<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
For the Quarterly Period Ended September 30, 2000
Commission File No. 1-13481
METRO-GOLDWYN-MAYER INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Delaware 95-4605850
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2500 Broadway Street, Santa Monica, CA 90404
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 449-3000
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
The number of shares of the Registrant's common stock outstanding as of
November 1, 2000 were
207,143,100.
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<PAGE>
METRO-GOLDWYN-MAYER INC.
FORM 10-Q
September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<C> <S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999.............................. 1
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Quarters and Nine Months
ended September 30, 2000 and 1999 (unaudited).................. 2
Condensed Consolidated Statements of Stockholders' Equity for
the Nine Months ended September 30, 2000 (unaudited)........... 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2000 and 1999 (unaudited)........... 4
Notes to Condensed Consolidated Financial Statements............ 5
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations........................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 20
Part II. Other Information
Item 1. Legal Proceedings............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 23
Signatures................................................................ 24
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents........................... $ 190,603 $ 152,213
Accounts and contracts receivable (net of allowance
for doubtful accounts of $22,902 and $20,985,
respectively)...................................... 429,503 452,914
Film and television costs, net...................... 2,299,305 2,164,458
Investments in and advances to affiliates........... 14,286 15,207
Property and equipment, net......................... 46,691 48,203
Excess of cost over net assets of acquired
businesses, net.................................... 535,123 546,173
Other assets........................................ 47,538 45,193
---------- ----------
$3,563,049 $3,424,361
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Bank and other debt............................... $ 712,976 $ 719,438
Accounts payable and accrued liabilities.......... 183,932 189,904
Accrued participants' share....................... 215,595 237,102
Income taxes payable.............................. 31,979 31,619
Advances and deferred revenues.................... 105,655 112,189
Other liabilities................................. 17,118 17,285
---------- ----------
Total liabilities............................... 1,267,255 1,307,537
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares
authorized, none issued.......................... -- --
Common stock, $.01 par value, 500,000,000 shares
authorized, 207,136,208 and 201,419,331 shares
issued........................................... 2,071 2,014
Additional paid-in capital........................ 3,071,265 2,931,004
Deficit........................................... (777,882) (816,506)
Accumulated other comprehensive income............ 340 316
Less: treasury stock, at cost..................... -- (4)
---------- ----------
Total stockholders' equity...................... 2,295,794 2,116,824
---------- ----------
$3,563,049 $3,424,361
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
1
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended September
30, Nine Months Ended September 30,
-------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues................ $ 315,381 $ 299,310 $ 955,533 $ 770,227
Expenses:
Film and television
production and
distribution......... 249,214 242,449 795,640 869,219
General and
administrative
expenses............. 25,815 18,800 77,802 67,928
Severance and related
costs................ -- -- (3,715) 76,158
Contract termination
fee.................. -- -- -- 225,000
Goodwill
amortization......... 3,683 3,683 11,051 11,170
------------ ------------ --------------- ---------------
Total expenses...... 278,712 264,932 880,778 1,249,475
------------ ------------ --------------- ---------------
Operating income
(loss)................. 36,669 34,378 74,755 (479,248)
Other income (expense):
Interest expense, net
of amounts
capitalized.......... (12,583) (22,807) (42,198) (64,045)
Interest and other
income, net.......... 4,764 827 14,864 3,345
------------ ------------ --------------- ---------------
Total other
expense............ (7,819) (21,980) (27,334) (60,700)
------------ ------------ --------------- ---------------
Income (loss) from
operations before
provision for income
taxes.................. 28,850 12,398 47,421 (539,948)
Income tax provision.... (1,735) (2,054) (8,797) (6,136)
------------ ------------ --------------- ---------------
Net income (loss)....... 27,115 10,344 38,624 (546,084)
Foreign currency
translation
adjustments............ (305) 106 (31) 110
Unrealized gains
(losses) on
securities............. (13) -- 55 --
------------ ------------ --------------- ---------------
Comprehensive income
(loss)................. $ 26,797 $ 10,450 $ 38,648 $ (545,974)
============ ============ =============== ===============
Income (loss) per share:
Basic................. $ 0.13 $ 0.07 $ 0.19 $ (3.61)
============ ============ =============== ===============
Diluted............... $ 0.13 $ 0.07 $ 0.18 $ (3.61)
============ ============ =============== ===============
Weighted average number
of common shares
outstanding:
Basic................. 206,887,234 151,314,519 204,005,104 151,070,095
============ ============ =============== ===============
Diluted............... 212,858,774 154,730,092 210,238,167 151,070,095
============ ============ =============== ===============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Add'l Accum. Other Less: Total
----------------------- Paid-in Comprehensive Treasury Stockholders'
No. of Shares Par Value Capital Deficit Income Stock Equity
------------- --------- ---------- --------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1999................... 201,419,331 $2,014 $2,931,004 $(816,506) $316 $ (4) $2,116,824
Issuance of common stock
to outside parties,
net.................... 5,363,800 54 133,330 -- -- -- 133,384
Issuance of common stock
to related parties,
net.................... 353,077 3 6,931 -- -- 4 6,938
Net income.............. -- -- -- 38,624 -- -- 38,624
Other comprehensive
income:
Foreign currency
translation
adjustments............ -- -- -- -- (31) -- (31)
Unrealized gains on
securities............. -- -- -- -- 55 -- 55
----------- ------ ---------- --------- ---- ----- ----------
Balance September 30,
2000................... 207,136,208 $2,071 $3,071,265 $(777,882) $340 $ -- $2,295,794
=========== ====== ========== ========= ==== ===== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
METRO-GOLDWYN-MAYER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities............... $ 483,166 $ 81,453
--------- ---------
Investing activities:
Acquisition of the PolyGram libraries................. -- (236,201)
Additions to film costs, net.......................... (568,384) (477,502)
Additions to property and equipment................... (7,422) (7,274)
Other investing activities............................ (2,000) (4,595)
--------- ---------
Net cash used in investing activities................. (577,806) (725,572)
--------- ---------
Financing activities:
Net proceeds from issuance of equity securities to
outside parties...................................... 133,384 --
Net proceeds from issuance of equity securities under
stock option agreements.............................. 3,825 --
Additions to borrowed funds........................... -- 864,172
Repayments of borrowed funds.......................... (3,866) (263,833)
--------- ---------
Net cash provided by financing activities............. 133,343 600,339
--------- ---------
Net change in cash and cash equivalents from operating,
investing and financing activities..................... 38,703 (43,780)
Net decrease in cash due to foreign currency
fluctuations........................................... (313) (604)
--------- ---------
Net change in cash and cash equivalents................. 38,390 (44,384)
Cash and cash equivalents at beginning of the period.... 152,213 54,839
--------- ---------
Cash and cash equivalents at end of the period.......... $ 190,603 $ 10,455
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Metro-Goldwyn-Mayer Inc. ("MGM"), Metro-Goldwyn-Mayer
Studios Inc. and its majority owned subsidiaries ("MGM Studios") and Orion
Pictures Corporation and its majority owned subsidiaries ("Orion")
(collectively, the "Company"). MGM is a Delaware corporation formed on July
10, 1996 specifically to acquire MGM Studios, and is majority owned by an
investor group comprised of Tracinda Corporation and a corporation that is
principally owned by Tracinda Corporation, 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. and its subsidiaries
("PolyGram") on January 7, 1999.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial statements and the instructions to
Form 10-Q related to interim period financial statements. Accordingly, these
unaudited condensed consolidated financial statements do not include certain
information and footnotes required by accounting principles generally accepted
in the United States 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
unaudited 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, 1999. 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.
