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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 1-13481
METRO-GOLDWYN-MAYER INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4605850
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2500 BROADWAY STREET, SANTA MONICA, CA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 449-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the Registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock (based on the last sale price
of such stock as reported by the Dow Jones News Retrieval) held by non-
affiliates of the Registrant as of March 11, 1998 was $151,593,460.
The number of shares of the Registrant's common stock outstanding as of
March 11, 1998 was 65,779,852.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's proxy statement for the annual meeting to
be held on May 12, 1998 (the "Proxy Statement"), to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Metro-Goldwyn-Mayer Inc., a Delaware corporation (together, unless the
context indicates otherwise, with its direct and indirect subsidiaries, "MGM"
or the "Company"), is an entertainment company engaged primarily in the
development, production and worldwide distribution of theatrical motion
pictures and television programs. The Company, including Metro-Goldwyn-Mayer
Studios Inc. ("MGM Studios"), United Artists Corporation ("UA"), Orion
Pictures Corporation ("Orion"), Goldwyn Films Inc. ("Goldwyn") and its other
subsidiaries, is one of only seven major film and television studios
worldwide. With approximately 4,000 film titles and over 8,200 episodes of
television programming, the Company's library (the "Library") constitutes the
largest collection of post-1948 feature films in the world. Motion pictures in
the Library have won over 185 Academy Awards, including Best Picture Awards
for Annie Hall, The Apartment, The Best Years of Our Lives, Dances With
Wolves, The Deer Hunter, Hamlet, In the Heat of the Night, Marty, Midnight
Cowboy, Platoon, Rain Man, Rocky, Silence of the Lambs, Tom Jones and West
Side Story. The Library also includes 18 titles in the James Bond film
franchise, five titles in the Rocky film franchise and nine titles in the Pink
Panther film franchise.
MGM's executive offices are located at 2500 Broadway Street, Santa Monica,
California 90404. The Company's telephone number is (310) 449-3000.
BACKGROUND OF THE COMPANY
Metro-Goldwyn-Mayer ("Old MGM") was established in 1924 through the merger
of Metro Pictures, Goldwyn Pictures and Louis B. Mayer Productions. A
corporation wholly owned by Kirk Kerkorian became Old MGM's controlling
shareholder in 1969. In 1981 Old MGM acquired UA, which had been formed in
1919 when Mary Pickford, Douglas Fairbanks, D.W. Griffith and Charlie Chaplin
joined forces to release their own motion pictures, as well as motion pictures
made by independent producers. In 1986 Turner Broadcasting System, Inc.
("Turner") acquired the businesses of Old MGM, and as part of that
transaction, Tracinda Corporation ("Tracinda") and certain of the former
stockholders of Old MGM concurrently acquired UA, including the UA library,
from Old MGM. Shortly thereafter, UA reacquired the Metro-Goldwyn-Mayer name
and logo and certain other assets from Turner. UA was then renamed MGM/UA
Communications Co. ("MGM/UA"). Turner retained the film library created
through the pre-1986 operations of Old MGM (the "Old MGM Library").
In November 1990 MGM/UA was acquired by Pathe Communications Corporation
("Pathe") and was renamed MGM-Pathe Communications Co. ("MGM-Pathe"), the
predecessor to MGM Studios. In May 1992 Credit Lyonnais Bank Nederland N.V.
("CLBN"), Pathe's principal lender, foreclosed on substantially all of the
stock of MGM-Pathe, following default by Pathe, and such stock was ultimately
transferred to Consortium de Realisation ("CDR"), a wholly owned subsidiary of
Credit Lyonnais S. A. ("CL").
In July 1993 Frank G. Mancuso was appointed as Chairman and Chief Executive
Officer of MGM Studios. In January 1996 CDR announced its intention to sell
MGM Studios.
Tracinda, Seven Network Limited ("Seven") and senior management of MGM
Studios formed the Company (then known as P&F Acquisition Corp.) to acquire
all of the outstanding capital stock of MGM Studios and its subsidiaries,
including UA, in October 1996 for an aggregate consideration of $1.3 billion
(the "MGM Acquisition"). Tracinda is wholly-owned by Mr. Kerkorian. Seven is
one of the largest television broadcast networks in Australia with stations in
five major Australian metropolitan areas and one regional television station.
In July 1997 the Company acquired all of the outstanding capital stock of
Orion and its subsidiaries, including Goldwyn (the "Orion Companies"), from
Metromedia International Group, Inc. (the "Orion
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Acquisition"). In connection with the Orion Acquisition, the Company obtained
the film and television libraries of the Orion Companies consisting of
approximately 1,900 film titles and 3,000 television episodes, nearly doubling
the size of the Library to its current size of approximately 4,000 film titles
and over 8,200 episodes of television programming. The Landmark Theatres owned
by Goldwyn were excluded from the Orion Acquisition.
