
compliance with all applicable covenants. We cannot assure you that we will
remain in compliance with such covenants or other conditions under our credit
facility in the future. We expect to use a portion of the proceeds of this
offering to repay all amounts outstanding under the revolving facility. We
anticipate substantial continued borrowing under our credit facility.
Cash Provided by Operating Activities.
In the first six months of 1999, cash provided by operating activities was
$92.2 million compared to $247.2 million in the first six months of 1998.
In March 1999, in consideration for the early termination of the Warner
Home Video agreement, we agreed to pay Warner Home Video $225.0 million,
$112.5 million of which was paid on March 12, 1999 and the remainder of which,
plus interest, was paid on September 1, 1999. We recorded a pre-tax contract
termination charge in the 1999 period of $225.0 million for costs in
connection with terminating the Warner Home Video agreement.
In addition, the slate of films we released in the first six months of 1999
performed below expectations.
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<PAGE>
Cash Used in Investing Activities.
For the first six months of 1999, cash used in investing activities was
$610.4 million. During the first six months of 1999, we incurred $367.5 million
in film and television costs. In January 1999, we acquired the PolyGram
library, containing over 1,300 feature films, for $235.0 million, plus
acquisition related costs of approximately $1.2 million. The purchase was
funded by borrowings under the revolving facility and available cash.
Anticipated Needs.
Our 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, we may wish to continue to make
investments in new distribution channels to further exploit our motion picture
and television library. We plan to continue to evaluate the level of such
investments in the context of the capital available to us and changing market
conditions.
We expect to incur approximately $11.0 million of additional costs in 1999
in connection with the integration of the PolyGram library and our transition
to home video self-distribution in the U.S. and Canadian markets. We do not
expect our obligations for property and equipment expenditures, including the
purchase of computer systems and equipment and other improvements, to exceed
$15.0 million per year.
In connection with our termination of the Warner Home Video agreement, we
anticipate that the worldwide home video distribution rights we reconveyed to
Turner will decrease our cash flow by approximately $10.0 million per year
through June 2001.
We are obligated to fund 50 percent of the expenses of MGM Networks Latin
America up to a maximum of approximately $24.0 million. We have funded
approximately $17.0 million under such obligation as of September 1, 1999 and
expect to fund an additional $1.5 million in 1999.
In June 1999, in association with a change in our senior management and a
corresponding review of our operations, we incurred certain restructuring and
other charges aggregating $225.2 million, of which $140.0 million was film-
performance related. As a result of the change in senior management, we did not
commence production as anticipated under our business plan. Therefore, we
expect to release a reduced number of major films in the first six months of
2000, which may adversely impact cash flows and results of operations at least
through 2001. However, as opportunites arise, we will pursue the purchase of
feature films from third parties that we could release during this period.
As a result of these recent and planned capital expenditures and cash we
will require to meet our current business plan, we determined that cash flow
from operations and the amounts available under the existing tranches of our
credit facility may not be adequate to meet our obligations and commitments. We
believe that the proceeds from this offering, together with amounts available
under our revolving credit facility and cash flow from operations will be
adequate for us to conduct our operations in accordance with our business plan
for at least the next twelve months. This belief is based in part on the
assumption that our future releases will perform as planned. In addition to the
foregoing sources of liquidity, we are currently considering various film
financing alternatives.
If necessary in order to manage our cash needs, we may also delay or alter
production or release schedules or seek to reduce our aggregate investment in
new film and television production costs. We cannot assure you that any such
steps would be adequate or timely, or that we could reach acceptable
arrangements with third parties if necessary. In addition, although these steps
would improve our short-term cash flow and, in the case of partnering, reduce
our exposure should a motion picture perform below expectations, such steps
could adversely affect long-term cash flow and results of operations in
subsequent periods.
We intend to continue to pursue our goal of becoming an integrated global
entertainment content company. In connection with our pursuit of this goal, we
may consider various strategic alternatives, such as
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<PAGE>
business combinations with companies with strengths complementary to ours,
other acquisitions and joint ventures, as opportunities arise. The nature, size
and structure of any such transaction could require us to seek additional
financing.
Impact of 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, we have completed the Year 2000 conversion with
respect to all of our computer systems and applications. We have completed
remediation and testing of our computer systems and applications with the
exception of certain systems, which are scheduled to be fully replaced by
September 30, 1999. While we have completed all required system remediation and
testing for the Year 2000, we will continue our testing efforts and make
appropriate remediations as necessary through January 1, 2000.
Because of the substantial progress made by us towards our Year 2000
conversion, we do not anticipate that any additional significant changes will
be required or that the Year 2000 issue will pose significant operational
problems for us. 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 us to address and may have a material impact on our financial
condition and results of operations.
In addition, we have had communications with certain of our significant
suppliers, distributors, financial institutions, lessors and others with which
we do business to evaluate their Year 2000 compliance plans and state of
readiness and to determine the extent to which our systems may be affected by
the failure of others to remediate their own Year 2000 issues. We have also
distributed a Year 2000 assessment form to all critical vendors and certain
other parties, in order to provide us with further information as to their Year
2000 conversion progress. To date, we have received feedback from certain but
not all such parties, and have 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 our financial condition and results of operations.
Costs to Address the Year 2000 Issue. To date, we estimate that we have
spent approximately $1.0 million to address the Year 2000 issue, with the
majority of the work being performed by our employees. The aggregate cost to
complete the Year 2000 conversion is estimated to be approximately
$1.1 million. We intend to fund such costs from our operations and funds
borrowed under our principal credit facility. We believe such costs will not
have a material adverse effect on our liquidity or financial condition.
However, as we progress with our Year 2000 conversion and implements any
necessary changes to our systems and applications, certain additional costs may
be identified. There can be no assurance that such additional costs will not
have a material adverse effect on our financial condition and results of
operations.
Risks of Year 2000 Issue. To date, we have not identified any system or
application 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 we progress with our Year 2000 testing, we may identify systems and
applications which do present a material risk of Year 2000 disruption. Such
disruption may include, among other things, the inability to process
transactions or information, record and access data relating to the
availability of titles in our library for licensing and distribution, send
invoices or engage in similar normal business activities. Our failure to
identify systems and applications which require Year 2000 conversion that are
critical to our operations or
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<PAGE>
our failure or others with which we do business to become Year 2000 ready in a
timely manner could have a material adverse effect on our financial condition
and results of operations.
Contingency Plans. While our Year 2000 conversion is expected to be
completed prior to any potential disruption to our business, we acknowledge the
uncertainties involved in preparing its systems for the Year 2000. As such, we
have developed a comprehensive Year 2000 specific contingency plan that, when
used in combination with our 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 our systems or applications. As part
of its Year 2000 contingency effort, information received from external sources
is examined for date integrity before being brought into our internal systems.
If we determine that our business or a segment thereof is at material risk of
disruption due to the Year 2000 issue, we will prepare to implement all or part
of our contingency plan.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion, the date set to complete such conversion and
possible risks associated with the Year 2000 issue are based on our current
estimates and are subject to various uncertainties that could cause the actual
results to differ materially from our expectations. Such uncertainties include,
among others, our success in identifying systems and applications that are not
Year 2000 compliant, the nature and amount of programming required to upgrade
or replace each of the affected systems and applications, the availability of
qualified personnel, consultants and other resources, and the success of the
Year 2000 conversion efforts of others.
Quantitative and Qualitative Disclosures about Market Risk
We have only limited involvement in derivative financial instruments and do
not use them for trading purposes. Certain amounts borrowed under the credit
facility are at variable interest rates and we are thus subject to market risk
resulting from interest rate fluctuations. We enter into interest rate swaps in
part to alter interest rate exposures. Interest rate swaps allow us to raise
long-term borrowings at floating rates and effectively swap them into fixed
rates that are lower than those available to us if fixed-rate borrowings were
made directly. Under interest rate swaps, we agree 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 our 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 our revenues are denominated, and we
incur certain operating and production costs, in foreign currencies, we are
subject to market risks resulting from fluctuations in foreign currency
exchange rates. In certain instances, we enter 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. We had no significant foreign currency exchange
contracts outstanding at June 30, 1999.
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<PAGE>
BUSINESS
General
Metro-Goldwyn-Mayer Inc., a Delaware corporation, is a premier global
entertainment content company. We develop, produce and distribute theatrical
motion pictures and television programs, and we intend to create and own
branded cable and satellite programming channels. Our principal subsidiaries
are Metro-Goldwyn-Mayer Studios Inc., United Artists Corporation, United
Artists Films Inc. and Orion Pictures Corporation. We are one of only seven
major film and television studios worldwide. Our library contains over 4,100
theatrically released feature film titles and 8,900 television episodes and is
the largest collection of post-1948 feature films in the world. Films in our
library have won nearly 200 Academy Awards, including Best Picture Awards for
Annie Hall, The Apartment, The Best Years of Our Lives, Dances With Wolves,
Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon, Rain Man,
Rocky, Silence of the Lambs, Tom Jones and West Side Story. Our library also
includes 20 titles in the James Bond film franchise, five titles in the Rocky
film franchise and nine titles in the Pink Panther film franchise. We are
currently celebrating our 75th anniversary.
Background of the Company
Metro-Goldwyn-Mayer ("Old MGM") was established in 1924 through the merger
of Metro Pictures, Goldwyn Pictures and Louis B. Mayer Productions. A
corporation wholly owned by Kirk Kerkorian became Old MGM's controlling
shareholder in 1969. In 1981, Old MGM acquired UA, which had been formed in
1919 when Mary Pickford, Douglas Fairbanks, D.W. Griffith and Charlie Chaplin
joined forces to release their own motion pictures, as well as motion pictures
made by independent producers. In 1986, Turner Broadcasting System, Inc.
acquired the businesses of Old MGM, and as part of that transaction, Tracinda
Corporation and certain of the former stockholders of Old MGM concurrently
acquired United Artists Corporation, including the UA library, from Old MGM.
Shortly thereafter, UA reacquired the Metro-Goldwyn-Mayer name and logo and
certain other assets from Turner. UA was then renamed MGM/UA Communications Co.
Turner retained the film library created through the pre-1986 operations of Old
MGM.
In November 1990, MGM/UA was acquired by Pathe Communications Corporation
and was renamed MGM-Pathe Communications Co., the predecessor to MGM Studios.
In May 1992, Credit Lyonnais Bank Nederland N.V., Pathe's principal lender,
foreclosed on substantially all of the stock of MGM-Pathe, following default by
Pathe, and such stock was ultimately transferred to Consortium de Realisation,
a wholly owned subsidiary of Credit Lyonnais S. A.
In July 1993, Frank G. Mancuso was appointed as Chairman and Chief Executive
Officer of MGM Studios. In January 1996, Consortium de Realisation announced
its intention to sell MGM Studios.
Tracinda, senior management of MGM Studios and Seven Network Limited, a
company formed under the laws of Australia, formed MGM to acquire all of the
outstanding capital stock of MGM Studios and its subsidiaries, including UA, in
October 1996 for an aggregate consideration of $1.3 billion. Tracinda is
wholly-owned by Mr. Kerkorian.
In July 1997, we acquired all of the outstanding capital stock of Orion and
its subsidiaries, including the entity formerly known as The Samuel Goldwyn
Company and now known as Orion Film Classics Company Films, from Metromedia
International Group, Inc. In connection with the Orion acquisition, we obtained
the film and television libraries of the Orion companies consisting of
approximately 1,900 film titles and 3,000 television episodes. The Landmark
Theatres owned by the Orion companies were excluded from the Orion acquisition.
In November 1997, we completed an initial public offering, whereby we issued
and sold 9,000,000 new shares of common stock, $.01 par value per share, at a
price per share of $20, less an underwriting discount, for net proceeds (after
expenses of the initial public offering) of $165 million. Concurrently with the
consummation of the initial public offering, Tracinda purchased directly from
us, at a purchase price of $18.85 per share (equal to the per share price to
the public in the initial public offering, less the underwriting discount),
3,978,780 shares of the common stock for an aggregate purchase price of $75
million.
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<PAGE>
On September 1, 1998, Tracinda and a Delaware corporation that is
principally owned by Tracinda, which we refer to collectively as the "Tracinda
Group," purchased 16,208,463 shares of the common stock from Seven Network,
representing all of our capital stock held by Seven Network, for a price per
share of $24 and an aggregate purchase price of $389 million.
In November 1998, we completed a rights offering, whereby we issued and sold
84,848,485 new shares of the common stock at a subscription price of $8.25 per
share for net proceeds (after expenses of the rights offering) of $696.5
million. After giving effect to the completion of the rights offering and the
exercise of the subscription rights distributed in connection therewith, the
Tracinda Group continued to beneficially own approximately 89.5 percent of the
outstanding common stock.
In January 1999, we acquired from PolyGram N.V. and its subsidiaries certain
film libraries and film-related rights for consideration of $235 million. The
PolyGram library contains over 1,300 feature films and are comprised of (a) the
Epic library, which consists of approximately 1,000 film titles acquired
between 1992 and 1997 by Credit Lyonnais Bank Nederland and Consortium de
Realisation from various filmed entertainment companies, (b) the library of
films released by PolyGram before March 31, 1996 and (c) the Island/Atlantic
and Vision/Palace libraries, which were acquired by PolyGram.
We intend to continue to pursue our goal of becoming an integrated global
entertainment content company. In connection with our pursuit of this goal, we
may consider various strategic alternatives, such as business combinations with
companies with strengths complentary to ours, other acquisitions and joint
ventures, as opportunities arise.
The Motion Picture and Television Industry
Motion Pictures--General. The motion picture industry consists of two
principal activities: production and distribution. Production involves the
development, financing and production of feature-length motion pictures.
Distribution involves the promotion and exploitation of motion pictures
throughout the world in a variety of media, including theatrical exhibition,
home video, television and other ancillary markets. The U.S. motion picture
industry can be divided into major studios and independent companies, with the
major studios dominating the industry in the number of theatrical releases. In
addition to us (including Metro-Goldwyn-Mayer-Pictures Inc., United Artists
Films and Orion), the major studios as defined by the Motion Picture
Association of America are The Walt Disney Company (including Buena Vista,
Touchstone and Miramax), Paramount Pictures Corporation, Sony Pictures
Entertainment, Inc. (including Columbia Pictures Industries, Inc.), Twentieth
Century Fox Film Corp., Universal Studios, Inc., and Warner Bros. (including
Turner, New Line Cinema and Castle Rock Entertainment). The major studios are
typically large diversified corporations that have strong relationships with
creative talent, exhibitors and others involved in the entertainment industry
and have global film production and distribution capabilities.
Historically, the major studios have produced and distributed the majority
of high grossing theatrical motion pictures released annually in the United
States. Over the past decade, the number of feature-length motion pictures
released by the major studios has increased dramatically from 157 in 1989 (34.3
percent of the total) to 221 in 1998 (45.1 percent of the total). In addition,
most of the studios have created or accumulated substantial and valuable motion
picture libraries that generate significant revenues. These revenues can
provide the major studios with a stable source of earnings that offsets the
variations in the financial performance of their motion picture releases and
other aspects of their motion picture operations.
The independent companies generally have more limited production and
distribution capabilities than do the major studios. While certain independent
companies may produce as many films as a major studio in any year, independent
motion pictures typically have lower negative costs and are not as widely
released as motion pictures produced and distributed by the major studios.
Additionally, the independent companies may have limited or no internal
distribution organizations and may rely on the major studios for distribution
and financing.
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Motion picture production and distribution is highly speculative and
inherently risky. There can be no assurance of the economic success of any
motion picture since the revenues derived from the production and distribution
of a motion picture (which do not necessarily bear a direct correlation to the
production or distribution costs incurred) depend primarily upon its acceptance
by the public, which cannot be predicted. The commercial success of a motion
picture also depends upon the quality and acceptance of competing films
released into the marketplace at or near the same time, the availability of
alternative forms of entertainment and leisure time activities, general
economic conditions and other tangible and intangible factors, all of which can
change and cannot be predicted with certainty. Further, the theatrical success
of a motion picture is generally a key factor in generating revenues from other
distribution channels. There is a substantial risk that some or all of our
motion pictures will not be commercially successful, resulting in costs not
being recouped or anticipated profits not being realized. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Motion Picture Production. The production of a motion picture begins with
the screenplay adaptation of a popular novel or other literary work acquired by
the producer of the motion picture or the development of an original screenplay
based upon a story line or scenario conceived or acquired by the producer. In
the development phase, the producer may seek production financing and tentative
commitments from a director, the principal cast members and other creative
personnel. A proposed production schedule and budget are prepared. At the end
of this phase, the decision is made whether or not to "greenlight," or approve
for production, the motion picture.
After greenlighting, pre-production of the motion picture begins. In this
phase, the producer engages creative personnel to the extent not previously
committed, finalizes the filming schedule and production budget, obtains
insurance or self insures and secures completion guaranties, if necessary.
Moreover, the producer establishes filming locations, secures any necessary
studio facilities and stages and prepares for the start of actual filming.
Principal photography, or the actual filming of the screenplay, generally
extends from seven to 16 weeks, depending upon such factors as budget,
location, weather and complications inherent in the screenplay. Following
completion of principal photography, the motion picture enters what is
typically referred to as post-production. In this phase, the motion picture is
edited, opticals, dialogue, music and any special effects are added, and voice,
effects and music soundtracks and pictures are synchronized. This results in
the production of the negative from which release prints of the motion picture
are made. Major studios and independent film companies hire editors, composers
and special effects technicians on the basis of their suitability for a
particular picture.
The production and marketing of theatrical motion pictures requires
substantial capital. The costs of producing and marketing motion pictures have
increased substantially in recent years. These costs may continue to increase
in the future, thereby increasing the costs to the company of its motion
pictures. Production costs and marketing costs are rising at a faster rate than
increases in either domestic admissions to movie theaters or admission ticket
prices, leaving the company and all producers of motion pictures more dependent
on other media, such as home video and television, and foreign markets.
Motion Picture Distribution. The distribution of a motion picture involves
the licensing of the picture for distribution or exploitation in various
markets, both domestically and internationally, pursuant to a release pattern.
These markets include theatrical exhibition, non-theatrical exhibition (which
includes airlines, hotels and armed forces facilities), home video (including
rental and sell-through), presentation on television (including pay-per-view,
pay, network, syndication or basic cable) and marketing of the other rights in
the picture and underlying literary property, which may include publishing,
merchandising and soundtracks. The domestic and international markets generally
follow the same release pattern, with the starting date of the release in the
international market varying from being concurrent with the domestic theatrical
release to being as long as nine months afterwards. A motion picture typically
is distributed by a major studio or one or more
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distributors that acquire rights from a studio or other producer in one or more
markets or media or a combination of the foregoing.
Both major studios and independent film companies often acquire pictures for
distribution through a customary industry arrangement known as a "negative
pickup," under which the studio or independent film company agrees before
commencement of or during production to acquire from a production company all
rights to a film upon completion of production, and also acquire completed
films, as well as all associated obligations.
Television Production. The production of television series programming
involves the development of a format based on a creative concept or literary
property into a television script, the hiring of talent, the filming or taping
of the program and the technical and post-production work necessary to produce
a finished program. Television producers may originate projects internally or
acquire them from others. If a concept is deemed suitable for development, the
studio or other producer or network typically commissions and pays for a
script. Once a script is ordered, one or more license agreements are negotiated
with the potential broadcasters of such program. A pilot episode usually is
ordered or commissioned prior to the determination of whether a series will be
produced.
Television production can generally be divided into two distinct businesses:
network production (i.e., television shows for ABC, CBS, NBC, Fox, UPN and The
WB) and non-network production (i.e., made-for-cable and first-run
syndication). The economics of the two types of television production are
different. In network production, a network generally orders approximately six
to 13 initial episodes of each new series for a license fee equal to a
percentage of the program's cost. The balance of the production cost can only
be recouped through international sales and syndication if a series is
successful and generally remains unrecouped for at least four years. In the
non-network production or first-run syndication business, a producer seeking to
launch a new series commits to produce a minimum number of episodes if the
producer can "clear" the series by selling to individual television stations in
sufficient markets throughout the country (generally comprising 70 percent of
U.S. television households). Once produced, the episodes are immediately
available for licensing to international broadcasters as well. This approach
generally involves a lower production cost risk and earlier return on
investment than the network production business; however, non-network
programming also generally provides a lower total return on investment than
successful network production. See "--Production--Television Production."
Television Distribution. The U.S. television market is served by network
affiliated stations, independent stations and cable systems, although the
number of independent stations has decreased as many formerly independent
stations have become affiliated with new networks in recent years. During
"prime time" hours, network affiliates primarily broadcast programming produced
for the network. In non-prime time, network affiliates telecast network
programming, off-network programming, first-run programming (programming
produced for distribution on a syndicated basis) and programming produced by
the local stations themselves. Independent television stations and cable
networks, during both prime and non-prime time, produce their own programs and
telecast off-network programs or first-run programs acquired from independent
producers or syndicators. Syndicators generally are companies that sell to
independent television stations and network affiliates programming produced or
acquired by the syndicator for distribution.
Film and Television Library
With the completion of the PolyGram library acquisition in January 1999, we
currently own or hold certain distribution rights to over 4,100 theatrically
released motion pictures. Our library also contains the largest collection of
feature films produced since 1948. In 1948, certain major studios negotiated
consent decrees requiring that the studios separate their exhibition businesses
from their production and distribution businesses and mandating the divestiture
of certain theater holdings. This is generally believed to have triggered
greater competition among the studios and an increased emphasis on the
potential for commercial success in the development and production stages,
resulting in a greater focus on the content and quality of the
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motion pictures produced and distributed by the studios. We believe that films
produced and developed after 1948 generally are more valuable than films that
were previously produced and developed.
In addition to being the largest modern motion picture library in the world,
our library is also one of the most critically acclaimed libraries in the
motion picture industry, representing one of the largest collections of Academy
Award-winning films. The motion pictures in our library have won nearly 200
Academy Awards. Fourteen motion pictures in our library have won the Academy
Award for Best Picture: Annie Hall, The Apartment, The Best Years of Our Lives,
Dances With Wolves, Hamlet, In the Heat of the Night, Marty, Midnight Cowboy,
Platoon, Rain Man, Rocky, Silence of the Lambs, Tom Jones and West Side Story.
Our library also includes over 8,900 episodes from television series
previously broadcast on prime-time network television, cable or in first-run
syndication, including episodes of The Addams Family, American Gladiators, Bat
Masterson, Cagney & Lacey, Fame, Green Acres, Highway Patrol, In the Heat of
the Night, Mr. Ed, The Patty Duke Show, Pink Panther, Sea Hunt and
thirtysomething. The television series in our library have won, among others,
59 Emmy awards and nine Golden Globe awards.
Our library includes titles from a wide range of genres, including dramas,
comedies, action-adventure movies, westerns and suspense thrillers. We believe
that our library's diversity, quality and extensive size provides us with
substantial competitive advantages. We seek to continue to build upon these
advantages by producing and acquiring new motion pictures across a variety of
genres and budget ranges to update and enhance our library. See "--Production--
Motion Picture Production."
We will continue to implement the strategy of developing new projects from
existing library assets. Our library represents a readily-available, "market
tested" source of development ideas. For example, we have had recent success
with the remake of The Thomas Crown Affair and in 1995 had success with The
Birdcage, a remake of La Cage aux Folles. Furthermore, we have successfully
expanded the valuable film franchises within our library, most notably the
James Bond franchise, with the commercial success of GoldenEye in 1995 and
Tomorrow Never Dies in 1997. Tomorrow Never Dies has earned greater domestic
box office receipts than any other film in the James Bond film franchise. We
expect to release the latest James Bond film, The World Is Not Enough, in
November 1999. Additionally, we have successfully developed television series
based on library motion pictures such as: Poltergeist: The Legacy based on
Poltergeist; Stargate SG-1 based on Stargate; and All Dogs Go to Heaven, based
on the movie of the same name. We also produced a remake of Twelve Angry Men
and Inherit the Wind as made-for-television movies for Showtime Networks Inc.
We, together with Danjaq LLC, are the sole owner of all of the James Bond
motion pictures. Eighteen James Bond motion pictures in our library, in
addition to the upcoming release The World Is Not Enough, are produced and
distributed pursuant to a series of agreements with Danjaq. The motion pictures
are produced by Danjaq, and we have the right to approve all key elements of
the pictures, such as the selection of the director and the leading actors. The
copyright in each of the motion pictures is owned jointly by MGM and Danjaq.
Generally, we have the right to distribute each of the pictures in all media
worldwide in perpetuity or for a term of 15 years. Where our distribution
rights are not perpetual, the rights revert to joint control by MGM and Danjaq
after expiration of the distribution term. Danjaq owns any television series
created that is based on the James Bond motion pictures, and we have the
distribution rights to such series. Danjaq controls the merchandising rights
with respect to the pictures, and we are entitled to receive a portion of the
revenues from all merchandising licenses. Additionally, we control all the
marketing rights and the music from The Living Daylights (1987) and all
subsequent pictures. All other rights relating to the pictures are controlled
jointly by MGM and Danjaq. The agreements contain certain restrictions on the
sale or licensing by the company of any of its rights in the pictures.
Additionally, two James Bond motion pictures had previously been produced by
other parties. In 1967, Columbia and Famous Artists Productions Ltd. (a
subsidiary of the company) produced Casino Royale pursuant to an earlier
license from Ian Fleming and in 1983, Warner and Taliafilm, Inc. produced Never
Say Never
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Again. In 1998, we acquired the rights to Never Say Never Again and, as more
fully set forth below, MGM and Danjaq recently acquired the rights to Casino
Royale. With these two acquisitions, our library now contains every James Bond
motion picture ever made, and we are the only studio to hold such rights.
On November 17, 1997, MGM and Danjaq filed an action in federal court in Los
Angeles against Sony Corporation, Sony Pictures, Columbia, John Calley, Kevin
McClory and Spectre Associates, Inc. relating to a press release issued by Sony
Pictures announcing plans by its Columbia Pictures division to produce a series
of new James Bond feature films. On July 29, 1998, the court preliminarily
enjoined Sony Pictures, Columbia and the other defendants from the production,
preparation, distribution, advertising or other exploitation in the United
States of a James Bond motion picture in any medium and from using the "James
Bond" and the "James Bond 007" trademarks in the United States. On March 29,
1999, MGM and Danjaq entered into a settlement agreement with Sony Pictures,
Columbia and Mr. Calley that provided for a payment by the Sony parties and an
agreement by the Sony parties which effectively makes permanent the court's
July 1998 preliminary injunction. Specifically, the Sony Parties agreed (i) not
to make or distribute any James Bond motion pictures in the United States based
on Thunderball or any other purported rights deriving from Mr. McClory, and
(ii) not to utilize the "James Bond" and the "James Bond 007" trademarks in the
United States. Mr. McClory and Spectre did not participate in this settlement
agreement. Under the terms of a separate agreement entered into on March 29,
1999, MGM and Danjaq acquired from Columbia all of Columbia's rights to Casino
Royale and the Sony parties agreed to broaden the contractual prohibition
regarding making or distributing James Bond films and the James Bond
trademarks, as described in the prior paragraph, throughout the world. Mr.