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 139, which, effective for financial statements for fiscal years beginning
after December 15, 2000, rescinds FASB No. 53. The companies that were
previously subject to the requirements of SFAS No. 53 shall now follow the
guidance in American Institute of Certified Public Accountants Statement of
Position ("SOP") 00-2, "Accounting by Producers or Distributors of Films,"
issued in June 2000. SOP 00-2 establishes new accounting and reporting
standards for all producers and distributors that own or hold the rights to
distribute or exploit films. SOP 00-2 provides that the cumulative effect of
changes in accounting principles caused by its adoption should be included in
the determination of net income in conformity with Accounting Principles Board
Opinion No. 20, "Accounting Changes." The Company intends to adopt SOP 00-2
beginning January 1, 2001. Based on the Company's estimates at this time, the
effect of adopting SOP 00-2 as of January 1, 2001 would result in a one-time,
non-cash cumulative effect charge to earnings of approximately $375,000,000 to
$400,000,000, primarily to reduce the carrying value of its film inventory.
The Company anticipates that the new rules will impact its results of
operations for the foreseeable future.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The SAB provides guidance on the recognition, presentation and
disclosure of revenue in financial statements, including certain criteria for
gross versus net
5
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recording of sales transactions. SAB No. 101 allows any required changes to be
recorded in accordance with Accounting Principles Board No. 20, "Accounting
Changes." This SAB is required to be implemented by the Company in the quarter
ended December 31, 2000, with retroactive application to January 1, 2000. The
Company has not determined the effect of this new guidance on the financial
statements.
Note 2--WHV Contract Settlement
On March 12, 1999, the Company agreed to accelerate the expiration of the
right of Warner Home Video ("WHV") to distribute the Company's product in the
home video marketplace under an agreement executed in 1990 (the "WHV
Agreement"). In consideration for the early expiration of the WHV Agreement,
the Company paid WHV $225,000,000 in 1999. The parties restructured the terms
of the WHV Agreement, which functioned as an interim distribution agreement
(the "Transitional Video Agreement"), under which WHV distributed certain of
the Company's product in the home video marketplace. Additionally, the Company
reconveyed to Turner Entertainment Co., Inc. ("Turner"), an affiliate of WHV,
the right that the Company had to distribute in the home video markets
worldwide until June 2001, 2,950 Turner titles that had been serviced under
the WHV Agreement. The Transitional Video Agreement expired on January 31,
2000, at which time the Company commenced distribution of its home video
product in the domestic market. The Company contracted with Fox Entertainment
Group, Inc. to distribute its home video product internationally beginning on
Februrary 1, 2000. The Company recorded a pre-tax contract termination charge
in the quarter ended March 31, 1999 of $225,000,000 for costs in connection
with the early expiration of WHV's rights under the WHV Agreement.
Note 3--Restructuring and Other Charges
In June 1999, in association with a change in senior management and a
corresponding review of operations, the Company incurred certain
restructuring, severance and other costs aggregating $225,173,000, of which
$140,002,000 was film-performance related and $85,171,000 reflected severance
and other costs, including the estimated costs of withdrawing from the
Company's arrangements with United International Pictures ("UIP") on October
31, 2000. During the nine months ended September 30, 2000, the Company
utilized $85,119,000 of the film-performance related reserves and paid
$6,440,000 of severance and other costs. From June 1999 through September 30,
2000, the Company utilized $129,388,000 and recovered $10,614,000 of the film-
performance related reserves, and paid $31,890,000 of severance and other
costs.
In June 2000, the Company reduced previously charged reserves by $5,000,000
due to a negotiated settlement with UIP regarding the Company's withdrawal
from the joint venture. Additionally, in June 2000, the Company incurred
severance and other related charges of $1,285,000 related to the closure of a
foreign sales office.
6
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Film and Television Costs
Film and television costs, net of amortization, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
September 30, December
2000 31, 1999
------------- -----------
<S> <C> <C>
Theatrical productions:
Released........................................ $ 3,364,808 $ 3,011,248
Less: accumulated amortization.................. (1,706,485) (1,277,426)
----------- -----------
Released, net................................... 1,658,323 1,733,822
Completed not released, net..................... 6,045 28,286
In process and development, net................. 327,556 88,889
----------- -----------
Subtotal: theatrical productions.............. 1,991,924 1,850,997
----------- -----------
Television programming............................ 779,032 697,515
Less: accumulated amortization.................... (471,651) (384,054)
----------- -----------
Subtotal: television programming.............. 307,381 313,461
----------- -----------
$ 2,299,305 $ 2,164,458
=========== ===========
</TABLE>
Interest costs capitalized to theatrical productions were $4,300,000 and
$7,276,000 during the quarter and nine months ended September 30, 2000, and
$5,699,000 and $15,637,000 during the quarter and nine months ended September
30, 1999, respectively.