On November 18, 1997, the Company completed an initial public offering,
whereby it issued and sold 9,000,000 new shares of common stock, $.01 par
value per share (the "Common Stock") at a price per share of $20, less an
underwriting discount, for net proceeds (after expenses of the initial public
offering) to the Company of $165 million (the "Offering"). Concurrent with the
consummation of the Offering, Tracinda purchased directly from the Company, at
a purchase price of $18.85 per share (equal to the per share price to the
public in the Offering, less the underwriting discount), 3,978,780 shares of
the Common Stock for an aggregate purchase price of $75 million (the "Tracinda
Purchase"). In addition, Tracinda acquired an aggregate of 2,429,263 shares of
the Common Stock through open market purchases following commencement of the
Offering through December 31, 1997.
THE MOTION PICTURE AND TELEVISION INDUSTRY
Motion Pictures--General. The motion picture industry consists of two
principal activities: production and distribution. Production involves the
development, financing and production of feature-length motion pictures.
Distribution involves the promotion and exploitation of motion pictures
throughout the world in a variety of media, including theatrical exhibition,
home video, television and other ancillary markets. The U.S. motion picture
industry can be divided into major studios and independent companies, with the
major studios dominating the industry in the number of theatrical releases. In
addition to the Company (including Metro-Goldwyn-Mayer Pictures Inc. ("MGM
Pictures"), United Artists Pictures Inc. ("UA Pictures"), Orion and Goldwyn),
the major studios as defined by the Motion Picture Association of America are
The Walt Disney Company (including Buena Vista, Touchstone and Miramax)
("Disney"), Paramount Pictures Corporation ("Paramount"), Sony Pictures
Entertainment Inc. (including Columbia and TriStar) ("Sony"), Twentieth
Century Fox Film Corporation ("Fox"), Universal Studios, Inc. ("Universal")
and Warner Bros. (including Turner, New Line Cinema and Castle Rock
Entertainment) ("Warner"). The major studios are typically large diversified
corporations that have strong relationships with creative talent, exhibitors
and others involved in the entertainment industry and have global film
production and distribution capabilities.
Historically, the major studios have produced and distributed the majority
of high grossing theatrical motion pictures released annually in the United
States. Over the past decade, the number of feature-length motion pictures
released by the major studios has increased dramatically. In addition, most of
the studios have created or accumulated substantial and valuable motion
picture libraries that generate significant revenues. These revenues can
provide the major studios with a stable source of earnings that offsets the
variations in the financial performance of their motion picture releases and
other aspects of their motion picture operations.
The independent companies have more limited production and distribution
capabilities than do the major studios. While certain independent companies
may produce as many films as a major studio in any year, independent motion
pictures typically have lower negative costs and are not as widely released as
motion pictures produced and distributed by the major studios. Additionally,
the independent companies may have limited or no internal distribution
organizations and may rely on the major studios for distribution and
financing.
Motion Picture Production. The production of a motion picture begins with
the screenplay adaptation of a popular novel or other literary work acquired
by the producer of the motion picture or the development of an original
screenplay based upon a story line or scenario conceived or acquired by the
producer. In the development phase, the producer may seek production financing
and tentative commitments from a director, the principal cast members and
other creative personnel. A proposed production schedule and budget are
prepared. At the end of this phase, the decision is made whether or not to
"greenlight," or approve for production, the motion picture.
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After greenlighting, pre-production of the motion picture begins. In this
phase, the producer engages creative personnel to the extent not previously
committed, finalizes the filming schedule and production budget, obtains
insurance and secures completion guaranties, if necessary. Moreover, the
producer establishes filming locations, secures any necessary studio
facilities and stages and prepares for the start of actual filming.
Principal photography, or the actual filming of the screenplay, generally
extends from seven to 16 weeks, depending upon such factors as budget,
location, weather and complications inherent in the screenplay. Following
completion of principal photography, the motion picture enters what is
typically referred to as post-production. In this phase, the motion picture is
edited, opticals, dialogue, music and any special effects are added, and
voice, effects and music soundtracks and pictures are synchronized. This
results in the production of the negative from which release prints of the
motion picture are made. Major studios and independent film companies hire
editors, composers and special effects technicians on the basis of their
suitability for a particular picture.
The production and marketing of theatrical motion pictures requires
substantial capital. The costs of producing and marketing motion pictures have
generally increased in recent years. These costs may continue to increase in
the future, thereby increasing the costs to the Company of its motion
pictures. Production costs and releasing costs are rising at a faster rate
than increases in either domestic admissions to movie theaters or admission
ticket prices, leaving the Company more dependent on other media, such as home
video and television, and foreign markets.