McClory did not participate in the settlement and has retained certain
counterclaims against MGM and Danjaq for copyright infringement, and the court
has set a trial date of October 26, 1999.
We seek aggressively to market and distribute titles in our film library in
existing pay and free television, home video and other markets worldwide. We
believe that the size of our library allows us to minimize the over-
exploitation of any title and therefore better preserve the ongoing value of
our library by actively managing the rotation of titles through such markets.
During the most recent three-year period, we exploited approximately 60 percent
of the theatrical motion picture titles and approximately 50 percent of the
television title episodes in the library. Rather than selling our titles on a
single or multi-picture basis, we strive to strategically pool our motion
picture and television titles into cohesive programming packages directed at
specific markets, including purchasers of large quantity programming and
services in emerging markets which may not have their own programming
capabilities.
We also seek aggressively to market and distribute our titles through
developing technology. We believe that the development and growth of direct
broadcast satellite and other new distribution systems may generate significant
incremental profits for the industry as the number of channels requiring
content grows.
We have differing types of rights to the various titles in our library. In
some cases, we own the title outright, with the right to exploit the title in
all media and territories for an unlimited time. In other cases, the title may
be owned by a third party and we may have obtained the right to distribute the
title in certain media and territories for a limited term. Even if we own a
title, we may have granted rights to exploit the title in certain media and
territories to others. As of June 30, 1999, we owned outright, or had been
granted rights in perpetuity to, approximately 65 percent of the titles in our
library. Our rights in the other library titles are limited in time and,
pursuant to the terms of the existing arrangements, the rights granted to us
expire with respect to approximately six percent of the library over the next
two years (i.e. through the end of 2001), with respect to another approximately
12 percent over the six years thereafter (from 2002 to 2008), and with respect
to another approximately 18 percent thereafter (from 2009 on). We have
generally been able to renew such rights on acceptable terms; however no
assurances can be made that we will continue to be able to do so in the future.
In accordance with industry practice, for purposes of calculating the size of
the library, we include any title that we have the right to distribute in any
territory in any media for any term.
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Due to certain long-term pre-paid licenses entered into by prior management,
we do not expect to receive significant revenue with respect to substantial
portions of our library from domestic free and certain major international
television markets for the next several years. As of June 30, 1999, the titles
included in these licenses represent a cross-section of the titles in the
library, including substantially all of the pre-1990 MGM and UA titles, which
have been licensed in one or more of the U.S., France, Spain and Germany, and
approximately 40 percent of the Orion and PolyGram titles, which have been
licensed in one or more of France, Spain, Germany and the United Kingdom. See
"--Distribution--Pay and Free Television Distribution." We expect to benefit as
certain rights to the library that have been previously licensed to others
revert to us over time. See "--Distribution."
Production
Motion Picture Production
We currently develop and produce theatrical motion picture projects through
two separate production entities, MGM Pictures and UA Films. MGM Pictures
concentrates on developing and producing mainstream, normal major studio budget
level films. UA Films specializes in developing, producing and acquiring
specialized films and films with a negative cost investment of less than $10
million. Both production units are supported by centralized marketing, sales,
legal, physical production and distribution functions.
MGM Pictures plans to distribute approximately 10 to 15 motion pictures
annually across a variety of genres and budget ranges. MGM Pictures employs a
development staff of creative executives who refine concepts and scripts so
that projects are developed to the point that production decisions can be made.
MGM Pictures also intends to enter into satellite label agreements with a
select group of genre specific producers. These satellite producers will
develop and produce motion pictures exclusively or semi-exclusively for MGM
Pictures and will use their relationships and creative abilities to provide
another source of product for MGM Pictures. The 10 to 15 pictures distributed
by MGM Pictures are anticipated to be a combination of internally developed
pictures, pictures developed and/or produced by the satellite producers and
pictures which are co-produced or co-financed.
MGM Pictures' strategy is to both increase creative diversity and mitigate
financial risk in connection with motion picture production. We expect to
enhance creative diversity by employing the satellite label strategy discussed
above and by entering into selective production agreements with successful
established producers. As the first step in this strategy, in July 1999, we
entered into an agreement with Miramax pursuant to which MGM and Miramax will
jointly produce, finance and distribute up to eight motion pictures, relying on
our film library as a prominent source of material. Initial titles identified
for potential production under this agreement include Cold Mountain, based on
the best-selling novel, contributed by us, and the remake of the comedy classic
Harvey, contributed by Miramax. Miramax will develop the films under this
agreement, which MGM and Miramax will jointly finance. Half of these films will
be released domestically by each partner, with the other providing
international distribution.
We also intend to spread the financial risk inherent in motion picture
production, as well as increase the breadth of our release slate, by entering
into co-production and/or co-financing arrangements such as our agreement with
Miramax and our co-production agreement with Universal. On April 28, 1999, we
entered into an agreement with Universal that increased our commitment under
our existing co-production arrangement 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 we may incur the related production expenditures
over a longer period of time.
We plan to re-establish UA Films as a film-maker friendly studio which will
release approximately seven to 10 motion pictures each year. These motion
pictures will be produced or co-produced by UA Films or acquired through
negative pickups or other distribution arrangements and will include motion
pictures in a variety of genres generally involving producers and directors,
writers or other talent who typically work outside of the studio system. Our
investment in such pictures is expected to be significantly less than our
investment
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for pictures produced through MGM Pictures. We believe that this strategy of
releasing independent motion pictures will add greater diversity to our release
slate and enhance the library both through the addition of new film product and
the building of relationships with up-and-coming producers and directors,
writers and other talent.
We intend to pursue fewer traditional producer or talent "overhead"
arrangements, in which a studio pays a portion of the overhead of creative
talent (i.e., producer, director or actor) for the right to receive a "first
look" at that party's projects, than other major studios. Instead, we intend to
pursue our satellite label initiative, with limited or no funding of overhead,
as we believe that our capital resources are better allocated to acquire
literary properties or the services of talent for a specific project. Finally,
our current business plan also calls for our annual release slates to be
comprised of proportionately fewer large budget "event" motion pictures than
the current release slates of the other major studios.
We do not own any studio facilities or stages but rather lease facilities
and sound stages on an "as needed" basis in connection with the production of
specific motion picture and television projects. We have not experienced any
difficulties in leasing appropriate facilities and sound stages when needed.
The following table details our tentative release schedule for the last six
months of 1999 and the first quarter of 2000.
Release Schedule
<TABLE>
<CAPTION>
Approximate
Title Release Date Summary Principal Actors
----- ------------ ------- ----------------
<S> <C> <C> <C>
Tea With Mussolini(1).... Released A coming-of-age tale Cher, Judi Dench, Joan
about an illegitimate Plowright, Maggie Smith,
child who struggles to Lily Tomlin
assert his independence
and find his way into a
life of art, taken from
the autobiography of
Franco Zeffirelli.
The Thomas Crown Affair.. Released An adventure of a Pierce Brosnan, Rene
millionaire playboy who Russo
steals a priceless work
of art and then strikes
up a fiery romance with
the brilliant female
insurance investigator
who is on to his game.
Stigmata................. Released A priest assigned to Patricia Arquette,
investigate a young Gabriel Byrne
woman's stigmatic
experiences becomes more
concerned with saving
her life than denouncing
her claims.
One Man's Hero........... September 1999 An adventure about the Tom Berenger
legendary Saint Patrick
Battalion, who fought
for Mexico alongside
Pancho Villa in the
Mexican-American War.
Molly.................... October 1999 A mentally challenged Elizabeth Shue, Aaron
young woman's genius is Eckhart
unleashed after
experimental surgery,
while her brother's
carefree lifestyle is
turned on its side when
he must care for her.
The World Is Not Enough.. November 1999 Michael Apted directs Pierce Brosnan, Denise
our 19th installment of Richards, Sophie Marceau
the James Bond series.
Flawless................. December 1999 A tough, conservative Robert De Niro, Philip
security guard suffers a Seymour Hoffman
stroke and is assigned a
rehabilitative program
that includes singing
lessons with the drag
queen next door.
</TABLE>
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<TABLE>
<CAPTION>
Approximate
Title Release Date Summary Principal Actors
----- ------------ ------- ----------------
<S> <C> <C> <C>
Miss Julie(1)........... December 1999 A Count's daughter has Peter Mullan, Saffron
set out to seduce her Burrows
father's footservant.
But what begins as a
flirtation turns into a
dangerous and erotic
game of passion, power
and betrayal.
Things You Can Tell Just
By Looking at Her(1)... January 2000 An ensemble drama that Cameron Diaz, Glenn
explores the hopes, Close,
dreams, loves and losses Calista Flockhart, Holly
of several women living Hunter
and working in Los
Angeles.
Supernova............... January 2000 Science-fiction thriller James Spader, Angela
about a medical Bassett, Lou Diamond
spaceship that responds Phillips, Robert Forster
to a distress signal and
takes on a mysterious
passenger.
Return to Me............ February 2000 A man falls in love with David Duchovny, Minnie
a woman only to discover Driver
that she received a
heart transplant from
his dead wife.
Crime and Punishment in
Suburbia(1)............ March 2000 A modern adaptation of Monica Keena, Ellen
Dostoevsky's classic Barkin
novel, set in today's
American suburbs.
Mr. Accident(1)......... April 2000 A janitor meets the Yahoo Serious, Helen
woman of his dreams and Dallimore
joins her in trying to
thwart the tobacco
industry's nefarious
plans.
</TABLE>
- --------
(1) Acquired domestic and/or certain international distribution rights.
We may revise the release date of a motion picture as the production
schedule changes or in such a manner as we believe is likely to maximize
revenues. Additionally, there can be no assurance that any of the motion
pictures scheduled for release will be completed, that completion will occur in
accordance with the anticipated schedule or budget, or that the motion pictures
will necessarily involve all of the creative talent listed above.
Television Production
We have in the past engaged in the development and production of episodic
television series, mini-series and movies for distribution on domestic and
international television networks, local independent and network-affiliated
television stations, pay television networks, basic cable networks and home
video. Since the re-establishment of our television series production
operations in 1994, we have obtained commitments for approximately 1,035 hours
of television programming, of which approximately 20 percent remained to be
aired as of June 30, 1999. Historically, our television activities were focused
on the traditional network production business and made-for-television movies,
and many of the television programs in our library were produced as network
series. However, since the networks have substantially lowered the license fees
as a percentage of the budget for network television programming in recent
years, resulting in significantly larger production investment risks for the
producers of such programming, we altered our television strategy in 1994 when
our management re-established our television series production operations. See
"--The Motion Picture and Television Industry."
Since 1994, we have focused primarily on the development and production of
series for the first-run syndication business, which involves a lower
production investment risk for us, and movies and mini-series for both network
and off-network broadcasters. Our strategy is designed to (a) minimize up-front
capital
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investment through the production of series for the first-run syndication
business and through co-production arrangements, (b) minimize risks associated
with large deficit financing by developing product such as two-hour movies or
mini-series that generally offer stable, predictable cash flows, (c) use
valuable library assets such as The Outer Limits, Poltergeist: The Legacy,
Stargate and All Dogs Go to Heaven to develop recognizable products with
enhanced marketability at a reduced cost and (iv) develop alternative types of
programming, such as animated cartoon strips, talk shows, variety/magazine
shows such as National Enquirer and reality-based programming such as LAPD--
Life on the Beat.
As part of our strategy, in 1994 we entered into a programming arrangement
with Showtime whereby we provided television series and movies for premiere on
Showtime. Showtime agreed to license from us exclusive U.S. pay television
rights to the following television series: (a) 132 hours (six seasons) of The
Outer Limits (winner of the Cable Ace award for Best Dramatic Series in 1995
and 1996) of which 30 hours remained to be aired as of June 30, 1999; (b) 66
episodes (three seasons) of Poltergeist: The Legacy of which no episodes
remained to be aired as of June 30, 1999; and (c) 88 episodes (four seasons) of
Stargate SG-1 of which 43 episodes remained to be aired as of June 30, 1999. We
have no further commitments from Showtime with respect to these series.
Following their initial exhibition cycle on Showtime, we exploit these programs
further in other markets. In this respect, we entered into a license agreement
with Sci-Fi Channel for the exclusive domestic basic cable exhibition rights of
The Outer Limits, Poltergeist: The Legacy and Stargate SG-I. Additionally, we
are producing 22 new episodes of Poltergeist for USA/Sci Fi, of which eight
episodes remained to be aired as of June 30, 1999.
The programming agreement with Showtime also includes a commitment by
Showtime to license made-for-television movies from us, seven of which remained
to be produced as of June 30, 1999.
Additionally, we have obtained a commitment from Paxson Communications to
license 88 episodes of Flipper, a one-hour series, which includes a production
order for 44 episodes, all of which have been delivered. The series began
airing in fall 1998 on Paxson's PAX NET network, comprised principally of owned
and operated stations which cover in excess of 65 percent of U.S. television
households.
In addition to National Enquirer, which will premiere in first-run
syndication in September 1999, we anticipate developing additional series for
first-run syndication which would begin no earlier than 2000.
From time to time, we may produce series for network television on a
selective basis, which typically require deficit financing but generally offer
the potential for greater financial return. In our first sale of a series to
network television since 1994, we produced a two-hour pilot and 21 episodes of
The Magnificent Seven for CBS during the 1997/98 and 1998/99 broadcast seasons.
We have no further commitments from CBS with respect to this series.
We intend to pursue joint ventures, co-productions and other partnering
arrangements for some of our existing or future series in order to minimize the
up-front capital investment and limit the financial risk to us with respect to
the production of that series.
Since our ability to recover production costs and realize profits on our
television programs depends on various factors, including but not limited to
the programs' acceptance by the public, fluctuation in prevailing advertising
rates, and the ability to distribute the programs subsequent to their first-run
license, there can be no assurance that we can recover the production costs or
realize profits on any television series. Thus, there is a substantial risk
that some or all of our television projects will not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized. See "--Distribution."
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Distribution
Theatrical Distribution
General. The initial step in the release of a motion picture is the booking
of engagements with theatrical exhibitors. The exhibitors retain a portion of
the admissions paid at the box office, which generally includes a fixed amount
per week, as well as a percentage of the admissions that escalates over time. A
studio's or other producer's (or third party distributor's) share is
approximately 50 percent of gross box office admissions, although that
percentage has generally decreased in recent years and varies depending upon
factors such as market competition and the overall performance of the film.
We intend to release a slate of films appealing to a wide variety of
audiences. By strategically timing the release of our motion pictures
throughout the year, we intend to avoid some of the risks posed when a motion
picture is inappropriately released during the most crowded and competitive box
office seasons. We believe that this strategy is unlikely to have a negative
impact on our ability to generate home video rentals.
All motion pictures that we release theatrically in the U.S. and Canada,
whether produced by MGM Pictures, UA Films or third parties, are marketed and
distributed by Metro-Goldwyn-Mayer Distribution Co. Additionally, we currently
distribute our motion pictures in theatrical markets outside of the U.S. and
Canada through UIP, a partnership owned equally by us, Paramount and Universal.
UIP is the largest theatrical motion picture distribution company outside the
U.S., with distribution activities in over 50 countries. UIP has a cost sharing
arrangement that requires each partner to be responsible for one-third of UIP's
annual operating overhead. UIP charges each partner a distribution fee of 35
percent of gross theatrical receipts until the fee equals one-third of the
annual operating costs of the partnership, and thereafter a negotiated
percentage of any additional gross receipts as a fee for incremental use of the
organization. Each partner bears all of its own releasing costs and retains all
cash flow from its pictures after payment of fees. See "--Regulation."
In June 1999, we entered into an agreement with Fox pursuant to which Fox
will provide distribution services for our films in the international
theatrical market. This distribution arrangement will take effect at the
expiration of our license agreement with UIP, no later than November 1, 2000.
Although Fox will be servicing international theatrical distribution activities
on our behalf, we have reserved broad powers to direct and control the handling
and release of our films. We believe that this arrangement with Fox will reduce
the amount of fixed overhead related to the distribution of our theatrical
product in the international marketplace.
Co-Production and Distribution Agreements. In addition to producing feature
motion pictures independently, we enter into co-production agreements, such as
those with Miramax and Universal, split rights deals and similar arrangements
under which we retain certain distribution rights with respect to a picture and
share the cost of production with a partner that obtains other rights. While
such agreements limit our risk relating to a motion picture's performance as
they reduce our production costs, such agreements also limit profitability. We
also acquire rights to distribute films through negative pickup arrangements
under which we acquire a completed motion picture, or certain rights therein,
from a third party. Under co-production agreements, split rights deals
or negative pickup arrangements, we may be committed to spend specified amounts
for prints and advertising. Additionally, we occasionally enter into "rent-a-
system" arrangements under which we provide distribution services to an
independent film company for a percentage distribution fee. Under rent-a-system
arrangements the independent film company generally is responsible for all
print and advertising costs. These types of arrangements may be entered into
before, during or after production of a particular motion picture.
Theatrical Marketing. Our theatrical marketing department consists of five
functional groups: research, media planning, advertising, promotion and
publicity. The objective of the marketing department is to maximize each motion
picture's commercial potential by designing and implementing a marketing
campaign tailored to appeal to the picture's most receptive audience. The
marketing process begins with research before a motion picture is completed.
The research department determines, through audience screenings and focus
groups, a motion picture's appeal to its most likely target audience. The
marketing group begins to develop
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marketing materials well in advance of a motion picture's scheduled theatrical
release. The marketing campaign generally begins six months before release with
the circulation of teaser trailers, posters and exhibitor advertising
materials. The campaign becomes more aggressive two to three months before
release as full-length trailers are released in theaters and additional
materials are sent to exhibitors. Finally, a national media campaign is
launched four to five weeks before opening day. This media campaign generally
involves advertising a picture's release on national television, including
network prime time and syndication markets, national cable and radio and in
magazines, newspapers and specific target markets, such as colleges. In
addition, public appearances, such as television talk shows, are arranged for a
picture's stars in order to promote the film. The entire process is managed by
our in-house staff, although outside agencies are frequently retained to
provide creative services.
Home Video Distribution
Our marketing and distribution strategy in the home video market
domestically and internationally is to (a) market our motion picture and
television titles in cohesive packages, (b) create branded product lines,
(c) adapt to a maturing home video market and (d) release new motion pictures
into the home entertainment market at the time of the year that we believe will
generate the most sales without diminishing revenues from other markets. We
have recently repackaged and repriced a number of library titles through the
creation of various branded lines. Examples of these branded lines include
MGM's Movie Time, Contemporary Classics, Screen Epics, Vintage Classics and
Musicals. We believe this strategy has resulted in increased shelf space in
video retail stores and that this increased visibility has led to increased
sales of library titles. This strategy has also been used to expand the sales
and distribution of the Orion catalog titles. The addition of the Polygram
libraries in January 1999 is expected to enhance the longevity and sales
potential of the existing branded lines and to contribute to the creation of
new branded lines. Additionally, in connection with new films which it releases
into the market, we often release related library films, or groups of library
films in order to increase sales of both the library films and new releases. An
example is the upcoming worldwide re-release of the James Bond video catalog in
connection with the November 1999 theatrical release of The World Is Not
Enough. We intend to continue this strategy of packaging groups of films or
film franchises and releasing them in connection with the releases of our most
highly visible new films.
MGM Home Entertainment Inc. manages the marketing and distribution of both
current feature motion pictures and library product of MGM Studios and its
subsidiaries in the home video and other home entertainment markets.
In 1990, as part of the acquisition of MGM/UA by Pathe, MGM-Pathe (the
predecessor in interest to MGM Studios), MGM/UA and UA Pictures entered into a
long-term agreement with the predecessor to Warner Home Video, granting to
Warner Home Video certain home video distribution rights with respect to new
motion pictures and the motion picture library of MGM/UA and UA Pictures
throughout the world for a distribution fee expressed as a percentage of
worldwide home video revenues. The Warner Home Video agreement was originally
scheduled to expire in May 2003, with the home video rights of each of the
films still covered by the Warner Home Video agreement at that time reverting
to us five years after the film's initial availability in the U.S. home video
market. On March 12, 1999, we entered into an agreement with Warner Home Video
and Turner to terminate the Warner Home Video agreement. Warner Home Video will
distribute certain of our product in the home video marketplace until January
31, 2000. As part of this agreement, (a) we agreed to pay Warner Home Video
$225 million (all of which has been paid as of September 1, 1999), and (b) we
reconveyed as of January 1, 1999 to Warner Home Video our right to distribute
in the home video markets worldwide until June 2001, approximately 2,950 titles
from the Old MGM Library, the Turner library and all pre-1949 Warner titles,
which titles had been serviced under the Warner Home Video agreement.
We have begun building our own home video organization which will handle the
distribution of our product in the domestic home video market starting in
February 2000. We believe that the agreement to terminate the Warner Home Video
agreement, our transition to self-distribution in the domestic market and our
international agreement with Fox will enable us to manage home video
distribution in a more cost-effective manner and further increase sales and
profitability.
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In June 1999, we entered into an agreement with Fox pursuant to which Fox
will provide distribution services for our films in the international home
video market. These distribution arrangement will take effect on February 1,
2000. Although Fox will be servicing international home video distribution
activities on our behalf, we have reserved broad powers to direct and control
the handling of our home video product.
Even without these initiatives, our home video sales have increased since
1993. From 1993 to 1998, we increased our annual worldwide home video gross
revenue from feature films by 102 percent, from $243.0 million to $491.2
million. We believe that this increase is in part a result of more effective
and efficient marketing, the distribution of more current product, the
distribution of more titles due to the Orion acquisition, the renegotiation of
key vendor relationships and a reorganization of our distribution
infrastructure.
We have recently begun entering into revenue sharing agreements for our new
releases pursuant to which we lease titles to rental establishments and
receives a percentage of the consumer rental revenues generated from such
titles. We anticipate that we will continue to enter into more of such
agreements in the future. Although no assurance can be given, in part because
of the recent introduction of these arrangements in the industry, we believe
that such arrangements may increase our revenues from the home video rental
market, by allowing us to participate in increased revenues from successful
titles, although these revenues will be received over a longer period.
We intend to capitalize on developing technologies such as DVD, a high-
quality mass-produced delivery system for video and audio data. We were among
the first major studios to make titles available on DVD and, as of December 31,
1998, ranked fourth in total DVD market share behind Warner, Sony Pictures and
Universal. We believe we are well positioned to benefit if DVD is successful,
since the high quality of DVD is expected to create additional demand for the
many classic or familiar "collectible" titles in the library. As DVD is a
developing technology, it is uncertain when and if DVD will become a
substantial revenue source; however we were encouraged by the progress of the
format in 1998 and the first six months of 1999 and believe that DVD may
increasingly provide incremental profits in the future.
Pay and Free Television Distribution
General. We generally license our current theatrical motion pictures for pay
television through output agreements pursuant to which films not yet produced
are pre-licensed for a specified fee paid on delivery. We believe that output
agreements with international distributors with recognized expertise are
beneficial as they assure that a significant advance will be received for a
given territory and that a prominent distributor with recognized distribution
and marketing capabilities will distribute the picture in such territory.
We intend to enter into relatively short-term licenses of our library motion
pictures for pay and free television in packages that are strategically
designed for the relevant marketplace. We have created a proprietary database
for use by our sales force which contains detailed information on each of our
films, including dates of availability, media controlled by us, sales history,
genre, format, length, stars, soundtrack, etc. This information can be utilized
by the sales force in order to create strategically designed packages of motion
pictures based on one or more various criteria. We believe that this system is
one of the most advanced in the entertainment business and provides our sales
force with an advantage in a competitive marketplace that requires large
amounts of diverse content and is becoming more receptive to packaged
programming.
Domestic Pay Television. We have a theatrical motion picture output
agreement with Showtime requiring our future theatrical motion pictures to air
on Showtime's pay television network. The first output period expires upon the
first to occur of August 31, 2001 or the delivery of 150 pictures (other than
specialty pictures) under the agreement. As of June 30, 1999, we had delivered
44 pictures to Showtime. The second output period commences on September 1,
2001 and expires upon the first to occur of December 31, 2003 or the delivery
of 65 additional pictures (other than specialty pictures). Additionally, the
agreement requires our future specialty motion pictures (i.e., pictures
released under the UA Films logo) to air on Showtime's pay television
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network. The output period for specialty motion pictures expires upon the first
to occur of December 31, 2003 or the delivery of 50 specialty motion pictures.
The license fees for each picture are determined according to a formula based
on U.S. theatrical rentals of such picture, with special provisions applicable
to the specialty motion pictures.
Our subsidiary, Orion, has a theatrical motion picture output agreement with
HBO requiring future theatrical motion pictures produced and distributed by
Orion to air on HBO's pay television network. The license fees for each picture
are determined according to a formula based on U.S. theatrical rentals of such
picture. The agreement expires on December 31, 2001, but HBO has the right to
extend the agreement through December 31, 2006.
Domestic Free Television. We distribute our feature motion pictures to U.S.
and Canadian networks, local television stations in the U.S. and Canada and
basic cable networks. We also generate revenue by granting syndication licenses
on a barter basis. Barter syndication allows the television stations to license
our product in exchange for a portion of the local commercial air time. We, in
turn, sell commercial air time to advertisers on a national basis, while the
television stations retain a portion of the commercial air time for local
advertisers. We have used outside barter companies to sell television spots to
advertisers in the past, but we commenced our own barter sales business in
1996.
In connection with the acquisition of MGM/UA by Pathe in November 1990, MGM-
Pathe licensed the domestic free television rights to a substantial portion of
its library (the UA library and the post-1986 MGM/UA titles in theatrical
release at the time, constituting approximately 850 titles) and selected
television programs to Turner for a period of ten years beginning from the
availability of each such product in that market. The license excludes motion
pictures released theatrically after 1987. The Turner license was amended on
September 10, 1999 to extend Turner's license period by approximately one year,
to release 200 titles from the license and to allow us to use the remaining
product licensed to Turner, on a non-exclusive basis, on MGM branded cable or
satellite channels that we may develop in the future. With respect to most of
the motion pictures and television programming covered by the Turner license,
the domestic free television rights revert to us between 2001 and 2003. We
expect to receive relatively little revenue from the licensing of the product
covered by the agreement with Turner in the domestic free television market
until such product reverts to us. We believe that, due to the significant
increases in licensing fees for domestic television since 1990, the expiration
of the Turner license and our subsequent ability to freely license the library
in this market, together with our ability to utilize these titles on MGM
branded cable and satellite channels, will generate incremental revenue for us.