Note 5--Bank and Other Debt
Bank and other debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Term Loans...................................... $700,000 $700,000
Capitalized lease obligations and other
borrowings..................................... 12,976 19,438
-------- --------
$712,976 $719,438
======== ========
</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 $600,000,000 revolving credit
facility (the "Revolving Facility"), a $400,000,000 seven and one-half year
term loan ("Tranche A Loan") and a $300,000,000 eight and one-half year term
loan ("Tranche B Loan") (collectively, the "Term Loans"). The Amended Credit
Facility was subsequently amended and restated on July 21, 2000, with less
restrictive operating and financial covenants. The Amended Credit Facility
contains provisions allowing, with the consent of the requisite lenders and
subject to syndication thereof, for an additional $200,000,000 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 (9.19 percent at September 30, 2000). The
Tranche B Loan bears interest at 2.75 percent over the Adjusted LIBOR rate
(9.44 percent at September 30, 2000). Scheduled amortization of the Term Loans
under the Amended Credit Facility commences with $33,000,000 in 2001,
$73,000,000 in 2002, $103,000,000 in 2003, $103,000,000 in 2004 and
$103,000,000 in 2005, with the remaining balance due at maturity. There were
no amounts outstanding under the Revolving Facility at September 30, 2000 and
December 31, 1999. The Revolving Facility matures in October 2003, subject to
extension under certain conditions.
7
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED 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 8.1 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. As of September 30, 2000, the Company was in compliance with all
applicable covenants.
Lease and other borrowings. Capitalized lease and other borrowings relate
principally to contractual liabilities and computer equipment financing at
interest rates ranging from approximately nine to ten percent.
Note 6--Stockholders' Equity
On May 26, 2000, pursuant to a Form S-3 shelf registration statement (the
"Shelf Registration Statement") filed with the Securities and Exchange
Commission, the Company completed the sale of 4,890,000 shares of its common
stock at $25 per share to various third party investors for aggregate net
proceeds of $121,539,000. On August 15, 2000, the Company, pursuant to the
Shelf Registration Statement, issued an additional 473,800 shares of its
common stock at $25 per share to third party investors for aggregate net
proceeds of $11,845,000. The proceeds will be used for general corporate
purposes, and have been invested in short-term instruments as of September 30,
2000.
Common stock equivalents representing 994,615 shares are not included in the
calculation of diluted earnings per share in the nine months ended September
30, 1999 because they are antidilutive.
Note 7--Related Party Transactions
Pursuant to an exclusive open-ended royalty-free license granted by a
predecessor-in-interest of the Company in 1980 and subsequently amended in
1992 and 1998, MGM Grand, Inc. (now know as MGM MIRAGE) has the right to use
certain trademarks that include the letters "MGM" in its hotel, resort hotel
and/or gaming businesses and other businesses that are not related to filmed
entertainment. In June 2000, in consideration of the payment to the Company of
an annual royalty of $1,000,000, such license was further amended to permit
MGM Grand, Inc. to use the letters "MGM" combined with the name "Mirage" in
the same manner and to the same extent that it was permitted theretofore to
use the name "MGM Grand."
Note 8--Segment Information
The Company applies the disclosure provisions of SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related 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. Income or losses 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.
8
<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 Program Other Total
--------- ---------- ------- --------
<S> <C> <C> <C> <C>
Quarter Ended September 30:
2000:
Revenues............................ $ 273,815 $ 35,686 $ 5,880 $315,381
Segment income...................... $ 65,403 $ 173 $ 591 $ 66,167
1999:
Revenues............................ $ 205,758 $ 86,183 $ 7,369 $299,310
Segment income...................... $ 33,766 $ 20,786 $ 2,309 $ 56,861
Nine Months Ended September 30:
2000:
Revenues............................ $ 813,391 $109,414 $32,728 $955,533
Segment income...................... $ 142,569 $ 1,019 $16,305 $159,893
1999:
Revenues............................ $ 553,766 $179,201 $37,260 $770,227
Segment income (loss)............... $(143,507) $ 28,839 $15,676 $(98,992)
</TABLE>
The following is a reconciliation of the change in reportable segment
assets:
<TABLE>
<CAPTION>
December 31, Increase September 30,
1999 (Decrease) 2000
------------ ---------- -------------
<S> <C> <C> <C>
Feature films......................... $2,255,693 $127,436 $2,383,129
Television programs................... 423,204 (28,076) 395,128
Other................................. 18,104 (1,919) 16,185
---------- -------- ----------
Total reportable segment assets..... $2,697,001 $ 97,441 $2,794,442
========== ======== ==========
</TABLE>
The following table presents the details of other operating segment income
(loss):
<TABLE>
<CAPTION>
Nine Months
Quarter Ended Ended September
September 30, 30,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Licensing and
merchandising............ $ 1,626 $ 1,434 $ 5,311 $ 3,476
Interactive media......... 194 668 9,195 (399)
Music..................... 556 610 3,304 4,328
Profit (losses) on equity
investments.............. 483 (1,479) 1,086 (6,417)
Other..................... (2,268) 1,076 (2,591) 14,688
------- ------- ------- -------
Total other operating
segment income......... $ 591 $ 2,309 $16,305 $15,676
======= ======= ======= =======
</TABLE>
9
<PAGE>
METRO-GOLDWYN-MAYER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of reportable segment income (loss) to
income (loss) from operations before provision for income taxes:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Segment income (loss)............. $ 66,167 $ 56,861 $159,893 $ (98,992)
General and administrative
expenses......................... (25,815) (18,800) (77,802) (67,928)
Severance and related (costs)
recoveries....................... -- -- 3,715 (76,158)
Contract termination fee.......... -- -- -- (225,000)
Goodwill amortization............. (3,683) (3,683) (11,051) (11,170)
-------- -------- -------- ---------
Operating income (loss)......... 36,669 34,378 74,755 (479,248)
Interest expense, net of amounts
capitalized...................... (12,583) (22,807) (42,198) (64,045)
Interest and other income, net.... 4,764 827 14,864 3,345
-------- -------- -------- ---------
Income (loss) from operations
before
provision for income taxes..... $ 28,850 $ 12,398 $ 47,421 $(539,948)
======== ======== ======== =========
</TABLE>
The following is a reconciliation of reportable segment assets to
consolidated total assets:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Total assets for reportable segments.............. $2,794,442 $2,697,001
Goodwill not allocated to segments................ 535,123 546,173
Cash and other unallocated amounts................ 233,484 181,187
---------- ----------
Consolidated total assets....................... $3,563,049 $3,424,361
========== ==========
</TABLE>
Note 9--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 not expected to be material in relation to the Company's financial
condition or results of operations.
Note 10--Supplementary Cash Flow Information
The Company paid interest, net of capitalized interest, of $35,466,000 and
$51,364,000 during the nine months ended September 30, 2000 and 1999,
respectively. The Company paid income taxes of $9,421,000 and $9,304,000
during the nine months ended September 30, 2000 and 1999, respectively.
