Form 10-K/A No. 1 dated December 31, 2002

 


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K/A

AMENDMENT NO. 1

 


 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2002

 

Commission File No. 1-13481

 

METRO-GOLDWYN-MAYER INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4605850

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2500 Broadway Street, Santa Monica, CA

 

90404

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (310) 449-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


 

Name of each exchange

on which registered


Common Stock, par value $0.01

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the Registrant’s best knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No  ¨

 

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of June 30, 2002 (based on the closing price on the New York Stock Exchange Composite Tape on June 30, 2002) was $657,635,273.

 

The number of shares of the Registrant’s common stock outstanding as of February 6, 2003 was 249,212,736.

 


 


 

EXPLANATORY NOTE

 

The purpose of this amendment is to supplement Item 15(a) of Part IV.

 

2


 

PART IV

 

Item 15.    Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

 

(a)  The following documents are filed as part of this report:

 

1.    Consolidated Financial Statements

 

The financial statements listed in the accompanying Index to Financial Statements are filed as part of this Form 10-K/A at pages 55 to 106.

 

2.    Financial Statement Schedules

 

The financial statement schedules listed in the accompanying Index to Financial Statements are filed as part of this Form 10-K/A at pages 107 to 114.

 

3.    Exhibits

 

The exhibits listed in the accompanying Exhibit Index on pages 115 to 117 are filed as part of this Form 10-K/A.

(b)  Reports on Form 8-K

 

Date Filed


  

Relating to


November 6, 2002

  

Item 5.    Other Information

December 10, 2002

  

Item 5.    Other Information

 

 

 

3


 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

METRO-GOLDWYN-MAYER INC.

By:

 

        /s/    DANIEL J. TAYLOR                


   

Daniel J. Taylor

Senior Executive Vice President and

Chief Financial Officer

 

March 31, 2003

 

4


 

 

CERTIFICATIONS

 

I, Alex Yemenidjian, certify that:

 

  1.   I have reviewed this annual report on Form 10-K/A of Metro-Goldwyn-Mayer Inc.;

 

  2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

 

  3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

 

Date: March 31, 2003

 

/s/    ALEX YEMENIDJIAN        


Alex Yemenidjian

Chief Executive Officer

 

 

 

5


 

 

I, Daniel J. Taylor, certify that:

 

  1.   I have reviewed this annual report on Form 10-K/A of Metro-Goldwyn-Mayer Inc.;

 

  2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

 

  3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

 

Date:   March 31, 2003

 

/s/    DANIEL J. TAYLOR


Daniel J. Taylor

Chief Financial Officer

 

 

 

6


INDEX TO FINANCIAL STATEMENTS

 

    

Page


Reports of Independent Auditors

  

55

Consolidated Balance Sheets as of December 31, 2002 and 2001

  

57

Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000

  

58

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2002, 2001
and 2000

  

59

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

  

60

Notes to Consolidated Financial Statements

  

61

Financial Statements of Acquired Companies

    

Independent Auditors’ Report

  

89

Combined Balance Sheets as of December 31, 2002 and 2001

  

90

Combined Statements of Income for the Years Ended December 31, 2002, 2001 and 2000

  

91

Combined Statements of Members’ Capital (Deficiency) for the Years Ended December 31, 2002, 2001 and 2000

  

92

Combined Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

  

93

Notes to Combined Financial Statements

  

94

Financial Statement Schedules

    

Reports of Independent Auditors

  

107

Schedule I: Financial Information of Registrant

  

109

Schedule II: Valuation and Qualifying Accounts and Reserves

  

114

 

54


REPORT OF INDEPENDENT AUDITORS

 

The Board of Directors and Shareholders

Metro-Goldwyn-Mayer Inc.

 

We have audited the accompanying consolidated balance sheet of Metro-Goldwyn-Mayer Inc. as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. The consolidated financial statements of the Company as of December 31, 2001 and for each of the two years in the period ended December 31, 2001 were audited by other auditors who have ceased operations and whose report dated February 4, 2002, expressed an unqualified opinion on those statements. 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 auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Metro-Goldwyn-Mayer Inc. as of December 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

 

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets.

 

As discussed above, the consolidated financial statements of the Company as of December 31, 2001 and for each of the two years in the period ended December 31, 2001 were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 and 2000 included (a) agreeing the previously reported net income (loss) to the previously issued financial statements and the adjustments to reported net income (loss) representing amortization expense recognized in those periods related to goodwill and goodwill related to equity investees, which is no longer being amortized as a result of initially applying Statement No. 142 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income (loss) to reported net income (loss), and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

 

ERNST & YOUNG LLP

 

Los Angeles, California

February 4, 2003

 

55


 

THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K.

 

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 (the “Company”) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metro-Goldwyn-Mayer Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

 

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for film and television costs and its accounting for derivative instruments and hedging activities.

 

ARTHUR ANDERSEN LLP

 

Los Angeles, California

February 4, 2002

 

56


 

PART I.    FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

METRO-GOLDWYN-MAYER INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

    

December 31, 2002


    

December 31, 2001


 

ASSETS

                 

Cash and cash equivalents

  

$

593,131

 

  

$

2,698

 

Short-term investments

  

 

6,488

 

  

 

—  

 

Accounts and contracts receivable (net of allowance for

                 

doubtful accounts of $40,980 and $26,173, respectively)

  

 

590,637

 

  

 

458,010

 

Film and television costs, net

  

 

1,870,692

 

  

 

2,035,277

 

Investments in and advances to affiliates

  

 

620,132

 

  

 

845,042

 

Property and equipment, net

  

 

41,397

 

  

 

38,837

 

Goodwill

  

 

516,706

 

  

 

516,706

 

Other assets

  

 

29,791

 

  

 

26,594

 

    


  


    

$

4,268,974

 

  

$

3,923,164

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Liabilities:

                 

Bank and other debt

  

$

1,156,725

 

  

$

836,186

 

Accounts payable and accrued liabilities

  

 

212,792

 

  

 

198,520

 

Accrued participants' share

  

 

263,070

 

  

 

243,836

 

Income taxes payable

  

 

33,030

 

  

 

31,865

 

Advances and deferred revenues

  

 

65,051

 

  

 

82,156

 

Other liabilities

  

 

23,840

 

  

 

41,119

 

    


  


Total liabilities

  

 

1,754,508

 

  

 

1,433,682

 

    


  


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, 251,960,505 and 239,629,500 shares issued

  

 

2,520

 

  

 

2,396

 

Additional paid-in capital

  

 

3,914,923

 

  

 

3,717,767

 

Deficit

  

 

(1,345,812

)

  

 

(1,203,565

)

Accumulated other comprehensive loss

  

 

(18,361

)

  

 

(27,116

)

Less: treasury stock, at cost, 3,107,609 shares

  

 

(38,804

)

  

 

—  

 

    


  


Total stockholders’ equity

  

 

2,514,466

 

  

 

2,489,482

 

    


  


    

$

4,268,974

 

  

$

3,923,164

 

    


  


 

The accompanying Notes to Consolidated Financial Statements  are an integral part of these consolidated statements.

 

57


 

METRO-GOLDWYN-MAYER INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Revenues

  

$

1,654,102

 

  

$

1,387,531

 

  

$

1,237,447

 

Expenses:

                          

Operating

  

 

1,062,956

 

  

 

766,330

 

  

 

771,811

 

Selling, general and administrative

  

 

671,817

 

  

 

585,255

 

  

 

339,458

 

Severance and related recoveries

  

 

—  

 

  

 

—  

 

  

 

(3,715

)

Depreciation and non-film amortization

  

 

20,467

 

  

 

32,952

 

  

 

28,648

 

    


  


  


Total expenses

  

 

1,755,240

 

  

 

1,384,537

 

  

 

1,136,202

 

    


  


  


Operating income (loss)

  

 

(101,138

)

  

 

2,994

 

  

 

101,245

 

Other income (expense):

                          

Gain on sale of equity interest in cable channel

  

 

32,514

 

  

 

—  

 

  

 

—  

 

Equity in net earnings (losses) of affiliates

  

 

13,561

 

  

 

(2,421

)

  

 

1,953

 

Interest expense, net of amounts capitalized

  

 

(79,929

)

  

 

(51,494

)

  

 

(51,425

)

Interest and other income, net

  

 

7,432

 

  

 

9,478

 

  

 

12,706

 

    


  


  


Total other expenses

  

 

(26,422

)

  

 

(44,437

)

  

 

(36,766

)

    


  


  


Income (loss) from operations before provision for income taxes

  

 

(127,560

)

  

 

(41,443

)

  

 

64,479

 

Income tax provision

  

 

(14,687

)

  

 

(14,297

)

  

 

(13,480

)

    


  


  


                            

Net income (loss) before cumulative effect of accounting change

  

 

(142,247

)

  

 

(55,740

)

  

 

50,999

 

Cumulative effect of accounting change

  

 

—  

 

  

 

(382,318

)

  

 

—  

 

    


  


  


Net income (loss)

  

$

(142,247

)

  

$

(438,058

)

  

$

50,999

 

    


  


  


Income (loss) per share:

                          

Basic:

                          

Net income (loss) before cumulative effect of accounting change

  

$

(0.57

)

  

$

(0.24

)

  

$

0.25

 

Cumulative effect of accounting change

  

 

—  

 

  

 

(1.65

)

  

 

—  

 

    


  


  


Net income (loss)

  

$

(0.57

)

  

$

(1.89

)

  

$

0.25

 

    


  


  


Diluted:

                          

Net income (loss) before cumulative effect of accounting change

  

$

(0.57

)

  

$

(0.24

)

  

$

0.24

 

Cumulative effect of accounting change

  

 

—  

 

  

 

(1.65

)

  

 

—  

 

    


  


  


Net income (loss)

  

$

(0.57

)

  

$

(1.89

)

  

$

0.24

 

    


  


  


Weighted average number of common shares outstanding:

                          

Basic

  

 

248,355,556

 

  

 

232,082,403

 

  

 

204,797,589

 

Diluted

  

 

248,355,556

 

  

 

232,082,403

 

  

 

210,313,274

 

 

The accompanying Notes to Consolidated Financial Statements  are an integral part of these consolidated statements.

 

58


METRO-GOLDWYN-MAYER INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

   

Preferred Stock


   

Common Stock


 

Add’l 

Paid-in

Capital


 

Deficit


   

Compre-

hensive

Income 

(Loss)


   

Accum.

