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) |
Registrants 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 Registrants 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 Registrants 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 Registrants 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 | ||
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 |
59 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 |
60 | |
61 | ||
Financial Statements of Acquired Companies |
||
89 | ||
90 | ||
Combined Statements of Income for the Years Ended December 31, 2002, 2001 and 2000 |
91 | |
92 | ||
Combined Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 |
93 | |
94 | ||
Financial Statement Schedules |
||
107 | ||
109 | ||
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 Companys 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 Companys 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 Companys 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.
(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 |
Addl 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 1Basis 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 Accountants 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 years gross film revenues bear to managements 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 Companys 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 Companys 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 Companys 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 films 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 Activitiesan 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 Companys 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 Companys 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 OperationsReporting 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 Companys 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 Companys financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean 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 2Severance 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 Companys 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 Companys 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 Companys 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 Companys 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 3Film 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 Companys 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 4Investments 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: Womens 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 Companys credit facilities. Based upon certain assumptions that management of the Company believes are reasonable, the Companys determination of the difference between the Companys original cost basis in their investment in the Cable Channels and the Companys 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 managements 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 Companys 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 Companys share of the Cable Channels 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 Companys 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 Companys 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 Companys 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 Companys 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 ventures 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 Companys share of
70
METRO-GOLDWYN-MAYER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MGM Latin Americas 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 companys 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 Companys 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 5Property 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 6Bank 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 Companys 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 7Financial 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 Companys 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 Companys 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 Companys 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 8Stockholders 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 9Income Taxes
The Companys 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 10Retirement 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 Companys 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 Companys 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 Companys 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 11Related 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 Companys 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 Companys 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 Companys 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)
Companys trademarks and logos for resale to consumers in retail shops located within Grand Hotels 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 Companys trademarks and logos in connection with the retail sale of merchandise at MGM MIRAGEs 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 MIRAGEs 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 Companys 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 Channels 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 Companys 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 Companys 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 12Segment Information
The Company applies the disclosure provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Companys 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 Companys 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 Companys 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 13Commitments 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 Companys financial condition or results of operations.
Note 14Supplementary 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 15Quarterly 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
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 Companys 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
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 receivableaffiliates, net of allowance for doubtful accounts |
|
722 |
|
1,028 | ||
Other receivablesaffiliates, net of allowance for doubtful accounts |
|
620 |
|
642 | ||
Notes receivableaffiliates |
|
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 |
|