During the nine months ended September 30, 2000, the Company issued to its
employees a stock grant of 47,300 shares of common stock valued at $2,154,000.
During the nine months ended September 30, 1999, the Company issued to its
employees a stock grant of 42,300 shares of common stock valued at $1,235,000.
Net cash used by operating activities for the nine months ended September
30, 1999 reflects a $225,000,000 payment to WHV representing the consideration
paid by the Company for the early expiration of the WHV Agreement (see Note
2).
10
<PAGE>
Note 11--Subsequent Event
Subsequent to September 30, 2000, in conjunction with certain investment
transactions, the Company incurred a loss on disposal of approximately
$4,000,000, resulting primarily from the impact of fluctuations in foreign
currency exchange rates.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report includes forward-looking statements. Generally, the words
"believes," "anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents we file with
the Securities and Exchange Commission from time to time, which could cause
actual results or outcomes to differ materially from those projected. Undue
reliance should not be placed on these forward-looking statements which speak
only as of the date hereof. We undertake no obligation to update these
forward-looking statements.
The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes
thereto and other financial information contained elsewhere in this Form 10-Q.
General
We are engaged primarily in the development, production and worldwide
distribution of theatrical motion pictures and television programming.
The commercial potential of individual motion pictures and television
programming varies dramatically, and is not directly correlated with
production or acquisition costs. Therefore, it is difficult to predict or
project a trend of 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 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 June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 139, which, effective for financial
statements for fiscal years beginning after December 15, 2000, rescinds
Statement of Financial Accounting Standards No. 53. The companies that were
previously subject to the requirements of Statement of Financial Accounting
Standards No. 53 shall now follow the guidance in American Institute of
Certified Public Accountants Statement of Position 00-2, "Accounting by
Producers or Distributors of Films," issued in June 2000. Statement of
Position 00-2 establishes new accounting and reporting standards for all
producers and distributors that own or hold the rights to distribute or
exploit films. Statement of Position 00-2 provides that the cumulative effect
of changes in accounting principles caused by its adoption should be included
in the determination of net income in conformity with Accounting Principles
Board Opinion No. 20, "Accounting Changes." We intend to adopt the statement
of position beginning January 1, 2001. Based on our estimates at this time,
the effect of adopting Statement of Position 00-2 as of January 1, 2001 would
result in a one-time, non-cash cumulative effect charge to earnings of
approximately $375 million to $400 million, primarily to reduce the carrying
value of our film inventory. We anticipate that the new rules will impact our
results of operations for the foreseeable future.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The SAB provides guidance on the recognition, presentation and
disclosure of revenue in financial statements, including certain criteria for
gross versus net recording of sales transactions. SAB No. 101 allows any
required changes to be recorded in accordance with
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<PAGE>
Accounting Principles Board Opinion No. 20, "Accounting Changes." This SAB is
required to be implemented by us in the quarter ended December 31, 2000, with
retroactive application to January 1, 2000. We have not determined the effect
of this new guidance on the financial statements.
Results of Operations
Periods Ended September 30, 2000 Compared to Periods Ended September 30, 1999
The following table sets forth our operating results for the quarters and
nine months ended September 30, 2000 and 1999. As stated in the financial
statements and related notes thereto, in the quarter 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. In the quarter ended September 30, 1999, due to the
strong performance of certain of the films in release in that period, we
recovered $18.8 million of feature film write-downs previously charged in the
quarter ended June 30, 1999. Additionally, in March 1999 we accelerated the
expiration of the Warner Home Video agreement, which resulted in a $225.0
million charge included in operating results for the nine months ended
September 30, 1999. The net operating results in the 2000 periods, therefore,
are not comparable to the operating results in the 1999 periods.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Feature films...................... $273,815 $205,758 $813,391 $ 553,766
Television programs................ 35,686 86,183 109,414 179,201
Other.............................. 5,880 7,369 32,728 37,260
-------- -------- -------- ---------
Total revenues................... 315,381 299,310 955,533 770,227
-------- -------- -------- ---------
Operating income (loss):
Feature films...................... 65,403 33,766 142,569 (143,507)
Television programs................ 173 20,786 1,019 28,839
Other.............................. 591 2,309 16,305 15,676
General and administration
expenses.......................... (25,815) (18,800) (77,802) (67,928)
Severance and related (costs)
recoveries........................ -- -- 3,715 (76,158)
Contract termination fee........... -- -- -- (225,000)
Goodwill amortization.............. (3,683) (3,683) (11,051) (11,170)
-------- -------- -------- ---------
Operating income (loss).............. 36,669 34,378 74,755 (479,248)
Interest expense, net of amounts
capitalized......................... (12,583) (22,807) (42,198) (64,045)
Interest and other income............ 4,764 827 14,864 3,345
-------- -------- -------- ---------
Income (loss) before provision for
income taxes........................ 28,850 12,398 47,421 (539,948)
Income tax provision................. (1,735) (2,054) (8,797) (6,136)
-------- -------- -------- ---------
Net income (loss)................ $ 27,115 $ 10,344 $ 38,624 $(546,084)
======== ======== ======== =========
</TABLE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Feature Films. Feature film revenues increased by $68.1 million, or 33
percent, to $273.8 million in the quarter ended September 30, 2000 (the "2000
Quarter") compared to the quarter ended September 30, 1999 (the "1999
Quarter").
Worldwide theatrical revenues decreased by $43.2 million, or 65 percent, to
$23.5 million in the 2000 Quarter, primarily due to the performance of the
releases in the 2000 Quarter compared to those in the 1999 Quarter. In the
2000 Quarter, we released Autumn in New York in the domestic theatrical
marketplace, as well as
13
<PAGE>
the release on a more limited basis of Crime and Punishment in Suburbia, The
Fantasticks and This Is Spinal Tap, as compared to significantly higher
revenues earned by the release in the 1999 Quarter of The Thomas Crown Affair,
Stigmata and One Man's Hero. There were no new international theatrical
releases in the 2000 Quarter as compared to three new international releases
in the 1999 Quarter.
Worldwide home video revenues increased by $66.7 million, or 111 percent, to
$126.8 million in the 2000 Quarter. In the 2000 Quarter, home video revenues
reflected the continuing successful worldwide performance of The World Is Not
Enough, The Thomas Crown Affair and Stigmata, as well as the domestic home
video release of Supernova and new library sales promotions. In the 1999
Quarter, our domestic home video releases included The Mod Squad, which
generated lower revenues than the releases in the 2000 Quarter, and in
international home video markets included the release of Ronin and Species 2.