Other

Compre-

hensive

Income

(Loss)


   

Less:

Treasury

Stock


    

Total

Stockholders’

Equity


 
   

No. of

Shares


   

Par

Value


   

No. of

Shares


 

Par

Value


            

Balance December 31, 1999

 

—  

 

 

$

 —  

 

 

201,419,331

 

$

2,014

 

$

2,931,004

 

$

(816,506

)

 

$

 

 

 

$

316

 

 

$

(4

)

  

$

2,116,824

 

Common stock issued to outside parties, net

 

—  

 

 

 

—  

 

 

5,363,800

 

 

54

 

 

133,330

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

133,384

 

Common stock issued to directors, officers and employees, net

 

—  

 

 

 

—  

 

 

434,454

 

 

4

 

 

8,277

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

4

 

  

 

8,285

 

Comprehensive income (loss):

                                                                      

Net income

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

50,999

 

 

 

50,999

 

 

 

—  

 

 

 

—  

 

  

 

50,999

 

Foreign currency translation adjustment

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

152

 

 

 

152

 

 

 

—  

 

  

 

152

 

Unrealized gains on securities

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

43

 

 

 

43

 

 

 

—  

 

  

 

43

 

                                         


                        

Comprehensive income

                                       

 

51,194

 

                        
   

 


 
 

 

 


 


 


 


  


Balance December 31, 2000

 

—  

 

 

 

—  

 

 

207,217,585

 

 

2,072

 

 

3,072,611

 

 

(765,507

)

 

 

—  

 

 

 

511

 

 

 

—  

 

  

 

2,309,687

 

Preferred stock issued to Tracinda, net

 

15,715,667

 

 

 

157

 

 

—  

 

 

—  

 

 

324,843

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

325,000

 

Conversion of preferred stock into common stock

 

(15,715,667

)

 

 

(157

)

 

15,715,667

 

 

157

 

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

Common stock issued to outside parties, net

 

—  

 

 

 

—  

 

 

16,080,590

 

 

161

 

 

310,478

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

310,639

 

Common stock issued to directors, officers and employees, net

 

—  

 

 

 

—  

 

 

615,658

 

 

6

 

 

9,835

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

9,841

 

Comprehensive income (loss):

                                                                      

Net loss

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(438,058

)

 

 

(438,058

)

 

 

—  

 

 

 

—  

 

  

 

(438,058

)

Cumulative effect of accounting change

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

469

 

 

 

469

 

 

 

—  

 

  

 

469

 

Unrealized loss on derivative instruments

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

(27,523

)

 

 

(27,523

)

 

 

—  

 

  

 

(27,523

)

Unrealized loss on securities

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

(240

)

 

 

(240

)

 

 

—  

 

  

 

(240

)

Foreign currency translation adjustments

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

(333

)

 

 

(333

)

 

 

—  

 

  

 

(333

)

                                         


                        

Comprehensive loss

                                       

 

(465,685

)

                        
   

 


 
 

 

 


 


 


 


  


Balance December 31, 2001

 

—  

 

 

 

—  

 

 

239,629,500

 

 

2,396

 

 

3,717,767

 

 

(1,203,565

)

 

 

—  

 

 

 

(27,116

)

 

 

—  

 

  

 

2,489,482

 

Common stock issued to outside parties, net

 

—  

 

 

 

—  

 

 

10,550,000

 

 

106

 

 

164,665

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

164,771

 

Acquisition of treasury stock, at cost

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(32,709

)

  

 

(32,709

)

Contribution of treasury stock to deferred compensation plan

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(7,608

)

  

 

(7,608

)

Common stock issued to directors, officers and employees, net

 

—  

 

 

 

—  

 

 

1,781,005

 

 

18

 

 

32,491

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

1,513

 

  

 

34,022

 

Comprehensive income (loss):

                                                                      

Net loss

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(142,247

)

 

 

(142,247

)

 

 

—  

 

 

 

—  

 

  

 

(142,247

)

Unrealized gain on derivative instruments

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

13,195

 

 

 

13,195

 

 

 

—  

 

  

 

13,195

 

Unrealized loss on securities

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

(585

)

 

 

(585

)

 

 

—  

 

  

 

(585

)

Change in unfunded pension obligation

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

(3,994

)

 

 

(3,994

)

 

 

—  

 

  

 

(3,994

)

Foreign currency translation adjustments

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

139

 

 

 

139

 

 

 

—  

 

  

 

139

 

                                         


                        

Comprehensive loss

 

—  

 

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 

(133,492

)

                        
   

 


 
 

 

 


 


 


 


  


Balance December 31, 2002

 

—  

 

 

$

—  

 

 

251,960,505

 

$

2,520

 

$

3,914,923

 

$

(1,345,812

)

 

$

—  

 

 

$

(18,361

)

 

$

(38,804

)

  

$

2,514,466

 

   

 


 
 

 

 


 


 


 


  


 

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.

 

59


 

METRO-GOLDWYN-MAYER INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Operating activities:

                          

Net income (loss)

  

$

(142,247

)

  

$

(438,058

)

  

$

50,999

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                          

Cumulative effect of accounting change

  

 

—  

 

  

 

382,318

 

  

 

—  

 

Additions to film costs, net

  

 

(468,083

)

  

 

(391,633

)

  

 

(810,956

)

Amortization of film and television costs and participants’ share

  

 

798,411

 

  

 

548,742

 

  

 

665,148

 

Depreciation and amortization of property and equipment

  

 

20,467

 

  

 

18,218

 

  

 

13,913

 

Amortization of goodwill and deferred financing costs

  

 

16,637

 

  

 

21,439

 

  

 

20,994

 

Change in fair value of financial instruments

  

 

(462

)

  

 

(292

)

  

 

—  

 

Stock contributions to employees, directors and employee savings plan

  

 

4,252

 

  

 

2,773

 

  

 

3,432

 

Provision for bad debt and other reserves

  

 

21,205

 

  

 

1,442

 

  

 

3,545

 

Loss on sale of marketable equity securities

  

 

—  

 

  

 

—  

 

  

 

1,265

 

(Gains) losses on equity investments, net

  

 

(13,561

)

  

 

2,421

 

  

 

(1,953

)

Gain on sale of cable channel

  

 

(32,514

)

  

 

—  

 

  

 

—  

 

(Increase) decrease in accounts and contracts receivable and other assets

  

 

(171,169

)

  

 

(35,739

)

  

 

36,589

 

Decrease in accounts payable, accrued and other liabilities, accrued participants’ share and taxes

  

 

(105,940

)

  

 

(97,983

)

  

 

(152,518

)

Decrease in advances and deferred revenues

  

 

(17,105

)

  

 

(9,981

)

  

 

(20,052

)

Foreign currency exchange loss

  

 

1,330

 

  

 

148

 

  

 

7,135

 

    


  


  


Net cash provided by (used in) operating activities

  

 

(88,779

)

  

 

3,815

 

  

 

(182,459

)

    


  


  


Investing activities:

                          

Sale of equity interest in cable channel

  

 

250,000

 

  

 

—  

 

  

 

—  

 

Dividends received from cable channels

  

 

30,000

 

  

 

—  

 

  

 

—  

 

Investments in and advances to affiliates

  

 

(9,376

)

  

 

(834,882

)

  

 

(1,247

)

Purchases of short-term investments

  

 

(6,456

)

  

 

—  

 

  

 

—  

 

Purchases of available-for-sale securities

  

 

—  

 

  

 

—  

 

  

 

(152,819

)

Sales of available-for-sale securities

  

 

—  

 

  

 

—  

 

  

 

148,081

 

Additions to property and equipment

  

 

(23,055

)

  

 

(9,905

)

  

 

(12,259

)

    


  


  


Net cash provided by (used in) investing activities

  

 

241,113

 

  

 

(844,787

)

  

 

(18,244

)

    


  


  


Financing activities:

                          

Net proceeds from issuance of preferred stock to Tracinda

  

 

—  

 

  

 

325,000

 

  

 

—  

 

Net proceeds from issuance of equity securities to outside parties

  

 

164,771

 

  

 

310,639

 

  

 

133,384

 

Net proceeds from issuance of equity securities to related parties

  

 

2,154

 

  

 

7,068

 

  

 

4,849

 

Acquisition of treasury stock

  

 

(32,709

)

  

 

—  

 

  

 

—  

 

Additions to borrowed funds

  

 

1,337,410

 

  

 

159,000

 

  

 

54,000

 

Repayments of borrowed funds

  

 

(1,016,871

)

  

 

(34,766

)

  

 

(63,121

)

Financing costs and other

  

 

(16,823

)

  

 

—  

 

  

 

(3,267

)

    


  


  


Net cash provided by financing activities

  

 

437,932

 

  

 

766,941

 

  

 

125,845

 

    


  


  


Net change in cash and cash equivalents from operating, investing and financing activities

  

 

590,266

 

  

 

(74,031

)

  

 

(74,858

)

Net increase (decrease) in cash due to foreign currency fluctuations

  

 

167

 

  

 

(411

)

  

 

(215

)

    


  


  


Net change in cash and cash equivalents

  

 

590,433

 

  

 

(74,442

)

  

 

(75,073

)

Cash and cash equivalents at beginning of the year

  

 

2,698

 

  

 

77,140

 

  

 

152,213

 

    


  


  


Cash and cash equivalents at end of the year

  

$

593,131

 

  

$

2,698

 

  

$

77,140

 

    


  


  


 

The accompanying Notes to Consolidated Financial Statements

are an integral part of these consolidated statements.

 

60


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2002

 

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. (“MGM”), Metro-Goldwyn-Mayer Studios Inc. and its majority owned subsidiaries (collectively, “MGM Studios”) and Orion Pictures Corporation and its majority owned subsidiaries (collectively, “Orion”) (collectively, the “Company”). MGM is a Delaware corporation formed on July 10, 1996 specifically to acquire MGM Studios, and is majority owned by an investor group comprised of Tracinda Corporation and a corporation that is principally owned by Tracinda (collectively, “Tracinda”) and certain current and former executive officers of the Company. The acquisition of MGM Studios by MGM was completed on October 10, 1996, at which time MGM commenced principal operations. The acquisition of Orion was completed on July 10, 1997. The Company completed the acquisition of certain film libraries and film related rights that were previously owned by PolyGram N.V. and its subsidiaries (collectively, “PolyGram”) on January 7, 1999.

 

As permitted by the American Institute of Certified Public Accountant’s Statement of Position (“SOP”) 00-2, “Accounting by Producers or Distributors of Films,” the Company has presented unclassified consolidated balance sheets. For the years ended December 31, 2002 and 2001, exploitation costs are included in selling, general and administrative expenses. In prior years, the amortization of these costs are included in operating expenses, as these amounts were previously capitalized and amortized as part of film costs. See “New Accounting Pronouncements.”

 

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. Additionally, the Company holds equity interests in three domestic cable channels as well as various international cable channels. The Company’s business units have been aggregated into four reportable operating segments: feature films, television programming, cable channels and other operating activities (see Note 12). Operating units included in the other operating segment include consumer products, interactive media and music.

 

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. 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, among other factors, 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

 

61


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

but not control are accounted for using the equity method (see Note 4). All significant intercompany balances and transactions have been eliminated.

 

Cash and Cash Equivalents.    The Company considers all highly liquid debt instruments, purchased with an initial maturity of three months or less, to be cash equivalents. Included in other assets at December 31, 2002 and 2001 is approximately $5,066,000 and $4,127,000, respectively, of cash restricted by various escrow agreements. The Company has reclassified a $32,247,000 and $25,312,000 bank overdraft to accounts payable at December 31, 2002 and 2001, respectively. The carrying value of the Company’s cash equivalents approximated cost at each balance sheet date.