Motion Picture Distribution. The distribution of a motion picture involves
the licensing of the picture for distribution or exploitation in various
markets, both domestically and internationally, pursuant to a release pattern.
These markets include theatrical exhibition, non-theatrical exhibition (which
includes airlines, hotels and armed forces facilities), home video (including
rental and sell-through), presentation on television (including pay-per-view,
pay, network, syndication or basic cable) and marketing of the other rights in
the picture and underlying literary property, which may include books,
merchandising and soundtracks. The domestic and international markets
generally follow the same release pattern, with the starting date of the
release in the international market varying from being concurrent with the
domestic theatrical release to being as long as nine months afterwards. A
motion picture typically is distributed by a major studio or one or more
distributors that acquire rights from a studio or other producer in one or
more markets or media or a combination of the foregoing.
Both major studios and independent film companies often acquire pictures for
distribution through a customary industry arrangement known as a "negative
pickup," under which the studio or independent film company agrees to acquire
from a production company all rights to a film upon completion of production,
and also acquire completed films.
Television Production. The production of television series programming
involves the development of a format based on a creative concept or literary
property into a television script, the hiring of talent, the filming or taping
of the program and the technical and post-production work necessary to produce
a finished program. Television producers may originate projects internally or
acquire them from others. If a concept is deemed suitable for development, the
studio or other producer or network typically commissions and pays for a
script. Once a script is ordered, one or more license agreements are
negotiated with the potential broadcasters of such program. A pilot episode
usually is ordered or commissioned prior to the determination of whether a
series will be produced.
Television production can generally be divided into two distinct businesses:
network production (i.e., television shows for ABC, CBS, NBC, Fox, UPN and WB)
and non-network production (i.e., made-for-cable and first-run syndication).
The economics of the two types of television production are different. In
network production, a network generally orders approximately six to 13 initial
episodes of each new series for a license fee equal to a percentage of the
program's cost. The balance of the production cost can only be recouped
through international sales and syndication if a series is successful and
generally remains unrecouped for at least four years. In the non-network
production or first-run syndication business, a producer seeking to launch a
new series
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commits to produce a minimum number of episodes if the producer can "clear"
the series by selling to individual television stations in sufficient markets
throughout the country (generally comprising 70 percent of television
households). Once produced, the episodes are immediately available for
licensing to international broadcasters as well. This approach generally
involves a lower production cost risk and earlier return on investment ("ROI")
than the network production business; however, non-network programming also
generally provides a lower ROI than successful network production. See "--
Production--Television Production."
Television Distribution. The U.S. television market is served by network
affiliated stations, independent stations and cable systems, although the
number of independent stations has decreased as many formerly independent
stations have become affiliated with new networks in recent years. During
"prime time" hours, network affiliates primarily broadcast programming
produced for the network. In non-prime time, network affiliates telecast
network programming, off-network programming, first-run programming
(programming produced for distribution on a syndicated basis) and programming
produced by the local stations themselves. Independent television stations and
cable networks, during both prime and non-prime time, produce their own
programs and telecast off-network programs or first-run programs acquired from
independent producers or syndicators. Syndicators generally are companies that
sell to independent television stations and network affiliates programming
produced or acquired by the syndicator for distribution.
BUSINESS STRATEGY
The Company's goal is to enhance its position as a premier global
entertainment content company by maximizing the value of its assets, including
the Library and its film and television production units, under the direction
of its experienced management team. To achieve this goal, the Company seeks
to:
Build and Leverage the Library. The Company believes that the Library is its
most powerful asset and that the Library will continue to generate relatively
stable cash flows through the worldwide distribution of its titles. Management
seeks to maximize the value of the Library by (i) producing new motion
pictures and television programs that will not only be successful on their
own, but will also increase the depth and breadth of the Library, (ii)
aggressively marketing and repackaging the Library's titles, (iii) developing
new distribution channels for delivering MGM branded programming, (iv)
capitalizing on developments in technology and (v) further penetrating
international markets as they grow. As opportunities arise, the Company may
pursue strategic acquisitions, including acquisitions of additional titles or
of new distribution channels for the Library. Additionally, the Company
expects to benefit as certain rights to the Library that have been previously
licensed to others revert to the Company over time. See "--Distribution."
Develop, Produce and Distribute Theatrical Motion Pictures. Through MGM
Pictures and UA Pictures, the Company plans to produce or co-produce and
distribute approximately ten to 12 motion pictures annually across a variety
of genres. The Company intends to (i) actively manage its production and
release schedules to maximize overall performance of those motion pictures,
(ii) tightly control development and production expenditures while maintaining
the artistic integrity required to develop and produce successful feature
films and (iii) utilize the Library as an inexpensive source for sequels and
remakes and the expansion of certain well-tested, familiar film franchises.