See "--Film and Television Library."
International Pay and Free Television. We currently distribute our motion
pictures and television product through pay television licenses in over 90
territories. We have output agreements with licensees in major territories,
including Germany, France, the United Kingdom, Spain, Italy, Japan and Brazil.
In 1998 and the six months ended June 30, 1999, we received $52.1 million and
$29.9 million in revenue from international pay television distribution,
accounting for four percent and six percent of our total revenue for such
periods.
We currently distribute our motion pictures and television product through
free television licenses in over 100 territories. In 1998 and the six months
ended June 30, 1999, we received $147.4 million and $85.5 million in revenues
under these agreements, accounting for 12 percent and 18 percent of our total
revenues for such periods. These license arrangements typically provide
licensees with the right to exhibit the licensed motion pictures on television
for a specific number of airings over a period of three to seven years.
However, in connection with the acquisition of MGM/UA by Pathe in November
1990, MGM-Pathe entered into long-term licenses of pay and free television
rights for theatrical and television movies and, in some cases, television
series in its library at that time with United Communications (France) and
F.O.R.T.A. (Spain). A similar agreement had been entered into in 1984 with
Degeto Film (Germany). Substantially all of the license fees under these long-
term licenses have already been paid to us, and therefore, we do not expect to
receive significant revenue from these licenses in future periods. With respect
to most of the motion pictures licensed to United Communications, the rights
granted revert to us between 2000 and 2003. The James Bond features were
excluded from such license. With respect to most of the motion pictures
licensed to F.O.R.T.A.,
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the free television rights are currently reverting to us through 2000. With
respect to most of the motion pictures and television series licensed to Degeto
Film, the distribution rights granted revert to us between 1999 and 2010. See
"--Film and Television Library."
Additionally, Orion entered into certain long-term licenses covering a
significant number of its library motion pictures in the international free and
pay television markets. Orion had already received substantially all of the
license fees under these licenses, prior to our acquisition of Orion and
therefore, we do not expect significant revenue from these licenses in future
periods. Orion also licensed titles to Capitol Film and TV International
(Germany), Compagnie Luxembourgeoise de Telediffusion (France), British Sky
Broadcasting (the United Kingdom), Film Finance Group, Inc. and Principal
Network Limited (Italy) and Televisio de Catalunya, S.A. (Spain). The
distribution rights granted to Capitol Film and TV International revert to
Orion in 2025. The distribution rights granted to Compagnie Luxembourgeoise de
Telediffusion revert to Orion between 2003 and 2013. The distribution rights
granted to British Sky Broadcasting currently are reverting to Orion, with such
reversion being complete in 2002. The distribution rights granted to Film
Finance Group, Inc. and Principal Network Limited revert to Orion between 1999
and 2012. The distribution rights granted to Televisio de Catalunya, S.A.
currently are reverting to Orion, with such reversion being complete in 2010.
We believe that, due to the importance of France, Spain, Germany, the United
Kingdom and Italy and the significant increases in licensing fees for
television in these markets since 1990, the expiration of these licenses and
subsequent ability of the company to freely license our library in these
markets could create substantial incremental revenue.
The MGM/UA and Orion licenses discussed above (in "--Domestic Free
Television" and "--International Pay and Free Television") cover a cross-
section of the motion pictures in our library. Although we exploit the
remaining titles in the library in these markets, they do not generate
significant revenues.
In addition to licensing packages of films, we hold equity positions ranging
from approximately five percent to 25 percent in joint ventures such as LAPTV,
Telecine, Star Channel and Movie Network Channels, which are emerging
international premium film satellite television networks broadcasting in
different territories around the world. We have entered into license agreements
with respect to each of LAPTV, Telecine, Star Channel and MovieVision,
licensing theatrical and television motion pictures and, in some cases,
television series to each of the ventures.
Branded Cable and Satellite Channels. We believe that pursuing our strategy
of providing strategically pooled, branded MGM programming through the
licensing of programming packages to cable networks and television
broadcasters, as well as through the development of new channels of
distribution that deliver our programming, will provide opportunities in the
international marketplace as foreign countries continue to develop cable
television infrastructures and satellite television becomes more available.
In April 1998, we and our 50 percent equity partner, an indirect subsidiary
of Tele-Communications, Inc., decided to terminate our joint venture in MGM
Gold (Asia). MGM Gold (Asia) was a 24-hour satellite and cable delivered
service based and distributed in Asia that featured programming from our
library. The economic deterioration in Southeast Asia during 1997-98, which had
resulted in diminished growth in multi-channel television households and slower
than anticipated penetration in India and China, were the primary factors
influencing the decision to cease the operations of the joint venture. We
invested $13.2 million in the venture.
In May 1998, MGM and an indirect subsidiary of United International Holdings
combined their Latin American cable programming businesses into a joint venture
to form MGM Networks Latin America. Under the terms of the joint venture, we
acquired a 50 percent equity interest in the venture by contributing our
branded Brazilian channel which began operations in December 1997. In turn, UIH
contributed its 100 percent interest in United Family Communications, which
produces and distributes Casa Club TV to satellite and cable television
distributors throughout Latin America and Brazil, for a 50 percent interest in
the joint venture. We
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share equally in the profits of the venture and as of September 1, 1999, are
obligated to fund 50 percent of the joint venture's expenses up to an
additional $7.1 million. We have funded approximately $17.0 million to the
venture as of September 1, 1999. We have a license agreement with MGM Networks
Latin America, licensing certain motion pictures and trademarks to the venture.
The joint venture is based in Coral Gables, Florida. MGM Latin America and MGM
Brazil are general entertainment channels programmed by the joint venture
primarily with MGM theatrical and television product. Casa Club TV is a
lifestyle channel offering home and garden, food and other lifestyle
programming. As of June 30, 1999, MGM Networks Latin America distributed its
signal to approximately 4.4 million homes in 16 countries throughout Latin
America.
Trademarks and Consumer Products
We own the registered trademarks Metro-Goldwyn-Mayer, MGM, United Artists,
UA, Orion, Cannon and variations thereof, as well as trademarks, logos and
other representations of characters, such as The Pink Panther, from motion
pictures and television series we produced or distributed. In 1998 and the six
months ended June 30, 1999, we received $10.7 million and $4.6 million
respectively, in revenue from the licensing of these trademarks, logos and
other representations.
We believe that the MGM name and its lion logo are among the most recognized
in the world, evoking images of classic Hollywood. We believe that the name and
logo represent assets the value of which has been substantially unrealized in
the past. We plan to pursue a focused branded strategy that will capitalize
upon our name and logo and seek licensing opportunities for such name and logo,
as well as other trademarks of the company, in a range of product categories
and distribution channels.
In February 1980, Old MGM granted to a predecessor-in-interest to MGM Grand,
Inc. an exclusive open-ended royalty-free license, which was amended in 1992
and further amended in 1998. Pursuant to the license, as amended, MGM Grand,
Inc. has the right to use certain trademarks that include the letters "MGM," as
well as logos and names consisting of or related to stylized depictions of a
lion, in its resort hotel and/or gaming businesses and other businesses that
are not related to filmed entertainment. In 1986, MGM/UA granted MGM Grand Air,
Inc. an exclusive open-ended royalty-free license to use one of its logos
consisting of a stylized depiction of a lion in Grand Air's airline business.
See "Certain Relationships and Related Transactions."
Employees
As of June 30, 1999, we had approximately 860 full-time and part-time
regular employees in our worldwide operations. Of that total, approximately 100
were primarily engaged in production and development, approximately 300 were
primarily engaged in sales, marketing and distribution and approximately 460
were primarily engaged in management and administration. Approximately 160 of
our employees are currently covered by employment contracts. We also hire
additional employees on a picture-by-picture basis in connection with the
production of our motion pictures and television programming. The salaries of
these additional employees, as well as portions of the salaries of our certain
full-time employees who provide direct production services, are typically
allocated to the capitalized cost of the related motion pictures or television
programming. We believe that our employee and labor relations are good.
Approximately 25 of our current employees (and many of the employees that we
hire on a project-by-project basis) are represented under industry-wide
collective bargaining agreements with various unions, including the Writers
Guild of America, the Directors Guild of America, the Screen Actors Guild, and
the International Alliance of Theatrical Stage Employees. A strike, job action
or labor disturbance by the members of any of these organizations may have a
material adverse effect on the production of a motion picture or television
program within the United States.
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Regulation
In 1994, the U.S. was unable to reach agreement with its major international
trading partners to include audiovisual works, such as television programs and
motion pictures, under the terms of the General Agreement on Trade and Tariffs
Treaty. The failure to include audiovisual works under GATT allows many
countries (including members of the European Union, which consists of Austria,
Belgium, Denmark, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg,
The Netherlands, Portugal, Spain, Sweden and the United Kingdom) to continue
enforcing quotas that restrict the amount of U.S. produced television
programming which may be aired on television in such countries. The European
Union Council of Ministers has adopted a directive requiring all member states
of the European Union to enact laws specifying that broadcasters must reserve,
where practicable, a majority of their transmission time (exclusive of news,
sports, game shows and advertising) for European works. The directive must be
implemented by appropriate legislation in each member country. Under the
directive, member states remain free to require broadcasters under their
jurisdiction to comply with stricter rules. For example, France requires that
original French programming constitute a required portion of all programming
aired on French television. These quotas generally apply only to television
programming and not to theatrical exhibition of motion pictures, but quotas on
the theatrical exhibition of motion pictures could also be enacted in the
future. There can be no assurance that additional or more restrictive
theatrical or television quotas will not be enacted or that countries with
existing quotas will not more strictly enforce such quotas. Additional or more
restrictive quotas or more stringent enforcement of existing quotas could
materially and adversely affect the business of the company by limiting the
ability of the company to exploit fully its motion pictures internationally.
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the U.S. and most foreign countries, which laws provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. We seek to take appropriate and reasonable
measures to secure, protect and maintain or obtain agreements to secure,
protect and maintain copyright protection for all of its motion pictures or
television programming under the laws of applicable jurisdictions. Motion
picture piracy is an international as well as a domestic problem. Motion
picture piracy is extensive in many parts of the world, including South
America, Asia (including Korea, China and Taiwan), the countries of the former
Soviet Union and other former Eastern bloc countries. In addition to the MPAA,
the Motion Picture Association, the American Film Marketing Association and the
American Film Export Association monitor the progress and efforts made by
various countries to limit or prevent piracy. In the past, these various trade
associations have enacted voluntary embargoes of motion picture exports to
certain countries in order to pressure the governments of those countries to
become more aggressive in preventing motion picture piracy. In addition, the
U.S. government has publicly considered trade sanctions against specific
countries which do not take steps to prevent copyright infringement of U.S.
produced motion pictures. There can be no assurance that voluntary industry
embargoes or U.S. government trade sanctions will be enacted. If enacted, such
actions could impact the amount of revenue that the company realizes from the
international exploitation of its motion pictures depending upon the countries
subject to such action and the duration of such action. If not enacted or if
other measures are not taken, the motion picture industry (including the
company) may continue to lose an indeterminate amount of revenues as a result
of motion picture piracy.
Article 85(1) of the Treaty of Rome prohibits certain agreements and
concerted practices which prevent, restrict or distort trade within the
European Union. In 1989, after several years of proceedings before the European
Commission, UIP received an exemption from Article 85(1) with respect to its
theatrical distribution activities in the European Union. In connection with
this exemption, UIP gave certain undertakings to the European Commission. The
1989 exemption expired in 1993, and although UIP has filed an application
seeking renewal of such exemption, such renewal has not yet been granted. In
July 1996, the European Commission conducted unannounced visits of four of
UIP's offices in Europe, interviewing officers and copying documents. These
visits were based on complaints submitted to the European Commission by third
parties, to the effect that UIP was acting in an anti-competitive manner and
was not complying with certain of the undertakings given by it in connection
with receiving the 1989 exemption. In addition, in January 1998, the
Competition Directorate of the Commission of the European Communities issued a
Statement of Objections in response to
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UIP's renewal application. The Statement of Objections indicates that, although
a final decision has not been taken, the Commission is of the opinion that the
exemption granted to UIP in 1989 should not be extended and that UIP should be
required to cease operations in the European Union. UIP responded to the
Statement of Objections in May 1998 and a hearing was held before the European
Commission in late September 1998. In July 1999, the European Commission
published an official notice in the Official Journal of the European
Communities stating its intention to take a favorable view of the UIP case,
subject to certain amendments to the various UIP agreements and certain
additional understandings. Due to our new theatrical distribution arrangement
with Fox, we do not believe that failure to obtain the exemption would have a
material adverse impact on operations.
On February 2, 1999, the United States Department of Justice (Antitrust
Division), in the course of an antitrust investigation, issued a civil
investigative demand to us, requiring us to produce certain documents and
answer certain interrogatories concerning conduct, activities or proposed
action in the motion picture exhibition industry. We believe that similar
demands were issued to other major studios. We are in the process of complying
with the civil investigative demand. While we have communicated with the
Department of Justice regarding the investigation, we believe it is too early
to determine the Department of Justice's intentions and whether we are a target
of the investigation.
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. While we have not been
asked to provide any information to date, we believe that we may receive a
demand to provide information in connection with this study in the future. We
believe that similar demands may be issued to other major studios. We believe
that it is too early to determine the federal government's intentions and
whether we are a target of the study.
The Code and Ratings Administration of the MPAA assigns ratings indicating
age-group suitability for theatrical distribution of motion pictures. We have
followed and will continue to follow the practice of submitting its pictures
for such ratings. As a substantial number of our films are rated "R," under
rules enforced by theatrical exhibitors, children under certain ages may attend
the applicable motion picture only if accompanied by an adult.
United States television stations and networks as well as foreign
governments impose content restrictions on motion pictures which may restrict
in whole or in part exhibition on television or in a particular territory.
There can be no assurance that such restrictions will not limit or alter our
ability to exhibit certain motion pictures in such media or markets.
Properties
We lease approximately 375,000 square feet of office space, as well as
related parking facilities, for our corporate headquarters in Santa Monica,
California under several leases which generally expire in May 2003. We also
lease approximately 27,000 square feet in New York City for our East Coast
publicity, marketing and theatrical and television distribution offices under a
lease that expires in June 2004. Additionally, we lease approximately 40,000
square feet of office space in Los Angeles, California, which has been used by
Orion, under a lease that expires in January 2004. The current monthly rent for
the above properties is approximately $1.1 million in the aggregate (in
addition to taxes, insurance and certain expenses paid by us). We sublease the
office space used by Orion prior to its acquisition by us. In addition, we
maintain relatively small domestic theatrical and television distribution
branches in Boca Raton, Chicago, Montreal, San Juan and Toronto and have small
international television distribution offices in London and Sydney. In 1998, we
closed our Paris office and consolidated our European distribution operations
to our London office. We also lease studio facilities and stages from
unaffiliated parties on an as-needed basis in connection with the production of
specific motion picture and television projects.
We believe that our current facilities are adequate to conduct our business
operations for the foreseeable future.
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MANAGEMENT
Current Directors and Executive Officers
The following table sets forth the name, age and position of each of our
directors and executive officers as of August 31, 1999. Each director will hold
office until the next annual meeting of stockholders or until his or her
successor has been elected and qualified. Executive officers are elected by the
Board of Directors and serve at the discretion of the Board of Directors and
Mr. Yemenidjian.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Alex Yemenidjian........ 43 Chairman of the Board and Chief Executive Officer
Christopher J. McGurk... 42 Vice Chairman of the Board and Chief Operating Officer
James D. Aljian......... 66 Director
Francis Ford Coppola.... 60 Director
Willie D. Davis......... 65 Director
Alexander M. Haig,
Jr. ................... 74 Director
Kirk Kerkorian.......... 82 Director
Frank G. Mancuso........ 66 Director
Jerome B. York.......... 61 Director
William A. Jones........ 57 Senior Executive Vice President and Secretary
Daniel J. Taylor........ 42 Senior Executive Vice President and Chief Financial Officer
Robert Brada............ 34 Executive Vice President and General Counsel
</TABLE>
All members of the Board of Directors are elected annually by our
stockholders for a one-year term. The common stock does not have cumulative
voting rights.
Backgrounds of Current Directors and Executive Officers
Alex Yemenidjian. Mr. Yemenidjian has been Chairman of the Board and Chief
Executive Officer since April 1999 and has been a director since November 1997.
Mr. Yemenidjian currently serves as the President of MGM Grand, Inc., a
position he has held since July 1995, and has served as a director of MGM
Grand, Inc. since 1989. Mr. Yemenidjian has also served MGM Grand, Inc. in
other capacities during such period, including as Chief Operating Officer from
June 1995 until April 1999 and as Chief Financial Officer from May 1994 to
January 1998. In addition, Mr. Yemenidjian served as an executive of Tracinda
from January 1990 to January 1997 and from February 1999 to April 1999.
Christopher J. McGurk. Mr. McGurk has been Vice Chairman of the Board of
Directors and Chief Operating Officer since April 1999. From November 1996
until joining MGM, Mr. McGurk was President and Chief Operating Officer of
Universal Pictures, a division of Universal Studios. Prior to joining
Universal, Mr. McGurk spent eight years at The Walt Disney Company, including
as President, Motion Pictures Group, Walt Disney Studios from 1994 to 1996, and
as Executive Vice President and Chief Financial Officer from 1990 to 1994.
James D. Aljian. Mr. Aljian has been a director since October 1996. Mr.
Aljian has served as an executive of Tracinda since October 1987. In addition,
Mr. Aljian serves on the board of directors of MGM Grand, Inc. and on the
shareholders' committee of DaimlerChrysler AG.
Francis Ford Coppola. Mr. Coppola has been a director since January 1998.
Since 1993 Mr. Coppola has been the owner, Chairman and President of American
Zoetrope, a film company based in San Francisco. Mr. Coppola is also a five-
time Oscar-winning director, writer and producer. Mr. Coppola previously served
on the board of directors of Metro-Goldwyn-Mayer Studios Inc.
Willie D. Davis. Mr. Davis has been a director since November 1998. Mr.
Davis is President and Director of All-Pro Broadcasting, Inc., an AM and FM
radio broadcasting company. Mr. Davis has served on the board
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of directors of MGM Grand, Inc. since 1989 and is director of Sara Lee
Corporation, K-Mart Corporation, Johnson Controls, Inc., Alliance Bank, WICOR,
Dow Chemical Company, Rally's Hamburgers, Inc., Strong Fund and Bassett
Furniture Industries, Incorporated.
Alexander M. Haig, Jr. Mr. Haig has been a director of and a consultant to
MGM since November 1998. Mr. Haig is Chairman of Worldwide Associates Inc., an
international business advisory firm. In addition, Mr. Haig has served on the
board of directors and as a consultant to MGM Grand, Inc. since 1990 and serves
on the boards of directors of America Online, Inc., Interneuron
Pharmaceuticals, Inc. and Preferred Employers Holdings, Inc.
Kirk Kerkorian. Mr. Kerkorian has been a director since October 1996 and has
had a professional relationship with MGM Studios and its predecessors for over
25 years. Mr. Kerkorian has served as Chief Executive Officer, President and
sole director and shareholder of Tracinda for more than the past five years. In
addition, Mr. Kerkorian serves on the board of directors of MGM Grand, Inc.
Frank G. Mancuso. Mr. Mancuso has been a director since October 1996. Mr.
Mancuso was the Chairman of the Board and Chief Executive Officer from October
1996 to April 1999 and was the Chairman of the Board and Chief Executive
Officer of MGM Studios from July 1993 to April 1999. Prior to joining MGM
Studios, Mr. Mancuso was the Chairman and Chief Executive Officer of Paramount
Pictures Corporation from September 1984 to May 1991, having served Paramount
in numerous other capacities beginning in 1963.
Jerome B. York. Mr. York has been a director since October 1996. Mr. York
has served as the Vice Chairman of Tracinda since September 1995. Prior to
joining Tracinda, Mr. York served as Senior Vice President and Chief Financial
Officer of IBM Corporation from May 1993 to September 1995 and as a director of
IBM Corporation from January 1995 to September 1995. Prior thereto, Mr. York
served as Executive Vice President--Finance and Chief Financial Officer of
Chrysler Corporation from May 1990 to May 1993 and as a director of Chrysler
Corporation from April 1992 to May 1993. In addition, Mr. York serves on the
Board of Directors of MGM Grand, Inc., Apple Computer, Inc. and Waste
Management, Inc.
William A. Jones. Mr. Jones has been Senior Executive Vice President and
Secretary since June 1997 and, prior thereto, served as Executive Vice
President--Corporate Affairs and Secretary since January 1995. Mr. Jones served
as Executive Vice President, General Counsel and Secretary from May 1991 to
January 1995 and as General Counsel and Secretary of predecessors to the
Company since 1983. Mr. Jones was a director of MGM-Pathe from June 1991 to
January 1992.
Daniel J. Taylor. Mr. Taylor has been Senior Executive Vice President and
Chief Financial Officer since June 1998 and, prior thereto, was Executive Vice
President--Corporate Finance since August 1997. From May 1991 to July 1997, Mr.
Taylor served as an executive of Tracinda. Prior thereto, Mr. Taylor served as
Vice President--Taxes and in various other capacities at the predecessor of MGM
from 1985 to May 1991.
Robert Brada. Mr. Brada has been Executive Vice President and General
Counsel since August 1998 and, prior thereto, served as Executive Vice
President from June 1998 through August 1998 and was Senior Vice President and
Deputy General Counsel since June 1995. Prior to joining MGM Studios, Mr. Brada
was with the law firm of White & Case LLP in its Los Angeles and Paris offices
from 1990 to June 1995.
Employment Agreements
Current Executive Officers
Alex Yemenidjian. We entered into an employment agreement with Mr.
Yemenidjian effective as of April 26, 1999, which provides that he will serve
as Chairman of the Board of Directors and Chief Executive
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Officer for an initial term that ends on April 30, 2004. Pursuant to the
agreement, Mr. Yemenidjian is entitled to a current annual salary of $2,500,000
and an annual discretionary bonus. Mr. Yemenidjian also received options under
the 1996 Incentive Plan to purchase 10,000,000 shares of the common stock,
consisting of 5,000,000 shares with an exercise price of $14.90 per share and
5,000,000 shares with an exercise price of $30.00 per share. Twenty percent of
the options vest to Mr. Yemenidjian on April 30 of each year beginning April
30, 2000. If we terminate Mr. Yemenidjian's employment without cause, if he
terminates the agreement for "good reason" or in the event of a "designated
change of control," his options under the 1996 Incentive Plan will vest
immediately and he will be entitled to continue to receive his annual salary
and all other benefits for the remainder of the term of the employment
agreement.
Christopher J. McGurk. We entered into an employment agreement with Mr.
McGurk effective as of April 28, 1999, which provides that he will serve as
Vice Chairman of the Board of Directors and Chief Operating Officer for an
initial term which ends on April 30, 2004. Pursuant to the agreement, Mr.
McGurk is entitled to a current annual salary of $2,000,000, which will
increase by $75,000 in April each year for four years, and an annual
discretionary bonus. In addition, Mr. McGurk received a one-time signing bonus
of $1,700,000 and an award of 500,000 shares of common stock. Mr. McGurk also
received options under the 1996 Incentive Plan to purchase 3,000,000 shares of
the common stock, consisting of 1,500,000 shares with an exercise price of
$14.90 per share and 1,500,000 shares with an exercise price of $30.00 per
share. Twenty percent of the options vest to Mr. McGurk on April 30 of each
year beginning April 30, 2000. If Mr. McGurk's employment is terminated without
cause or if he terminates the agreement for "good reason" or in the event of a
"designated change of control," his options under the 1996 Incentive Plan will
vest immediately and he will be entitled to continue to receive his annual
salary and all other benefits for the remainder of the term of the employment
agreement.
William A. Jones. We entered into an employment agreement with Mr. Jones
effective as of October 10, 1996, as amended as of July 16, 1999, which
provides that he will serve as Senior Executive Vice President for an initial
term which ends on October 9, 2001. We have an option exercisable on or before
six months prior to the expiration of the initial term to extend the term of
the agreement for three additional years. Pursuant to the agreement, Mr. Jones
is entitled to a current annual salary of $625,000, subject to adjustment as
determined by the company, and an annual discretionary bonus. We are also
obligated to maintain a term life insurance policy in the face amount of $2
million on Mr. Jones' life for his benefit. If Mr. Jones' employment is
terminated without cause or if he terminates the agreement for "good reason,"
his options and bonus interests under the 1996 Incentive Plan and Senior
Management Bonus Plan will vest immediately and he will be entitled to receive
all insurance benefits for the remainder of the term of the employment
agreement plus (1) if the option has been timely exercised at the time of such
termination, the net present value of the sum of the annual salary through the
entire remaining term of the employment agreement or (2) if the option has not
been timely exercised at the time of such termination, a liquidated sum equal
to the amount he would have been entitled to receive had such termination
occurred as of June 30, 1999.
Daniel J. Taylor. We entered into an employment agreement with Mr. Taylor
effective as of August 1, 1997, as amended as of June 15, 1998, which provides
that he will serve as Senior Executive Vice President and Chief Financial
Officer for an initial term which ends on June 14, 2003. Pursuant to the
agreement, as amended, Mr. Taylor is entitled to a current annual salary of
$750,000, which will increase by $50,000 in October of each year for four
years, and an annual discretionary bonus. In addition, Mr. Taylor may receive
an additional bonus, payable only in the event of a designated change in
control of us (as defined in the 1996 Incentive Plan). The amount of the Taylor
additional bonus will be determined as of the day before, and will be payable
within five business days from and after, a designated change in control and
will otherwise be equivalent to the amount which would have been received with
respect to 29,292 bonus interests on such date, after giving effect to the
bonus interests repricing, had such bonus interests been granted to Mr. Taylor
in August 1997. If Mr. Taylor's employment is terminated without cause by the
company or if he terminates the agreement for "good reason," his options and
bonus interests under the 1996 Incentive Plan and Senior Management Bonus Plan
will vest immediately and he will be entitled to receive the net present value
of the sum of the annual salary through the entire remaining term of the
employment agreement and all insurance
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benefits for the remainder of the term of the employment agreement. As of
December 31, 1998, the amount payable to Mr. Taylor in the event of such
circumstances would be approximately $3.4 million.