 

Short-Term Investments.    Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity. As of December 31, 2002, short-term investments consist of U.S. Treasury Bills of $6,488,000 with maturity terms ranging from 4 to 6 months.

 

Accounts and Contracts Receivable.    At December 31, 2002, accounts and contracts receivable aggregated $631,617,000 (before allowance for doubtful accounts), of which approximately $465,552,000 is due within one year and $327,107,000 is unbilled. 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, 2002 and 2001, there were no customers accounting for greater than ten percent of the Company’s accounts and contracts receivable.

 

Sales Returns.    In the home video market, the Company calculates an estimate of future product returns. In determining the estimate of product sales that will be returned, the Company performs an analysis that considers historical returns, changes in customer demand and current economic trends. Based on this information, a percentage of each sale is reserved provided that the customer has the right of return.

 

Revenue Recognition.    All revenue is recognized upon meeting all recognition requirements of SOP 00-2. 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. Under revenue sharing arrangements, the Company also participates in consumer rental revenues generated in the home video market by rental establishments and records revenues as earned. Revenues from television licensing, together with related costs, are recognized when the feature film or television program is initially available to the licensee for telecast. Payments received in advance of initial availability are classified as deferred revenue until all SOP 00-2 revenue recognition requirements have been met. As of December 31, 2002, deferred revenue primarily consists of advances related to the Company’s television licensing contracts under which the related product will become available in future periods. Long-term, non-interest-bearing receivables arising from licensing agreements are discounted to present value in accordance with Accounting Principles Board (“APB”) Opinion No. 21, “Interest on Receivables and Payables.”

 

Film and Television Costs.    Except for purchase accounting adjustments, film costs include the costs of production, capitalized overhead and interest. These costs, as well as participations and talent residuals, are

 

62


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 as of the beginning of the current year from all sources (the “individual film forecast method”). The cost allocated to films revalued in purchase accounting (including the MGM, Orion and PolyGram film libraries) is being amortized over their estimated economic lives not to exceed 20 years.

 

Beginning January 1, 2001, under SOP 00-2 (see “New Accounting Pronouncements”), exploitation costs, including advertising and marketing costs, are being expensed as incurred. The Company incurred advertising and marketing costs of approximately $410,000,000 and $346,000,000, respectively, for the years ended December 31, 2002 and 2001. Theatrical print costs are being amortized over the periods of theatrical release of the respective territories and are included in operating expenses. Under accounting rules in effect for periods prior to January 1, 2001, such costs were capitalized as a part of film costs and amortized over the life of the film using the individual film forecast method.

 

Capitalized film costs are stated at the lower of unamortized cost or estimated fair 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 that capitalized film costs exceed estimated fair value.

 

The Company also maintains home video product in inventory which primarily consists of digital video discs and videocassette tapes and are stated at the lower of cost or market.

 

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 at the date of acquisition. 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.    Beginning January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (see “New Accounting Pronouncements”). According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value based test. Fair value for goodwill is based on discounted cash flows, market multiples and/or appraised values as appropriate. Under SFAS No. 142, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows, which include feature film operations, television programming operations, cable channels and other businesses (consumer products, music and interactive operations). SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Upon adoption and during 2002, the Company completed an impairment review and did not recognize any impairment of goodwill and other intangible assets already included in the financial statements. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. Accordingly,

 

63


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

beginning January 1, 2002, the Company has foregone all related amortization expense. Since the Company is recording its equity in net earnings of the Cable Channels (see Note 4) on a one-quarter lag, amortization of goodwill of the Cable Channels ($9,528,000 for the quarter ended March 31, 2002) is not included in the calculation of the Company’s equity in the net earnings in this investment commencing on April 1, 2002. Prior to January 1, 2002, the Company amortized goodwill over an estimated useful life of 40 years (20 years for the Cable Channels) using the straight-line method. Amortization expense, including amounts related to equity investees, totaled $9,528,000, $34,117,000 and $15,064,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Accumulated amortization of goodwill was $71,037,000 as of December 31, 2001.

 

For the years ended December 31, 2002, 2001 and 2000, the reconciliation of reported net income (loss) and net income (loss) per share to adjusted net income (loss) and adjusted net income (loss) per share reflecting the elimination of goodwill amortization is as follows (in thousands, except per share data, unaudited):

 

    

Year Ended December 31,


    

2002


    

2001


    

2000


  

2002


    

2001


    

2000


    

Net Income (Loss)


  

Per Share Data


Net income (loss) before cumulative effect of accounting change, as reported

  

$

(142,247

)

  

$

(55,740

)

  

$

50,999

  

$

(0.57

)

  

$

(0.24

)

  

$

0.25

Elimination of goodwill amortization

  

 

—  

 

  

 

14,734

 

  

 

14,734

  

 

—  

 

  

 

0.06

 

  

 

0.07

Elimination of goodwill amortization related to equity investees

  

 

9,528

 

  

 

19,383

 

  

 

330

  

 

0.04

 

  

 

0.08

 

  

 

0.00

    


  


  

  


  


  

Net income (loss) before cumulative effect of accounting change, as adjusted

  

$

(132,719

)

  

$

(21,623

)

  

$

66,063

  

$

(0.53

)

  

$

(0.10

)

  

$

0.32

    


  


  

  


  


  

Net income (loss), as reported

  

$

(142,247

)

  

$

(438,058

)

  

$

50,999

  

$

(0.57

)

  

$

(1.89

)

  

$

0.25

Elimination of goodwill amortization

  

 

—  

 

  

 

14,734

 

  

 

14,734

  

 

—  

 

  

 

0.06

 

  

 

0.07

Elimination of goodwill amortization related to equity investees

  

 

9,528

 

  

 

19,383

 

  

 

330

  

 

0.04

 

  

 

0.08

 

  

 

0.00

    


  


  

  


  


  

Net income (loss), as adjusted

  

$

(132,719

)

  

$

(403,941

)

  

$

66,063

  

$

(0.53

)

  

$

(1.75

)

  

$

0.32

    


  


  

  


  


  

 

Due to the one-quarter lag in reporting of the Cable Channels, operating results for the the year ended December 31, 2002 were reduced by amortization of goodwill of $9,528,000.

 

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 basis 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.    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 accompanying statements of operations.

 

64


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Financial Instruments.    The carrying values of short-term trade receivables and payables approximate their estimated fair values because of the short maturity of these instruments. The carrying values of receivables with maturities greater than one year have been discounted at LIBOR plus 2.75 percent (approximately four percent and five percent at December 31, 2002 and 2001, respectively), which approximates the Company’s current effective borrowing rates, in accordance with APB Opinion No. 21.

 

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 differences 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. Additionally, in certain instances, we enter into foreign currency exchange forward 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. See “New Accounting Pronouncements.”

 

Earnings Per Share.    The Company computes earnings per share in accordance with SFAS No. 128, “Earnings Per Share” (“EPS”). The weighted average number of shares used in computing basic earnings or loss per share was 248,355,556, 232,082,403 and 204,797,589 in the years ended December 31, 2002, 2001 and 2000, respectively. Dilutive securities of 5,515,685 related to stock options have been included in the calculation of diluted EPS for the year ended December 31, 2000. Dilutive securities of 1,000,720 and 3,248,176 are not included in the calculation of diluted EPS in the years ending December 31, 2002 and 2001, respectively, because they are antidilutive. Additionally, potentially dilutive securities of 30,850,065, 10,811,375 and 9,668,136 have not been included in the calculation of diluted EPS in the years ended December 31, 2002, 2001 and 2000, respectively, because their exercise prices are greater than the average market price of the Company’s common stock during the periods.

 

Comprehensive Income (Loss).    The Company computes comprehensive income pursuant to SFAS No. 130, “Reporting Comprehensive Income.” 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. Total comprehensive income (loss) for the Company includes net income (loss) and other comprehensive income items, including unrealized loss on derivative instruments, unrealized gain (loss) on securities, changes in unfunded pension plan obligations and cumulative foreign currency translation adjustments. Components of other comprehensive income (loss) are shown below (in thousands):

 

    

Year Ended December 31,


    

2002


    

2001


    

2000


Net income (loss)

  

$

(142,247

)

  

$

(438,058

)

  

$

50,999

Other comprehensive income (loss):

                        

Cumulative effect of accounting change for derivative Instruments

  

 

—  

 

  

 

469

 

  

 

—  

Unrealized gain (loss) on derivative instruments

  

 

13,195

 

  

 

(27,523

)

  

 

—  

Unrealized gain (loss) on securities

  

 

(585

)

  

 

(240

)

  

 

43

Unfunded pension plan obligation

  

 

(3,994

)

  

 

—  

 

  

 

—  

Cumulative foreign currency translation adjustments

  

 

139

 

  

 

(333

)

  

 

152

    


  


  

Total comprehensive income (loss)

  

$

(133,492

)

  

$

(465,685

)

  

$

51,194

    


  


  

 

65


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Components of accumulated other comprehensive income (loss) are shown below (in thousands):

 

    

Unrealized

Loss on

Derivative

Instruments


      

Unrealized

Gain (Loss)

on Securities


    

Unfunded Pension Plan

Obligation


      

Cumulative

Translation

Adjustments


    

Accumulated

Other

Comprehensive

Income (Loss)


 

Balance at December 31, 2000

  

$

—  

 

    

$

43

 

  

$

—  

 

    

$

468

 

  

$

511

 

Cumulative effect of accounting change

  

 

469

 

    

 

—  

 

  

 

—  

 

    

 

—  

 

  

 

469

 

Current year change

  

 

(27,523

)

    

 

(240

)

  

 

—  

 

    

 

(333

)

  

 

(28,096

)

    


    


  


    


  


Balance at December 31, 2001

  

 

(27,054

)

    

 

(197

)

  

 

—  

 

    

 

135

 

  

 

(27,116

)

Current year change

  

 

13,195

 

    

 

(585

)

  

 

(3,994

)

    

 

139

 

  

 

8,755

 

    


    


  


    


  


Balance at December 31, 2002

  

$

(13,859

)

    

$

(782

)

  

$

(3,994

)

    

$

274

 

  

$

(18,361

)

    


    


  


    


  


 

Use of Estimates in the Preparation of Financial Statements.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 materially from those estimates.

 

New Accounting Pronouncements.    In June 2000, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 139, “Rescission of FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89 and 121,” which, effective for financial statements for fiscal years beginning after December 15, 2000, rescinds SFAS No. 53, “Financial Reporting by Producers and Distributors of Motion Picture Films.” The companies that were previously subject to the requirements of SFAS No. 53 now follow the guidance in SOP 00-2 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 APB Opinion No. 20, “Accounting Changes.” The Company adopted SOP 00-2 on January 1, 2001 and recorded a one-time, non-cash cumulative effect charge to earnings of $382,318,000, primarily to reduce the carrying value of its film and television costs. The new rules also require that advertising costs be expensed as incurred as opposed to the old rules which generally allowed advertising costs to be capitalized as part of film costs and amortized using the individual film forecast method. Due to the significant advertising costs incurred in the early stages of a film’s release, the Company anticipates that the new rules will significantly impact its results of operations for the foreseeable future. Additionally, under SFAS No. 53, the Company classified additions to film costs as an investing activity in the Statements of Cash Flows. In accordance with SOP 00-2, the Company now classifies additions to film costs as an operating activity.