Additionally, the Company plans to produce or acquire and release
approximately four to six specialty motion pictures annually through Goldwyn.
The Company also plans to distribute annually approximately four to six motion
pictures produced by others.
Develop, Produce and Distribute Television Programming. The Company intends
to focus primarily on the development and production of series for pay
television and the first-run syndication business by using its extensive
Library as a source of ideas. Under its television programming strategy, the
Company has generally been able to recover substantially all production costs
for a series shortly following completion of production by obtaining up-front
financial commitments from domestic pay television broadcasters for production
of multiple episodes of the series and concurrently licensing the series in
international markets. The Company also develops programs such as two-hour
television movies and mini-series. In addition, the Company has recently begun
allocating a portion of its television production budget to producing series
for network television. See "-- Production--Television Production."
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Leverage the MGM Brand Name. The Company believes that the MGM name and its
lion logo are among the most recognized in the world. The Company intends to
capitalize on the inherent value of its name and logo through the distribution
of branded programming and the selective development of high-quality consumer
products.
When Mr. Mancuso was appointed Chairman and Chief Executive Officer in 1993,
he began implementing the above business strategy. Under Mr. Mancuso's
direction, the Company completed the Orion Acquisition to build the Library,
has reestablished a television series production business and has taken steps
to leverage the MGM brand name. In addition, under Mr. Mancuso's direction the
Company has produced and/or released such successful motion pictures as The
Birdcage, Get Shorty, GoldenEye, Leaving Las Vegas, Species, Stargate and
Tomorrow Never Dies. Although the Company did not approve any motion pictures
for production during the ten month period from CDR's announcement in January
1996 of its intention to sell MGM Studios to the consummation of such sale in
October 1996 (the "Sale Period"), since completion of the MGM Acquisition,
management has taken steps to return operations to a more expanded production
and release schedule. Since October 1996 the Company has approved 16 motion
pictures for production. There can be no assurance that the Company will not
experience problems or delays in its return to more normal operations.
FILM AND TELEVISION LIBRARY
The Library is one of the most critically acclaimed libraries in the motion
picture industry, representing one of the largest collections of Academy
Award-winning films. As of December 31, 1997 the Company owned, or held
certain distribution rights with respect to, approximately 4,000 theatrical
motion pictures, excluding the approximately 2,950 titles that the Company has
the right to distribute in home video markets under an agreement with Turner.
See discussion below and "--Distribution--Home Video Distribution." The motion
pictures in the Company's Library have won over 185 Academy Awards. Fifteen
motion pictures have won the Academy Award for Best Picture, including Annie
Hall, The Apartment, The Best Years of Our Lives, Dances With Wolves, The Deer
Hunter, Hamlet, In the Heat of the Night, Marty, Midnight Cowboy, Platoon,
Rain Man, Rocky, Silence of the Lambs, Tom Jones and West Side Story.
The Library also constitutes the largest collection of post-1948 feature
films in the world. In 1948 certain major studios negotiated consent decrees
requiring that the studios separate their exhibition businesses from their
production and distribution businesses and mandating the divestiture of
certain theater holdings. This is generally believed to have triggered greater
competition among the studios and an increased emphasis on the potential for
commercial success in the development and production stages, resulting in a
greater focus on the content and quality of the motion pictures produced and
distributed by the studios. The Company believes that films produced and
developed after 1948 generally are more valuable than films that were produced
and developed previously.
Additionally, the Library includes motion pictures from a wide range of
genres, including dramas, comedies, action-adventure movies, westerns and
suspense thrillers. Management believes that the Library's diversity, quality
and extensive size provides the Company with substantial competitive
advantages. The Company seeks to continue to build upon these advantages by
producing and acquiring new motion pictures across a variety of genres and
budget ranges to update and enhance the Library. See "--Production--Motion
Picture Production."
The Library also includes over 8,200 episodes from television series
previously broadcast on prime-time network television or in first-run
syndication, including episodes of The Addams Family, American Gladiators, Bat
Masterson, Cagney & Lacey, Fame, Green Acres, Highway Patrol, In the Heat of
the Night, Mr. Ed, The Patty Duke Show, Pink Panther, Sea Hunt and
thirtysomething. The television series in the Library have won 41 Emmy awards
and seven Golden Globe awards.