The continued growth in the digital video disc ("DVD") market also contributed
to the increase in home video revenues. DVD sales increased to $48.7 million
in the 2000 Quarter from $11.4 million in the 1999 Quarter.
Worldwide pay television revenues from feature films increased by $13.9
million, or 33 percent, to $56.0 million in the 2000 Quarter, principally due
to the delivery to domestic pay television of The Thomas Crown Affair and
Stigmata, which generated significant license fees in the 2000 Quarter, as
well as increased revenue from our recently amended licensing agreement with
Showtime Networks Inc. In the 1999 Quarter, we delivered Ronin and Disturbing
Behavior to domestic pay television, which generated lower license fees than
the films in the 2000 Quarter. Network television revenues from feature films
increased by $19.0 million, or 645 percent, to $22.0 million in the 2000
Quarter as we delivered Tomorrow Never Dies to network television, as compared
to the delivery in the 1999 Quarter of Larger Than Life for a much lower
license fee. Worldwide syndicated television revenues from feature films
increased by $14.2 million, or 49 percent, to $43.3 million in the 2000
Quarter, principally due to the domestic basic cable sale of Red Corner, as
well as increased library sales in international markets.
Other feature film revenues decreased by $2.6 million, or 53 percent, to
$2.3 million in the 2000 Quarter due to lower third party royalty income
collected in the period.
Operating income from feature films increased by $31.6 million, or 94
percent, to $65.4 million in the 2000 Quarter, principally reflecting the
increase in revenues discussed above as well as reduced third party
distribution fees.
Television Programming. Television programming revenues decreased by $50.5
million, or 59 percent, to $35.7 million in the 2000 Quarter. Worldwide pay
television revenues decreased by $1.5 million, or 26 percent, to $4.3 million
in the 2000 Quarter, as we had only one series, Stargate SG-1, in broadcast on
domestic pay television as compared to two series, Stargate SG-1 and The Outer
Limits, in the 1999 Quarter. Additionally, in the 1999 Quarter we recognized
$8.2 million in consideration regarding the termination of certain domestic
pay television contractual commitments. There were no such transactions in the
2000 Quarter.
Worldwide syndicated television programming revenues decreased by $43.2
million, or 62 percent, to $26.7 million in the 2000 Quarter, primarily due to
lower basic cable sales than in the 1999 Quarter, which included significant
new sales to basic cable for the series The Outer Limits, Poltergeist: The
Legacy and In the Heat of the Night. Worldwide home video revenues with
respect to television programming increased by $2.2 million, or 108 percent,
to $4.2 million in the 2000 Quarter, primarily due to increased Stargate SG-1
sales.
Operating income from television programming decreased by $20.6 million, or
99 percent, to $0.2 million in the 2000 Quarter, which reflected the decrease
in revenues discussed above.
Other. Other revenues included distribution of consumer products,
interactive media and branded programming services, as well as music
soundtrack and royalty income and third party audit recoveries. Operating
profit from other businesses decreased by $1.7 million, or 74 percent, to $0.6
million in the 2000 Quarter as compared to the 1999 Quarter. Operating results
in the 2000 Quarter included consumer products
14
<PAGE>
revenue of $3.1 million and music soundtrack and royalty revenue of $1.1
million, as compared to consumer products revenue of $3.3 million and music
soundtrack and royalty revenue of $1.2 million in the 1999 Quarter.
Interactive media revenues were $0.4 million in the 2000 Quarter as compared
to $1.9 million in the 1999 Quarter, which included fees collected for the
right to develop a new James Bond series interactive game. There were no new
releases of interactive games in the 2000 Quarter. Additionally, operating
results in the 2000 Quarter include the receipt of $1.3 million in third party
audit recoveries and other miscellaneous income as compared to recoveries of
$1.0 million in the 1999 Quarter.
Expenses for other businesses included interactive product costs of $0.1
million in the 2000 Quarter as compared to $1.1 million of development costs
in the 1999 Quarter. Consumer products cost of sales were $1.0 million in the
2000 Quarter as compared to $1.3 million in the 1999 Quarter. In addition,
operating expenses for other businesses in the 1999 Quarter included aggregate
start-up losses of $1.5 million on our equity investments, including our
interest in the cable programming joint venture, MGM Networks Latin America.
There were no comparable losses in the 2000 Quarter. Other expenses aggregated
$4.7 million in the 2000 Quarter and $1.2 million in the 1999 Quarter. Other
expenses in the 2000 Quarter reflected costs to develop our new website and
increased foreign currency transaction losses, as well as distribution
expenses related to branded programming services.
General and Administration Expenses. General and administration expenses
increased by $7.0 million, or 37 percent, to $25.8 million in the 2000
Quarter, primarily due to a new employee incentive plan implemented in 2000
and lower legal recoveries collected than in the 1999 Quarter.
Interest Expense, Net of Amounts Capitalized. Net interest expense decreased
by $10.2 million, or 45 percent, to $12.6 million in the 2000 Quarter due to
debt repayment associated with proceeds received in November 1999 from our
rights offering, as well as proceeds from new issuances of our common stock in
2000.
Interest and Other Income. Interest and other income increased by $3.9
million, or 476 percent, to $4.8 million in the 2000 Quarter due to interest
income earned on our short-term investments, which have increased from
retained proceeds from our May 2000 and August 2000 issuances of our common
stock.
Income Tax Provision. The provision for income taxes decreased by $0.3
million, or 16 percent, to $1.7 million in the 2000 Quarter due to foreign tax
refunds collected in the period, partially offset by increased foreign
remittance taxes attributable to increased international distribution
revenues.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Feature Films. Feature film revenues increased by $259.6 million, or 47
percent, to $813.4 million in the nine months ended September 30, 2000 (the
"2000 Period") compared to the nine months ended September 30, 1999 (the "1999
Period").
Worldwide theatrical revenues increased by $16.6 million, or 14 percent, to
$133.2 million in the 2000 Period primarily due to the significant worldwide
theatrical revenues earned by The World Is Not Enough, which was initially
released in November 1999, and by the new film releases Return to Me and
Autumn in New York. In the 1999 Period, significant releases included The
Thomas Crown Affair and Stigmata. Overall, in the 2000 Period, we released
seven new feature films domestically, three of which were released on a
limited distribution basis, and two new films internationally. In the 1999
Period, we released eight new films domestically, two of which were released
on a limited distribution basis, and four new films internationally.