 

In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities— Deferral of the Effective Date of FASB Statement No. 133,” and by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB No. 133.” This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in contracts, and for hedging activities. The Company adopted SFAS No. 133 on January 1, 2001 and recorded a one-time, non-cash cumulative effect adjustment to stockholders’ equity and other comprehensive income (loss) of $469,000. The adoption of SFAS No. 133 has not materially impacted the Company’s results of operations.

 

66


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value based test. Under SFAS No. 142, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows, which include feature film operations, television programming operations, cable channels and other businesses (consumer products, music and interactive operations). The Company adopted SFAS No. 142 beginning January 1, 2002, and upon adoption the Company did not recognize any impairment of goodwill and other intangible assets already included in the financial statements. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. Accordingly, beginning January 1, 2002, the Company has foregone all related amortization expense.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting of asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will implement SFAS No. 143 on January 1, 2003. The impact of such adoption is not anticipated to have a material effect on the Company’s financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends Accounting Research Board No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for subsidiaries for which control is likely to be temporary. The Company adopted SFAS No. 144 on January 1, 2002. The impact of such adoption did not have a material effect on the Company’s financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 nullifies EITF Issue No 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” and will be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company will implement SFAS No. 146 on January 1, 2003. The impact of such adoption is not anticipated to have a material effect on the Company’s financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will implement SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. The Company has not yet determined whether they will voluntarily change to the fair value based method of accounting for stock-based employee compensation.

 

67


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 2—Severance and Other Related Costs

 

In June 1999, the Company incurred $85,171,000 of severance and other related costs, as well as the estimated costs of withdrawing from the Company’s arrangements with United International Pictures B.V. (“UIP”) on November 1, 2000. The severance charge in 1999 included the termination of 46 employees, including the Company’s former Chairman and Vice Chairman, across all divisions of the Company.

 

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.

 

As of December 31, 2002, the Company has paid $54,844,000 of the severance and other related costs. In January and February 2002, in accordance with certain agreements with the Company’s former Chairman and Vice Chairman, $16,964,000 of the severance and related costs were converted into 863,499 shares of common stock of the Company.

 

Note 3—Film and Television Costs

 

Film and television costs, net of amortization, are summarized as follows (in thousands):

 

    

December 31,

2002


    

December 31,

2001


 

Theatrical productions:

                 

Released

  

$

3,984,330

 

  

$

3,515,842

 

Less: accumulated amortization

  

 

(2,593,626

)

  

 

(2,117,116

)

    


  


Released, net

  

 

1,390,704

 

  

 

1,398,726

 

Completed not released

  

 

34,521

 

  

 

99,142

 

In production

  

 

188,188

 

  

 

242,621

 

In development

  

 

28,745

 

  

 

31,931

 

    


  


Subtotal: theatrical productions

  

 

1,642,158

 

  

 

1,772,420

 

    


  


Television programming:

                 

Released

  

 

936,440

 

  

 

861,826

 

Less: accumulated amortization

  

 

(738,164

)

  

 

(626,686

)

    


  


Released, net

  

 

198,276

 

  

 

235,140

 

In production

  

 

29,224

 

  

 

25,968

 

In development

  

 

1,034

 

  

 

1,749

 

    


  


Subtotal: television programming

  

 

228,534

 

  

 

262,857

 

    


  


    

$

1,870,692

 

  

$

2,035,277

 

    


  


 

Interest costs capitalized to theatrical productions were $14,520,000, $23,466,000 and $15,453,000 during the years ended December 31, 2002, 2001 and 2000, respectively.

 

Based on the Company’s estimates of projected gross revenues as of December 31, 2002, approximately 17 percent of completed film costs are expected to be amortized over the next twelve months, and approximately $210,000,000 of accrued participants’ share as of December 31, 2002 will be paid in the next twelve months. Additionally, approximately 68 percent of unamortized film costs applicable to released theatrical films and

 

68


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

television programs, excluding acquired film libraries, will be amortized during the three years ending December 31, 2005, and 82 percent will be amortized by December 31, 2007. For acquired film libraries, approximately $1.0 billion of net film costs as of December 31, 2002 remain to be amortized under the individual film forecast method over an average remaining life of 14 years.

 

Note 4—Investments In and Advances to Affiliates

 

Investments are summarized as follows (in thousands):

 

    

December 31,

2002


  

December 31,

2001


Domestic cable channels

  

$

595,457

  

$

822,502

Foreign cable channels

  

 

15,697

  

 

15,351

Joint ventures

  

 

8,828

  

 

7,039

Others

  

 

150

  

 

150

    

  

    

$

620,132

  

$

845,042

    

  

 

Domestic Cable Channels.    On April 2, 2001, the Company invested $825,000,000 in cash for a 20 percent interest in two general partnerships which own and operate the American Movie Classics, the Independent Film Channel and WE: Women’s Entertainment (formerly Romance Classics) and, until recently, Bravo, cable channels, collectively referred to as the “Cable Channels.” These partnerships were wholly-owned by Rainbow Media Holdings, Inc. (“Rainbow Media”), a 74 percent subsidiary of Cablevision Systems Corporation (“Cablevision”). The proceeds of the $825,000,000 investment were used as follows: (i) $365,000,000 was used to repay bank debt of the partnerships; (ii) $295,500,000 was used to repay intercompany loans from Cablevision and its affiliates; and (iii) $164,500,000 was added to the working capital of the partnerships. The Company financed the investment through the sale of equity securities (see Note 8), which provided aggregate net proceeds of approximately $635,600,000, and borrowings under the Company’s credit facilities. Based upon certain assumptions that management of the Company believes are reasonable, the Company’s determination of the difference between the Company’s original cost basis in their investment in the Cable Channels and the Company’s share of the underlying equity in net assets (referred to as “intangible assets”) was approximately $762,000,000 (after amortization of goodwill and the sale of the Bravo cable channel discussed below, the difference between our cost basis and our share of the underlying equity in net assets is approximately $530 million).

 

On December 5, 2002, the Company and Cablevision, together with an affiliate of Cablevision, sold their ownership interests in the Bravo cable channel (“Bravo”) to an affiliate of the National Broadcasting Company (“NBC”) for $1.25 billion. The proceeds were divided between Cablevision and the Company in accordance with their 80 percent and 20 percent ownership interests in Bravo. The Company received $250,000,000 in cash from an affiliate of NBC for its interest in Bravo, and recorded a gain of $32,514,000 on the sale.

 

The Company is accounting for its remaining investment in the Cable Channels in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” In accordance with APB Opinion No. 18, management continually reviews its equity investments to determine if any permanent impairment has occurred. If, in management’s judgment, an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings. Such determination is dependent on the specific facts and circumstances, including the financial condition of the investee, subscriber demand and growth, demand for advertising time and space, the intent and ability to retain the investment, and general economic conditions in the areas in which the investee operates. As of December 31, 2002, management has determined that there have been no impairments.

 

69


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Pursuant to the requirements of APB No. 18, the Company is recording its share of the earnings and losses in the Cable Channels based on the most recently available financial statements received from the Cable Channels. Due to a lag in the receipt of the financial statements from the Cable Channels, the Company is reporting its interest in the Cable Channels on a one-quarter lag. Summarized financial information for the Cable Channels as of September 30, 2002, and for the year ended September 30, 2002, were as follows (in thousands):

 

As of September 30, 2002:

      

Current assets

  

$

422,427

Non-current assets

  

$

589,897

Current liabilities

  

$

149,928

Non-current liabilities

  

$

291,082

For the year ended September 30, 2002:

      

Revenues, net

  

$

476,703

Operating income

  

$

143,341

Net income

  

$

143,300

 

In the year ended December 31, 2002, the Company’s share of the Cable Channels’ net operating results was a profit of $20,627,000 (of which a profit of $5,829,000 pertained to Bravo). Due to the one quarter lag in reporting of the Cable Channels, the results for the year ended December 31, 2002 were reduced by the amortization of goodwill of $9,528,000 for the period from January 1 to March 31, 2002 (see Note 1). In the year ended December 31, 2001, the Company’s share of the Cable Channel’s net operating results was a loss of $2,845,000 (of which a loss of $118,000 pertained to Bravo), which included goodwill amortization of $19,050,000.

 

While the Company is not involved in the day-to-day operations of the Cable Channels, the Company’s approval is required before either partnership may: (i) declare bankruptcy or begin or consent to any reorganization or assignment for the benefit of creditors; (ii) enter into any new transaction with a related party; (iii) make any non-proportionate distributions; (iv) amend the partnership governing documents; or (v) change its tax structure.

 

The Company has the right to participate on a pro rata basis in any sale to a third party by Rainbow Media of its partnership interests, and Rainbow Media can require the Company to participate in any such sale. If a third party invests in either partnership, the Company’s interest and that of Rainbow Media will be diluted on a pro rata basis. Neither the Company nor Rainbow Media will be required to make additional capital contributions to the partnerships. However, if Rainbow Media makes an additional capital contribution and the Company does not, the Company’s interest in the partnerships will be diluted accordingly. If the partnerships fail to attain certain financial projections provided to the Company by Rainbow Media for the years 2002 through 2005, inclusive, the Company will be entitled, 30 days after receipt of partnership financial statements for 2005, to require Rainbow Media to acquire the Company’s partnership interests for fair market value, as determined pursuant to the agreement. The Company formed a wholly-owned subsidiary, MGM Networks U.S. Inc., which made the above-described investment, serves as a general partner of the applicable Rainbow Media companies and is the MGM entity which holds the aforesaid partnership interests and rights attendant thereto.

 

Foreign Cable Channels.    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 fund 50 percent of the joint venture’s expenses up to a maximum of approximately $25,250,000, of which the Company had funded approximately $24,800,000 as of December 31, 2002. The Company’s share of

 

70


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

MGM Latin America’s losses in the years ended December 31, 2002, 2001 and 2000 were $2,672,000, $1,592,000 and $3,388,000, respectively.

 

Additionally, the Company holds minority equity interests in various television channels located in certain international territories for which the Company realized its share of the channels’ net operating results, which aggregated a net loss of $265,000 in the year ended December 31, 2002 and a net profit of $3,476,000 and $5,341,000 in the years ended December 31, 2001 and 2000, respectively.