Robert Brada. We entered into an employment agreement with Mr. Brada
effective as of June 1, 1995, as amended as of June 1, 1998 and as of August
21, 1998, which provides that he will serve as Executive Vice President and
General Counsel for an initial term which ends on May 31, 2001. Pursuant to the
agreement, as amended, Mr. Brada is entitled to a current annual salary of
$425,000, subject to increase as we determine on August 21 of each year and an
annual discretionary bonus. In addition, Mr. Brada will receive a bonus,
payable only in the event of a designated change in control of us (as defined
in the 1996 Incentive Plan) or certain other major corporate events. The amount
of the Brada additional bonus shall be determined as of the day before, and
shall be payable within five business days from and after, a designated change
in control or other major corporate event and shall otherwise be equivalent to
the amount which would have been received with respect to 40,584 Bonus
Interests on such date, after giving effect to the bonus interest repricing had
such bonus interests been granted to Mr. Brada in October 1996. If Mr. Brada's
employment is terminated without cause or if he terminates the agreement for
"good reason," his options and bonus interests under the 1996 Incentive Plan
and, under certain circumstances, the Brada additional bonus, will vest
immediately and he will be entitled to continue to receive the salary through
the entire remaining term of the employment agreement. As of December 31, 1998,
the amount payable to Mr. Brada in the event of such circumstances would be
approximately $968,000.
Each of the above named executives also is entitled to receive certain other
benefits, which may include a car allowance, medical insurance, participation
in the benefit plans and any other similar plan or program which we provide for
our senior officers generally.
Former Executive Officers
Frank G. Mancuso. We entered into an employment agreement with Frank G.
Mancuso effective as of October 10, 1996, as amended as of August 4, 1997,
which provided that he would serve as Chairman and Chief Executive Officer for
an initial term ending on October 9, 2001. The employment agreement entitled
Mr. Mancuso to an annual base salary of $2 million, subject to increase at the
discretion of the Board of Directors, and an annual stock purchase payment of
$3 million (payable annually in advance), out of the after tax proceeds of
which he was required to purchase shares of the common stock. Such purchases
were at a price of $24.00 per share until November 17, 1998. Thereafter, such
purchases were at the fair market value of such shares. In addition, Mr.
Mancuso was entitled to receive certain other benefits, including a car
allowance, medical insurance, participation in our 1996 Incentive Plan, Senior
Management Bonus Plan, Savings Plan, MGM Retirement Plan and any other similar
plan or program which we provided for our senior officers generally, and other
benefits customarily afforded to executives of similar stature in the motion
picture industry. We were also obligated to maintain a five year, reducing-term
life insurance policy in the initial face amount of $25 million on Mr.
Mancuso's life for his benefit. Pursuant to his employment agreement, Mr.
Mancuso holds stock options to purchase shares of the common stock and bonus
interests. In part to induce him to enter into his employment agreement, in
October 1996 Mr. Mancuso received 63,751 shares of the common stock and
$1,020,000 in cash. Mr. Mancuso resigned as Chairman of the Board and Chief
Executive Officer on April 26, 1999 but remained as a director. Effective as of
August 20, 1999, we entered into a consulting agreement with Mr. Mancuso, which
provides that he will serve as a non-exclusive consultant for a term commencing
May 1, 1999 and ending October 10, 2001. Pursuant to the consulting agreement,
he is entitled to an annual base consulting fee of $2 million and additional
payments of $3 million on November 18, 1999 and $2,688,525 on November 18,
2000, all such amounts subject to acceleration and payment of the net present
value of the remaining payments in a lump sum in certain circumstances. The
consulting agreement also provides for a repricing of Mr. Mancuso's stock
options from $24.00 to $14.90 per share, all of which became fully vested and
immediately exercisable, and bonus interests, the trigger price of which was
reduced from $24.00 per bonus interest to $14.90 and the ceiling price from
$48.00 to $29.80 (while maintaining the maximum value of each bonus interest at
$24.00) all of which became fully vested. Mr. Mancuso will be entitled to
receive certain
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benefits during the term of the consulting agreement, including medical and
disability insurance. We will not be obligated to maintain the reducing-term
life insurance policy previously provided for Mr. Mancuso.
A. Robert Pisano. We entered into an employment agreement with Mr. Pisano
effective as of October 10, 1996, which provided that he would serve as Vice
Chairman for an initial term ending on October 9, 2001. The agreement entitled
Mr. Pisano to an annual salary of $950,000, an annual guaranteed bonus of
$750,000 and an annual discretionary bonus. In addition, Mr. Pisano was
entitled to receive certain other benefits, including a car allowance, medical
insurance, participation in the 1996 Incentive Plan, Senior Management Bonus
Plan, Savings Plan, MGM Retirement Plan and any other similar plan or program
which we provided for our senior officers generally. We were also obligated to
maintain a term life insurance policy in the face amount of $5 million on Mr.
Pisano's life for his benefit. Under the 1996 Incentive Plan and the Senior
Management Bonus Plan, Mr. Pisano holds stock options to purchase shares of the
common stock and bonus interests, respectively. In part to induce him to enter
into his employment agreement, Mr. Pisano received 15,000 shares of the common
stock and $235,343 in cash.
Additionally, pursuant to a previous employment agreement and in place of
certain benefits under a pension plan maintained for Mr. Pisano's benefit by a
prior employer which Mr. Pisano forfeited when he joined MGM in 1993, we
entered into the Supplemental Executive Retirement Agreement with Mr. Pisano.
The Supplemental Executive Retirement Agreement provides Mr. Pisano with an
annual benefit equal to $150,000, less an amount equal to the benefit Mr.
Pisano is entitled to receive under the prior plan and subject to certain
adjustments, payable in the form of a single life annuity commencing on the
date Mr. Pisano attains age 60. The minimum aggregate amount payable to Mr.
Pisano or his beneficiaries will be $900,000, less all benefits to which Mr.
Pisano is entitled under the prior plan. All benefits under the Supplemental
Executive Retirement Agreement are fully vested. After payments have commenced
under the Supplemental Executive Retirement Agreement, the benefit amount shall
be increased effective each January 1 by the adjustment factor applied to
retiree payments for the calendar year under the Prior Plan. If Mr. Pisano is
unmarried on the date benefits commence, the benefit shall be payable monthly
for Mr. Pisano's life ("life only" basis). If, however, Mr. Pisano is married
on the date benefits commence, he may elect to have the benefits to which he is
entitled payable on the life only basis or have the actuarial equivalent of the
life only form payable in equal monthly payments to him during his lifetime
with an amount equal to 50 percent or 100 percent of such payments to continue
after his death to his spouse for the remainder of his spouse's life.
Mr. Pisano resigned on April 26, 1999. Effective as of August 20, 1999, we
entered into a consulting agreement with Mr. Pisano, providing for his services
as an exclusive full-time consultant from May 1, 1999 until July 31, 1999 (the
"Initial Term") and thereafter as a non-exclusive consultant until October 9,
2001. Pursuant to the consulting agreement, Mr. Pisano received a base
consulting fee at an annual rate of $950,000 during the Initial Term and on
August 20, 1999 a lump sum payment equal to the net present value of the
difference between $8.5 million and all amounts theretofore paid to him as
salary and guaranteed bonuses pursuant to the employment agreement and as base
consulting fees pursuant to the consulting agreement. Pursuant to the
consulting agreement, all of Mr. Pisano's stock options became fully vested and
immediately exercisable and all of his bonus interests became fully vested. Mr.
Pisano will be entitled to receive certain benefits during the term of the
consulting agreement, including medical and disability insurance and the $5
million term life insurance policy referred to above, until such benefits are
provided by a third-party employer.
The employment agreements of each of Messrs. Yemenidjian, McGurk, Jones,
Taylor, Mancuso and Pisano also contain: (a) certain nondisclosure provisions
which are effective for the term of such individual's employment with us and
for an indefinite period thereafter; (b) with the exception of
Mr. Yemenidjian's employment agreement, certain noninterference and non-
competition provisions, which are in effect for the term of that individual's
employment with us and one year thereafter; and (c) together with Mr. Brada's
employment agreement, a provision prohibiting the solicitation for employment
and employment of certain company employees, or making public statements
concerning us, for a period of one year following termination of employment.
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Limitation of Liability and Indemnification Matters
As permitted by applicable provisions of the Delaware corporate law, our
Amended and Restated Certificate of Incorporation, as amended to date, contains
a provision where we will indemnify each of our officers and directors (or
their estates, if applicable), and may indemnify any employee or agent of ours
(or their estates, if applicable), to the fullest extent permitted by the
Delaware corporate law as it exists or may in the future be amended.
In addition, we have entered into indemnification agreements with its
directors, its executive officers and certain other officers providing for
indemnification by us, including under circumstances in which indemnification
is otherwise discretionary under Delaware law. These agreements constitute
binding agreements between us and each of the other parties thereto, thus
preventing us from modifying its indemnification policy in a way that is
adverse to any person who is a party to such an agreement.
We currently maintain insurance on behalf of our officers and directors
against certain liabilities that may be asserted against the officer or
director in his or her capacity as an officer or director, subject to customary
exclusions. The amount of insurance is deemed by the Board of Directors to be
adequate to cover such liabilities. Pursuant to the consulting agreement with
Mr. Mancuso, we are required to maintain this insurance in a mutually
acceptable amount, with Mr. Mancuso as a named insured thereunder, to the
extent available at reasonable cost.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sales of Securities to Mr. Mancuso
Pursuant to Mr. Mancuso's employment agreement, Mr. Mancuso received an
annual stock purchase payment of $3 million which was payable annually in
advance in November of each year, out of the after tax proceeds of which he was
required to purchase shares of the common stock. For the year ended December
31, 1998, Mr. Mancuso purchased 159,082 shares of the common stock for
aggregate consideration of approximately $3.0 million.
Shareholders Agreement
The Tracinda Group, MGM, and certain of our current and former executives
and employees are parties to the shareholders agreement, which provides for
certain rights relating to the shares of the common stock, including
registration rights and transfer restrictions. See "Security Ownership of
Certain Beneficial Owners and Management--Shareholders Agreement."
Other Transactions With Tracinda and its Affiliates
In connection with the rights offering in October 1998, the Tracinda Group
entered into a standby agreement with us pursuant to which it exercised all of
the subscription rights distributed to it in the rights offering, thus
purchasing 75,933,009 shares of common stock, for an aggregate purchase price
of approximately $626,447,000. In addition, the Tracinda Group agreed to
purchase any shares of the common stock which were not otherwise subscribed for
in the rights offering. Because the rights offering was oversubscribed, the
Tracinda Group was not obliged to purchase any additional shares of the common
stock.
In February 1980 a predecessor-in-interest to us granted to a predecessor-
in-interest to MGM Grand Inc. an exclusive open-ended royalty-free license,
which was amended in 1992 and further amended in 1998. Pursuant to the license,
MGM Grand has the right to use certain trademarks that include the letters
"MGM," as well as logos and names consisting of or related to stylized
depictions of a lion, in its resort hotel and/or gaming businesses and other
businesses that are not related to filmed entertainment. In 1986 MGM granted
MGM Grand Air, Inc. an exclusive open-ended royalty-free license to use one of
its logos consisting of a stylized depiction of a lion in MGM Grand Air's
airline business. We did not receive any monetary compensation for these
licenses. Tracinda owns a majority of the outstanding common stock of MGM
Grand, the parent of both MGM Grand Hotel and MGM Grand Air. Additionally, we
and affiliates of Tracinda occasionally conduct cross-promotional campaigns, in
which the company's motion pictures and the affiliates' hotels are promoted
together; however, we believe that the amounts involved are immaterial.
We and MGM Grand Hotel have an ongoing relationship whereby MGM Grand Hotel
can utilize key art, still photographs of artwork and one minute film clips
from certain of the company's motion picture releases on an as-needed basis. We
did not receive any monetary compensation for these licenses.
We sell to MGM Grand Hotel and certain of its affiliates, on a wholesale
basis, videocassettes and other merchandise such as baseball caps, clothing,
keychains and watches bearing our trademarks and logos for resale to consumers
in retail shops located within MGM Grand Hotel's hotels. For the year ended
December 31, 1998, we recognized revenues of $24,000 for such videocassettes
and merchandise.
From time to time, we use aircraft owned by Tracinda for use in our
business. We believe that the terms of these arrangements are no less favorable
than those that could be obtained from unrelated parties. For the year ended
December 31, 1998 and the six months ended June 30, 1999, the aggregate of the
payments made to Tracinda for the use of these aircraft was approximately
$29,000 and $46,000, respectively.
Other Transactions
We had an exclusive producer overhead arrangement with FGM Entertainment for
the services of Frank Mancuso, Jr., the son of Mr. Mancuso, which was
terminated in August 1999. Under the agreement which had a term ending on July
31, 2002, FGM Entertainment, a company wholly owned by Mr. Mancuso, Jr., was
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entitled to receive $400,000 each year, subject to five to ten percent annual
increases, for overhead expenses, as well as a development fund and a
production fund to pay for the costs of developing and producing projects. FGM
Entertainment was required to submit all projects that it wished to produce or
develop to the company and received a producing fee, as well as certain
participations and royalties, for each picture that was produced under the
arrangement. For the year ended December 31, 1998 and the six months ended June
30, 1999, these fees, participations and royalties, paid to Mr. Mancuso, Jr.
for movies produced by him such as Species, Fled, Hoodlum and Ronin, totaled
approximately $2.4 million and $0.6 million. We have the right to acquire the
domestic or worldwide rights to each picture produced under the arrangement and
control all remake, sequel and television rights. Pursuant to this termination
agreement, the obligation to fund overhead has ceased, Mr. Mancuso Jr. has
agreed to acquire "Mary Jane's Last Dance" for $3 million, and he has the right
to acquire the remainder of the projects he developed pursuant to a turnaround
arrangement.
In connection with the commencement of Mr. Taylor's employment with us and
to assist Mr. Taylor with his relocation to the Los Angeles area, we entered
into an agreement with Mr. Taylor pursuant to which we agreed to purchase, if
Mr. Taylor requested, Mr. Taylor's former residence for the amount of $390,000.
The residence was sold to a third party in November 1998. Pursuant to our
relocation policies, until the sale of the residence closed, we reimbursed Mr.
Taylor for the mortgage payments on the residence in the amount of $2,473 per
month and was responsible for the cost of maintaining the residence. For the
year ended December 31, 1998, such payments aggregated $33,760. In addition, we
had made an unsecured non-recourse interest-free loan in the principal amount
of $130,000 in order to assist Mr. Taylor in the purchase of a residence in the
Los Angeles area, which amount has been settled in accordance with the terms of
such loan.
In 1998, we acquired all of the interest of Taliafilm, Inc., a company
wholly owned by the sister of Mr. Coppola, in the motion picture Never Say
Never Again for $2.5 million and approximately 20 percent of the adjusted gross
receipts received from the exploitation of the film. In addition, we assumed
certain obligations of Taliafilm relating to such film.
In 1995, we licensed to a subsidiary of Seven Network Limited, a former
beneficial owner of more than five percent of our common stock, the right to
distribute certain motion picture and television product in the Australian free
television market. This agreement was amended on September 9, 1997. The product
licensed includes certain library pictures and theatrical motion pictures and
television series, miniseries and made-for-television movies produced or
distributed by us during the term of the agreement. The license fees for the
library product are at a rate which we believe is arm's-length. The term of the
output portion of the agreement is 15 years. The license fees for output
product television series, television movies and television mini-series are on
a "most favored nations" basis with prices paid by the Seven subsidiary for
comparable programming. For the year ended December 31, 1998 and the six months
ended June 30, 1999, we recognized revenues of $5.7 million and $2.6 million,
respectively, under this agreement.
In 1994, in connection with the formation of Movie Network Channels, a joint
venture in which the company and a subsidiary of Seven have non-controlling
interests, we licensed to the joint venture certain of its current theatrical
and television motion pictures, as well as a number of library pictures, for
distribution on Australian pay and basic cable television. The agreement
expires on June 30, 2000, with all motion pictures covered by the agreement
reverting to us within one year after that date, but both MGM and Movie Network
Channels have the right to extend the license for a further five years. We
receive a license fee for each picture that is based on the number of Movie
Network Channel's subscribers. For the year ended December 31, 1998 and the six
months ended June 30, 1999, we recognized revenues of $3.7 million and $1.7
million, respectively, under this license agreement. We believe that the terms
of the agreement are no less favorable to the company than those contained in
our licenses with unaffiliated licensees.
Seven has agreed to reimburse us for losses that we may incur in connection
with the distribution of Joey, an Australian film with respect to which we have
acquired distribution rights from an unrelated third party.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the beneficial ownership of the common stock as
of August 31, 1999 of (a) each of our director, (b) the "named Executive
Officers" as defined in Item 402 of Regulation S-K under the Securities Act of
1933, (c) our directors and named executive officers as a group and (d) each
person who at such time, to our knowledge, beneficially owned more than five
percent of the outstanding shares of the common stock.
<TABLE>
<CAPTION>
Number of Percentage
Name and Address of Beneficial Owner Shares(1) of Class
------------------------------------ ----------- ----------
<S> <C> <C>
The Tracinda Group(2)............................... 134,997,723 89.1%
150 S. Rodeo Drive
Beverly Hills, CA 90212
Alex Yemenidjian(3)................................. 5,000 *
Christopher J. McGurk(4)............................ 322,500 *
James D. Aljian(3).................................. 13,731 *
Francis Ford Coppola(3)............................. 977 --
Willie D. Davis(3).................................. 929 *
Alexander M. Haig, Jr.(3)........................... -- --
Kirk Kerkorian(3)(5)................................ 134,997,723 89.1
Frank G. Mancuso(3)(6).............................. 2,402,694 1.6
Jerome B. York(3)................................... 13,469 *
William A. Jones(7)................................. 135,582 *
Daniel J. Taylor (8)................................ 67,032 *
Robert Brada(9)..................................... 9,607 *
A. Robert Pisano(10)................................ 565,540 *
Michael G. Corrigan(11)............................. 181,457 *
David G. Johnson(12)................................ 210,416 *
All directors and named executive officers as a
group (15 persons)................................. 138,926,737 90.2
</TABLE>
- --------
* Less than 1 percent.
(1) The number of shares shown includes shares over which the person named
has either sole or shared voting or investment power and shares as to
which certain directors and executive officers disclaim beneficial
ownership. The shares of the common stock which a person has the right to
acquire within 60 days of August 31, 1999 and the shares of common stock
underlying options that are vested as of August 31, 1999 or that will
become vested within 60 days are deemed to be outstanding for the purpose
of calculating the beneficial ownership of the holder of such options or
other rights, but are not deemed to be outstanding for the purpose of
computing the beneficial ownership of any other person. As a result, the
aggregate percentage ownership of the common stock shown above may exceed
100 percent.
(2) Includes: 156,251 shares of the common stock issuable at a price of $6.41
per share pursuant to a presently exercisable stock option which expires
on October 10, 2002 and 16,208,463 shares of the common stock acquired
from Seven Network Limited on September 1, 1998 for aggregate
consideration of $389 million. All of the shares of the common stock held
by the Tracinda Group are pledged to a group of banks to secure a
syndicated credit facility to the Tracinda Group. The Tracinda Group has
indicated that it may purchase shares directly from us in the offering.
The price paid for any such shares will be at a price per share equal to
the per share price to the public, less the underwriting discount. At the
conclusion of the offering, assuming the underwriters do not exercise the
over-allotment option and 36,036,036 shares of common stock are issued,
Tracinda will beneficially own approximately 72.0 percent of the shares
outstanding after the offering if it does not purchase any shares,
approximately 73.9 percent if it purchases 10 percent of the offered
shares, and approximately 81.6 percent if it purchases 50 percent of the
offered shares.
(3) Each of Messrs. Aljian, Kerkorian and York is an employee of, and,
together with Mr. Yemenidjian, was nominated to the board of directors of
the company by, Tracinda. Each of Messrs. Aljian, Davis, Haig, Kerkorian,
Yemenidjian and York is a director of, and Mr. Yemenidjian is also an
executive officer of, MGM Grand, Inc., an affiliate of Tracinda.
Includes: with respect to Messrs. Coppola, Davis, Mancuso and York 500,
156, 313 and 250 shares of the common stock, representing in each case
the estimated number of shares of the common stock, based on a per share
price of $20.00 as of August 31, 1999, to be issued under our director
plan within 60 days of August 31, 1999.
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(4) Shares of the common stock granted to Mr. McGurk pursuant to his
employment agreement.
(5) Mr. Kerkorian is the chief executive officer, president, and sole
shareholder and director of and was nominated to our board of directors
by Tracinda. Represents 134,997,723 shares of the common stock
beneficially owned by the Tracinda Group.
(6) Includes: 1,745,680 shares of the common stock underlying options vested
as of August 31, 1999 or that will become vested within 60 days of such
date. Also includes 7,578 shares of the common stock which are owned by
Mr. Mancuso's children and grandchildren and as to which Mr. Mancuso
disclaims beneficial ownership.
(7) Includes: 95,750 shares of the common stock underlying options vested as
of August 31, 1999 or that will become vested within 60 days of such
date, and 832 shares of the common stock allocated to Mr. Jones' account
in our savings plan as of August 31, 1999.
(8) Includes: 65,056 shares of the common stock underlying options vested as
of August 31, 1999 or that will become vested within 60 days of such date
and 824 shares of the common stock allocated to Mr. Taylor's account in
our savings plan as of August 31, 1999.
(9) Includes: 8,580 shares of the common stock underlying options vested as
of August 31, 1999 or that will become vested within 60 days of such date
and 796 shares of the common stock allocated to Mr. Brada's account in
our savings plan as of August 31, 1999.
(10) Includes: 523,754 shares of the common stock underlying options vested as
of August 31, 1999 or that will become vested within 60 days of such date
and 867 shares of the common stock allocated to Mr. Pisano's account in
our savings plan as of August 31, 1999. Also includes 7,052 shares of the
common stock which are held by the Pisano's Children's Trust and as to
which Mr. Pisano disclaims beneficial ownership.
(11) Includes: 179,168 shares of the common stock underlying options vested
and exercisable as of August 31, 1999. Mr. Corrigan ceased to be employed
by MGM on June 15, 1998.
(12) Includes: 179,168 shares of the common stock underlying options vested
and exercisable as of August 31, 1999 and 330 shares of the common stock
allocated to Mr. Johnson's account in our savings plan as of August 31,
1999. Mr. Johnson resigned from MGM effective August 20, 1998.
Shareholders Agreement
The following is a summary description of the material terms of the amended
and restated shareholders agreement dated as of August 4, 1997 by and among the
company, the Tracinda Group and the current and former executives specified on
the signature pages thereto. This summary description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
definitive shareholders agreement, a copy of which is filed as an exhibit to
the 10-K for fiscal year ended December 31, 1998. For purposes of the
shareholders agreement, any shares of the common stock beneficially owned,
directly or indirectly, by any member of the Tracinda Group will be deemed to
be owned by Tracinda.
Tag-Along Rights. The Tracinda Group has agreed to be bound by certain "tag-
along" restrictions with respect to certain transfers of its shares of the
common stock. Subject to certain exceptions, if any member of the Tracinda
Group desires to transfer shares of the common stock beneficially owned by it,
directly or indirectly, in whole or in part, then each executive who is a party
to the shareholders agreement shall have the right but not the obligation, (i)
to exercise certain options held by such executive pursuant to the company's
1996 incentive plan to the extent required to realize the "tag-along" rights of
such executive and (ii) to elect that such member of the Tracinda Group be
obligated to require, as a condition to such tag-along sale, that the proposed
purchaser purchase from each such electing executive a proportional number of
shares.
Registration Rights. Subject to certain exceptions and conditions, the
Tracinda Group and the executives have the right to make up to three requests,
in the case of the Tracinda Group, and up to two requests with respect to all
of the executives, for registration under the Securities Act of 1933 of all or
part of the common
S-63
<PAGE>
stock or certain other securities held by them. Any request for a demand
registration must include such registrable securities with an estimated value
of no less than $50 million. Demand registration requests may be for shelf
registrations, covering sales on a delayed or continuous basis.
In addition, if we propose to register any of its equity securities under
the Securities Act (other than (a) a registration on Form S-4 or Form S-8 or
(b) a registration in connection with a pro rata distribution of rights to
subscribe for shares of the common stock), whether or not for sale for its own
account, then, subject to certain exceptions and conditions, each member of the
Tracinda Group and each of the executives shall be entitled to request that the
registrable securities of the same class beneficially owned by such party be
included in such registration.
We will pay all of the expenses of any demand or piggyback registration,
including the fees and expenses of a single counsel retained by the selling
stockholders; however, each selling stockholder will be responsible for the
underwriting discounts and commissions and transfer taxes in connection with
shares sold by such stockholder. Each selling stockholder and the underwriters
through whom shares are sold on behalf of a selling stockholder will be
entitled to customary indemnification from us against certain liabilities,
including liabilities under the Securities Act.
Certain Holdback Agreements. The Tracinda Group and each of the executives
has agreed, under certain circumstances, if requested by us or any managing
underwriters of a registration of securities of MGM, not to effect any public
sale or distribution (including sales pursuant to Rule 144 under the Securities
Act) of equity securities of the company, or any securities convertible into or
exchangeable or exercisable for equity securities, for a period not to exceed
the period commencing with the date seven days prior to and ending with the
date 180 days after the effective date of any underwritten registration by us
of our securities (except as part of such underwritten registration). We have
agreed to a similar restriction (except as part of such underwritten
registration or pursuant to registrations on Form S-4 or Form S-8 or any
successor forms) and to use our best efforts to cause certain holders of its
capital stock (other than in a registered public offering) to so agree.
S-64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by Banc of America
Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation, Credit
Suisse First Boston Corporation, Deutsche Bank Securities Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, CIBC World Markets Corp., ING Barings LLC
and The Seidler Companies Incorporated have severally agreed to purchase from
us the respective number of shares of common stock set forth opposite their
names below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ----------
<S> <C>
Banc of America Securities LLC....................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
Credit Suisse First Boston Corporation............................
Deutsche Bank Securities Inc. ....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated................
CIBC World Markets Corp...........................................
ING Barings LLC...................................................
The Seidler Companies Incorporated................................
DLJdirect Inc. ...................................................
----------
Total........................................................... 36,036,036
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions. Except for those shares covered by the
over-allotment option, the underwriters are obligated to purchase and accept
delivery of all the shares of common stock if they purchase any of the shares.
The underwriters initially propose to offer some of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus supplement and some of the shares of common stock
to dealers at that price less a concession not in excess of $ per share. The
Underwriters may allow, and these dealers may re-allow, a concession not in
excess of $ per share on sales to some other dealers. After the initial
offering of the shares to the public, the representatives of the underwriters
may change the public offering price and these concessions.
If the Tracinda Group purchases any shares in this offering, it will
purchase them directly from us at a purchase price equal to the per share price
to the public, less the underwriting discount. The underwriters would not
participate in the sale of any shares to the Tracinda Group.