Worldwide home video revenues increased by $194.0 million, or 85 percent, to
$421.4 million in the 2000 Period. In the 2000 Period, our home video releases
included the successful releases of The World Is Not Enough, which generated
revenues in excess of $85.0 million in the period, The Thomas Crown Affair,
Stigmata and Supernova, as well as various library promotions. In the 1999
Period, lower revenues were earned by the release in home video markets of
Ronin, At First Sight, The Mod Squad and Disturbing Behavior. The continued
growth
15
<PAGE>
in the DVD market also contributed to the increase in home video revenues. DVD
sales increased to $158.1 million in the 2000 Period, which included the
release of The World Is Not Enough, from $37.0 million in the 1999 Period.
Worldwide pay television revenues from feature films increased by $24.1
million, or 26 percent, to $117.2 million in the 2000 Period. Domestic pay
television revenues in the 2000 Period included the deliveries of The Thomas
Crown Affair, Stigmata, The Mod Squad, The Rage: Carrie 2 and Tea With
Mussolini, as well as increased license fees from our recently amended
agreement with Showtime Networks Inc. and international pay television
revenues from The Man in the Iron Mask, Ronin and Species 2. In the 1999
Period, domestic pay television revenues included deliveries of Ronin,
Disturbing Behavior, The Man in the Iron Mask, Species 2 and Dirty Work.
Network television revenues from feature films increased by $11.9 million, or
117 percent, in the 2000 Period due to the delivery of Tomorrow Never Dies to
network television as compared to the deliveries of Fled, Mulholland Falls,
Kingpin and Larger Than Life in the 1999 Period. Worldwide syndicated
television revenues from feature films increased by $6.6 million, or 7
percent, to $105.8 million in the 2000 Period, principally due to the domestic
basic cable sale of Red Corner.
Other feature film revenues increased by $6.4 million, or 88 percent, to
$13.6 million in the 2000 Period due to higher third party royalty and
miscellaneous income collected in the period.
We realized operating income from feature films of $142.6 million in the
2000 Period as compared to an operating loss of $143.5 million in the 1999
Period. Operating results in the 2000 Period reflected the increase in
revenues discussed above, which included profits earned from the significant
worldwide theatrical and home video receipts generated by The World Is Not
Enough and the home video releases of The Thomas Crown Affair and Stigmata.
Additionally, we had insignificant feature film write-downs in the 2000
Period. Operating results in the 1999 Period reflected feature film write-
downs and an additional reserve for charges regarding a re-evaluation of
several film projects in various stages of development and production, which
resulted in aggregate film-related charges of $170.7 million.
Television Programming. Television programming revenues decreased by $69.8
million, or 39 percent, to $109.4 million in the 2000 Period. Network
television revenues decreased by $8.7 million, or 100 percent, as we had no
new series airing on network television in the 2000 Period as compared to The
Magnificent Seven and the delivery of one television movie in the 1999 Period.
Worldwide pay television revenues decreased by $2.8 million, or 15 percent, to
$15.9 million in the 2000 Period due to fewer television movies delivered in
the 2000 Period than in 1999. Additionally, television programming revenues
decreased by another $8.4 million in the 2000 Period due to consideration we
received in the 1999 Period regarding the termination of certain domestic pay
television contractual commitments. There were no such transactions in the
2000 Period.
Worldwide syndicated television programming revenues decreased by $54.8
million, or 41 percent, to $78.6 million in the 2000 Period, primarily due to
fewer original episodes in syndication in the 2000 Period as well as lower
domestic basic cable sales. In the 1999 Period, significant new sales to basic
cable were realized for the series The Outer Limits, Poltergeist: The Legacy
and In the Heat of the Night. There were no comparable licenses of library
programming in the 2000 Period. Worldwide home video revenues with respect to
television programming increased by $4.4 million, or 47 percent, to $13.9
million in the 2000 Period, primarily due to the release of the animated video
Tom Sawyer and increased Stargate SG-1 sales.
Operating income from television programming decreased by $27.8 million, or
96 percent, to $1.0 million in the 2000 Period, reflecting the decrease in
revenues discussed above.
Other. Other revenues included distribution of consumer products,
interactive media and branded programming services, as well as music
soundtrack and royalty income and third party audit recoveries. Operating
profit from other businesses increased by $0.6 million, or 4 percent, to $16.3
million in the 2000 Period. Operating results in the 2000 Period included
consumer products revenue of $9.5 million and music soundtrack and royalty
revenue of $5.2 million, as compared to consumer products revenue of $7.9
million and
16
<PAGE>
music soundtrack and royalty revenue of $6.2 million in the 1999 Period.
Interactive media revenues were $12.7 million in the 2000 Period, which
included revenues realized from the successful release of the interactive game
version of Tomorrow Never Dies. In the 1999 Period, interactive media revenues
aggregated $6.4 million, which included fees collected for the rights to
develop James Bond interactive games. Additionally, operating results in the
2000 Period include the receipt of $5.2 million in third party audit
recoveries and other miscellaneous income as compared to higher audit
recoveries of $16.7 million in the 1999 Period.
Expenses for other businesses in the 2000 Period included interactive
product costs of $3.3 million, principally related to the release of the
interactive game version of Tomorrow Never Dies, as compared to $6.4 million
of development costs in the 1999 Period. Consumer products cost of sales were
$2.6 million in the 2000 Period and $2.4 million in the 1999 Period. In
addition, we realized profits of $1.1 million from our equity investments in
the 2000 Period. Operating expenses in the 1999 Period included aggregate
start-up losses of $6.4 million on our equity investments, including our
interest in the cable programming joint venture, MGM Networks Latin America.
Other expenses aggregated $11.6 million in the 2000 Period and $6.4 million in
the 1999 Period. The increase in other expenses in the 2000 Period reflected
costs to develop our new website and increased foreign currency transaction
losses, as well as distribution expenses related to branded programming
services.
General and Administration Expenses. General and administration expenses
increased by $9.9 million, or 15 percent, to $77.8 million in the 2000 Period,
primarily due to a new employee incentive plan implemented in the current
year, an increase in an employee stock grant and reduced legal recoveries
collected than in the 1999 Period, partially offset by cost savings associated
with a company-wide restructuring in June 1999.