 

Joint Ventures.    On August 13, 2001, the Company, through its wholly-owned subsidiary, MGM On Demand Inc., acquired a 20 percent interest in a joint venture established to create an on-demand movie service to offer a broad selection of theatrically-released motion pictures via digital delivery for broadband internet users in the United States. Other partners in the joint venture include Sony Pictures Entertainment, Universal Studios, Warner Bros. and Paramount Pictures. The Company has funded $11,609,000 for its equity interest and its share of operating expenses of the joint venture as of December 31, 2002. The Company financed its investment through borrowings under its credit facilities. The Company is committed to fund its share of the operating expenses of the joint venture, as required. The Company is accounting for its interest in the joint venture under the equity method. In the years ended December 31, 2002 and 2001, the Company recognized a net loss of $3,352,000 and $446,000 for its share of the operating results of the joint venture.

 

In February 2002, the Company, through its wholly-owned subsidiary, MGM Domestic Television Distribution Inc., and NBC Enterprises, Inc. formed a new media sales company, MGM-NBC Media Sales, LLC (“MGM-NBC Media Sales”), to distribute off-network feature film and television series and first-run syndication programming from each company in the television barter sales markets. The joint venture recognizes income from distribution fees of ten percent earned on each company’s barter sales, and incurs overhead costs to operate the joint venture, which are shared between the companies. Each company is entitled to its share of the net profits or losses of MGM-NBC Media Sales based on a contractual formula as specified in the agreement. In the year ended December 31, 2002, the Company recognized a profit of $243,000 for its share of the operating results of the joint venture.

 

On March 27, 2002, the Company, through its wholly-owned subsidiary, MGM Digital Development Inc. (“MGM Digital”), acquired a one-seventh interest in NDC, LLC (“NDC”), a partnership created with the six other major studios to (i) develop and/or ratify standards for digital motion picture equipment and for digital cinema technology to be used in the delivery of high quality in-theatre digital cinema, and (ii) update and deploy a limited amount of new digital motion picture equipment in theatres. MGM Digital contributed $979,000 for its initial interest in NDC. The agreement has an initial term expiring on March 27, 2004. In the year ended December 31, 2002, the Company recognized a loss of $1,020,000 representing its aggregate investment in the joint venture.

 

Other Investments.    Until November 1, 2000, distribution in foreign theatrical and certain pay television markets was performed by United International Pictures (“UIP”), in which the Company had a one-third interest. The Company included 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.

 

On November 1, 2000, the Company contracted with Twentieth Century Fox Film Corporation (“Fox”) for distribution of the Company’s film releases in international theatrical and non-theatrical markets in territories in which the Company owns or controls the right to perform distribution services in such territories. Under the terms of the agreement, the Company pays Fox a distribution fee based on gross film rentals. The Company has

 

71


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

the option to terminate the agreement on January 31, 2004 for a fee ranging from $10,000,000 to $15,000,000, which includes any distribution fees owed to Fox for the year prior to the termination date.

 

Note 5—Property and Equipment

 

Property and equipment are summarized as follows (in thousands):

 

    

December 31,

2002


    

December 31,

2001


 

Leasehold improvements

  

$

38,853

 

  

$

28,081

 

Furniture, fixtures and equipment

  

 

79,858

 

  

 

68,115

 

    


  


    

 

118,711

 

  

 

96,196

 

Less accumulated depreciation and amortization

  

 

(77,314

)

  

 

(57,359

)

    


  


    

$

41,397

 

  

$

38,837

 

    


  


 

Note 6—Bank and Other Debt

 

Bank and other debt is summarized as follows (in thousands):

 

    

December 31,

2002


  

December 31,

2001


Revolving Facility

  

$

—  

  

$

159,000

Term Loans

  

 

1,150,000

  

 

668,500

Capitalized lease obligations and other borrowings

  

 

6,725

  

 

8,686

    

  

    

$

1,156,725

  

$

836,186

    

  

 

On June 11, 2002, the Company entered into a third amended and restated credit facility with a syndicate of banks, which amended a pre-existing credit facility, aggregating $1.75 billion (the “Amended Credit Facility”) consisting of a five-year $600,000,000 revolving credit facility (the “Revolving Facility”), a five-year $300,000,000 term loan (“Tranche A Loan”) and a six-year $850,000,000 term loan (“Tranche B Loan”) (collectively, the “Term Loans”). The Revolving Facility and the Tranche A Loan bear interest at 2.75 percent over the Adjusted LIBOR rate, as defined (4.14 percent at December 31, 2002). The Tranche B Loan bears interest at 3.00 percent over the Adjusted LIBOR rate (4.39 percent at December 31, 2002). Scheduled amortization of the Term Loans under the Amended Credit Facility is $16,411,000 in 2003, $65,643,000 in each of 2004, 2005 and 2006, $122,786,000 in 2007 and $813,875,000 in 2008. The Revolving Facility matures on June 30, 2007. In connection with the amendment of the pre-existing credit facility, the Company expensed previously deferred financing costs aggregating approximately $12,000,000, which have been included in interest expense for the year ended December 31, 2002.

 

The Company’s borrowings under the Amended Credit Facility are secured by substantially all the assets of the Company, with the exception of the copyrights in the James Bond series of motion pictures. 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 limits the amount of the investment in the Company which may be made by MGM Studios and Orion in the form of loans or advances, or purchases of capital stock of the Company, up to a maximum aggregate amount of $500,000,000 (or a maximum aggregate amount of $300,000,000 in the event that MGM Studios elects to release its entire investment in the Cable Channels from the loan collateral, as permitted under the Amended Credit Facility). As

 

72


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

of December 31, 2002, $38,804,000 was loaned to MGM by MGM Studios to fund the purchase of treasury stock by MGM (see Note 8). Restricted net assets of MGM Studios and Orion at December 31, 2002 are approximately $2.0 billion. As of December 31, 2002, the Company was in compliance with all applicable covenants.

 

Production loans and other borrowings.    Production loans and other borrowings relate principally to individual bank loans to fund production costs, contractual liabilities and capitalized lease obligations.

 

Maturity schedule.    See Note 13 for maturity schedule for credit facilities, lease and other borrowings as of December 31, 2002.

 

Note 7—Financial Instruments

 

The Company is exposed to the impact of interest rate changes as a result of its variable rate long-term debt. Accordingly, the Company had previously entered into three-year fixed interest rate swap agreements whereby the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate amounts calculated by reference to an agreed notional principal amount. The swap agreements aggregate a notional value of $565,000,000 at an average rate of approximately 5.94 percent and expire in July 2003. Because these swap agreements carry interest rates that currently exceed the Company’s borrowing rates under the Amended Credit Facility (see Note 6), the Company will recognize additional interest costs, which will be charged against future earnings. The Company has also entered into additional interest rate swap agreements for a notional value of $100,000,000 at an average pay rate of approximately 2.34 percent, which expired in January 2003. As of December 31, 2002, the Company would be required to pay approximately $13,929,000 if all such swap agreements were terminated, and this amount has been included in other liabilities and accumulated other comprehensive income (loss).

 

The Company is subject to market risks resulting from fluctuations in foreign currency exchange rates because approximately 25 percent of the Company’s revenues are denominated, and the Company incurs certain operating and production costs, in foreign currencies. In certain instances, the Company enters into foreign currency exchange forward contracts in order to reduce exposure to changes in foreign currency exchange rates that affect the value of the Company’s firm commitments and certain anticipated foreign currency cash flows. The Company currently intends to continue to enter into such contracts to hedge against future material foreign currency exchange rate risks. As of December 31, 2002, the Company has outstanding foreign currency forward contracts aggregating Canadian $8,500,000 and EUR 213,000. As of December 31, 2002, the Company would be entitled to receive approximately $52,000 if all such foreign currency forward contracts were terminated, and this amount has been included in other assets and accumulated other comprehensive income (loss).

 

Note 8—Stockholders’ Equity

 

Private Placements.    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 the 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 the Common Stock at $25 per share to third party investors for aggregate net proceeds of $11,845,000.

 

In February and March 2001, pursuant to the Shelf Registration Statement, the Company issued 16,080,590 shares of the Common Stock for aggregate net proceeds of $310,639,000. On April 2, 2001, the Company used the net proceeds from these sales to partially finance its investment in the Cable Channels (see Note 4).

 

73


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

On March 18, 2002, pursuant to the Shelf Registration Statement, the Company completed the sale of 10,550,000 shares of common stock of the Company at $16.50 per share, less an underwriting discount of $0.825 per share, in an underwritten public offering for aggregate net proceeds of $164,771,000. The Company used the net proceeds from the stock offering for general corporate purposes, including reduction of the revolving portion of its credit facility and financing of business operations.

 

Sale of Preferred Stock to Tracinda.    On February 7, 2001, the Company sold 15,715,667 shares of Series B preferred stock (“Preferred Stock”) to Tracinda for net proceeds of $325,000,000. On April 2, 2001, the Company used the net proceeds of this sale to partially finance its investment in the Cable Channels. On May 2, 2001, upon approval of the stockholders of the Company, the Preferred Stock was converted into 15,715,667 shares of the Common Stock of the Company. Tracinda currently beneficially owns approximately 67.3 percent of the Company’s outstanding Common Stock.

 

Treasury Stock.    On January 3, 2002, certain Senior Executives of the Company, pursuant to the conversion of bonus interests payable under a Senior Management Bonus Plan, contributed 383,940 shares of the Company’s common stock valued at $7,608,000 to a senior executive deferred compensation plan. These shares have been classified as treasury stock.

 

On July 26, 2002, the Company announced a share repurchase program authorizing the Company to purchase up to 10,000,000 shares of its common stock. The Company intends to fund the repurchase program from available cash on hand. As of December 31, 2002, the Company had repurchased 2,866,800 shares of common stock at an aggregate cost of $32,709,000.

 

Stock Options.    Commencing in August 2002, Celsus Financial Corp., an entity wholly-owned by a director of the Company, exercised options to acquire 177,814 shares of the Company’s common stock (as adjusted) at an exercise price of $5.63 per share (as adjusted).

 

1996 Incentive Plan.    The Company has an Amended and Restated 1996 Stock Incentive Plan (the “1996 Incentive Plan”), which allows for the granting of stock awards aggregating not more than 36,000,000 shares. Awards under the 1996 Incentive Plan are generally not restricted to any specific form or structure and may include, without limitation, qualified or non-qualified stock options, incentive stock options, restricted stock awards and stock appreciation rights (collectively, “Awards”). Awards may be conditioned on continued employment, have various vesting schedules and accelerated vesting and exercisability provisions in the event of, among other things, a change in control of the Company. Outstanding stock options under the 1996 Incentive Plan generally vest over a period of five years and are not exercisable until vested.