The Company will continue to implement its strategy of developing new
projects from existing Library assets. The Library represents a readily-
available, "market tested" source of development ideas. For example, the
Company recently had success with the film The Birdcage, a remake of La Cage
aux Folles, and is expected
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to release Species II, the sequel to Species, in 1998. Furthermore, the
Company has successfully expanded the valuable film franchises within its
Library, most notably the James Bond franchise, with the 1995 commercial
success of GoldenEye and the release of the latest James Bond film, Tomorrow
Never Dies, on December 19, 1997. As of February 28, 1998, Tomorrow Never Dies
had earned greater domestic box office receipts than any other film in the
James Bond franchise. Additionally, the Company has successfully developed
four television series based on Library motion pictures: Poltergeist: The
Legacy based on Poltergeist; Stargate SG-1 based on Stargate; All Dogs Go to
Heaven, based on the movie of the same name; Fame L.A. based on Fame; and The
Magnificent Seven, based on the movie of the same name. The Company also
produced a remake of Twelve Angry Men as a made-for-television movie, which
first aired on Showtime Networks Inc. ("Showtime") in August 1997.
Eighteen James Bond motion pictures in the Library are produced and
distributed pursuant to a series of agreements with Danjaq, LLC ("Danjaq").
The motion pictures are produced by Danjaq, and the Company has the right to
approve all key elements of the pictures, such as the selection of the
director and the leading actors. The copyright in each of the motion pictures
is owned jointly by the Company and Danjaq. Generally, the Company has the
right to distribute each of the pictures in all media worldwide in perpetuity
or for a term of 15 years. Where the Company's distribution rights are not
perpetual, the rights revert to joint control by the Company and Danjaq after
expiration of the distribution term. Danjaq owns any television series created
that is based on the James Bond motion pictures, and the Company has the
distribution rights to such series. Danjaq controls the merchandising rights
with respect to the pictures, with the Company being entitled to receive a
portion of the revenues from all merchandising licenses. Additionally, the
Company controls all marketing rights, and controls the music from The Living
Daylights (1987) and all subsequent pictures. All other rights relating to the
pictures are controlled jointly by the Company and Danjaq. The agreements
contain certain restrictions on the sale or licensing by the Company of any of
its rights in the pictures. Although the Company does not believe that this
joint nature of ownership and control of the James Bond franchise will have
any material adverse effect on the Company in the future, no assurance to that
effect can be given.
Prior to 1959, Ian Fleming authored a number of novels depicting the
adventures of James Bond, and commencing in 1959, Mr. Fleming and Kevin
McClory collaborated on the development of certain plot lines and treatments
and a script entitled Thunderball, featuring the James Bond character. In that
connection, Mr. McClory ultimately acquired from Mr. Fleming certain rights to
make a feature film using the James Bond character in these plot lines. Mr.
Fleming thereafter wrote a novel of the same name. In 1961, Mr. McClory
commenced litigation against Mr. Fleming with regard to the script, the novel
and certain related rights.
In 1962, prior to the settlement of the Fleming-McClory litigation, Mr.
Fleming effectively granted to a predecessor-in-interest of Danjaq the
exclusive worldwide rights to, among other things, make films based on Mr.
Fleming's existing or future James Bond novels (other than Thunderball or
Casino Royale) and to create original screenplays about the adventures of
James Bond not based on Mr. Flemings's James Bond novels. This agreement
further provides that the film rights to the Thunderball novel that were the
subject of the Fleming-McClory litigation would also be transferred to
Danjaq's predecessor to the extent Mr. Fleming was permitted to transfer such
rights following completion of the litigation.
The Fleming-McClory litigation was resolved in 1963 by a settlement among
Mr. Fleming, Mr. McClory and the other parties to the litigation in which Mr.
McClory acknowledged that Mr. Fleming was the creator and proprietor of the
James Bond character. Pursuant to that settlement, Mr. McClory was, in effect,
given the film rights in the Thunderball documents and scripts attached to the
settlement agreement, the rights to reproduce any part of Mr. Fleming's
Thunderball novel in a film and to exhibit any such film in any manner
whatsoever and the rights to use the James Bond character in the film
Thunderball. The Company believes these rights, at most, gave Mr. McClory the
right to make a film of the story in the novel Thunderball (i.e. a "remake" of
Thunderball). Mr. McClory produced the film Thunderball (with UA and Danjaq)
in 1965. Mr. McClory has at various times since 1963 taken the position that
he has broader rights to use the James Bond character than simply remake
Thunderball, but since 1965 he has only made the 1983 film Never Say Never
Again, which Mr. McClory claimed was a remake of the film Thunderball.