Severance and Related Costs. In June 1999 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
United International Pictures.
In June 2000, we reduced previously charged reserves by $5.0 million due to
a negotiated settlement with United International Pictures regarding our
withdrawal from the joint venture. Additionally, in June 2000 we incurred
severance and other related charges of $1.3 million associated with the
closure of a foreign sales office.
Contract Termination Fee. On March 12, 1999, we agreed to accelerate the
expiration of the right of Warner Home Video to distribute our product in the
home video marketplace under the Warner Home Video agreement. In consideration
for the early expiration of the Warner Home Video agreement, we paid Warner
Home Video $225.0 million in 1999. The parties restructured the terms of the
Warner Home Video agreement, which functioned as a transitional video
agreement, under which Warner Home Video distributed certain of our product in
the home video marketplace. Additionally, as of January 1, 1999 we reconveyed
to Turner Entertainment Co., Inc. the right that we had to distribute in the
home video markets worldwide until June 2001, 2,950 Turner titles that had
been serviced under the Warner Home Video agreement. The transitional video
agreement expired on January 31, 2000, at which time we commenced distribution
of our home video product in the domestic market. We also contracted with Fox
Entertainment Group to distribute our home video product internationally
beginning February 1, 2000. Operating results in the 1999 Period include a
pre-tax contract termination charge for the $225.0 million payment referred to
above in connection with the early expiration of Warner Home Video's rights
under the Warner Home Video agreement.
Interest Expense, Net of Amounts Capitalized. Net interest expense decreased
by $21.8 million, or 34 percent, to $42.2 million in the 2000 Period due to
debt repayment associated with proceeds received in November 1999 from our
1999 rights offering, as well as proceeds from new issuances of our common
stock in 2000.
Interest and Other Income. Interest and other income increased by $11.5
million, or 344 percent, to $14.9 million in the 2000 Period due to interest
income earned on our short-term investments, which have increased from
retained proceeds from the May and August 2000 issuances of our common stock.
17
<PAGE>
Income Tax Provision. The provision for income taxes increased by $2.7
million, or 43 percent, to $8.8 million in the 2000 Period due to foreign
remittance taxes attributable to increased international distribution
revenues.
EBITDA
While management considers earnings before interest, taxes, depreciation and
non-film amortization ("EBITDA") to be an important measure of comparative
operating performance, it should be considered in addition to, but not as a
substitute for or superior to, operating income, net earnings, cash flow and
other measures of financial performance prepared in accordance with generally
accepted accounting principles. EBITDA does not reflect cash available to fund
cash requirements, and the items excluded from EBITDA, such as depreciation
and non-film amortization, are significant components in assessing 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.
The following table sets forth EBITDA for the quarters and nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Feature films...................... $273,815 $205,758 $813,391 $ 553,766
Television programs................ 35,686 86,183 109,414 179,201
Other.............................. 5,880 7,369 32,728 37,260
-------- -------- -------- ---------
Total revenues................... 315,381 299,310 955,533 770,227
-------- -------- -------- ---------
EBITDA:
Feature films...................... 65,403 33,766 142,569 (143,507)
Television programs................ 173 20,786 1,019 28,839
Other.............................. 591 2,309 16,305 15,676
General and administration
expenses.......................... (22,331) (16,673) (68,904) (61,496)
Severance and related (costs)
recoveries........................ -- -- 3,715 (76,158)
Contract termination fee........... -- -- -- (225,000)
-------- -------- -------- ---------
EBITDA........................... 43,836 40,188 94,704 (461,646)
Depreciation and non-film
amortization........................ (7,167) (5,810) (19,949) (17,602)
-------- -------- -------- ---------
Operating income (loss).............. 36,669 34,378 74,755 (479,248)
Interest expense, net of amounts
capitalized......................... (12,583) (22,807) (42,198) (64,045)
Interest and other income............ 4,764 827 14,864 3,345
-------- -------- -------- ---------
Income (loss) before provision for
income taxes........................ 28,850 12,398 47,421 (539,948)
Income tax provision................. (1,735) (2,054) (8,797) (6,136)
-------- -------- -------- ---------
Net income (loss)................ $ 27,115 $ 10,344 $ 38,624 $(546,084)
======== ======== ======== =========
</TABLE>
Liquidity and Capital Resources
General. Our operations are capital intensive. In recent years we have
funded our operations primarily from (i) the sale of equity securities, (ii)
bank borrowings and (iii) internally generated funds. During the 2000 Period,
the net cash provided by operating activities was $483.2 million; net cash
used in investing activities (primarily additions to film and television
costs) was $577.8 million; and net cash provided by financing activities
(primarily sale of equity securities) was $133.3 million.
18
<PAGE>
Sales of Equity Securities. Sales of equity securities included proceeds
from our initial public offering and Tracinda Corporation's concurrent
purchase of our common stock, which were completed in November 1997, our 1998
rights offering, which was completed in November 1998, and our 1999 rights
offering, which was completed in November 1999.
Additionally, pursuant to a Form S-3 shelf registration statement filed with
the Securities and Exchange Commission, on May 26, 2000 we completed the sale
of 4,890,000 shares of our common stock at $25 per share to various third
party investors for aggregate net proceeds of $121.5 million. On August 15,
2000 we completed the sale of another 473,800 shares of our common stock at
$25 per share to various third party investors for aggregate net proceeds of
$11.8 million. The proceeds will be used for general corporate purposes, and
have been invested in short-term instruments as of September 30, 2000.
Bank Borrowings. We have a $1.3 billion syndicated credit facility
consisting of (i) a six year $600.0 million revolving credit facility, (ii) a
$400.0 million seven and one-half year term loan and (iii) a $300.0 million
eight and one-half year term loan. We used a portion of the proceeds from our
1999 rights offering to repay all amounts then outstanding under the revolving
facility. As of November 1, 2000, $600.0 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 the $400.0 million term loan bear
interest at 2.50 percent over the Adjusted LIBOR rate, as defined therein
(9.12 percent at November 1, 2000), and the $300.0 million term loan bears
interest at 2.75 percent over the Adjusted LIBOR rate (9.37 percent at
November 1, 2000). 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 8.1 percent, which
expire at various times no later than December 2001. Scheduled amortization of
the term loans under our 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. Our credit facility was amended and restated on July 21,
2000, with less restrictive operating and financial covenants. As of September
30, 2000, we were in compliance with all applicable covenants. There can be no
assurances that we will remain in compliance with such covenants or other
conditions under our credit facility in the future. We anticipate substantial
continued borrowing under our credit facility.