 

74


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

 

Stock option transactions under the 1996 Incentive Plan were as follows:

 

    

December 31, 2002


  

December 31, 2001


  

December 31, 2000


    

Shares


    

Weighted

Average

Exercise

Price


  

Shares


    

Weighted

Average

Exercise

Price


  

Shares


    

Weighted

Average

Exercise

Price


Options outstanding at beginning of year

  

25,163,418

 

  

$

20.30

  

23,675,034

 

  

$

21.01

  

21,396,307

 

  

$

20.52

Granted

  

5,027,300

 

  

$

15.65

  

3,423,100

 

  

$

18.05

  

3,116,082

 

  

$

22.92

Exercised

  

(79,748

)

  

$

14.47

  

(468,905

)

  

$

14.80

  

(330,802

)

  

$

14.66

Cancelled or expired

  

(352,105

)

  

$

18.98

  

(1,465,811

)

  

$

28.66

  

(506,553

)

  

$

16.08

    

  

  

  

  

  

Options outstanding at end of year

  

29,758,865

 

  

$

19.54

  

25,163,418

 

  

$

20.30

  

23,675,034

 

  

$

21.01

    

  

  

  

  

  

Options exercisable at end of year

  

16,905,382

 

  

$

20.13

  

12,427,343

 

  

$

19.83

  

9,457,039

 

  

$

19.86

    

  

  

  

  

  

 

The following table summarizes information about the outstanding options as of December 31, 2002 under the 1996 Incentive Plan:

 

Exercise price


  

Outstanding Number

of Options


    

Weighted Average

Remaining Contractual

Life


$10.89–$11.38

  

     654,480

    

8.87

$14.90             

  

12,384,937

    

5.99

$15.19–$19.94

  

  6,869,540

    

8.67

$20.00–$26.63

  

  3,249,908

    

7.41

$30.00             

  

  6,600,000

    

6.35

    
      
    

29,758,865

      
    
      

 

The Company applies APB Opinion No. 25, “Accounting For Stock Issued to Employees,” and related interpretations in accounting for its plan. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, the Company’s net income (loss) would have been the following pro forma amounts (in thousands, except per share data):

 

    

Year Ended December 31,


    

2002


    

2001


    

2000


Net income (loss):

                        

As reported

  

$

(142,247

)

  

$

(438,058

)

  

$

50,999

Pro forma

  

$

(189,465

)

  

$

(479,245

)

  

$

16,721

Basic income (loss) per share:

                        

As reported

  

$

(0.57

)

  

$

(1.89

)

  

$

0.25

Pro forma

  

$

(0.76

)

  

$

(2.06

)

  

$

0.08

Diluted income (loss) per share:

                        

As reported

  

$

(0.57

)

  

$

(1.89

)

  

$

0.24

Pro forma

  

$

(0.76

)

  

$

(2.06

)

  

$

0.08

 

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, 2002,

 

75


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2001 and 2000 was $7.31, $9.26 and $12.54, respectively. The dividend yield was 0 percent in all periods, and expected volatility was 51.0 percent, 53.5 percent and 56.3 percent for the years ended December 31, 2002, 2001 and 2000, respectively. Also, the calculation uses a weighted average expected life of 5.0 years in each year, and a weighted average assumed risk-free interest rate of 4.4 percent, 4.6 percent and 6.2 percent for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Senior Management Bonus Plan and Other Options.    The Company has a Senior Management Bonus Plan (the “Senior Management Bonus Plan”) under which 2,420,685 bonus interests (“Bonus Interests”) were granted to certain senior 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.

 

On October 23, 2001, the Company entered into agreements with certain executives who are participants in the Senior Management Bonus Plan, pursuant to which such executives agreed to accept in lieu of cash amount otherwise payable with respect to the December 31, 2001 Determination Date, shares of the Common Stock of the Company, as determined by dividing such cash amount by the fair market value of the Common Stock (as defined). On January 2, 2002, 383,940 shares of the Common Stock were issued pursuant to these agreements. The shares issued in accordance with the agreements were deferred pursuant to the Amended and Restated MGM Deferred Compensation Plan and are not transferable by any such executive during the holding period which ends the earlier of (i) January 1, 2003, (ii) the date such executive ceases to be employed by the Company, or (iii) a designated change in control, as defined. In addition, on November 21, 2001 and February 15, 2002 the Company entered into similar agreements with three former executives who also held bonus interests under the Senior Management Bonus Plan. The 1,022,813 shares of the Common Stock issued to such former executives in accordance with the aforementioned agreement were sold on the open market in accordance with a trading plan that complies with the Securities Exchange Act of 1934, as amended, or pursuant to a Registration Statement on Form S-3 filed with the Securities and Exchange Commission.

 

At December 31, 2002, there were 187,853 Bonus Interests outstanding, all of which are vested.

 

Pursuant to an employment termination agreement, in August 1999 the Company repriced stock options of a former executive officer aggregating 1,745,680 shares. Such options were repriced to $14.90 and became fully vested and exercisable. These options are being accounted for as a variable option grant.

 

During the year ended December 31, 2002, the Company recognized a benefit under these plans of $12,111,000 due to the decrease in the market price of the Company’s common stock. The Company has

 

76


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

expensed $4,371,000 and $2,650,000 for obligations under these plans for the years ended December 31, 2001 and 2000, respectively. There are no amounts accrued under these plans at December 31, 2002. At December 31, 2001, the Company had accrued $45,814,000 for these obligations.

 

Employee Incentive Plan.    In January 2000 the Company approved the adoption of an employee incentive plan (the “Employee Incentive Plan”) for eligible employees (the “Participants”), subject to stockholder approval, which was obtained May 4, 2000. In the case of certain named executive officers of the Company (the “Named Executive Officers”), bonus awards are determined solely by the Compensation Committee of the Board of Directors (the “Committee”) as follows: (i) objective performance goals, bonus targets and performance measures are pre-established by the Committee at a time when the actual performance relative to the goal remains substantially uncertain and may be based on such objective business criteria as the Committee may determine, including film performance and EBITDA, among others; (ii) the Committee may exercise discretion to reduce an award to a Named Executive Officer by up to 25% so long as such reduction does not result in an increase in the amount of the bonus of any other Participant; and (iii) prior to the payment of any bonus to any of the Named Executive Officers, the Committee will certify to the Company’s Board of Directors or the Executive Committee that the objective pre-established performance goals upon which such bonus is based have been attained and that the amount of each bonus has been determined solely on the basis of the attainment of such goals (subject to the exercise of the negative discretion discussed above). The Company has expensed $2,750,000 and $13,335,000 for obligations under this plan for the years ended December 31, 2002 and 2001, respectively.

 

Additionally, the Company issued a stock bonus to certain employees aggregating $2,154,000 in the year ended December 31, 2000.

 

Note 9—Income Taxes

 

The Company’s domestic and foreign tax liability balances consist of the following (in thousands):

 

    

December 31,

2002


  

December 31,

2001


Current

  

$

33,030

  

$

31,865

Deferred

  

 

—  

  

 

—  

    

  

    

$

33,030

  

$

31,865

    

  

 

77


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The income tax effects of temporary differences between book value and tax basis of assets and liabilities are as follows (in thousands):

 

    

December 31,

2002


    

December 31,

2001


 

Deferred tax assets:

                 

Film and television costs

  

$

379,984

 

  

$

289,621

 

Participations and residuals payable

  

 

33,037

 

  

 

28,924

 

Reserves and investments

  

 

59,438

 

  

 

61,897

 

Net miscellaneous tax assets

  

 

44,422

 

  

 

48,281

 

Operating loss carryforwards

  

 

181,970

 

  

 

161,122

 

    


  


Subtotal, gross deferred tax assets

  

 

698,851

 

  

 

589,845

 

Valuation allowance

  

 

(443,157

)

  

 

(372,542

)

    


  


Total deferred tax assets

  

 

255,694

 

  

 

217,303

 

    


  


Deferred tax liabilities:

                 

Film revenue

  

 

(73,266

)

  

 

(48,498

)

Purchased film costs

  

 

(21,415

)

  

 

(23,794

)

Goodwill

  

 

(13,553

)

  

 

(9,839

)

Acquired partnership interests

  

 

(147,460

)

  

 

(135,172

)

    


  


Total deferred tax liabilities

  

 

(255,694

)

  

 

(217,303

)

    


  


Net deferred tax liability

  

$

—  

 

  

$

—  

 

    


  


 

At December 31, 2002, the Company and its subsidiaries for U.S. federal income tax purposes had a net operating loss carryforward of $466,589,000, which expires in various years between 2011 and 2022. 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, 2002 and 2001, the Company has determined that deferred tax assets in the amount of $443,157,000 and $372,542,000 do not satisfy the recognition criteria set forth in SFAS No. 109, “Accounting for Income Taxes.” Accordingly, the Company has recorded valuation allowances for these amounts.

 

Details of the provision for income taxes are as follows (in thousands):

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Current taxes:

                          

Foreign taxes

  

$

14,687

 

  

$

14,297

 

  

$

12,480

 

Federal and state taxes

  

 

—  

 

  

 

—  

 

  

 

1,000

 

Deferred taxes:

                          

Federal and state taxes

  

 

(70,615

)

  

 

23,820

 

  

 

(27,734

)

Adjustment for change in valuation allowance

  

 

70,615

 

  

 

(23,820

)

  

 

27,734

 

    


  


  


Total tax provision

  

$

14,687

 

  

$

14,297

 

  

$

13,480

 

    


  


  


 

78


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:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Federal tax rate on pre-tax book income (loss)

  

(35

)%

  

(35

)%

  

35

%

Goodwill and other permanent differences

  

(2

)

  

1

 

  

9

 

Foreign taxes, net of available federal tax benefit

  

8

 

  

2

 

  

14

 

Loss carryforward and other tax attributes (benefited) not benefited

  

41

 

  

35

 

  

(37

)

    

  

  

Effective tax rate

  

12

 %

  

3

 %

  

21

%

    

  

  

 

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 Opinion No. 23, “Accounting For Income Taxes-Special Areas,” tax expense has accordingly been provided for these unremitted earnings.

 

Note 10—Retirement Plans

 

The Company has a non-contributory retirement plan (the “Basic Plan”) covering substantially all regular full-time, non-union employees. Benefits are based on years of service and compensation, as defined. The Company’s disclosures are in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Post-retirement Benefits,” which revised employers’ disclosures about pension and post-retirement benefit plans.