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On October 13, 1997, Sony issued a press release announcing plans by its
Columbia Pictures division to produce a series of new James Bond feature films
based on works created by Mr. Fleming, Mr. McClory and John Whittingham. On
November 17, 1997, the Company and Danjaq filed an action in federal court in
Los Angeles against Sony Corporation, Sony Pictures Entertainment Inc.,
Columbia Pictures Industries, Inc., John Calley, Kevin McClory and Spectre
Associates, Inc. seeking declaratory and injunctive relief and/or damages for
copyright infringement, trademark dilution, slander of title, unfair
competition, inducing breach of contract and breach of fiduciary duties, and
misappropriation of trade secrets. On January 23, 1998, the Company and Danjaq
filed an amended complaint adding claims for trademark infringement, federal
unfair competition and California trademark dilution. Among other things, the
Company and Danjaq contend not only that Mr. McClory's rights were limited to
remaking Thunderball but that even those rights have expired under U.S. law
pursuant to the doctrine of Stewart v. Abend, 495 U.S. 207 (1990) and that Mr.
McClory's rights have been recently acquired by Danjaq. See "Item 3. Legal
Proceedings."
The Company seeks to aggressively market and distribute titles in the
Library in existing pay and free television, home video and other markets
worldwide, as well as through developing technologies. Rather than selling its
titles on a single or multi-picture basis, the Company strives to pool
strategically its motion picture and television titles into cohesive
programming packages directed at specific markets, including purchasers of
large quantity programming and services in emerging markets which may not have
their own programming capabilities. The Company believes that the development
and growth of direct broadcast satellite ("DBS") and other new distribution
systems may generate significant incremental profits for the industry as the
number of channels requiring content grows. The Company believes that, with
its extensive Library and its branded programming strategy, the Company is
well positioned to benefit from such growth and development. As opportunities
arise, the Company expects to consider acquisitions, including acquisitions to
expand the Library or to obtain new distribution channels.
The Company has differing types of rights to the various titles in the
Library. In some cases, the Company owns the title outright, with the right to
exploit the title in all media and territories for an unlimited time. In other
cases, the title may be owned by a third party and the Company may have
obtained the right to distribute the title in certain media and territories
for a limited term. Even if a title is owned by the Company, the Company may
have granted rights to exploit the title in certain media and territories to
others. The Company owns outright, or has been granted rights in perpetuity
to, approximately 50 percent of the titles in the Library. The Company's
rights in the other titles are limited in time and, pursuant to the terms of
the existing arrangements, the rights granted to the Company expire with
respect to approximately 15 percent of the Library over the next five years
(i.e. through the year 2002), with respect to another approximately 17 percent
over the five years thereafter (from 2002 to 2007), and with respect to
another approximately 15 percent over the ten years thereafter (from 2007 to
2017). The Company has generally been able to renew such rights on acceptable
terms, however no assurances can be made that it will continue to be able to
do so in the future. In accordance with industry practice, for purposes of
calculating the size of the Library, the Company includes any title that the
Company has the right to distribute in any territory in any media for any
term. The only material exception to the foregoing practice is that, even
though the Company has home video distribution rights through 2001 with
respect to approximately 2,950 titles owned by Turner, the Company does not
include such titles in calculating the number of titles in the Library.
Due to certain long-term pre-paid licenses entered into by prior management,
the Company does not expect to receive significant revenue with respect to
substantial portions of its Library from domestic free and certain major
international television markets for the next several years. This includes
many of the most valuable titles in the Library, including approximately 50
percent of the pre-1990 MGM and UA titles, which have been licensed in one or
more of the U.S., France, Spain and Germany, and less than 50 percent of the
Orion titles, which have been licensed in one or more of France, Spain,
Germany and the United Kingdom. See "--Distribution--Pay and Free Television
Distribution." The Company expects to benefit as certain rights to the Library
that have been previously licensed to others revert to the Company over time.
See "--Distribution--Home Video Distribution" and the discussion above.
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PRODUCTION
MOTION PICTURE PRODUCTION
The Company currently develops and produces theatrical motion picture
projects through two separate production entities, MGM Pictures and UA
Pictures. The Company operates these production units independently with
separate management teams and allows them to compete directly for the best new
projects on the creative side of the business. At the same time, the Company
supports the units with the benefits of centralized marketing, sales, legal,
physical production and distribution functions. Direct access to senior
management also expedites major decision-making. By utilizing its two separate
production units, management believes that the Company benefits from the
distinct creative talents and perspective of each of its chief production
executives, resulting in greater diversity within its overall release slate.
Through these production units, the Company plans to produce or co-produce
and distribute between approximately ten and 12 motion pictures annually
across a variety of genres and budget ranges and release approximately four to
six additional pictures each year that are produced by other producers. Both
production units employ a development staff of creative executives who work to
refine concepts and scripts so that projects are developed to the point that
production decisions can be made. The creative staffs of both MGM Pictures and
UA Pictures currently have approximately 100 ongoing projects in the
aggregate, which are in various phases of development and pre-production. The
Company's current strategy is to have fewer projects in development at any one
time than the other major studios in order to concentrate its efforts and
assets on the projects that management believes could be the most commercially
successful. The Company believes that this strategy will result in lower
development related write-offs and abandonment costs. Historically, the
Company's development related write-offs and abandonment costs were $21.2
million, $11.6 million and $19.5 million in the years ended December 31, 1997,
1996 and 1995, respectively.