We have granted the underwriters an option, exercisable for 30 days from the
date of the underwriting agreement, to purchase up to 5,405,405 additional
shares of common stock at the public offering price less underwriting fees. The
underwriters may exercise the option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to
specific conditions, to purchase a number of additional shares about
proportionate to that underwriter's initial purchase commitment.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect of any of those
liabilities.
MGM and the executive officers and directors and some stockholders of MGM
have agreed, that for a period of 180 days from the date of this prospectus
supplement, they will not, subject to some exceptions, without the prior
written joint consent of Donaldson, Lufkin & Jenrette Securities Corporation
and Banc of
S-65
<PAGE>
America Securities LLC, (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or (2) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any common stock. Either
of the foregoing transfer restrictions will apply regardless of whether a
covered transaction is to be settled by the delivery of common stock, or other
securities, in cash or otherwise. In addition, for the 180 day period, we have
also agreed not to file any registration statement with respect to, and each of
our executive officers, directors and some stockholders has agreed not to make
any demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written joint consent of
Donaldson, Lufkin & Jenrette Securities Corporation and Banc of America
Securities LLC.
Affiliates of Banc of America Securities LLC acted as syndication agent for
our credit facility and as lender under the bridge loan. Because more than 10%
of the net proceeds of this offering may be paid to a member of the National
Association of Securities Dealers, Inc. (the "NASD") or a person affiliated or
associated with a member, the offering is being conducted in compliance with
Rule 2710(c)(8) of the NASD conduct rules. We will use substantially all of the
proceeds of this offering to repay any outstanding amounts under our bridge
loan and credit facility. The Representatives may, from time to time, engage in
transactions with and perform services for us in the ordinary course of their
business. Banc of America Securites LLC, CIBC World Markets Corp., ING Barings
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, or their
affiliates, have performed investment banking and advisory services for us from
time to time for which they have received customary fees and reimbursement of
expenses.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares of common stock included in this offering may not be
offered or sold, directly or indirectly, nor may this prospectus supplement or
any other offering material or advertisement in connection with the offer and
sale of any of these shares be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons who receive this prospectus
supplement are advised to inform themselves about and to observe any
restrictions relating to the offering of the common stock and the distribution
of this prospectus supplement. This prospectus supplement is not an offer to
sell or a solicitation of an offer to buy any shares of common stock included
in this offering in any jurisdiction where that would not be permitted or
legal.
In connection with the offering, any of the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover the syndicate short
positions or to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
LEGAL MATTERS
The validity of the issuance of the shares of the common stock issued hereby
will be passed upon for us by Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP, Los Angeles, California. Certain matters in connection with this
offering will be passed upon for the Underwriters by O'Melveny & Myers LLP,
Los Angeles, California, which represents us with respect to unrelated matters,
and may continue to do so in the future.
S-66
<PAGE>
EXPERTS
Our financial statements for the years ended December 31, 1998 and December
31, 1997 and for the period from October 11, 1996 to December 31, 1996 and for
MGM Studios for the period from January 1, 1996 to October 10, 1996 included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC, in accordance with the Securities Exchange Act of
1934. You may read and copy any document we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public from the SEC's web site
at: http://www.sec.gov.
The SEC allows us to "incorporate by reference" into this prospectus the
information we file with them, which means that we can disclose important
information to you by referring to our filed SEC documents. The information
incorporated by reference is considered to be part of this prospectus.
Information we file with the SEC after the date of this document will update
and supersede the information in this prospectus. We incorporate by reference
the documents listed below and any future filings made with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until this offering is completed:
(1) Our Annual Report on Form 10-K for the year ended December 31, 1998;
(2) Our Quarterly Reports on Form 10-Q for the periods ended March 31, 1999
and June 30, 1999;
(3) Our current report on Form 8-K, dated March 16, 1999;
(4) The description of capital stock contained in Item 1 of our
Registration Statement on Form 8-A, filed with the SEC on October 14,
1997, as amended; and
(5) Our Proxy Statement dated June 15, 1999.
We have also filed a registration statement on Form S-3 with the SEC under
the Securities Act for the securities offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement. You should read the registration statement for further
information about our common stock and us. The registration statement can be
found in the SEC's public reference rooms or on the SEC's website referred to
above, and you may request a copy of any of these filings, at no cost, by
writing or calling William A. Jones, Senior Executive Vice President and
Secretary of the company, at:
Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, California 90404
(310) 449-3000
You can find additional information by visiting our website at:
http://www.mgm.com.
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date
on the front of this prospectus.
S-67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Metro-Goldwyn-Mayer Inc.
Successor Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............ F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years Ended December 31, 1998, 1997 and the Period from October
11, 1996 to December 31, 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and the Period from October 11, 1996 to
December 31, 1996...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and the Period from October 11, 1996 to December 31, 1996... F-6
Notes to Consolidated Financial Statements.............................. F-7
Condensed Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998.................................................. F-27
Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Six Months ended June 30, 1999 (Unaudited) and 1998..... F-28
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
for the Six Months ended June 30, 1999................................. F-29
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six
Months ended June 30, 1999 and 1998.................................... F-30
Notes to Unaudited Condensed Financial Statements....................... F-31
Metro-Goldwyn-Mayer Studios Inc.
Predecessor Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-37
Consolidated Statement of Operations and Comprehensive Income (Loss) for
the Period from January 1, 1996 to October 10, 1996.................... F-38
Consolidated Statement of Stockholder's Equity for the Period from
January 1, 1996 to October 10, 1996.................................... F-39
Consolidated Statement of Cash Flows for the Period from January 1, 1996
to October 10, 1996.................................................... F-40
Notes to Consolidated Financial Statements.............................. F-41
Financial Statement Schedules
Report of Independent Public Accountants (Successor).................... F-47
Report of Independent Public Accountants (Predecessor).................. F-48
Schedule I: Condensed Financial Information of Registrant............... F-49
Schedule II: Valuation and Qualifying Accounts.......................... F-54
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Inc.:
We have audited the accompanying consolidated balance sheets of Metro-
Goldwyn-Mayer Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity and cash flows for the years
then ended and the period from October 11, 1996 (date of commencement of
principal operations) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metro-Goldwyn-Mayer Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended and the period from
October 11, 1996 (date of commencement of principal operations) to December 31,
1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
February 23, 1999 (except with respect to
the matter discussed in Note 15,
as to which date is March 12, 1999)
F-2
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents............................ $ 54,839 $ 3,978
Accounts and contracts receivable (net of allowance
for doubtful accounts of $23,220 and $27,603,
respectively)....................................... 365,067 285,283
Film and television costs, net....................... 2,076,663 1,867,126
Investments and advances to affiliates............... 17,674 9,917
Property and equipment, net.......................... 38,636 32,785
Excess of cost over net assets of acquired
businesses, net..................................... 561,026 574,795
Other assets......................................... 45,073 48,770
---------- ----------
$3,158,978 $2,822,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Bank and other debt................................ $ 715,574 $ 890,508
Accounts payable and accrued liabilities........... 100,377 147,476
Accrued participants' share........................ 232,515 216,530
Income taxes payable............................... 34,869 31,579
Advances and deferred revenues..................... 130,664 130,329
Other liabilities.................................. 25,322 27,677
---------- ----------
Total liabilities................................ 1,239,321 1,444,099
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 250,000,000 shares
authorized, 150,856,424 and 65,765,655 shares
issued and outstanding............................ 1,509 658
Additional paid-in capital......................... 2,203,490 1,504,850
Deficit............................................ (285,596) (127,948)
Accumulated other comprehensive income............. 254 995
---------- ----------
Stockholders' equity............................. 1,919,657 1,378,555
---------- ----------
$3,158,978 $2,822,654
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
<TABLE>
<CAPTION>
October 11 to
Year Ended December 31, December 31,
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Revenues.............................. $ 1,240,723 $ 831,302 $ 228,686
Expenses:
Film and television production and
distribution....................... 1,191,848 799,539 195,076
General and administrative
expenses........................... 92,244 87,644 18,319
Severance and related costs......... 13,182 -- --
Goodwill amortization............... 14,289 11,230 1,717
----------- ----------- ----------
Total expenses.................... 1,311,563 898,413 215,112
----------- ----------- ----------
Operating income (loss)............... (70,840) (67,111) 13,574
Other income (expense):
Interest expense, net of amounts
capitalized........................ (80,611) (53,105) (9,875)
Interest and other income, net...... 3,984 2,447 813
----------- ----------- ----------
Total other expense............... (76,627) (50,658) (9,062)
----------- ----------- ----------
Income (loss) from operations before
provision for income taxes........... (147,467) (117,769) 4,512
Income tax provision.................. (10,181) (10,345) (4,346)
----------- ----------- ----------
Net income (loss)..................... (157,648) (128,114) 166
Foreign currency translation
adjustment........................... (741) (150) 1,145
----------- ----------- ----------
Comprehensive income (loss)........... $ (158,389) $ (128,264) $ 1,311
=========== =========== ==========
Earnings (loss) per share:
Basic............................... $ (2.08) $ (4.47) $ 0.01
=========== =========== ==========
Diluted............................. $ (2.08) $ (4.47) $ 0.00
=========== =========== ==========
Weighted average number of common
shares outstanding:
Basic............................... 75,816,326 28,634,362 16,692,217
=========== =========== ==========
Diluted............................. 75,816,326 28,634,362 37,796,672
=========== =========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ------------------ Add'l Retained Accum. Other Total
No. of Par No. of Par Paid-in Earnings Comprehensive Stockholders'
Shares Value Shares Value Capital (Deficit) Income Equity
--------- ------- ----------- ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Balance....... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of preferred
and common stock....... 501,006 5 16,700,342 167 901,639 -- -- 901,811
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 1,145 1,145
Net income.............. -- -- -- -- -- 166 -- 166
--------- ------ ----------- ------ ---------- --------- ------ ----------
Balance December 31,
1996................... 501,006 5 16,700,342 167 901,639 166 1,145 903,122
Issuance of preferred
and common stock....... 1,914 -- 28,110,145 281 603,416 -- -- 603,697
Conversion of preferred
stock into common
stock.................. (502,920) (5) 20,955,168 210 (205) -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (150) (150)
Net loss................ -- -- -- -- -- (128,114) -- (128,114)
--------- ------ ----------- ------ ---------- --------- ------ ----------
Balance December 31,
1997................... -- -- 65,765,655 658 1,504,850 (127,948) 995 1,378,555
Issuance of common
stock.................. -- -- 85,090,769 851 697,084 -- -- 697,935
Amortization of deferred
stock compensation..... -- -- -- -- 1,556 -- -- 1,556
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (741) (741)
Net loss................ -- -- -- -- -- (157,648) -- (157,648)
--------- ------ ----------- ------ ---------- --------- ------ ----------
Balance December 31,
1998................... -- $ -- 150,856,424 $1,509 $2,203,490 $(285,596) $ 254 $1,919,657
========= ====== =========== ====== ========== ========= ====== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
October 11 to
Year Ended December 31, December 31,
1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss).................... $ (157,648) $ (128,114) $ 166
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of film and television
costs and participants' share...... 751,807 429,003 83,508
Depreciation and amortization of
property and equipment............. 8,564 6,783 1,418
Amortization of goodwill and
deferred financing costs........... 19,985 16,323 2,761
Reduction in goodwill due to
realization of tax benefits........ -- -- 1,206
Amortization of deferred executive
compensation....................... 1,556 -- --
Stock contributions to employee
savings plan....................... 1,435 -- --
Increase in bad debt and other
reserves........................... 467 6,382 --
Losses (gains) on equity
investments, net................... 10,887 17,620 (2,592)
(Increase) decrease in accounts and
contracts receivable and other
assets............................. (81,436) 35,054 12,895
Decrease in accounts payable,
accrued and other liabilities,
accrued participants' share and
domestic and foreign taxes......... (121,264) (99,455) (31,542)
Increase (decrease) in advances and
deferred revenues.................. 335 (40,468) (6,258)
Foreign currency exchange (gain)
loss............................... (1,145) 2,190 (234)
---------- ------------ -----------
Net cash provided by operating
activities......................... 433,543 245,318 61,328
---------- ------------ -----------
Investing activities:
Acquisition of Metro-Goldwyn-Mayer
Studios Inc......................... -- -- (1,331,430)
Acquisition of Orion Pictures
Corporation......................... -- (561,617) --
Additions to film costs, net......... (871,271) (703,222) (55,814)
Additions to property and equipment.. (14,005) (9,555) (2,079)
Other investing activities........... (18,646) (11,280) (1,538)
---------- ------------ -----------
Net cash used in investing
activities.......................... (903,922) (1,285,674) (1,390,861)
---------- ------------ -----------
Financing activities:
Proceeds from issuance of equity
securities to outside parties....... 73,185 165,000 --
Proceeds from issuance of equity
securities to related parties....... 623,315 438,697 901,811
Proceeds from debt issuance.......... -- 200,000 475,000
Additions to borrowed funds.......... 472,478 452,600 4,036
Repayments of borrowed funds......... (647,412) (217,473) (35,453)
Financing costs and other............ -- (10,040) --
---------- ------------ -----------
Net cash provided by financing
activities.......................... 521,566 1,028,784 1,345,394
---------- ------------ -----------
Net change in cash and cash equivalents
from operating, investing and
financing activities.................. 51,187 (11,572) 15,861
Net increase (decrease) in cash due to
foreign currency fluctuations......... (326) (831) 520
---------- ------------ -----------
Net change in cash and cash
equivalents........................... 50,861 (12,403) 16,381
Cash and cash equivalents at beginning
of period............................. 3,978 16,381 --
---------- ------------ -----------
Cash and cash equivalents at end of the
period................................ $ 54,839 $ 3,978 $ 16,381
========== ============ ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-6
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1--Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of Metro-Goldwyn-Mayer Inc. (formerly known as P&F
Acquisition Corp.) ("MGM"), 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 executive officers of the Company. Until
September 1, 1998 the investor group included Seven Network Limited ("Seven"),
whose interest was wholly acquired by Tracinda pursuant to the Seven Sale (as
defined in Note 7). The acquisition of MGM Studios by MGM was completed on
October 10, 1996, at which time MGM commenced principal operations (see Note
2). The acquisition of Orion was completed on July 10, 1997 (see Notes 2 and
7). Prior to its acquisition by MGM, MGM Studios was wholly owned by MGM Group
Holdings Corporation, an indirect wholly owned subsidiary of Consortium de
Realisation ("CDR"). CDR is a wholly owned subsidiary of Credit Lyonnais S.A.
and is controlled by the French State.
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 53,
"Financial Reporting by Producers and Distributors of Motion Pictures", the
Company has presented an unclassified consolidated balance sheet. Certain
reclassifications have been made to amounts reported in prior periods to
conform with the current presentation.
Business. The Company is engaged primarily in the development, production
and worldwide distribution of theatrical motion pictures and television
programs. The Company also distributes films produced or financed, in whole or
in part, by third parties. The Company's business units have been aggregated
into three reportable operating segments: feature films, television programming
and other operating activities (see Note 11). Operating units included in the
other operating segment include licensing and merchandising, interactive media
and music, as well as the Company's equity investments (see Note 4).
Motion picture and television production and distribution is highly
speculative and inherently risky. There can be no assurance of the economic
success of such motion pictures and television programming since the revenues
derived from the production and distribution (which do not necessarily bear a
direct correlation to the production or distribution costs incurred) depend
primarily upon their acceptance by the public, which cannot be predicted. The
commercial success of a motion picture also depends upon the quality and
acceptance of other competing films released into the marketplace at or near
the same time, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. The theatrical success of a motion picture is a very important
factor in generating revenues from such motion picture in other media.
The success of the Company's television programming also may be impacted by
prevailing advertising rates, which are subject to fluctuation. Therefore,
there is a substantial risk that some or all of the Company's motion picture
and television projects will not be commercially successful, resulting in costs
not being recouped or anticipated profits not being realized.
Principles of Consolidation. The consolidated financial statements include
the accounts of MGM, MGM Studios, Orion and all of their majority-owned and
controlled subsidiaries. The Company's investments in related companies which
represent a 20% to 50% ownership interest over which the Company has
significant influence but not control are accounted for using the equity method
(see Note 4). All significant intercompany balances have been eliminated.
F-7
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments, purchased with an initial maturity of three months or less, to be
cash equivalents. Included in other assets at December 31, 1998 and 1997 is
approximately $4,333,000 and $4,905,000, respectively, of cash restricted by
various escrow agreements. The carrying value of the Company's cash equivalents
approximated cost at each balance sheet date.
Revenue Recognition. Revenues from theatrical distribution of feature films
are recognized on the dates of exhibition. Revenues from direct home video
distribution are recognized, net of an allowance for estimated returns,
together with related costs, in the period in which the product is available
for sale by the Company's customers. Revenues from television licensing,
together with related costs, are recognized when the feature film or television
program is available to the licensee for telecast. Long-term non-interest-
bearing receivables arising from licensing agreements are discounted to present
value.
Accounting for Film and Television Costs. Except for purchase accounting
adjustments, film costs include the costs of production, prints, pre-release
and other advertising expected to benefit future periods and capitalized
overhead and interest. These costs, as well as participations and talent
residuals, are charged against earnings on an individual film basis in the
ratio that the current year's gross film revenues bear to management's estimate
of total remaining ultimate gross film revenues from all sources. The cost
allocated to films revalued in purchase accounting is being amortized over
their estimated economic lives not to exceed 20 years.
Film costs are stated at the lower of cost or estimated net realizable value
on an individual film basis. Revenue and cost forecasts are continually
reviewed by management and revised when warranted by changing conditions. When
estimates of total revenues and costs indicate that a feature film or
television program will result in an ultimate loss, additional amortization is
recognized to the extent required to produce a zero gross margin over the
remaining life of the film or television program.
Property and Equipment. Except for purchase accounting adjustments, property
and equipment are stated at cost. Property and equipment acquired as part of
the acquisitions of MGM Studios and Orion are stated at estimated fair market
value. Depreciation of property and equipment is computed under the straight-
line method over the expected useful lives of applicable assets, ranging from
three to five years. Leasehold improvements are amortized under the straight-
line method over the shorter of the estimated useful lives of the assets or the
terms of the related leases. When property is sold or otherwise disposed of,
the cost and related accumulated depreciation is removed from the accounts, and
any resulting gain or loss is included in income. The costs of normal
maintenance, repairs and minor replacements are charged to expense when
incurred.
Goodwill. The excess cost of acquisition over the fair market values of
identifiable net assets acquired (goodwill) is amortized over an estimated
useful life of 40 years using the straight-line method. The Company has adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of". This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
carrying value of existing assets are reviewed when events or changes in
circumstances indicate that an impairment test is necessary in order to
determine if an impairment has occurred. When factors indicate that such assets
should be evaluated for possible impairment, the Company will estimate the
future cash flows expected to result from the use of the assets and their
eventual disposition, and compare the amounts to the carrying value of the
assets to determine if an impairment loss has occurred. For the period from
October 11, 1996 to December 31, 1996, goodwill was reduced by $1,206,000 due
to the utilization of certain tax assets not benefitted at the acquisition
date. During the year ended December 31, 1997, the Company reduced goodwill and
accrued tax reserves by $11,075,000 due to the favorable resolution of certain
pre-acquisition contingencies. Accumulated amortization of goodwill was
$26,716,000 and $12,947,000 as of December 31, 1998 and 1997, respectively.
F-8
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes. In accordance with SFAS No. 109, "Accounting for Income
Taxes," deferred tax assets and liabilities are recognized with respect to the
tax consequences attributable to differences between the financial statement
carrying values and tax bases of existing assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary differences are
expected to be recovered or settled. Further, the effect on deferred tax assets
and liabilities of changes in tax rates is recognized in income in the period
that includes the enactment date.
Foreign Currency Translation. Generally, foreign subsidiary assets and
liabilities are translated into United States dollars at the exchange rates in
effect at the balance sheet date. Revenues and expenses of foreign subsidiaries
are translated into United States dollars at the average exchange rates that
prevailed during the period. The gains or losses that result from this process
are included as a component of the accumulated other comprehensive income
balance in stockholders' equity. Foreign currency denominated transactions are
recorded at the exchange rate in effect at the time of occurrence, and the
gains or losses resulting from subsequent translation at current exchange rates
are included in the statement of operations.
Financial Instruments. The carrying values of short-term trade receivables
and payables approximate their estimated fair values because of the short
maturity of these instruments. The carrying values of receivables with
maturities greater than one year have been discounted at LIBOR plus 2.50
percent (approximately 7.57 percent and 8.31 percent at December 31, 1998 and
1997, respectively), which approximates the Company's current effective
borrowing rates.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Company enters into interest rate swaps
to lower funding costs, to diversify sources of funding, or to alter interest
rate exposures arising from mismatches between assets and liabilities. Interest
rate swaps allow the Company to raise long-term borrowings at floating rates
and effectively swap them into fixed rates that are lower than those available
to the Company if fixed-rate borrowings were made directly. Under interest rate
swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest amounts
calculated by reference to an agreed notional principal amount.
Accounts and Contracts Receivable. At December 31, 1998, accounts and
contracts receivable aggregated $388,287,000 (before allowance for doubtful
accounts), of which approximately $338,000,000 is due within one year.
Concentration of credit and geographic risk with respect to accounts receivable
is limited due to the large number and general dispersion of accounts which
constitute the Company's customer base. The Company performs credit evaluations
of its customers and in some instances requires collateral. At December 31,
1998 and 1997, there were no significant customers accounting for greater than
10 percent of the Company's accounts and contracts receivable.
Earnings Per Share. The Company has adopted SFAS No. 128, "Earnings Per
Share" ("EPS"), effective for the year ending December 31, 1997, and has
restated its earnings per share disclosures for the period ended December 31,
1996 to comply with SFAS No. 128. Under SFAS No. 128, primary EPS is replaced
by "Basic" EPS, which excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. "Diluted" EPS, which is computed similarly
to fully diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. When dilutive, stock options are included as share
equivalents in computing diluted earnings per share using the treasury stock
method. The weighted average number of shares used in computing basic earnings
(loss) per share was 75,816,326 and 28,634,362 in the years ended December 31,
1998 and 1997, and 16,692,217 in the period from October 11, 1996 to
December 31, 1996, respectively. The per share computations for all periods
presented
F-9
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reflect the 41.667 for 1 stock split (see Note 7). Basic EPS for the period
from October 11, 1996 to December 31, 1996 increased by $.01 per share due to
the adoption of SFAS No. 128. Included in the computation of weighted average
shares for diluted EPS for the period from October 11, 1996 to December 31,
1996 are 21,104,455 shares of dilutive securities. Dilutive securities of
1,642,556 and 18,291,004 shares are not included in the calculation of diluted
EPS in the years ending December 31, 1998 and 1997 because they are
antidilutive.
Comprehensive Income. The Company has adopted SFAS No. 130, "Reporting
Comprehensive Income", effective for the year ending December 31, 1998. This
statement establishes standards for the reporting and display of comprehensive
income and its components in financial statements and thereby reports a measure
of all changes in equity of an enterprise that result from transactions and
other economic events other than transactions with owners.
Use of Estimates in the Preparation of Financial Statements. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities. Management estimates ultimate
revenues and costs for feature films and television programs for each market
based on anticipated release patterns, public acceptance and historical results
for similar products. Actual results could differ from those estimates.
New Accounting Pronouncements. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for all quarters of fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
In October 1998, the FASB 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 SOP should be included in the determination of net income in
conformity with Accounting Principles Board Opinion No. 20, "Accounting
Changes". 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.
The Company will adopt these statements on their respective effective dates.
The effect of these new accounting pronouncements has not yet been determined
by Management.
Note 2--Acquisitions and Restructuring Charges
On October 10, 1996, MGM completed the acquisition of all the common stock
of MGM Studios (the "Acquisition") for a purchase price of $1,300,000,000 in
cash, plus payment of acquisition related costs of approximately $31,430,000.
In connection with an investment agreement (the "Investment Agreement") among
Mr. Frank Mancuso, an investor group comprised of Tracinda and Seven
(collectively, the "Investors") and MGM, Tracinda acquired $200,000,000 of the
common stock of MGM (the "Common Stock") and $450,000,000 of the Series A
Cumulative Convertible Preferred Stock of MGM (the "Preferred Stock"), and
Seven acquired $200,000,000 of the Common Stock and $50,000,000 of the
Preferred Stock, concurrent with the closing of the Acquisition. Also, in
connection with the Acquisition, Tracinda and Celsus Financial Corp., an entity
wholly-owned by Michael R. Gleason (a former director of the Company), were
each granted an option by the Company to purchase 156,251 shares of the Common
Stock at an exercise price of $6.41 per share (the options expire on October
10, 2002) and reimbursed an agreed-upon amount of $4,750,000 each for costs
related to the Acquisition.
F-10
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 10, 1997, the Company acquired all the outstanding common stock of
Orion, together with certain of its subsidiaries, for an aggregate purchase
price of $573,000,000 (the "Orion Acquisition"). The Company financed the Orion
Acquisition through (i) the issuance of 13,375,107 and 1,625,013 shares of the
Common Stock to Tracinda and Seven, respectively, for aggregate net proceeds of
$360,000,000, (ii) borrowings by Orion under a new $250,000,000 Orion credit
facility ("Original Orion Credit Facility"), which was subsequently amended
(see Note 6), and (iii) assumption of certain liabilities.
The Orion Acquisition has been accounted for as a purchase. Orion's assets
and liabilities have been recorded in the Company's financial statements at
their estimated fair values at the acquisition date allocated as follows (in
thousands):
<TABLE>
<S> <C>
Accounts and contracts receivable.............................. $ 51,015
Film and television costs...................................... 396,437
Other assets................................................... 14,953
Excess of cost over net assets of acquired businesses.......... 294,355
Liabilities assumed, including reserve for severance of
$36,000....................................................... (190,795)
Cash on hand................................................... (4,348)
---------
Cash purchase price............................................ $ 561,617
=========
</TABLE>
The results of operations of MGM Studios have been included in the
consolidated financial statements from October 11, 1996, date of commencement
of principal operations. The results of operations of Orion have been included
in the consolidated financial statements from July 10, 1997, date of
acquisition. The Company has made severance and other payments associated with
the Orion Acquisition aggregating $36,000,000 from the date of acquisition to
December 31, 1998. The pro forma results of operations for the years ended
December 31, 1997 and 1996 as if the Acquisition, the Orion Acquisition, the
41.667 stock split and the conversion of the Preferred Stock had occurred at
the beginning of each period are as follows (in thousands, except share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Revenues............................................ $ 893,419 $1,315,128
Operating income (loss)............................. $ (84,819) $ (598,742)
Net income (loss)................................... $ (158,364) $ (669,251)
Pro forma loss per share............................ $ (2.91) $ (12.73)
Pro forma weighted average shares................... 54,458,427 52,567,754
</TABLE>
In association with a restructuring program implemented by the Company in
September 1998, the Company recorded a charge of $13,782,000 representing
severance and other costs, of which $9,972,000 has been paid through December
31, 1998. This charge included the termination of 114 employees across all
divisions of the Company.