 

79


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

As of December 31, 2000, the Company amended the Basic Plan to cease benefit accruals. Reconciliation of the funded status of the plans and the amounts included in the Company’s consolidated balance sheets are as follows (in thousands):

 

    

December 31,

2002


    

December 31,

2001


 

Projected benefit obligations:

                 

Beginning obligations

  

$

15,713

 

  

$

14,542

 

Service cost

  

 

—  

 

  

 

—  

 

Interest cost

  

 

1,127

 

  

 

1,072

 

Actuarial loss

  

 

1,508

 

  

 

465

 

Benefits paid

  

 

(1,080

)

  

 

(366

)

    


  


Ending obligations

  

$

17,268

 

  

$

15,713

 

    


  


Fair value of plan assets (primarily debt securities):

                 

Beginning fair value

  

$

14,765

 

  

$

14,688

 

Actual return on plan assets

  

 

(1,422

)

  

 

(174

)

Employer contributions

  

 

1,083

 

  

 

617

 

Benefits paid

  

 

(1,080

)

  

 

(366

)

    


  


Ending fair value

  

$

13,346

 

  

$

14,765

 

    


  


Funded status of the plans:

                 

Projected benefit obligations

  

$

17,268

 

  

$

15,713

 

Plan assets at fair value

  

 

13,346

 

  

 

14,765

 

    


  


Projected benefit obligations in excess of plan assets

  

 

(3,922

)

  

 

(948

)

Unrecognized net asset as of beginning of year

  

 

(61

)

  

 

(81

)

Unrecognized net loss

  

 

6,056

 

  

 

2,095

 

Unrecognized prior service credit

  

 

(93

)

  

 

(107

)

    


  


Net balance sheet asset

  

$

1,980

 

  

$

959

 

    


  


Key assumptions used in the actuarial computations were as follows:

                 

Discount rate

  

 

7.25

%

  

 

7.25

%

    


  


Long-term rate of return on assets

  

 

7.25

%

  

 

7.25

%

    


  


Rate of increase in future compensation levels

  

 

N/A

 

  

 

N/A

 

    


  


 

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.

 

80


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Pension cost includes the following components (in thousands):

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Service cost

  

$

—  

 

  

$

—  

 

  

$

1,459

 

Interest cost on projected benefit obligation

  

 

1,127

 

  

 

1,072

 

  

 

1,230

 

Expected return on plan assets

  

 

(1,058

)

  

 

(1,080

)

  

 

(1,210

)

Net amortization and deferral

  

 

(7

)

  

 

(34

)

  

 

(34

)

Recognized curtailment gain

  

 

—  

 

  

 

—  

 

  

 

(1,588

)

    


  


  


Net periodic pension (benefit) cost

  

$

62

 

  

$

(42

)

  

$

(143

)

    


  


  


 

A significant number of the Company’s production employees are covered by union sponsored, collectively bargained multi-employer pension plans. The Company contributed approximately $17,487,000, $11,541,000 and $11,577,000, respectively, for such plans for the years ended December 31, 2002, 2001 and 2000. 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 $3,536,000, $2,653,000 and $1,285,000, respectively, to the Savings Plan in the years ended December 31, 2002, 2001 and 2000.

 

Note 11—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 1998. Pursuant to the license, as amended, MGM Grand Inc. (now known as “MGM MIRAGE”) 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. The Company did not receive any monetary compensation for this license. 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.” Tracinda owns a majority of the outstanding common stock of MGM MIRAGE, the parent of MGM Grand Hotel, Inc. (“Grand Hotel”). In consideration of this further grant of rights, MGM MIRAGE paid the Company $1,000,000 in each of the years ended December 31, 2002, 2001 and 2000. Subsequent annual payments are due on each anniversary date thereafter. 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. In addition, the Company makes available to Grand Hotel approximately 20 seats for casino guests at certain premieres of the Company’s motion pictures. The Company did not receive any monetary compensation for the use of these assets.

 

The Company periodically 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

 

81


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Company’s trademarks and logos for resale to consumers in retail shops located within Grand Hotel’s hotels. In December 2000, pursuant to a Merchandise License Agreement, the Company granted a subsidiary of MGM MIRAGE the right to use certain of the Company’s trademarks and logos in connection with the retail sale of merchandise at MGM MIRAGE’s properties. The Company receives royalties based on retail sales of the licensed merchandise. The agreement has a term of five years, subject to the MGM MIRAGE’s right to extend the term for one additional five-year period and its option to terminate the agreement at any time upon 60 days’ notice. During the years ended December 31, 2002, 2001 and 2000, the Company recognized licensing and royalty revenues of $4,000, $9,000 and $6,000, respectively.

 

In July 2001, the Company entered into an agreement with Grand Hotel for the licensing of the MGM logo on slot machines for a one year term. The Company recognized licensing revenue of $200,000 during the year ended December 31, 2001 with respect to this agreement.

 

From time to time, the Company charters airplanes from MGM MIRAGE and 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, 2002, 2001 and 2000, the aggregate of the payments made to MGM MIRAGE and/or Tracinda for such charters were approximately $79,000, $271,000 and $98,000, respectively.

 

From time to time, the Company reserves hotel rooms from MGM MIRAGE for use by key exhibitors. For the years ended December 31, 2002 and 2001, the aggregate amount paid by the Company for such rooms was approximately $465,000 and $32,000, respectively.

 

In 1994, in connection with the formation of Movie Network Channels, a joint venture in which the Company has a non-controlling interest, 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 television. The agreement expires on June 30, 2005, with all motion pictures covered by the agreement reverting to the Company within one year after that date, but both the Company and Movie Network Channels have the right to extend the license for a further four years. The Company receives a license fee for each picture that is based on the number of Movie Network Channel’s subscribers. The Company recognized such license fee revenues of $4,014,000, $3,249,000 and $3,273,000 during the years ended December 31, 2002, 2001 and 2000, 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.

 

The Company, under various agreements, licenses the right to distribute certain motion picture and television product in the domestic television market to the Rainbow Media cable channels, in which the Company acquired a 20 percent equity interest on April 2, 2001. During the years ended December 31, 2002 and 2001, the Company recognized revenues of $4,768,000 and $6,158,000, respectively, under these licensing arrangements. The Company believes that the terms of these agreements are no less favorable to the Company than those contained in its licenses with unaffiliated licensees.

 

The Company has equity interests ranging from five percent to 50 percent in certain television channels located in various international territories, in which the Company licenses certain library pictures and theatrical motion pictures and television series, miniseries and made-for-television movies produced or distributed by the Company during the terms of the agreements. The Company recognized aggregate license fees under these agreements of $22,804,000, $24,107,000 and $23,861,000 during the years ended December 31, 2002, 2001 and 2000, respectively.

 

82


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The Company has a 50 percent equity interest in MGM-NBC Media Sales (see Note 4) to distribute off-network feature films and television series and first-run syndication programming from both the Company and NBC Enterprises, Inc. in the television barter sales markets. In the year ended December 31, 2002, the Company incurred a sales agency fee to MGM-NBC Media Sales of $1,298,000. At December 31, 2002, the Company has a receivable from MGM-NBC Media Sales of $11,661,000 for the distribution of its product and certain administration charges.

 

In December 1999, the Company agreed to provide a production company owned by Mr. Coppola, a director of the Company and a member of the Company’s Executive Committee, certain office space and office furnishings/equipment at no charge for a two-year period, as consideration for creative services provided by Mr. Coppola in connection with certain of the Company’s film product.

 

In March 2000, the Company entered into an agreement in principle with a subsidiary of American Zoetrope (“Zoetrope”), a production company owned by Mr. Coppola, for the financing and distribution in the United States and Canada of lower budget theatrical motion pictures to be produced by Zoetrope over a three-year period. This Agreement was scheduled to expire on March 3, 2003, but has been extended for six months until September 3, 2003. Under the agreement, the Company has an exclusive “first look” on projects developed by Zoetrope with a budget (or anticipated budget) of less than $12,000,000 and, subject to certain conditions being met, the Company will acquire distribution rights in the United States and Canada as well as certain other ancillary rights on up to ten qualifying pictures produced by Zoetrope in exchange for an amount equal to no more than $2,500,000 per picture. In addition, the Company has agreed to spend a minimum of between approximately $1,000,000 to $2,250,000 per qualifying picture in marketing and release costs.

 

Another motion picture studio has acquired the right, for a designated period of time, from the Company to produce a motion picture. The Company has retained the option to either co-finance such motion picture or receive a rights fee and passive profit participation. Ms. Presley, a director of the Company, is a producer of such contemplated motion picture.

 

83


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 12—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 four reportable operating segments: feature films, television programming, cable channels and other (see Note 1). Due to the significant acquisitions of cable channels in 2001, the Company has separated cable channels as a reportable operating segment. 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, other than those accounted for under the equity method, 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. In 2002, upon adoption of SFAS No. 142, the Company has allocated goodwill of $516,706,000 to its operating segments ($475,201,000 to feature films and $41,505,000 to television programming). In prior years, goodwill was included in corporate assets and not allocated to segments. Other corporate assets consist of cash and certain corporate receivables. Summarized financial information concerning the Company’s reportable segments is shown in the following tables (in thousands):

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Revenues:

                          

Feature films

  

$

1,416,947

 

  

$

1,217,969

 

  

$

1,058,296

 

Television programming

  

 

171,220

 

  

 

137,967

 

  

 

139,229

 

Cable channels

  

 

113,066

 

  

 

77,674

 

  

 

32,744

 

Other

  

 

64,393

 

  

 

31,595

 

  

 

39,922

 

    


  


  


Subtotal

  

 

1,765,626

 

  

 

1,465,205

 

  

 

1,270,191

 

Less: unconsolidated companies

  

 

(111,524

)

  

 

(77,674

)

  

 

(32,744

)

    


  


  


Consolidated revenues

  

$

1,654,102

 

  

$

1,387,531

 

  

$

1,237,447

 

    


  


  


Segment Income (Loss):

                          

Feature films

  

$

(40,052

)

  

$

101,842

 

  

$

200,478

 

Television programming

  

 

4,902

 

  

 

12,715

 

  

 

(2,649

)

Cable channels

  

 

12,850

 

  

 

(4,140

)

  

 

953

 

Other

  

 

40,047

 

  

 

15,800

 

  

 

18,768

 

    


  


  


Subtotal

  

 

17,747

 

  

 

126,217

 

  

 

217,550

 

Less: unconsolidated companies

  

 

(13,561

)

  

 

2,421

 

  

 

(1,953

)

    


  


  


Consolidated segment income

  

$

4,186

 

  

$

128,638

 

  

$

215,597

 

    


  


  


Identifiable Assets:

                          

Feature films

  

$

2,640,294

 

  

$

2,183,488

 

  

$

2,479,639

 

Television programming

  

 

369,723

 

  

 

334,886

 

  

 

401,776

 

Cable channels

  

 

620,644

 

  

 

845,042

 

  

 

12,403

 

Other

  

 

12,349

 

  

 

9,857

 

  

 

14,772

 

    


  


  


Consolidated segment assets

  

$

3,643,010

 

  

$

3,373,273

 

  

$

2,908,590

 

    


  


  


 

84


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Capital Expenditures:

                          

Feature films

  

$

20,141

 

  

$

8,554

 

  

$

10,493

 

Television programming

  

 

2,820

 

  

 

1,312

 

  

 

1,700

 

Other

  

 

94

 

  

 

39

 

  

 

66

 

    


  


  


Consolidated capital expenditures

  

$

23,055

 

  

$

9,905

 

  

$

12,259

 

    


  


  


Depreciation Expense:

                          

Feature films

  

$

17,880

 

  

$

15,733

 

  

$

11,909

 

Television programming

  

 

2,504

 

  

 

2,414

 

  

 

1,930

 

Cable channels

  

 

5,174

 

  

 

1,115

 

  

 

311

 

Other

  

 

83

 

  

 

71

 

  

 

74

 

    


  


  


Subtotal

  