Additionally, the Company plans to release approximately four to six
specialty motion pictures each year through Goldwyn. These motion pictures
will be produced or co-produced by Goldwyn or acquired through negative
pickups or other distribution arrangements and will include motion pictures in
a variety of genres generally involving producers and directors, writers or
other talent who typically work outside of the major studio system. The
Company's investment in such pictures is expected to be significantly less
than the Company's investment for pictures produced through MGM Pictures or UA
Pictures. The Company believes that this strategy of releasing independent
motion pictures will add greater diversity to the Company's release slate and
enhance the Library both through the addition of new film product and the
building of relationships with up-and-coming producers and directors, writers
and other talent.
In order to manage the financial risks inherent in motion picture
production, management has developed a rigorous budgeting and approval process
and strictly controls the cost of each motion picture through active
management involvement in all phases of the production process. When a project
is considered to have commercial potential, budgets are developed
independently by the physical production department to determine the below-
the-line cost of a motion picture. At a point early in this process, a
preliminary below-the-line estimate is combined with potential above-the-line
costs, such as talent costs and participations, to form a model of the total
cost of the motion picture. The Company then performs sensitivity analyses to
determine the motion picture's potential ROI. The ROI range is developed using
a preliminary cost model together with a revenue model based on the picture's
budget, genre, cast, international appeal and other factors. The Company
believes that, as a result of its focus on budgeting and controlling
production expenditures, it will be able to avoid unnecessary cost-overruns
and excess expenditures. The Company (like most major motion picture studios)
generally does not obtain "completion bonds" from outside insurers to protect
itself against budget overruns and completion delays.
The Company believes that it pursues fewer producer or talent "overhead"
arrangements, in which a studio pays a portion of the overhead of creative
talent (i.e., producer, director or actor) for the right to receive a "first
look" at that party's projects, than other major studios. In general, the
Company believes that its capital resources are better allocated to acquire
literary property or the services of talent for a specific project than to
fund overhead.
9
The Company does not own any studio facilities or stages but rather leases
facilities and sound stages on an "as needed" basis in connection with the
production of specific motion picture and television projects. The Company has
not experienced any difficulties in leasing appropriate facilities and sound
stages when needed.
Motion picture production and distribution is highly speculative and
inherently risky. There can be no assurance of the economic success of any
motion picture since the revenues derived from the production and distribution
of a motion picture (which do not necessarily bear a direct correlation to the
production or distribution costs incurred) depend primarily upon its
acceptance by the public, which cannot be predicted. The commercial success of
a motion picture also depends upon the quality and acceptance of 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.
Further, the theatrical success of a motion picture is generally a key factor
in generating revenues from other distribution channels. There is a
substantial risk that some or all of the Company's motion pictures will not be
commercially successful, resulting in costs not being recouped or anticipated
profits not being realized. Based on the Company's current business plan for
next five years, its annual release slates may be comprised of proportionately
fewer large budget "event" motion pictures than the current release slates of
the other major studios.
10
The following table details the Company's current 1998 release schedule.