F-11
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Film and Television Costs
Film and television costs, net of amortization, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Theatrical productions:
Released......................................... $2,116,007 $1,688,378
Less: accumulated amortization................... (750,008) (269,932)
---------- ----------
Released, net.................................... 1,365,999 1,418,446
Completed not released 98,654 7,662
In process and development....................... 283,242 174,386
---------- ----------
Subtotal: theatrical productions............... 1,747,895 1,600,494
---------- ----------
Television programming............................. 567,138 361,514
Less: accumulated amortization................... (238,370) (94,882)
---------- ----------
Subtotal: television programming............... 328,768 266,632
---------- ----------
$2,076,663 $1,867,126
========== ==========
</TABLE>
Interest costs capitalized to theatrical productions were $16,775,000,
$15,242,000 and $524,000 during the years ended December 31, 1998 and 1997, and
the period from October 11, 1996 to December 31, 1996, respectively.
Based on the Company's estimates of projected gross revenues as of December
31, 1998, approximately 60% of unamortized film costs applicable to released
theatrical films and released television programs will be amortized during the
nine years ending December 31, 2007.
On January 7, 1999, the Company acquired certain film libraries and film
related rights containing over 1,300 feature films that were previously owned
by PolyGram N.V. and its subsidiaries for $235 million. The purchase was funded
through an advance on the Revolving Facility (as defined in Note 6) and
utilization of cash on hand.
Note 4--Investments and Advances to Affiliates
Distribution in foreign theatrical and certain pay television markets is
performed by United International Pictures B.V. ("UIP"), in which the Company
has a one-third interest. The Company's investment in UIP, which is included in
investments and advances to affiliates, is stated at cost plus equity in
undistributed earnings. The Company includes in its financial statements the
revenues and related costs associated with its films distributed by UIP. The
distribution fees paid to UIP by the Company are included in film and
television production and distribution expense. Due to timing differences there
are no taxable earnings and therefore, there is no tax provision on
undistributed earnings. The Company's share of the net profits in UIP in the
years ended December 31, 1998 and 1997, and the period from October 11, 1996 to
December 31, 1996, were $7,391,000, $6,227,000 and $2,592,000, respectively.
In May 1996, the Company entered into a joint venture agreement with Encore
International, Inc., an indirect subsidiary of Telecommunications, Inc., to
develop MGM Gold Networks (Asia) ("MGM Gold"), a satellite and cable delivery
channel based in Asia whose operations were terminated in April 1998. In
addition, in May 1998, the Company acquired a 50 percent interest in a Latin
American cable programming joint venture, MGM Networks Latin America ("MGM
Latin America"), for certain assets contributed by the Company to the joint
venture. The Company shares equally in the profits of the venture and is
obligated to
F-12
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fund 50 percent of the joint venture's expenses up to a maximum of
approximately $24,000,000, of which the Company had funded approximately
$12,400,000 as of December 31, 1998. The Company's share of MGM Gold's and MGM
Latin America's start-up losses in the years ended December 31, 1998 and 1997
were $9,296,000 and $11,754,000, respectively.
Investments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
UIP.............................................. $ 8,273 $ 6,623
MGM Latin America................................ 6,724 --
Others........................................... 2,677 3,294
-------- --------
$ 17,674 $ 9,917
======== ========
Note 5--Property and Equipment
Property and equipment are summarized as follows (in thousands):
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Leasehold improvements........................... $ 20,921 $ 14,845
Furniture, fixtures and equipment................ 34,056 26,141
-------- --------
54,977 40,986
Less accumulated depreciation and amortization... (16,341) (8,201)
-------- --------
$ 38,636 $ 32,785
======== ========
Note 6--Bank and Other Debt
Bank and other debt is summarized as follows (in thousands):
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Revolving Facility............................... $ -- $175,000
Term Loans....................................... 700,000 700,000
Capitalized lease obligations and other
borrowings...................................... 15,574 15,508
-------- --------
$715,574 $890,508
======== ========
</TABLE>
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 (7.94 percent at December 31,
1998). The Tranche B Loan bears interest at 2.75 percent over the Adjusted
LIBOR rate (8.19 percent at December 31, 1998). 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.
F-13
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
$800,000,000 at an average rate of approximately 7.5 percent, which expire in
various terms no later than December 2001. At December 31, 1998, the Company
would have to pay approximately $6,978,000 to terminate such swap contracts.
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.
The Amended Credit Facility was amended, effective March 30, 1998 and September
9, 1998, to modify certain of these financial covenants.
Lease and other borrowings. Capitalized lease and other borrowings relate
principally to contractual liabilities and computer equipment financing at
interest rates of approximately 10%.
Maturity schedule. Credit facilities, lease and other borrowings at December
31, 1998 are scheduled to mature as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................ $ 7,334
2000............................................................ 5,009
2001............................................................ 33,123
2002............................................................ 73,695
2003............................................................ 103,774
Thereafter...................................................... 492,639
--------
$715,574
========
</TABLE>
Note 7--Stockholders' Equity
Recapitalization. On November 13, 1997, the Company effected a
recapitalization pursuant to which the Company, immediately prior to the
closing of the IPO and the Tracinda Purchase (as such terms are defined below)
(i) converted each share of its Preferred Stock into one share of Common Stock,
(ii) effected a 41.667 for 1 stock split and (iii) increased the number of
authorized shares of the Common Stock from 50,000,000 to 125,000,000. Share and
per share information have been retroactively restated for all periods
presented to reflect this recapitalization.
Orion Acquisition. The Company financed a portion of the Orion Acquisition
through the issuance of 13,375,107 and 1,625,013 shares of the Common Stock to
Tracinda and Seven, respectively, for aggregate net proceeds of $360,000,000
(see Note 2).
Initial Public Offering and Tracinda Purchase. On November 13, 1997, the
Company issued and sold 9,000,000 new shares of the Common Stock at a price per
share of $20, less an underwriting discount and offering expenses, for net
proceeds of $165,000,000, in an initial public offering (the "IPO"). Concurrent
with the consummation of the IPO, Tracinda purchased directly from the Company
3,978,780 shares of the Common Stock, at a price per share of $20 less an
amount equal to the underwriting discount per share for shares issued in the
IPO, for net proceeds of $75,000,000 (the "Tracinda Purchase"). Subsequently,
$190,000,000 of the net proceeds of the IPO and the Tracinda Purchase were used
to repay existing bank debt and the remaining net proceeds were retained and
used for working capital purposes.
Seven Sale. On September 1, 1998, Tracinda purchased from Seven 16,208,463
shares of the Common Stock, representing all of the capital stock of the
Company beneficially owned by Seven, for a price per share
F-14
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $24 and an aggregate purchase price of $389,003,000 (the "Seven Sale"). With
the consummation of the Seven Sale, Tracinda and 250 Rodeo, Inc., an affiliate
of Tracinda ("250 Rodeo"), increased their beneficial ownership of the Company
to approximately 89.5 percent.
Rights Offering. On October 26, 1998 (the "Record Date"), the Company issued
to the holders of record of the Common Stock, at no charge to such holders,
transferable subscription rights (the "Rights") to subscribe for 84,848,485
shares (the "Shares") of the Common Stock for $8.25 per share (the
"Subscription Price") (the "Rights Offering"). Holders of the Common Stock
received 1.289 Rights for each share of the Common Stock held as of the Record
Date. Rights holders were allowed to purchase one share of the Common Stock at
the Subscription Price for each whole Right held (the "Basic Subscription
Privilege"). Rights holders who exercised the Basic Subscription Privilege in
full also had the opportunity to purchase additional shares at the Subscription
Price pursuant to an Oversubscription Privilege, as defined. Pursuant to the
Rights Offering, Tracinda and 250 Rodeo each committed to exercise the Basic
Subscription Privilege with respect to all of the Subscription Rights
distributed to it (subject to certain conditions). The Rights expired on
November 16, 1998. The Rights Offering was fully subscribed (including shares
issued pursuant to the Oversubscription Privilege), and the Company issued the
Shares for total net proceeds of $696,500,000 (gross proceeds of $700,000,000
less applicable fees and expenses of approximately $3,500,000). The net
proceeds from the Rights Offering were used to repay in full the amounts
outstanding under a bridge loan, and then to repay borrowings outstanding under
the Revolving Facility.
In connection with the Rights Offering, the Company also amended its Amended
and Restated Certificate of Incorporation in order to increase the number of
shares of the Common Stock authorized from 125,000,000 to 250,000,000 (the
"Amendment"). The Amendment was approved by the Board of Directors of the
Company and Tracinda (which represents a majority of the outstanding Common
Stock) on October 22, 1998 and was effective prior to the closing of the Rights
Offering.
1996 Incentive Plan. The Company has an Amended and Restated 1996 Stock
Incentive Plan (the "1996 Incentive Plan"). Awards under the 1996 Incentive
Plan are generally not restricted to any specific form or structure and may
include, without limitation, qualified or non-qualified stock options,
incentive stock options, restricted stock awards and stock appreciation rights
(collectively, "Awards"). Outstanding stock options under the 1996 Incentive
Plan generally vest over a period of five years and are not exercisable until
vested. Awards may be conditioned on continued employment, have various vesting
schedules and accelerated vesting and exercisability provisions in the event
of, among other things, a change in control of the Company.
In connection with the Rights Offering, the per share exercise price of the
stock options granted to certain executive officers and other key employees of
the Company (the "Executive Repricing Participants") aggregating 3,164,604
options were reduced from $24.00 to $14.90, and for approximately 400 other
employees the exercise price of 2,027,900 stock options was reduced from $20.00
to $14.90, for 10,400 options from $22.00 to $14.90, for 103,800 options from
$21.50 to $14.90 and for 19,800 options from $19.63 to $14.90 (the "Employee
Options") (collectively, the "Options Repricing"). The options which have had
their exercise price adjusted pursuant to the Options Repricing will not be
exercisable until the later of (i) six months following the Rights Offering,
(ii) the date the Options Repricing is approved by the holders of 75 percent of
the outstanding shares of the Common Stock and (iii) the applicable date of
exercise set forth in the respective option agreement. No changes will be made
to the vesting schedule or expiration date of the options subject to the
Options Repricing.
F-15
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option transactions under the 1996 Incentive Plan were as follows:
<TABLE>
<CAPTION>
October 11 to
December 31, 1998 December 31, 1997 December 31, 1996
-------------------- ---------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 7,683,952 $22.71 1,745,680 $24.00 -- --
Granted................. 5,973,714 $14.73 5,948,672 $22.33 1,745,680 $24.00
Cancelled............... (5,945,055) $22.16 (10,400) $20.00 -- --
---------- ------ --------- ------ --------- ------
Options outstanding at
end of year............ 7,712,611 $17.25 7,683,952 $22.71 1,745,680 $24.00
========== ====== ========= ====== ========= ======
Options exercisable at
end of year............ 765,662 $24.00 -- -- -- --
========== ====== ========= ====== ========= ======
The following table summarizes information about the outstanding options at
December 31, 1998 under the 1996 Incentive Plan:
<CAPTION>
Outstanding
-------------------------------
Weighted
Average
remaining
years of
Exercise Number of contractual
Price Options life
-------- --------- -----------
<S> <C> <C> <C>
$11.38 285,000 9.94
$14.90 5,323,595 8.39
$24.00 2,104,016 7.78
---------
7,712,611
=========
</TABLE>
Senior Management Bonus Plan. The Company has a Senior Management Bonus Plan
(the "Senior Management Bonus Plan") under which 2,420,685 bonus interests
("Bonus Interests") have been granted to certain key employees. Subject to
certain vesting and other requirements, each Bonus Interest held by the
Executive Repricing Participants entitles the holder to receive a cash payment
if (a) the sum of the average closing price of Common Stock during the 20
trading days plus, in certain circumstances, per share distributions on the
Common Stock (together, the "Price") preceding a Determination Date, as
defined, is greater than (b) $14.90 and less than $29.80 (adjusted for stock
splits, reverse stock splits and similar events). With respect to Bonus
Interests held by all others, each Bonus Interest entitles the holder to
receive a cash payment if the Price preceding a Determination Date, as defined,
is greater than $24.00 and less than $48.00 (adjusted for stock splits, reverse
stock splits and similar events). The cash payment will be equal to (i) the
vested portion of the Bonus Interest at the Determination Date multiplied by
(ii) the amount by which the Price at the Determination Date is less than
$29.80, with respect to Executive Repricing Participants, or $48.00 with
respect to all others, multiplied by (iii) 1.61, with respect to the Executive
Repricing Participants only (in each case, a maximum of $24.00 per Bonus
Interest). Once a payment is made in respect of the vested portion of a Bonus
Interest, no further payment is due in respect of that portion. If at any
Determination Date the Price equals or exceeds $29.80, with respect to
Executive Repricing Participants, or $48.00, with respect to all others, no
payments will thereafter be due in respect of any then-vested portion of a
Bonus Interest. Bonus Interests vested 20 percent at October 1, 1997 and 1/60
each month thereafter. Bonus Interests vested at December 31, 1998 were
1,103,301.
F-16
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting For Stock Issued to Employees," and related interpretations in
accounting for its plans. Had compensation cost for these plans been determined
consistent with FASB Statement No. 123, the Company's net income (loss) would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended October 11 to
December 31, December 31,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported............................ $(157,648) $(128,114) $ 166
Pro forma.............................. $(170,546) $(136,187) $ (15)
Pro forma loss per share............... $ (2.25) $ (4.76) $(0.00)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
model based on the following assumptions: the weighted average fair value of
stock options granted in the year ended December 31, 1998, 1997 and in the
period from October 11 to December 31, 1996 was $4.62, $5.41 and $6.94,
respectively. The dividend yield was 0 percent in all periods, and expected
volatility was 40.5 percent for the year ended December 31, 1998 and 0 percent
in all other periods. Also, the calculation uses a weighted average expected
life of 5.0 years, 5.0 years and 5.5 years, and a weighted average assumed
risk-free interest rate of 4.9 percent, 5.9 percent and 6.2 percent, for the
years ended December 31, 1998, 1997 and the period from October 11 to December
31, 1996, respectively.
Note 8--Income Taxes
The Company's domestic and foreign tax liability balances consist of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current............................................ $34,869 $30,879
Deferred........................................... -- 700
------- -------
$34,869 $31,579
======= =======
</TABLE>
F-17
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For income tax purposes, the historical tax basis of the assets and
liabilities of MGM Studios and Orion have been retained following their
acquisitions by the Company. The income tax effects of temporary differences
between book value and tax basis of assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Film and television costs........................ $ 32,078 $ 21,143
Participations and residuals payable............. 61,434 10,886
Reserves and investments......................... 48,332 52,375
Net miscellaneous tax assets..................... 26,595 34,780
Operating loss carryforwards..................... 104,607 74,069
--------- ---------
Subtotal, gross deferred tax assets............. 273,046 193,253
Valuation allowance.............................. (228,044) (173,867)
--------- ---------
Total deferred tax assets...................... 45,002 19,386
--------- ---------
Deferred tax liabilities:
Film revenue..................................... (41,556) (18,709)
Goodwill......................................... (3,446) (1,377)
--------- ---------
Total deferred tax liabilities................. (45,002) (20,086)
--------- ---------
Net deferred tax liability......................... $ -- $ (700)
========= =========
</TABLE>
As of December 31, 1998, the Company and its subsidiaries for U.S. federal
income tax purposes had net operating loss carryforwards of $30,323,000,
$91,511,000 and $146,388,000, which expire in 2011, 2012 and 2018,
respectively. Under U.S. tax rules enacted in 1997, net operating losses
generated in tax years beginning before August 6, 1997 may be carried forward
for 15 years while losses generated in subsequent tax years may be carried
forward 20 years. Presently, there are no limitations on the use of these
carryforwards.
At December 31, 1998, management has determined that $228,044,000 of
deferred tax assets do not satisfy the recognition criteria set forth in SFAS
No. 109. Accordingly, a valuation allowance has been recorded by the Company
for this amount.
Details of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
October 11 to
Year Ended December 31, December 31,
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Current taxes:
Foreign taxes.................... $ 10,181 $ 9,645 $ 3,140
Deferred taxes:
Federal and state taxes
(benefit)....................... (54,177) (66,102) 6,055
Adjustment for change in
valuation allowance............. 54,177 66,802 (4,849)
----------- ----------- -------
Total tax provision................ $ 10,181 $ 10,345 $ 4,346
=========== =========== =======
</TABLE>
F-18
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary reconciliation of the federal tax rate to the
effective tax rate:
<TABLE>
<CAPTION>
Year Ended October 11 to
December 31, December 31,
1998 1997 1996
------ ------ -------------
<S> <C> <C> <C>
Federal tax rate on pre-tax book income
(loss).................................. (35)% (35)% 35%
Goodwill and other permanent
differences............................. 3 % 3 % 14%
Foreign taxes, net of available federal
tax benefit............................. 7 % 8 % 45%
Loss carryforward not benefitted......... 32 % 32 % --%
------ ------ ---
Effective tax rate....................... 7 % 8 % 94%
====== ====== ===
</TABLE>
The Company has various foreign subsidiaries formed or acquired to produce
or distribute motion pictures outside the United States. In the opinion of
management, the earnings of these subsidiaries are not permanently invested
outside the United States. Pursuant to APB No. 23, "Accounting For Income
Taxes--Special Areas," tax expense has accordingly been provided for these
unremitted earnings.
Note 9--Retirement Plans
The Company has a non-contributory retirement plan (the "Basic Plan")
covering substantially all regular full-time, non-union employees. Benefits are
based on years of service and compensation, as defined. In 1998, the Company
adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which revised employers' disclosures about pension
and post-retirement benefit plans.
Reconciliation of the funded status of the plans and the amounts included in
the Company's consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Projected benefit obligations:
Beginning obligations.......................... $10,500 $ 9,913
Service cost................................... 1,149 1,213
Interest cost.................................. 852 841
Actuarial gains................................ 1,506 381
Benefits paid.................................. (355) (1,848)
------- -------
Ending obligations............................. $13,652 $10,500
======= =======
Fair value of plan assets (primarily debt
securities):
Beginning fair value........................... $ 8,741 $ 8,403
Actual return on plan assets................... 1,107 662
Employer contributions......................... 1,712 1,524
Benefits paid.................................. (355) (1,848)
Expenses....................................... -- --
------- -------
Ending fair value.............................. $11,205 $ 8,741
======= =======
</TABLE>
F-19
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Funded status of the plans:
Projected benefit obligations.................. $13,652 $10,500
Plan assets at fair value...................... 11,205 8,741
------- -------
Projected benefit obligations in excess of plan
assets........................................ (2,447) (1,759)
Unrecognized net asset as of beginning of
year.......................................... (140) (160)
Unrecognized net gain.......................... 1,936 860
Unrecognized prior service cost................ (149) (163)
------- -------
Net balance sheet liability.................... $ (800) $(1,222)
======= =======
Key assumptions used in the actuarial computations were as follows:
Discount rate.................................. 6.75% 7.50%
======= =======
Long-term rate of return on assets............. 7.25% 7.25%
======= =======
Rate of increase in future compensation
levels........................................ 5.00% 5.00%
======= =======
</TABLE>
The unrecognized net asset is being amortized over the estimated remaining
service life of 19.4 years. Domestic pension benefits and expense were
determined under the entry age actuarial cost method.
Pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
Year ended October 11 to
December 31, December 31,
1998 1997 1996
------ ------ -------------
<S> <C> <C> <C>
Service cost................................. $1,149 $1,213 $ 244
Interest cost on projected benefit
obligation.................................. 852 841 163
Actual (return) loss on plan assets.......... (676) (636) 224
Net amortization and deferral................ (34) (34) (330)
------ ------ -----
Net periodic pension cost.................... $1,291 $1,384 $ 301
====== ====== =====
</TABLE>
A significant number of the Company's production employees are covered by
union sponsored, collectively bargained multi-employer pension plans. The
Company contributed approximately $8,890,000, $12,366,000 and $2,824,000,
respectively, for such plans in years ended December 31, 1998 and 1997 and the
period from October 11, 1996 to December 31, 1996. Information from the plans'
administrators is not sufficient to permit the Company to determine its share
of unfunded vested benefits, if any.
The Company also provides each of its employees, including its officers, who
have completed one year of service with the Company the opportunity to
participate in the MGM Savings Plan (the "Savings Plan"). The Company
contributed approximately $1,435,000, $1,172,000 and $219,000, respectively, to
the Savings Plan in the years ended December 31, 1998 and 1997 and the period
from October 11, 1996 to December 31, 1996.
Note 10--Related Party Transactions
In February 1980 a predecessor-in-interest to the Company granted to a
predecessor-in-interest to MGM Grand, Inc. an exclusive open-ended royalty-free
license, which was amended in 1992 and further amended in 1998. Pursuant to the
license, as amended, MGM Grand, Inc. has the right to use certain trademarks
that include the letters "MGM," as well as logos and names consisting of or
related to stylized depictions of a lion, in its resort hotel and/or gaming
businesses and other businesses that are not related to filmed entertainment.
In
F-20
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1986 MGM granted MGM Grand Air, Inc. ("Grand Air") an exclusive open-ended
royalty-free license to use one of its logos consisting of a stylized depiction
of a lion in Grand Air's airline business. The Company did not receive any
monetary compensation for these licenses. Tracinda owns a majority of the
outstanding common stock of MGM Grand, Inc., the parent of both MGM Grand Hotel
("Grand Hotel") and Grand Air. Additionally, the Company and affiliates of
Tracinda occasionally conduct cross-promotional campaigns, in which the
Company's motion pictures and the affiliates' hotels are promoted together;
however, the Company believes that the amounts involved are immaterial.
The Company and Grand Hotel have an ongoing relationship whereby Grand Hotel
can utilize key art, still photographs of artwork and one minute film clips
from certain of the Company's motion picture releases on an as-needed basis.
The Company did not receive any monetary compensation for these licenses.
The Company sells to Grand Hotel and certain of its affiliates, on a
wholesale basis, videocassettes and other merchandise such as baseball caps,
clothing, keychains and watches bearing the Company's trademarks and logos for
resale to consumers in retail shops located within Grand Hotel's hotels. Grand
Hotel currently is the Company's largest wholesale customer of the Company's
merchandise and, consequently, receives customary volume discounts from the
Company. During the years ended December 31, 1998 and 1997 and the period from
October 11, 1996 to December 31, 1996, the Company recognized revenues of
$24,000, $257,000 and $70,000, respectively, for such videocassettes and
merchandise.
In 1997 MGM Studios and Grand Hotel entered into a site location agreement
with respect to production of a pilot episode of a television series being
developed by MGM Studios. Grand Hotel was not compensated for the use of the
site, but was compensated, on customary terms, for goods and services provided
by Grand Hotel in the amount of $462,000 in the year ended December 31, 1997.
From time to time, the Company charters airplanes from Tracinda for use in
the Company's business. The Company believes that the terms of the charter
arrangements are no less favorable to the Company than those that could be
obtained from unrelated third parties. During the years ended December 31, 1998
and 1997 and the period from October 11, 1996 to December 31, 1996, the
aggregate of the payments made to Tracinda for such charters were approximately
$29,000, $308,000 and $10,000, respectively.
In 1995 the Company licensed to a subsidiary of Seven, a former beneficial
owner of more than 5 percent of the Company's Common Stock, the right to
distribute certain motion picture and television product in the Australian free
television market. This agreement was amended on September 9, 1997. The product
licensed includes certain library pictures and theatrical motion pictures and
television series, miniseries and made-for-television movies produced or
distributed by the Company during the term of the agreement. The license fees
for the library product are at a rate which the Company believes is arm's-
length. The term of the output portion of the agreement is 15 years. The
license fees for output product television series, television movies and
television mini-series are on a "most favored nations" basis with prices paid
by the Seven subsidiary for comparable programming. During the years ended
December 31, 1998 and 1997 and the period from October 11, 1996 to December 31,
1996, the Company recognized revenues of $5,651,000, $4,454,000 and $1,055,000,
respectively, under this agreement. Management believes that the terms of this
agreement are consistent with the terms of comparable television license
arrangements with third parties.
In 1994, in connection with the formation of Movie Network Channels, a joint
venture in which the Company and a subsidiary of Seven have non-controlling
interests, the Company licensed to the joint venture certain of its current
theatrical and television motion pictures, as well as a number of its library
pictures, for distribution on Australian pay and basic cable television. The
agreement expires on June 30, 2000, with all motion pictures covered by the
agreement reverting to the Company within one year after that date, but both
the Company and
F-21
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Movie Network Channels have the right to extend the license for a further five
years. The Company receives a license fee for each picture that is based on the
number of Movie Network Channels' subscribers. The Company recognized such
license fee revenues of $3,678,000, $3,056,000 and $292,000 during the years
ended December 31, 1998 and 1997 and the period from October 11, 1996 to
December 31, 1996, respectively. The Company believes that the terms of the
agreement are no less favorable to the Company than those contained in its
licenses with unaffiliated licensees.
Seven has agreed to reimburse the Company for losses that the Company may
incur in connection with the distribution of an Australian film with respect to
which the Company has acquired distribution rights from an unrelated third
party.
The Company has an exclusive producer overhead arrangement with FGM
Entertainment for the services of Frank Mancuso, Jr., the son of the Company's
Chairman of the Board and Chief Executive Officer, which expires on July 31,
2002. FGM Entertainment, a company wholly owned by Mr. Mancuso, Jr., receives
$400,000 each year, subject to five to ten percent annual increases, for
overhead expenses, as well as a development fund and a production fund to pay
for the costs of developing and producing projects. FGM Entertainment must
submit all projects that it wishes to produce or develop to the Company and
receives a producing fee, as well as certain participations and royalties, for
each picture that is produced under the arrangement. The Company has the right
to acquire the domestic or worldwide rights to each picture produced under the
arrangement and controls all remake, sequel and television rights. Pursuant to
this arrangement, the Company paid Mr. Mancuso, Jr. approximately $2,429,000,
$1,916,000 and $39,000 during the years ended December 31, 1998 and 1997 and
the period from October 11, 1996 to December 31, 1996, respectively.
On January 14, 1997, MGM Studios and Tracinda entered into an agreement to
share the proceeds from certain insurance claims relating to litigation which
arose prior to 1991. The potential insurance proceeds were allocated 65% to MGM
Studios and 35% to Tracinda based on the relative value of each company's
respective claims, as determined by the parties. The Company received
$8,031,000 in insurance proceeds under such policies during the year ended
December 31, 1997, of which $2,811,000 was paid to Tracinda.