 

25,641

 

  

 

19,333

 

  

 

14,224

 

Less: unconsolidated companies

  

 

(5,174

)

  

 

(1,115

)

  

 

(311

)

    


  


  


Consolidated segment depreciation

  

$

20,467

 

  

$

18,218

 

  

$

13,913

 

    


  


  


 

The following table presents the details of other operating segment income:

 

    

Year Ended December 31,


 
    

2002


  

2001


    

2000


 

Licensing and merchandising

  

$

7,754

  

$

6,460

 

  

$

5,666

 

Interactive media

  

 

9,859

  

 

3,586

 

  

 

9,381

 

Music

  

 

8,175

  

 

7,593

 

  

 

6,111

 

Other

  

 

14,259

  

 

(1,839

)

  

 

(2,390

)

    

  


  


    

$

40,047

  

$

15,800

 

  

$

18,768

 

    

  


  


 

The following is a reconciliation of reportable segment income (loss) to income (loss) from operations before provision for income taxes:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Segment income

  

$

4,186

 

  

$

128,638

 

  

$

215,597

 

General and administrative expenses

  

 

(84,857

)

  

 

(92,692

)

  

 

(89,419

)

Severance and related recoveries

  

 

—  

 

  

 

—  

 

  

 

3,715

 

Depreciation and non-film amortization

  

 

(20,467

)

  

 

(32,952

)

  

 

(28,648

)

    


  


  


Operating income (loss)

  

 

(101,138

)

  

 

2,994

 

  

 

101,245

 

Gain on sale of equity interest in cable channel

  

 

32,514

 

  

 

—  

 

  

 

—  

 

Equity in net earnings (losses) of affiliates

  

 

13,561

 

  

 

(2,421

)

  

 

1,953

 

Interest expense, net of amounts capitalized

  

 

(79,929

)

  

 

(51,494

)

  

 

(51,425

)

Interest and other income, net

  

 

7,432

 

  

 

9,478

 

  

 

12,706

 

    


  


  


Income (loss) from operations before provision for income taxes

  

$

(127,560

)

  

$

(41,443

)

  

$

64,479

 

    


  


  


 

85


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following is a reconciliation of reportable segment assets to consolidated total assets:

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


Total assets for reportable segments

  

$

3,643,010

  

$

3,373,273

  

$

2,908,590

Goodwill not allocated to segments

  

 

—  

  

 

516,706

  

 

531,440

Other unallocated amounts (principally cash in 2002)

  

 

625,964

  

 

33,185

  

 

108,160

    

  

  

Consolidated total assets

  

$

4,268,974

  

$

3,923,164

  

$

3,548,190

    

  

  

 

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:

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


United States and Canada

  

$

1,101,624

  

$

872,056

  

$

669,158

Europe

  

 

366,918

  

 

364,663

  

 

372,308

Asia and Australia

  

 

123,415

  

 

97,925

  

 

138,672

Other

  

 

62,145

  

 

52,887

  

 

57,309

    

  

  

    

$

1,654,102

  

$

1,387,531

  

$

1,237,447

    

  

  

 

Note 13—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 $20,511,000, $18,499,000 and $17,264,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Employment Agreements.    The Company has employment agreements with various 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 2006.

 

86


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Future minimum annual commitments under bank and other debt agreements, non-cancelable operating leases, employment agreements, creative talent agreements and letters of credit as of December 31, 2002 are as follows (in thousands):

 

    

2003


  

2004


  

2005


  

2006


  

2007


  

Thereafter


  

Total


Bank and other debt

  

$

22,471

  

$

66,308

  

$

65,643

  

$

65,643

  

$

122,785

  

$

813,875

  

$

1,156,725

Operating leases

  

 

21,182

  

 

24,611

  

 

24,988

  

 

25,493

  

 

26,268

  

 

252,425

  

 

374,967

Employment agreements

  

 

41,628

  

 

24,229

  

 

7,390

  

 

—  

  

 

—  

  

 

—  

  

 

73,247

Creative talent agreements

  

 

20,010

  

 

2,126

  

 

1,307

  

 

765

  

 

—  

  

 

—  

  

 

24,208

Letters of credit

  

 

20,038

  

 

90

  

 

—  

  

 

—  

  

 

—  

  

 

—  

  

 

20,128

    

  

  

  

  

  

  

Total

  

$

125,329

  

$

117,364

  

$

99,328

  

$

91,901

  

$

149,053

  

$

1,066,300

  

$

1,649,275

    

  

  

  

  

  

  

 

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.

 

The Company has provided an accrual for pending litigation as of December 31, 2002 in accordance with SFAS No. 5, “Accounting for Contingencies.” 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 14—Supplementary Cash Flow Information

 

The Company paid interest, net of capitalized interest, of $63,211,000, $43,833,000 and $43,936,000 during the years ended December 31, 2002, 2001 and 2000, respectively. The Company paid income taxes of $13,237,000, $14,751,000 and $12,829,000 during the years ended December 31, 2002, 2001 and 2000, respectively.

 

During the year ended December 31, 2002, the Company contributed 1,406,753 shares of common stock aggregating $27,616,000 to participants of the Senior Management Bonus Plan (see Note 8). During the year ended December 31, 2000, the Company issued to certain employees a stock grant of 47,300 shares of common stock valued at $2,154,000.

 

87


METRO-GOLDWYN-MAYER INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 15—Quarterly Financial Data (Unaudited)

 

Certain quarterly information is presented below (in thousands):

 

    

First

Quarter


    

Second

Quarter


    

Third

Quarter


    

Fourth

Quarter


 

2002:

                                   

Revenues

  

$

315,128

 

  

$

336,923

 

  

$

381,156

 

  

$

620,895

 

Operating income (loss)

  

$

(66,398

)

  

$

(99,253

)

  

$

23,732

 

  

$

40,781

 

Interest expense, net of amounts capitalized

  

$

(16,095

)

  

$

(26,530

)

  

$

(18,107

)

  

$

(19,197

)

Net income (loss)

  

$

(90,792

)

  

$

(121,809

)

  

$

11,695

 

  

$

58,659

 

Basic and diluted income (loss) per share

  

$

(0.37

)

  

$

(0.48

)

  

$

0.05

 

  

$

0.24

 

2001:

                                   

Revenues

  

$

343,896

 

  

$

274,859

 

  

$

393,310

 

  

$

375,466

 

Operating income (loss)

  

$

(9,321

)

  

$

(43,946

)

  

$

969

 

  

$

55,292

 

Interest expense, net of amounts capitalized

  

$

(9,453

)

  

$

(13,475

)

  

$

(14,287

)

  

$

(14,279

)

Cumulative effect of accounting change

  

$

(382,318

)

  

$

—  

 

  

$

—  

 

  

$

—  

 

Net income (loss)

  

$

(399,839

)

  

$

(61,305

)

  

$

(15,975

)

  

$

39,061

 

Basic and diluted income (loss) per share, before cumulative effect of accounting change

  

$

(0.08

)

  

$

(0.26

)

  

$

(0.07

)

  

$

0.16

 

Basic and diluted income (loss) per share

  

$

(1.86

)

  

$

(0.26

)

  

$

(0.07

)

  

$

0.16

 

2000:

                                   

Revenues

  

$

338,995

 

  

$

294,486

 

  

$

311,777

 

  

$

292,189

 

Operating income

  

$

19,917

 

  

$

18,169

 

  

$

36,669

 

  

$

28,443

 

Interest expense, net of amounts capitalized

  

$

(14,893

)

  

$

(14,722

)

  

$

(12,583

)

  

$

(9,227

)

Net income

  

$

5,215

 

  

$

6,294

 

  

$

27,115

 

  

$

12,375

 

Basic and diluted income per share

  

$

.03

 

  

$

.03

 

  

$

.13

 

  

$

.06

 

 

The Company adopted SOP 00-2 on January 1, 2001 and recorded a one-time, non-cash cumulative effect charge to earnings of $382,318,000, primarily to reduce the carrying value of its film and television costs (see Note 1).

 

The Company regularly reviews, and revises when necessary, its total revenue estimates on an individual title basis. These revisions can result in significant quarter-by-quarter fluctuations in film write-downs and amortization. The results of operations for the fourth quarter of 2001 were positively impacted by reduced film amortization rates due to a significant increase in digital video disc revenues and new television licensing agreements. The favorable impact of these items was partially offset by advertising costs incurred for unreleased film product as of December 31, 2001, which in 2001 are required to be expensed under the new accounting rules. The net favorable impact of these items on our operating income in the fourth quarter of 2001 aggregated approximately $12,504,000.

 

88


INDEPENDENT AUDITORS’ REPORT

 

The Members

American Movie Classics Company, The Independent Film Channel LLC and Bravo Company:

 

We have audited the accompanying combined balance sheets of American Movie Classics Company (a general partnership) and subsidiaries, The Independent Film Channel LLC (a limited liability company) and subsidiaries, and Bravo Company (collectively, the “Company”), as of December 31, 2002 and 2001, and the related combined statements of income, members’ capital (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2002. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at December 31, 2002 and 2001, and the combined results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

 

/s/    KPMG LLP

 

March 31, 2003

Melville, New York

 

89


AMERICAN MOVIE CLASSICS COMPANY AND SUBSIDIARIES,

THE INDEPENDENT FILM CHANNEL LLC AND SUBSIDIARIES, AND

BRAVO COMPANY

 

COMBINED BALANCE SHEETS

 

DECEMBER 31, 2002 and 2001

(in thousands)

 

    

2002


  

2001


ASSETS

             

Current assets:

             

Cash

  

$

33,830

  

$

49,740

Trade accounts receivable (less allowance for doubtful accounts of $18,244 and $5,289)

  

 

66,684

  

 

83,574

Trade accounts receivable—affiliates, net of allowance for doubtful accounts

  

 

722

  

 

1,028

Other receivables—affiliates, net of allowance for doubtful accounts

  

 

620

  

 

642

Notes receivable—affiliates

  

 

90,178

  

 

75,983

Prepaid expenses and other current assets

  

 

5,365

  

 

8,387

Current feature film inventory, net

  

 

65,455

  

 

71,077

    

  

Total current assets

  

 

262,854

  

 

290,431

Long-term feature film inventory, net

  

 

226,011

  

 

338,751

Plant and equipment, net

  

 

20,101

  

 

25,854

Deferred carriage fees, net

  

 

111,232

  

 

158,328

Deferred costs, net of accumulated amortization of $837 and $3,131

  

 

163

  

 

1,152

Other intangible assets, net of accumulated amortization of $122,399 and $107,854

  

 

23,046

  

 

37,591

Excess costs over the fair value of net assets acquired, net of accumulated amortization of $3,396 at December 31, 2001

  

 

1,574

  

 

1,574

    

  

    

$

644,981

  

$

853,681

    

  

LIABILITIES AND MEMBERS’ CAPITAL

             

Current liabilities:

             

Accounts payable

  

$

7,161

  

$

24,398

Accrued payroll and related costs