Cash Provided by Operating Activities. In the 2000 Period, cash provided by
operating activities was $483.2 million compared to cash provided by operating
activities of $81.5 million in the 1999 Period. The 1999 Period included a
$225.0 million payment to Warner Home Video in consideration for the early
expiration of the Warner Home Video agreement.
Cash Used in Investing Activities. In the 2000 Period, cash used in
investing activities was $577.8 million, which included $568.4 million
expended for film and television costs and other investing activities of $9.4
million. In the 1999 Period, cash used in investing activities was $725.6
million, which included the acquisition of the PolyGram N.V. libraries,
containing over 1,300 feature films, for $235.0 million, plus acquisition
related costs of approximately $1.2 million, and film and television costs of
$477.5 million, as well as other investing activities of $11.9 million.
Cash Provided by Financing Activities. In the 2000 Period, cash provided by
financing activities was $133.3 million, which included $133.4 million in net
proceeds from the sale of our common stock and $3.8 million for the exercise
of stock options, partially offset by repayment of borrowed funds of $3.9
million. In the 1999 Period, cash provided by financing activities was $600.3
million, consisting primarily of bank borrowings.
19
<PAGE>
Anticipated Needs. Our current strategy and business plan call for
substantial on-going investments 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 incurred approximately $3.0 million of additional costs in the 2000
Period in connection with the integration of the PolyGram N.V. libraries 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 reconveyed to
Turner Entertainment Co., Inc. 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 $20.5 million under such obligation as of September 30, 2000,
and expect to fund an additional $0.5 million in the remainder of 2000.
As a result of the change in senior management, we did not commence
production as anticipated under our business plan. Therefore, we released a
reduced number of major films in the first nine months of 2000, which may
adversely impact cash flows and results of operations at least through 2001.
However, as opportunities arise, we will pursue the purchase of feature films
from third parties that may be released during this period.
We believe that the remaining proceeds from our 1999 rights offering as well
as the proceeds from the sale of our common stock in May and August 2000,
together with amounts available under the revolving 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. There can be no assurance that any
such 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, 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 business combinations
with companies with strengths complementary to those of 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.
Item 3. 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 our 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.
20
<PAGE>
The following table provides information about our interest rate swaps at
September 30, 2000:
<TABLE>
<CAPTION>
Amounts scheduled
for maturity for
the year ending
December 31,
------------------ Estimated fair value at
2000 2001 September 30, 2000
-------- -------- -----------------------
<S> <C> <C> <C>
Interest Rate Swaps
Variable to fixed:
Notional value (in thousands)..... $225,000 $575,000 $9,272
Average pay rate.................. 6.127% 5.237%
Average receive rate.............. 6.777% 6.532%
</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 our firm commitments and certain anticipated
foreign currency cash flows. We currently intend to continue to enter into
such contracts to hedge against future material foreign currency exchange rate
risks. We had no foreign currency exchange contracts outstanding at September
30, 2000.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 26, 2000, American International Specialty Lines Insurance
Company, or AISLIC, one of our insurers, filed an action entitled American
International Specialty Lines Insurance Company v. Metro-Goldwyn-Mayer Inc.,
Danjaq, LLC et al. in Los Angeles Superior Court (Case No. BC 223707) seeking
to rescind our primary errors and omissions policy for a recent three-year
coverage period. AISLIC alternatively seeks a declaration that no coverage
exists under the policy for certain claims tendered to AISLIC pursuant to the
policy. AISLIC alleges that information pertinent to certain claims tendered
by us to AISLIC was omitted from our application for insurance.
On April 10, 2000, MGM filed a cross-complaint against AISLIC, and its
parent corporation, American International Group, Inc., for breach of the duty
of good faith and fair dealing and breach of contract. AISLIC subsequently
cross-complained for breach of contract and fraud. Danjaq also has filed a
cross-complaint against AISLIC and AIG. The parties are currently engaged in
discovery and no trial date has been set.
On July 14, 2000, another of MGM's insurers, Fireman's Fund, filed suit
against AISLIC and AIG for equitable contribution, equitable indemnity and
subrogation, and against MGM for reimbursement, allocation and declaratory
relief, arising from the same circumstances as the AISLIC v. MGM suit. On
September 27, 2000, the Court issued an order deeming Fireman's Fund Insurance
Co. v. AIG, et al. (Case No. BC 233429) related to AISLIC v. MGM, with both
matters to be handled by the same judge.
On October 9, 2000, MGM Studios was served with the complaint in Citizens
for Fair Treatment v. Time Warner Entertainment, et al. (Case No. 063137), an
industry-wide action brought by a public interest organization, which claims
that the seven major studios and New Line Cinema have violated California laws
prohibiting deceptive, unfair and unlawful business practices by allegedly
marketing R-rated films to children under 17 years of age. The basis for the
complaint is the findings of the Federal Trade Commission's September 2000
report concerning studio marketing practices. The complaint seeks restitution
and disgorgement of all monies attributable to the alleged wrong-doing, as
well as an injunction restraining and enjoining defendants from targeting and
marketing R-rated films to children under 17. We deny the material allegations
of the complaint, and we will defend ourselves vigorously against plaintiffs'
claims.
Reference is made to our 1999 Form 10-K and Form 10-Q for the quarter ended
March 31, 2000 for a description of other pending legal proceedings involving
MGM.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.1 Second Amended and Restated Credit Agreement, dated as of July 21,
2000, among MGM Studios, Orion, Bank of America, N.A., as Agent,
certain lenders and certain L/C issuers*
10.2 Employment Agreement of Jay Rakow dated as of August 7, 2000
10.3 Addendum to Employment Agreement of Jay Rakow dated as of August 7,
2000
10.4 Employment Agreement of Michael R. Gleason dated as of August 22, 2000
10.5 Indemnification Agreement dated as of August 2, 2000--Jay Rakow
10.6 Indemnification Agreement dated as of September 7, 2000--Priscilla
Presley
27 Financial Data Schedule
</TABLE>
--------
*Filed without Schedules
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
METRO-GOLDWYN-MAYER INC.
November 13, 2000
/s/ Alex Yemenidjian
By:__________________________________
Alex Yemenidjian
Chairman of the Board of Directors
and Chief Executive Officer
/s/ Daniel J. Taylor
By:__________________________________
Daniel J. Taylor
Senior Executive Vice President
and Chief Financial Officer
24