F-22
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", for its fiscal year ended December 31,
1998, which changed the way the Company reports information about its operating
segments. The Company business units have been aggregated into three reportable
operating segments: feature films, television programming and other (see Note
1). 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. 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>
Year Ended December 31, 1998:
Revenues.......................... $1,005,747 $197,759 $ 37,217 $1,240,723
Segment income (loss)............. $ 39,748 $ 12,885 $ (3,758) $ 48,875
Identifiable assets............... $2,096,092 $400,646 $ 19,718 $2,516,456
Capital expenditures.............. $ 9,293 $ 1,776 $ 18,733 $ 29,802
Depreciation expense.............. $ 5,683 $ 1,086 $ 53 $ 6,822
Year Ended December 31, 1997:
Revenues.......................... $ 699,219 $114,200 $ 17,883 $ 831,302
Segment income (loss)............. $ 65,509 $ (7,201) $(26,545) $ 31,763
Identifiable assets............... $1,874,683 $311,873 $ 9,414 $2,195,970
Capital expenditures.............. $ 6,346 $ 1,056 $ 11,312 $ 18,714
Depreciation expense.............. $ 4,505 $ 749 $ 23 $ 5,277
October 11 to December 31, 1996:
Revenues.......................... $ 209,354 $ 14,413 $ 4,919 $ 228,686
Segment income (loss)............. $ 37,140 $ (4,062) $ 532 $ 33,610
Identifiable assets............... $1,255,389 $166,781 $ 4,573 $1,426,743
Capital expenditures.............. $ 1,471 $ 195 $ 1,543 $ 3,209
Depreciation expense.............. $ 1,003 $ 133 $ 4 $ 1,140
</TABLE>
F-23
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of other operating segment income
(loss):
<TABLE>
<CAPTION>
October 11 to
Year Ended December 31, December 31,
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Licensing and merchandising........ $ 484 $ 2,526 $ 801
Interactive media.................. (9,930) (16,828) (1,878)
Music.............................. 4,787 2,140 1,149
Losses on equity investments....... (12,536) (14,225) --
Profit on sale of interest in joint
venture........................... 10,000 -- --
Other.............................. 3,437 (158) 460
----------- ----------- -------
$ (3,758) $ (26,545) $ 532
=========== =========== =======
</TABLE>
The following is a reconciliation of reportable segment income to
consolidated income (loss) before taxes:
<TABLE>
<CAPTION>
Year Ended October 11 to
December 31, December 31,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Segment income......................... $ 48,875 $ 31,763 $ 33,610
General and administrative expenses.... (92,244) (87,644) (18,319)
Severance and related costs............ (13,182) -- --
Goodwill amortization.................. (14,289) (11,230) (1,717)
--------- --------- --------
Operating income (loss).............. (70,840) (67,111) 13,574
Interest expense, net of amounts
capitalized........................... (80,611) (53,105) (9,875)
Interest and other income, net......... 3,984 2,447 813
--------- --------- --------
Consolidated income (loss) before
taxes............................... $(147,467) $(117,769) $ 4,512
========= ========= ========
</TABLE>
The following is a reconciliation of reportable segment assets to
consolidated total assets:
<TABLE>
<CAPTION>
Year Ended October 11 to
December 31, December 31,
1998 1997 1996
---------- ---------- -------------
<S> <C> <C> <C>
Total assets for reportable segments... $2,516,456 $2,195,970 $1,426,743
Goodwill not allocated to segments..... 561,026 574,795 302,741
Other unallocated amounts.............. 81,496 51,889 45,184
---------- ---------- ----------
Consolidated total assets............ $3,158,978 $2,822,654 $1,774,668
========== ========== ==========
</TABLE>
F-24
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's foreign activities are principally motion picture and
television production and distribution in territories outside of the United
States and Canada. Net foreign assets of subsidiaries operating in foreign
countries are not material in relation to consolidated net assets. Revenues
earned from motion picture and television films produced in the United States
by territory were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended October 11 to
December 31, December 31,
1998 1997 1996
---------- -------- -------------
<S> <C> <C> <C>
United States and Canada................... $ 740,480 $458,977 $137,160
Europe..................................... 276,673 255,396 62,298
Asia and Australia......................... 158,615 86,695 15,052
Other...................................... 64,955 30,234 14,176
---------- -------- --------
$1,240,723 $831,302 $228,686
========== ======== ========
</TABLE>
Note 12--Commitments and Contingencies
Leases. The Company has operating leases for offices and equipment. Certain
property leases include provisions for increases over base year rents as well
as for escalation clauses for maintenance and other building operations. Rent
expense was approximately $15,011,000, $12,915,000 and $2,936,000 for the years
ended December 31, 1998 and 1997 and the period from October 11, 1996 to
December 31, 1996, respectively.
Employment Agreements. The Company has employment agreements with several
principal officers and employees. The agreements provide for minimum salary
levels as well as, in some cases, bonuses.
Creative Talent Agreements. The Company has entered into contractual
agreements for creative talent related to future film production. Such amounts
are scheduled to be paid through 2002.
Future minimum annual commitments under non-cancelable operating leases,
employment agreements, and creative talent agreements as of December 31, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................ $ 78,746
2000............................................................ 45,923
2001............................................................ 27,246
2002............................................................ 13,013
2003............................................................ 8,075
Thereafter...................................................... 1,260
--------
$174,263
========
</TABLE>
Litigation. The Company, together with other major companies in the filmed
entertainment industry, has been subject to numerous antitrust suits brought by
various motion picture exhibitors, producers and others. In addition, various
legal proceedings involving alleged breaches of contract, antitrust violations,
copyright infringement and other claims are now pending, which the Company
considers routine to its business activities.
In the opinion of Company management, any liability under pending litigation
is likely to be not material in relation to the Company's financial condition.
F-25
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Supplementary Cash Flow Information
The Company paid interest, net of capitalized interest, of $66,887,000,
$45,394,000 and $7,103,000 during the years ended December 31, 1998 and 1997
and the period from October 11, 1996 to December 31, 1996, respectively.
The Company paid income taxes of $7,137,000, $8,425,000 and $922,000 during
the years ended December 31, 1998 and 1997 and the period from October 11, 1996
to December 31, 1996, respectively. During the year ended December 31, 1997,
the Company also received foreign remittance tax refunds of $12,296,000.
Note 14--Quarterly Financial Data (Unaudited)
Certain quarterly information is presented below (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998:
Revenues......................... $316,460 $281,201 $259,622 $383,440
Operating income (loss).......... $ 1,929 $(33,621) $(17,402) $(21,746)
Interest expense, net of amounts
capitalized..................... $ 18,254 $ 20,174 $ 22,022 $ 20,161
Net loss......................... $(18,643) $(54,994) $(40,271) $(43,740)
Basic and diluted loss per
share........................... $ (.28) $ (.84) $ (.61) $ (.30)
1997:
Revenues......................... $197,629 $153,385 $221,068 $259,220
Operating income (loss).......... $ (1,084) $ (4,775) $ 1,254 $(62,506)
Interest expense, net of amounts
capitalized..................... $ 11,016 $ 9,583 $ 15,415 $ 17,091
Net loss......................... $(14,193) $(14,812) $(16,560) $(82,549)
Basic and diluted loss per
share........................... $ (.85) $ (.88) $ (.55) $ (1.64)
</TABLE>
Note 15--Subsequent Events
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 home video
distribution network. The Transitional Video Agreement expires on January 31,
2000. Additionally, the Company reconveyed as of January 1, 1999 to Turner
Entertainment, Co., Inc., an affiliate of WHV, the right that the Company had
to distribute in the home video markets worldwide until June 1, 2001, 2,950
titles that had been serviced under the WHV Agreement. The Company intends to
record a one-time pre-tax contract termination charge in the first quarter of
1999 for approximately $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.
F-26
<PAGE>
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.
F-27
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenues......................................... $ 470,917 $ 597,661
Expenses:
Film and television production and
distribution.................................. 626,769 571,780
General and administrative expenses............ 49,129 50,651
Severance and related costs.................... 76,158 --
Contract termination fee....................... 225,000 --
Goodwill amortization.......................... 7,486 6,922
------------- ------------
Total expenses............................... 984,542 629,353
------------- ------------
Operating loss................................... (513,625) (31,692)
Other income (expense):
Interest expense, net of amounts capitalized... (41,238) (38,428)
Interest and other income, net................. 2,518 1,745
------------- ------------
Total other expense.......................... (38,720) (36,683)
------------- ------------
Loss from operations before provision for income
taxes........................................... (552,345) (68,375)
Income tax provision............................. (4,082) (5,262)
------------- ------------
Net loss......................................... (556,427) (73,637)
Foreign currency translation adjustment.......... 4 (84)
------------- ------------
Comprehensive loss............................... $ (556,423) $ (73,721)
============= ============
Basic and diluted loss per share................. $ (3.69) $ (1.12)
============= ============
Weighted average number of common shares
outstanding..................................... 150,945,857 65,781,329
============= ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
F-28
<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.
F-29
<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.
F-30
<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., Metro-Goldwyn-Mayer Studios
Inc. and its majority owned subsidiaries and Orion Pictures Corporation and its
majority owned subsidiaries. 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 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 six months 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 to distribute the company's product in the home
video marketplace under the agreement executed in 1990. 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, 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., 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
F-31
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
company 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 containing over 1,300 feature films that were previously owned
by PolyGram N.V. and its subsidiaries for $235 million 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 $9,938,000 and
$7,317,000 during the six months ended June 30, 1999 and 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>
F-32
<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 consisting of a six
year $600 million revolving credit facility, a $400 million seven and one-half
year term loan and a $300 million eight and one-half year term loan. The
amended credit facility 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 the amended credit facility to
$1.5 billion. The revolving facility and the $400 million term loan bear
interest at 2.50 percent over the Adjusted LIBOR rate, as defined (7.87 percent
at June 30, 1999). The $300 million term 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 208,366 shares and 439,264 shares are not included in
the calculation of diluted earnings per share in the six months ended June 30,
1999 and 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.
F-33
<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>
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>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Licensing and merchandising............................. $ 2,042 $ (510)
Interactive media....................................... (1,067) (8,557)
Music................................................... 3,718 1,906
Losses on equity investments............................ (4,938) (5,769)
Other................................................... 13,613 11,291
-------- --------
$ 13,368 $ (1,639)
======== ========
</TABLE>
F-34
<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>
Six Months Ended
June 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Segment income (loss).................................. $(155,852) $ 25,881
General and administrative expenses.................... (49,129) (50,651)
Severance and related costs............................ (76,158) --
Contract termination fee............................... (225,000) --
Goodwill amortization.................................. (7,486) (6,922)
--------- --------
Operating loss......................................... (513,625) (31,692)
Interest expense, net of amounts capitalized........... (41,238) (38,428)
Interest and other income, net......................... 2,518 1,745
--------- --------
Loss before provision for income taxes................. $(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.
F-35
<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.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Studios Inc.:
We have audited the accompanying consolidated statements of operations and
comprehensive income (loss), stockholder's equity and cash flows for the period
from January 1, 1996 to October 10, 1996 of Metro-Goldwyn-Mayer Studios Inc.
(formerly known as Metro-Goldwyn-Mayer Inc.) and its subsidiaries. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of the Company for the period from January 1, 1996 to October 10, 1996 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
December 16, 1996
F-37
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
January 1 to
October 10,
1996
------------
<S> <C>
Revenues......................................................... $ 912,706
Expenses:
Film and television production and distribution................. 953,820
General and administrative...................................... 60,056
Goodwill amortization........................................... 11,570
Provision for impairment........................................ 563,829
----------
Total expenses................................................. 1,589,275
----------
Operating loss................................................... (676,569)
Other income (expense):
Interest expense, net of amounts capitalized.................... (71,375)
Interest and other income, net.................................. 3,179
----------
Total other expense............................................ (68,196)
----------
Loss from operations before provision for income taxes........... (744,765)
Income tax provision............................................. (273)
----------
Net loss......................................................... (745,038)
Other comprehensive income, net of tax:
Foreign currency translation adjustment......................... 95
----------
Comprehensive loss............................................... $ (744,943)
==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-38
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
-------------------- Additional Accum. Other Total
Number of Par Paid-in Comprehensive Stockholder's
Shares Value Capital Deficit Income Equity
--------- --------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31,
1995................... 10 $ 1 $2,132,694 $(1,472,783) $(413) $ 659,499
Contributions received
from affiliate......... -- -- 89,439 -- -- 89,439
Dividends declared...... -- -- -- (3,995) -- (3,995)
Foreign currency
translation
adjustment............. -- -- -- -- 95 95
Net loss................ -- -- -- (745,038) -- (745,038)
-------- --------- ---------- ----------- ---------- ---------
Balance October 10,
1996................... 10 $ 1 $2,222,133 $(2,221,816) $(318) $ --
======== ========= ========== =========== ========== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-39
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
January 1 to
October 10,
1996
------------
<S> <C>
Operating activities:
Net loss......................................................... $(745,038)
Adjustments to reconcile net loss from operations to net cash
provided by operating activities:
Amortization of film and television costs, film distribution
organization and participants' share........................... 608,704
Depreciation and amortization of property and equipment......... 4,645
Provision for impairment and amortization of intangibles........ 575,399
Increase in bad debt and other reserves......................... 430
Gains on equity investments..................................... (1,967)
Increase in accounts and contracts receivable, advances to
affiliates and other assets.................................... (28,192)
Decrease in accounts payable, accrued and other liabilities,
accrued participants' share and domestic and foreign taxes..... (19,970)
Decrease in advances and deferred revenues...................... (51,199)
Foreign currency exchange loss and other........................ 325
---------
Net cash provided by operating activities...................... 343,137
---------
Investing activities:
Additions to film costs, net..................................... (369,148)
Additions to property and equipment.............................. (6,901)
Other investing activities....................................... (4,093)
---------
Net cash used in investing activities.......................... (380,142)
---------
Financing activities:
Additions to borrowed funds...................................... 165,866
Repayments of borrowed funds..................................... (114,854)
Dividends paid................................................... (6,160)
---------
Net cash provided by financing activities...................... 44,852
---------
Net change in cash and cash equivalents from operating, investing
and financing activities......................................... 7,847
Net decrease in cash due to foreign currency fluctuations......... (258)
---------
Net change in cash and cash equivalents........................... 7,589
Cash and cash equivalents at beginning of period.................. 17,128
---------
Cash and cash equivalents at end of the period.................... $ 24,717
=========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-40
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 10, 1996
Note 1--Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of Metro-Goldwyn-Mayer Studios Inc. (formerly known as
Metro-Goldwyn-Mayer Inc.), and its majority-owned subsidiaries ("MGM Studios"
or "the Company"). The Company is wholly owned by MGM Group Holdings
Corporation ("MGM Group Holdings"), an indirect wholly owned subsidiary of
Consortium de Realisation ("CDR"). CDR is a wholly owned subsidiary of Credit
Lyonnais S.A. ("Credit Lyonnais") and is controlled by the French State. On
October 10, 1996, the Company was sold to an unaffiliated group of investors
(see Note 11). The sale transaction has not been reflected in the accompanying
historical financial statements, except to reduce certain long-lived assets to
their net realizable value (see Note 2).
Business. The Company is engaged in the financing, production and worldwide
distribution of theatrical motion pictures and television programming, as well
as new media and interactive products. The Company also distributes films
produced or financed, in whole or in part, by third parties.
Principles of Consolidation. The consolidated financial statements include
the accounts of MGM Studios and all of its majority-owned and controlled
subsidiaries. The Company's investments in related companies which represent a
20% to 50% ownership interest over which the Company has significant influence
but not control are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated.
Revenue Recognition. Revenues from theatrical distribution of feature films
are recognized on the dates of exhibition. Revenues from direct home video
distribution are recognized, net of an allowance for estimated returns,
together with related costs, in the period in which the product is available
for sale by the Company's customers. Revenues from television licensing,
together with related costs, are recognized when the feature film or television
program is available to the licensee for telecast. Generally, feature films are
first made available for home video release in a particular territory six
months after theatrical release in such territory; for pay television, one year
after theatrical release; for initial free television, two to three years after
theatrical release; and for syndication, approximately three to five years
after theatrical release. Long-term non-interest-bearing receivables arising
from licensing agreements are discounted to present value.
Accounting for Film Costs. Except for purchase accounting adjustments, film
costs include the costs of production, prints, pre-release and other
advertising expected to benefit future periods and capitalized overhead and
interest. These costs, as well as participations and talent residuals, are
charged against earnings on an individual film basis in the ratio that the
current year's gross film revenues bear to management's estimate of total
remaining ultimate gross film revenues from all sources.
Film costs are stated at the lower of cost or estimated net realizable value
on an individual film basis. Revenue and cost forecasts are continually
reviewed by management and revised when warranted by changing conditions. When
estimates of total revenues and costs indicate that a feature film or
television program will result in an ultimate loss, additional amortization is
recognized to the extent required to produce a zero gross margin over the
remaining life of the film or television program.
The film distribution organization is an intangible asset reflecting the
estimated value of the Company's investment in its worldwide distribution
organization; these costs are being amortized on a straight-line basis over 40
years. During the period ended October 10, 1996, the Company recorded a charge
of $404,409,000 to write off its remaining investment in the film distribution
organization (see Note 2).
Property and equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is computed under the straight-line
method over the expected useful lives of applicable assets,
F-41
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ranging from three to five years. Amortization of leasehold assets is computed
under the straight-line method over the shorter of the estimated useful lives
of the assets or the terms of the related leases. When property is sold or
otherwise disposed of, the cost and related accumulated depreciation is removed
from the accounts, and any resulting gain or loss is included in income. The
costs of normal maintenance and repairs and minor replacements are charged to
expense when incurred.
Trademarks, Logos and Goodwill. Trademarks, logos and the excess cost of
acquisitions over the fair market values of identifiable net assets acquired
(goodwill) are amortized over an estimated useful life of 40 years using the
straight-line method. During 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The carrying value of
existing assets are reviewed when events or changes in circumstances indicate
that an impairment test is necessary in order to determine if an impairment has
occurred. When factors indicate that such assets should be evaluated for
possible impairment, the Company will estimate the future cash flows expected
to result from the use of the assets and their eventual disposition, and
compare the amounts to the carrying value of the assets to determine if an
impairment loss has occurred. Accordingly, the Company recorded a charge of
$159,420,000 to reduce the net realizable value of goodwill (see Note 2).
Income Taxes. In accordance with SFAS No. 109, "Accounting For Income
Taxes", deferred tax assets and liabilities are recognized with respect to the
tax consequences attributable to differences between the financial statement
carrying values and tax bases of existing assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary differences are
expected to be recovered or settled. Further, the effect on deferred tax assets
and liabilities of changes in tax rates is recognized in income in the period
that includes the enactment date.
From May 7, 1992 to October 10, 1996, the Company had been included in the
consolidated federal income tax return of MGM Group Holdings. The Company's
income tax provision has been computed on a separate return basis, modified to
allocate to MGM Studios the benefits calculated at the MGM Group Holdings level
which results from the Company's tax attributes. Foreign subsidiaries file
separate or consolidated returns depending on the statutes and elections
available in each foreign jurisdiction.
Foreign Currency Translation. Generally, foreign subsidiary assets and
liabilities are translated into United States dollars at the exchange rates in
effect at the balance sheet date. Revenues and expenses of foreign subsidiaries
are translated into United States dollars at the average exchange rates that
prevailed during the period. The gains or losses that result from this process
are included as a component of the cumulative translation adjustment balance in
stockholder's equity. Foreign currency denominated transactions are recorded at
the exchange rate in effect at the time of occurrence, and the gains or losses
resulting from subsequent translation at current exchange rates are included in
the statement of operations.
Use of Estimates in the Preparation of Financial Statements. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities. Management estimates ultimate
revenues and costs for feature films and television programs for each market
based on anticipated release patterns, public acceptance and historical results
for similar products. Actual results could differ from those estimates.
Note 2--Impairment of Intangible Assets
As discussed in Note 11, the Company was sold to an unaffiliated group of
investors effective on October 10, 1996. The proceeds from the sale of
$1,300,000,000 were insufficient to recover the net asset value of the
F-42
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company on the date of the disposition, and were insufficient to repay the bank
debt and related accrued interest due to Credit Lyonnais. In accordance with
SFAS No. 121, the Company recorded a charge of $404,409,000 to write off its
remaining investment in the film distribution organization and a charge of
$159,420,000 to reduce its investment in goodwill to net realizable value
during the period ended October 10, 1996.
Note 3--Stockholder's Equity
An affiliate of Credit Lyonnais has agreed to pay bonuses to certain
executives of the Company due upon the sale of the Company (see Note 11).
Accordingly, the Company has recorded compensation expense and a corresponding
contribution to capital of $9,641,000 during the period ended October 10, 1996,
respectively.
Note 4--Income Taxes
Pursuant to a tax sharing agreement, the Company computes its income tax
provision and corresponding deferred tax liabilities and assets, net of a
valuation allowance, on a separate tax return basis, modified as discussed
above with respect to the tax basis of assets transferred in the restructuring,
and further modified to reflect the allocation to the Company of any tax
benefits recognized by the consolidated filing group to the extent that the
Company's losses in the current period reduce the current or deferred income
taxes payable.
As of October 10, 1996, the Company and its subsidiaries had net operating
loss carryforwards of $268,888,000, capital loss carryforwards of $29,616,000
and investment tax credit carryforwards of $12,836,000, before adjustments for
the effect of the tax sharing agreement, which expire through 2010. These
carryforwards are available for use in the U.S. consolidated tax return group,
of which the Company is a member, and are subject to the tax sharing agreement
between the Company and MGM Group Holdings. A portion of these losses are
subject to substantial limitations on utilization because of various income tax
rules.
Details of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
January 1 to
October 10,
1996
------------
<S> <C>
Current taxes:
Foreign taxes................................................. $ 273
Deferred taxes:
Federal and state taxes (benefit)............................. (241,630)
Adjustment for change in enacted tax rate..................... --
Adjustment for change in valuation allowance.................. 241,630
---------
Total tax provision......................................... $ 273
=========
</TABLE>
The following is a summary reconciliation of the effective tax rate to the
assumed federal tax rate:
<TABLE>
<CAPTION>
January 1 to
October 10,
1996
------------
<S> <C>
Assumed federal tax rate on loss................................ (35)%
Goodwill and other permanent differences........................ 8 %
Foreign taxes, net of available federal tax benefit............. 1 %
Loss carryforward not benefited................................. 27 %
---
Effective tax rate............................................ 1 %
===
</TABLE>
F-43
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has various foreign subsidiaries formed or acquired to produce
or distribute motion pictures outside the United States. In the opinion of
management, the earnings of these subsidiaries are not permanently invested
outside the United States. Pursuant to APB 23, tax expense has accordingly been
provided for these unremitted earnings.
Federal income tax returns for the periods ended through March 25, 1986 have
been examined by the Internal Revenue Service. In the opinion of management,
any adjustments which may result from the examination of subsequent periods for
which the Company is responsible will not have a material effect on the
Company's consolidated financial position or results of operations.
Note 5--Retirement Plans
The Company has a non-contributory retirement plan (the "Basic Plan")
covering substantially all regular full-time, non-union employees. Benefits are
based on years of service and compensation, as defined.
Pension costs includes the following components (in thousands):
<TABLE>
<CAPTION>
January 1 to
October 10,
1996
------------
<S> <C>
Service cost.................................................... $ 854
Interest cost on projected benefit obligation................... 570
Actual return on plan assets.................................... (521)
Net amortization and deferral................................... 148
------
Net periodic pension cost....................................... $1,051
======
</TABLE>
A significant number of the Company's production employees are covered by
union sponsored, collectively bargained multi-employer pension plans. The
Company contributed approximately $5,775,000 in 1996 for such plans.
Information from the plans' administrators is not sufficient to permit the
Company to determine its share of unfunded vested benefits, if any.
Note 6--Related Party Transactions
The Company has credit arrangements with CLBN and Credit Lyonnais
(collectively, the "'Bank"). Interest of approximately $45,000,000 was charged
by the Bank during the period ended October 10, 1996. Pursuant to the terms of
its credit facilities, the Company also paid to the Bank charges related to
letters of credit and other fees of approximately $19,000.
The Company has entered into various agreements to develop and produce
certain films and television programs with Hometown Films Inc., an entity
controlled by Mr. Frank Mancuso, Jr., who is a relative of the Company's
Chairman of the Board and Chief Executive Officer. Pursuant to these
agreements, the Company paid Hometown Films Inc., approximately $1,582,000
during the period from January 1, 1996 to October 10, 1996. The agreements
provide for additional producer fees and potential profit participations to be
paid in the future at terms consistent with comparable development and
production agreements with third parties.
During the period ended October 10, 1996, the Company incurred legal fees of
approximately $1,735,000 to White & Case, one of whose partners is also a
director of the Company.
F-44
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Foreign Operations and Export Sales
The Company's foreign activities are principally motion picture and
television production and distribution in territories outside of the United
States and Canada. Net foreign assets and income from subsidiaries operating in
foreign countries are not material in relation to consolidated net assets or
consolidated net loss.
Revenues earned from motion picture and television films produced in the
United States by territory were as follows (in thousands):
<TABLE>
<CAPTION>
January 1 to
October 10,
1996
------------
<S> <C>
United States and Canada........................................ $570,586
Europe.......................................................... 215,588
Asia and Australia.............................................. 94,133
Other........................................................... 32,399
---------
$912,706
=========
</TABLE>
Note 8--Commitments and Contingencies
Leases. The Company has operating leases for offices and equipment. Certain
property leases include provisions for increases over base year rents as well
as for escalation clauses for maintenance and other building operations. Rent
expense was approximately $8,500,000 for the period ended October 10, 1996.
Employment Agreements. The Company has employment agreements with several
principal officers and employees. The agreements provide for minimum salary
levels as well as, in some cases, bonuses. In addition, the Company's
shareholder is obligated to pay bonuses to certain executives in the event the
value of the Company is eventually determined to exceed a defined amount. Based
on the sales price of the Company, as described in Note 11, this incentive
bonus amounted to $19,641,000. The Company has recorded compensation expense
and a corresponding contribution to capital of $9,641,000 for the period ended
October 10, 1996. Certain executives are entitled to terminate their employment
agreements upon the sale of the Company.
Creative Talent Agreements. The Company has entered into contractual
agreements for creative talent related to future film production which
aggregate approximately $9,449,000 at October 10, 1996. Such amounts are
scheduled to be paid through 1997.
Litigation. The Company, together with other major companies in the filmed
entertainment industry, has been subject to numerous antitrust suits brought by
various motion picture exhibitors, producers and others. In addition, various
legal proceedings involving alleged breaches of contract, antitrust violations,
copyright infringement and other claims are now pending, which the Company
considers routine to its business activities.
In the opinion of Company management, any liability under pending litigation
is not material in relation to the Company's results of operations.
Note 9--Supplementary Cash Flow Information
Total interest paid, net of capitalized interest, was $29,490,000 in the
period ended October 10, 1996. Income taxes paid were $17,856,000 in the period
ended October 10, 1996.
The Company recorded a non-cash contribution of capital of $9,641,000 during
the period ended October 10, 1996, respectively, from CDR due to the payment of
compensation expense (see Note 8).
F-45
<PAGE>
METRO-GOLDWYN-MAYER STUDIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Quarterly Financial Data (Unaudited)
Certain quarterly information is presented below (in thousands):
<TABLE>
<CAPTION>
First Second Third
Quarter Quarter Quarter
--------- -------- ---------
<S> <C> <C> <C>
1996:
Revenues................................... $ 286,947 $308,185 $ 317,574
Operating loss............................. (24,724) (25,086) (626,759)
Interest expense, net...................... 22,361 22,725 26,289
Net loss................................... (53,678) (49,874) (641,486)
</TABLE>
1996 Quarterly Results. The third quarter of 1996 includes the period from
July 1, 1996 to October 10, 1996, the date of the Acquisition. In the third
quarter of 1996, the Company recorded a charge of $563,829,000 to write off its
remaining investment in the film distribution organization and to reduce its
investment in goodwill to net realizable value (see Note 2).
Note 11--Subsequent Event
On October 10, 1996, CDR completed the sale of all of the Company's
outstanding stock to Metro-Goldwyn-Mayer Inc. (formerly P&F Acquisition Corp.)
an entity formed by Tracinda Corporation, Seven Network Limited and Mr. Frank
G. Mancuso, for $1,300,000,000. In connection with the sale of the Company, Mr.
Mancuso has entered into a new five year employment agreement to remain as
Chief Executive Officer and Chairman of the Board of Directors of the Company.
The acquisition price was financed with equity contributions of $900,000,000
and new bank debt of $400,000,000. The Company obtained $800,000,000 in Senior
Secured Credit Facilities to partially finance the acquisition of the Company
and to provide for ongoing operations of the Company. The Company's existing
bank debt was extinguished upon the closing of the transaction. The acquisition
will be accounted for as a purchase.
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Metro-Goldwyn-Mayer Inc. included in this
Prospectus and have issued our report thereon dated February 23, 1999. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedules are the responsibility
of the Company's management and are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Los Angeles, California
February 23, 1999
F-47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro-Goldwyn-Mayer Studios Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Metro-Goldwyn-Mayer Studios Inc. for the period
from January 1, 1996 to October 10, 1996 included in this Prospectus and have
issued our report thereon dated December 16, 1996. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying schedule is the responsibility of the Company's
management and are presented for the purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
December 16, 1996
F-48
<PAGE>
SCHEDULE I: CONDENSED FINANCIAL INFORMATION OF REGISTRANT
METRO-GOLDWYN-MAYER INC.
(PARENT ONLY)
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, December
1998 31, 1997
------------ -----------
<S> <C> <C>
ASSETS
------
Investments and advances to affiliates............... $1,919,657 $ 1,378,555
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities.......................................... $ -- $ --
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value, 250,000,000 shares
authorized, 150,856,424 and 65,765,655 shares
issued and outstanding............................ 1,509 658
Additional paid-in capital......................... 2,203,490 1,504,850
Deficit............................................ (285,596) (127,948)
Accumulated other comprehensive income............. 254 995
---------- -----------
Stockholders' equity............................. 1,919,657 1,378,555
---------- -----------
$1,919,657 $ 1,378,555
========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-49
<PAGE>
METRO-GOLDWYN-MAYER INC.
(PARENT ONLY)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended October 11 to
December 31, December 31,
1998 1997 1996
---------- ---------- -------------
<S> <C> <C> <C>
Revenues................................ $ -- $ -- $ --
Expenses:
Equity in net (income) losses of
subsidiaries......................... 157,648 94,760 (9,776)
Interest expense, net................. -- 33,354 9,610
---------- ---------- ----------
Total expenses...................... 157,648 128,114 (166)
---------- ---------- ----------
Net income (loss)....................... (157,648) (128,114) 166
Foreign currency translation
adjustment............................. (741) (150) 1,145
---------- ---------- ----------
Comprehensive income (loss)............. $ (158,389) $ (128,264) $ 1,311
========== ========== ==========
Earnings (loss) per share:
Basic................................. $ (2.08) $ (4.47) $ 0.01
========== ========== ==========
Diluted............................... $ (2.08) $ (4.47) $ 0.00
========== ========== ==========
Weighted average number of common shares
outstanding:
Basic................................. 75,816,326 28,634,362 16,692,217
========== ========== ==========
Diluted............................... 75,816,326 28,634,362 37,796,672
========== ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-50
<PAGE>
METRO-GOLDWYN-MAYER INC.
(PARENT ONLY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock
--------------- ------------------ Add'l Retained Accum. Other Total
No. of Par No. of Par Paid-in Earnings Comprehensive Stockholders'
Shares Value Shares Value Capital (Deficit) Income Equity
-------- ----- ----------- ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Balance....... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of preferred
and common stock....... 501,006 5 16,700,342 167 901,639 -- -- 901,811
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 1,145 1,145
Net income.............. -- -- -- -- -- 166 -- 166
-------- ----- ----------- ------ ---------- --------- ----- ----------
Balance December 31,
1996................... 501,006 5 16,700,342 167 901,639 166 1,145 903,122
Issuance of preferred
and common stock....... 1,914 -- 28,110,145 281 603,416 -- -- 603,697
Conversion of preferred
stock into common
stock.................. (502,920) (5) 20,955,168 210 (205) -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (150) (150)
Net loss................ -- -- -- -- -- (128,114) -- (128,114)
-------- ----- ----------- ------ ---------- --------- ----- ----------
Balance December 31,
1997................... -- -- 65,765,655 658 1,504,850 (127,948) 995 1,378,555
Issuance of common
stock.................. -- -- 85,090,769 851 697,084 -- -- 697,935
Amortization of deferred
stock compensation..... -- -- -- -- 1,556 -- -- 1,556
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (741) (741)
Net loss................ -- -- -- -- -- (157,648) -- (157,648)
-------- ----- ----------- ------ ---------- --------- ----- ----------
Balance December 31,
1998................... -- $ -- 150,856,424 $1,509 $2,203,490 $(285,596) $ 254 $1,919,657
======== ===== =========== ====== ========== ========= ===== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-51
<PAGE>
METRO-GOLDWYN-MAYER INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
October 11
Year Ended to
December 31, December 31,
1998 1997 1996
--------- --------- ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................... $(157,648) $(128,114) $ 166
Adjustments to reconcile net income from
operations to net cash used by operating
activities:
Losses (gains) on equity investments,
net.................................... 157,648 94,760 (9,776)
Amortization of debt issuance costs..... -- 3,934 1,068
Increase (decrease) in accrued
liabilities............................ -- (1,453) 1,453
--------- --------- -----------
Net cash used by operating activities... -- (30,873) (7,089)
--------- --------- -----------
Investing activities:
Acquisition of MGM Studios Inc............ -- -- (1,331,430)
Acquisition of Orion Pictures
Corporation.............................. -- (561,617) --
--------- --------- -----------
Net cash used in investing activities..... -- (561,617) (1,331,430)
--------- --------- -----------
Financing activities:
Proceeds from issuance of equity
securities to outside parties............ 73,185 165,000 --
Proceeds from issuance of equity
securities to related parties............ 623,315 438,697 901,811
Proceeds from debt issuance............... -- -- 475,000
Net bank repayments....................... -- (443,750) (31,417)
Net intercompany advances (repayments).... (696,500) 432,543 (6,875)
--------- --------- -----------
Net cash provided by financing
activities............................... -- 592,490 1,338,519
--------- --------- -----------
Net change in cash and cash equivalents..... -- -- --
Cash and cash equivalents at beginning of
period..................................... -- -- --
--------- --------- -----------
Cash and cash equivalents at end of the
period..................................... $ -- $ -- $ --
========= ========= ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-52
<PAGE>
METRO-GOLDWYN-MAYER INC. (PARENT ONLY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1--Basis of Presentation
The accompanying financial statements include the accounts of Metro-Goldwyn-
Mayer Inc. (formerly known as P&F Acquisition Corp.) ("MGM", or "the Company")
presented on a separate company (parent only) basis. MGM is a Delaware
corporation formed on July 10, 1996 specifically to acquire MGM Studios. The
acquisition of MGM Studios by MGM was completed on October 10, 1996 (see Note
2), at which time MGM commenced principal operations. MGM acquired Orion
Pictures Corporation and its majority owned subsidiaries on July 10, 1997.
Prior to its acquisition by MGM, MGM Studios was wholly owned by MGM Group
Holdings Corporation, an indirect wholly owned subsidiary of Consortium de
Realisation ("CDR"). CDR is a wholly owned subsidiary of Credit Lyonnais S.A.
and is controlled by the French State.
Note 2--Bank Debt
On October 15, 1997, MGM Studios entered into an amended and restated credit
facility with a syndicate of banks aggregating $1.3 billion (the "Amended
Credit Facility"). Concurrent with the Amended Credit Facility, MGM Studios
repaid $739,653,000 of bank debt and accrued interest on behalf of the Company.
For additional information regarding the Registrant's borrowings under debt
agreements and other borrowings, see Note 6 to the Consolidated Financial
Statements.
F-53
<PAGE>
METRO-GOLDWYN-MAYER INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands)
<TABLE>
<CAPTION>
Additions
------------------
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Acquired Deductions of Period
---------- ------------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1998:
Reserve for allowances and
doubtful accounts.......... $27,603 $ 467 $ -- $ (4,850) $23,220
======= ======== ======== ======== =======
Reserve for termination
costs under acquisitions... $16,380 $ -- $ -- $(16,380) $ --
======= ======== ======== ======== =======
Reserve for severance under
corporate restructuring
program.................... $ -- $ 13,182 $ -- $ (9,372) $ 3,810
======= ======== ======== ======== =======
Year Ended December 31,
1997:
Reserve for allowances and
doubtful accounts.......... $11,730 $ 3,166 $ 13,600 $ (893) $27,603
======= ======== ======== ======== =======
Reserve for termination
costs under acquisitions... $ 9,547 $ -- $ 36,000 $(29,167) $16,380
======= ======== ======== ======== =======
For the Period from October
11, 1996 to December 31,
1996:
Reserve for allowances and
doubtful accounts.......... $12,718 $ (21) $ -- $ (967) $11,730
======= ======== ======== ======== =======
Reserve for termination
costs under acquisitions... $ -- $ -- $ 45,384 $(35,837) $ 9,547
======= ======== ======== ======== =======
For the Period from January
1, 1996 to October 10,
1996:
Reserve for allowances and
doubtful accounts.......... $18,479 $ 430 $ -- $ (6,191) $12,718
======= ======== ======== ======== =======
Reserve for home video
inventory obsolescence,
shrinkage and
reduplication.............. $ 1,769 $ -- $ -- $ (1,769) $ --
======= ======== ======== ======== =======
</TABLE>
F-54
<PAGE>
PROSPECTUS
- ----------
[LOGO OF METRO GOLDWYN MAYER TRADEMARK]
METRO-GOLDWYN-MAYER INC.
Common Stock
Subscription Rights
We may use this prospectus to offer and sell, separately or together,
common stock and subscription rights.
These securities will have an aggregate initial public offering price not
to exceed $862,500,000 and will be offered and sold at prices and on terms to
be determined at the time of sale. The specific terms of the securities for
which this prospectus is being delivered will be set forth in an accompanying
supplement to this prospectus. These terms may include, where applicable, the
initial public offering price, the net proceeds to the company and whether the
subscription rights, if any, will be listed on any securities exchange.
Our common stock trades on the NYSE under the symbol "MGM." On September 7,
1999, the closing price of the common stock was $20 per share. Any
subscription rights which are issued will be transferable, and we anticipate
that the rights would be authorized for trading on the NYSE under the symbol
"MGM rt."
As will be described in more detail in any prospectus supplement, the
securities may be offered through an underwriter or underwriting syndicates
represented by one or more managing underwriters or through dealers. The
securities may also be sold directly or through agents to investors. See "Plan
of Distribution."
This prospectus may not be used to consummate sales of offered securities
unless accompanied by a prospectus supplement.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is September 9, 1999.
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
About this Prospectus...................................................... 2
Forward-Looking Statements................................................. 2
Use of Proceeds............................................................ 3
Price Range of Common Stock................................................ 4
Dividend Policy............................................................ 4
The Company................................................................ 4
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Plan of Distribution....................................................... 5
Description of Securities.................................................. 6
Legal Matters.............................................................. 7
Experts.................................................................... 7
Where You Can Find More Information........................................ 7
</TABLE>
ABOUT THIS PROSPECTUS
This prospectus is part of a Registration Statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this shelf process, we may from time to time over approximately the next two
years, sell any combination of the securities described in this prospectus in
one or more offerings up to a total dollar amount of $862,500,000. This
prospectus provides you with a general description of the securities we may
offer. Each time we sell securities, we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement also may add, update or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement together with additional information described under the heading
"Where You Can Find More Information" on page 7 below.
You should rely only on the information or representations incorporated by
reference or provided in this prospectus and in the accompanying prospectus
supplement. We have not authorized anyone to provide you with different
information. You may obtain copies of the Registration Statement, or any
document which we have filed as an exhibit to the Registration Statement or to
any other SEC filing, either from the SEC or from the Secretary of the company
as described below. We are not making an offer of these securities in any state
where the offer is not permitted. You should not assume that the information in
this prospectus or in the accompanying prospectus supplement is accurate as of
any date other than the dates printed on the front of each such document.
FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference forward-looking
statements, within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. Forward-looking statements typically can be
identified by the use of forward-looking words, such as "may," "will," "could,"
"project," "believe," "anticipate," "expect," "estimate," "continue,"
"potential," "plan," "intend," "forecast" and the like. These statements appear
in a number of places in this prospectus and the information incorporated by
reference and include statements regarding our current intentions, plans,
strategies, beliefs and expectations.
Forward-looking statements do not guarantee future performance and involve
risks and uncertainties that could cause actual results to differ materially
from those anticipated. The information contained in this prospectus, or
incorporated by reference, identifies important factors that could cause such
differences.
2
<PAGE>
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, we plan to use
substantially all of the net proceeds from the sale of the offered securities
to repay any outstanding amounts under our bridge loan and then to reduce
amounts that we owe under the revolving portion of our $1.3 billion primary
credit facility. We will use any remaining proceeds for general corporate
purposes. Our business plan calls for substantial continued borrowing under
this facility, subject to our compliance with its terms. For example, on
September 1, 1999, we drew upon funds from the facility to make the second
payment to Warner Home Video of $112.5 million, plus interest, in connection
with the termination of our home video distribution arrangement. As of
September 9, 1999, there was approximately $250 million outstanding under our
bridge loan (which is required to be repaid out of the proceeds of any equity
offering), and we owed approximately $359 million under the revolving portion
of our primary credit facility, which bear interest at the rate of 7.08% and
7.75% per annum, respectively, and are due (1) in the case of the bridge loan,
upon the earlier of the receipt of any net cash proceeds from the sale of the
offered securities or July 2006 and (2) in the case of the revolving portion of
our credit facility, in October 2003, subject to extension under certain
conditions. During the past 12 months, borrowings under the bridge loan and the
credit facility were used to (a) fund the PolyGram acquisition, (b) make our
payments to Warner Home Video and (c) provide working capital for general
corporate purposes.
3
<PAGE>
PRICE RANGE OF COMMON STOCK
The common stock is listed on the NYSE and trades under the symbol "MGM."
The following table sets forth for the quarters indicated the high and low
composite per share closing sales prices as reported by the NYSE.
<TABLE>
<CAPTION>
High Low
-------- ---------
<S> <C> <C>
1998
First Quarter.......................................... $24 3/16 $ 17 3/4
Second Quarter......................................... 26 1/2 21 15/16
Third Quarter.......................................... 22 1/8 13 7/8
Fourth Quarter......................................... 13 3/4 8
1999
First Quarter.......................................... $13 9/16 $ 10 3/8
Second Quarter......................................... 18 5/8 12 11/16
Third Quarter (through September 7).................... 22 16 1/2
</TABLE>
The last reported sales price of the common stock on the NYSE on September
7, 1999 was $20 per share. As of June 30, 1999, there were more than 2,000
beneficial holders.
DIVIDEND POLICY
We have not paid any dividends since 1996. For the foreseeable future, we
intend to retain any earnings to fund the operation of our business and to
service and repay our debt rather than pay cash dividends to our stockholders.
Furthermore, as a holding company with no independent operations, our ability
to pay dividends will depend upon the receipt of dividends or other payments
from our subsidiaries. Finally, our primary credit facility contains financial
covenants that could restrict our ability to pay dividends. Subject to the
foregoing, our Board of Directors has the sole discretion to pay cash
dividends.
THE COMPANY
Overview
We develop, produce and distribute worldwide theatrical motion pictures and
television programs. Our subsidiaries include Metro-Goldwyn-Mayer Studios Inc.,
United Artists Corporation, United Artists Films Inc. and Orion Pictures
Corporation. We are one of only seven major film and television studios
worldwide. Our library contains over 4,100 theatrically released feature film
titles and 8,900 television episodes, and is the largest collection of
post-1948 feature films in the world. Films in our library have won nearly 200
Academy Awards, including the Best Picture Award for Annie Hall, The Apartment,
The Best Years of Our Lives, Dances with Wolves, Hamlet, In the Heat of the
Night, Marty, Midnight Cowboy, Platoon, Rain Man, Rocky, Silence of the Lambs,
Tom Jones and West Side Story. We also have in our library 20 titles in the
James Bond film franchise, five titles in the Rocky film franchise and nine
titles in the Pink Panther film franchise.
As used in this prospectus, the terms "we," "our," "us," "MGM" and "the
company" refer to Metro-Goldwyn-Mayer Inc. and our subsidiaries unless the
context indicates otherwise.
4
<PAGE>
PLAN OF DISTRIBUTION
We may sell the securities being offered hereby:
. directly to one or more purchasers;
. through agents;
. to or through one or more dealers;
. to or through one or more underwriters;
. through one or more rights offerings to our stockholders; or
. through a combination of any such methods of sales.
The distribution of such securities pursuant to any prospectus supplement
may occur from time to time in one or more transactions either:
. at a fixed price or prices which may be changed;
. at market prices prevailing at the time of sale;
. at prices related to such prevailing market prices; or
. at negotiated prices.
We may enter into a standby arrangement with Tracinda Corporation and one of
its affiliates pursuant to which the Tracinda group would agree to buy
securities being offered hereby which are not purchased by the public.
Offers to purchase the securities being offered hereby may be solicited
directly by us or by agents designated by us from time to time. Any such agent,
who may be deemed to be our "underwriter" as that term is defined in the
Securities Act, involved in the offer or sale of such securities will be named,
and any commissions payable by us to such agent will be set forth, in the
applicable prospectus supplement.
If a dealer is utilized in the sale of such securities, we will sell such
securities to the dealer, as principal. The dealer, who may be deemed to be an
"underwriter" as that term is defined in the Securities Act, may then resell
such securities to the public at varying prices to be determined by such dealer
at the time of resale.
If an underwriter is, or underwriters are, utilized in the sale, we will
execute an underwriting agreement with such underwriters at the time of sale to
them and the names of the underwriters will be set forth in the applicable
prospectus supplement, which will be used by the underwriters to make resales
of such shares to the public. In connection with the sale of such securities,
such underwriters may be deemed to have received compensation from us in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of such securities for whom they may act as agents.
Underwriters may sell such shares to or though dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act
as agents. Any underwriting compensation paid by us to underwriters in
connection with the offering of such securities, and any discounts, concessions
or commissions allowed by underwriters to participating dealers, will be set
forth in the applicable prospectus supplement.
If we sell shares of common stock through one or more rights offerings, we
will distribute to our stockholders, as of a record date to be determined,
transferable rights to purchase common stock. The terms of such rights,
including the period during which rights may be exercised, the exercise price,
oversubscription privileges, if any, and subscription procedures, will be set
forth in the applicable prospectus supplement. If a dealer manager is, or
dealer managers are, utilized by us in connection with a rights offering, the
applicable prospectus supplement will identify the dealer manager or dealer
managers and describe the compensation arrangements with such dealer manager or
dealer managers.
5
<PAGE>
Underwriters, dealers, agents, dealer managers, and other persons, including
the Tracinda group, may be entitled, under agreements that may be entered into
with us, to indemnification by us against certain civil liabilities, including
the liabilities under the Securities Act, or to contribution with respect to
payments which they may be required to make in respect thereof. Underwriters,
dealers, dealer managers and agents may engage in transactions with, or perform
services for us in the ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers, dealer managers, or other persons to solicit offers by
certain institutions to purchase from us securities offered hereby pursuant to
contracts providing for payment and delivery on a future date or dates set
forth in the applicable prospectus supplement. Institutions with which such
contacts may be made may include, but are not limited to, commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others. The obligations of any
purchaser under any such contract will not be subject to any conditions except
that (a) the purchase of such securities shall not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject and (b) if such securities are also being sold to underwriters, we
shall have sold to such underwriters the securities offered hereby which are
not sold for delayed delivery. The underwriters, dealers, dealer managers and
such other persons will not have any responsibility in respect to the validity
or performance of such contracts. The prospectus supplement relating to such
contracts will set forth the price to be paid for such securities pursuant to
such contracts, the commissions payable for solicitation of such contracts and
the date or dates in the future for delivery of such shares pursuant to such
contracts.
The anticipated date of delivery of securities offered hereby will be set
forth in the applicable prospectus supplement relating to each offer.
We intend to offer the common stock covered hereby in an underwritten public
offering commencing on or about September 13, 1999, and will file a prospectus
supplement with the Commission in connection with such offering.
DESCRIPTION OF SECURITIES
Common Stock
Our authorized common stock consists of 500,000,000 shares of common stock.
All authorized shares of common stock have a par value of $0.01 per share and
are entitled to one vote per share on all matters submitted to a vote of
stockholders. In the event of a liquidation, dissolution or winding up of the
company, the holders of the common stock are entitled to share ratably in all
assets remaining after all liabilities and the liquidation preference
attributable to any outstanding preferred stock have been paid. The holders of
the common stock have no pre-emptive rights or cumulative voting rights and no
rights to convert their common stock into any other securities.
As of June 30, 1999, there were outstanding 151,170,833 shares of the common
stock. As of June 30, 1999, there were reserved for issuance upon the exercise
of options 8,437,567 shares of the common stock, of which options for 7,775,301
shares were outstanding, 4,437,155 of which were vested and exercisable or
would become vested and exercisable within 60 days.
Subscription Rights
The following description sets forth the general terms and provisions of any
subscription rights which may be issued and to which any prospectus supplement
may relate. The particular terms of the subscription rights and extent, if any,
to which such general provisions may not apply will be described in the
prospectus supplement relating to such subscription rights.
The subscription rights will be issued in connection with one or more rights
offerings. The subscription rights will be issued without charge to our
stockholders and will be transferable. The number of rights to be issued for
each outstanding share of our common stock as well as the subscription price
will be determined at the time of the rights offering, if any, and described in
the related prospectus supplement. We anticipate that
6
<PAGE>
the subscription rights will be traded on the New York Stock Exchange, the
exchange where our common stock is traded.
We anticipate there will be two types of subscription privileges associated
with the subscription rights. Under the basic subscription privilege, a rights
holder would be entitled to purchase one share of common stock for each right
held. Under the oversubscription privilege, any rights holder who exercises the
basic subscription privilege for all rights held would be entitled to subscribe
for additional shares of common stock at the time the basic subscription
privilege is exercised. Shares will be available for the oversubscription
privilege to the extent that other rights holders do not exercise their basic
subscription privilege in full and will be subject to proration if necessary.
In each case, the rights holder must specify the number of shares to be
purchased and submit the subscription price to the subscription agent.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be passed
upon for us by Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP,
Los Angeles, California.
EXPERTS
The company's financial statements and schedules for the years ended
December 31, 1998 and December 31, 1997 and for the period from October 11,
1996 to December 31, 1996 and for MGM Studios for the period from January 1,
1996 to October 10, 1996 incorporated by reference into this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC, in accordance with the Securities Exchange Act of
1934. You may read and copy any document we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public from the SEC's web site
at: http://www.sec.gov.
The SEC allows us to "incorporate by reference" into this prospectus the
information we file with them, which means that we can disclose important
information to you by referring to our filed SEC documents. The information
incorporated by reference is considered to be part of this prospectus.
Information we file with the SEC after the date of this document will update
and supersede the information in this prospectus. We incorporate by reference
the documents listed below and any future filings made with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until this offering is completed:
(1) Our Annual Report on Form 10-K for the year ended December 31, 1998;
(2) Our Quarterly Reports on Form 10-Q for the periods ended March 31,
1999 and June 30, 1999;
(3) Our Current Report on Form 8-K dated March 16, 1999;
(4) The description of capital stock contained in Item 1 of our
Registration Statement on Form 8-A, filed with the SEC on October 14,
1997, as amended; and
(5) Our Proxy Statement dated June 15, 1999.
We have also filed a Registration Statement on Form S-3 with the SEC under
the Securities Act for the securities offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement. You should read the registration statement for further
information about our common
7
<PAGE>
stock and us. The Registration Statement can be found in the SEC's public
reference room or on the SEC's website referred to above, and you may request a
copy of any of these filings, at no cost, by writing or calling William A.
Jones, Senior Executive Vice President and Secretary of the company, at:
Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, California 90404
(310) 449-3000
You can find additional information by visiting our website at:
http://www.mgm.com.
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[MGM LOGO APPEARS HERE]
36,036,036 Shares of Common Stock
------------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------------
Banc of America Securities LLC
Donaldson, Lufkin & Jenrette
----------------
Credit Suisse First Boston
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
CIBC World Markets
ING Barings
The Seidler Companies Incorporated
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus supplement and the accompanying
prospectus or to make representations as to matters not stated in this
prospectus supplement and the accompanying prospectus. You must not rely on
unauthorized information. This prospectus supplement and the accompanying
prospectus are not offers to sell these securities or our solicitation of your
offer to buy the securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of this prospectus supplement and the
accompanying prospectus nor any sales made hereunder after the date of this
prospectus supplement shall create an implication that the information
contained in this prospectus supplement and the accompanying prospectus or the
affairs of MGM have not changed since the date hereof.
- --------------------------------------------------------------------------------