RELEASE SCHEDULE
APPROXIMATE
TITLE RELEASE DATE SUMMARY PRINCIPAL ACTORS
- ------------------------ ------------- -------------------------- --------------------------
Live Flesh.............. Released Pedro Almadovar's latest Javier Bardem, Liberto
look at love and sex Rabal, Francesca Neri,
Angela Molina, Jose
Sancho
Deceiver................ Released Suspenseful thriller about Tim Roth, Chris Penn,
a murder investigation and Michael Rooker, Renee
the web of lies that Zellweger, Ellen Burstyn,
surrounds it Rosanna Arquette
Hurricane Streets....... Released Disturbing look at modern- Brendan Sexton III, Isidra
day youth Vega, Shawn Elliott
I Love You Don't Touch
Me..................... Released A bold romantic comedy Marla Schaffel, Mitchell
Whitfield, Meredith Scott
Lynn, Michael Harris
The Man in the Iron
Mask(2)................ Released Period piece based on the Leonardo DiCaprio, John
Alexandre Dumas novel Malkovich, Jeremy Irons,
Gerard Depardieu, Gabriel
Byrne
Welcome to Woop Woop.... April 1998 Twisted road comedy from Johnathon Schaech, Rod
the director of "The Taylor, Susie Porter, Dee
Adventures of Priscilla, Smart
Queen of the Desert"
Species II(1)........... April 1998 Sequel to the successful Michael Madsen, Marg
1995 film Helgenberger, Natasha
Henstridge
Music From Another Room. April 1998 Romantic comedy about a Brenda Blethyn, Jude Law,
man's search for his one Jennifer Tilly, Martha
true love Plimpton
Hanging Garden.......... May 1998 A 25-year old gay man Chris Leavins, Kerry Fox,
returns to his Seana McKenna, Peter
dysfunctional family in McNeill, Troy Veinotte
Nova Scotia after a 10-
year absence
Dirty Work(1)........... May 1998 Comedy about the revenge Norm Macdonald, Chevy
business Chase, Jack Warden, Don
Rickles
Be the Man(1)........... July 1998 Comic Super Dave Osborne Dave Osborne, Don Lake,
attempts to leave his Fuji, Mike Walden
bumpy career as a hapless
stuntman and open up a
school for would-be fall
guys
Disturbing Behavior(1).. August 1998 A teen thriller about a James Marsden, Nick Stahl,
new kid in town who Katie Holmes
discovers the town's evil
method of turning
rebellious teens into
wholesome overachievers
At First Sight(1)....... October 1998 Based on the true story by Val Kilmer, Mira Sorvino,
Oliver Sacks (Awakenings) Kelly McGillis, Nathan
of a blind man whose sight Lane, Steven Weber, Ken
is restored and the Howard, Bruce Davison
effects it has on him, his
sister and the woman he
loves
Ronin(2)................ November 1998 John Frankenheimer directs Robert DeNiro, Jean Reno,
an action-adventure about Sean Bean, Jonathan
a team of international Pryce, Stellan Skarsgard,
agents hired to carry out Natasha McElhone
a dangerous mission
Supernova(2)............ December 1998 Science-fiction thriller James Spader
about a medical spaceship
that responds to a
distress signal and takes
on a mysterious passenger
- --------
(1) Developed and produced by MGM Pictures.
(2) Developed and produced by UA Pictures.
11
The Company may revise the release date of a motion picture as the
production schedule changes or in such a manner as the Company believes is
likely to maximize revenues. Additionally, there can be no assurance that any
of the motion pictures scheduled for release will be completed, that
completion will occur in accordance with the anticipated schedule or budget,
or that the motion pictures will necessarily involve all of the creative
talent listed above, as the production, completion and distribution of motion
pictures are subject to numerous uncertainties including financing
requirements, personnel availability (see "--Employees") and the release
schedule of competitive motion pictures.
TELEVISION PRODUCTION
Through MGM Worldwide Television Group, the television production and
distribution unit of MGM Studios, the Company is engaged in the development
and production of episodic television series, mini-series and movies for
distribution on domestic and international television networks, local
independent and network-affiliated television stations, pay television
networks, basic cable networks and home video. Since the re-establishment of
its television series production operations in 1994, the Company has obtained
commitments for approximately 820 hours of television programming, of which
approximately 50 percent remained to be aired as of December 31, 1997.
Historically, the Company's television activities were focused on the
traditional network production business and made-for-television movies, and
many of the television programs in the Library were produced as network
series. Since the networks have substantially lowered the license fees as a
percentage of the budget for network television programming in recent years,
resulting in significantly larger production investment risks for the
producers of such programming, the Company altered its television strategy in
1994 when the Company's management re-established the Company's television
series production operations. See "--The Motion Picture and Television
Industry."
Since 1994 the Company has focused primarily on the development and
production of series for the first-run syndication business, which involves a
lower production investment risk for the Company, and movies and mini-series
for both network and off-network broadcasters. The Company's strategy is
designed to (i) minimize up-front capital investment through the production of
series for the first-run syndication business and through co-production
arrangements, (ii) minimize risks associated with large deficit financing by
developing product such as two-hour movies or mini-series that generally offer
stable, predictable cash flows, (iii) use valuable Library assets such as The
Outer Limits, Poltergeist, Stargate, All Dogs Go to Heaven, Fame and The
Magnificent Seven to develop recognizable products with enhanced marketability
at a reduced cost and (iv) develop alternative types of programming, such as
animated cartoon strips, talk shows, variety shows and reality-based
programming such as LAPD--Life on the Beat.
As part of its strategy, the Company has entered into a programming
arrangement with Showtime whereby the Company provides television series and
movies for premiere on Showtime. Showtime has agreed to license exclusive U.S.
pay television rights to the following television series: (i) 122 hours (one-
hour and two-hour episodes) (six seasons) of The Outer Limits (winner of the
Cable Ace award for Best Dramatic Series in 1995 and 1996) of which 56 hours
remained to be aired as of December 31, 1997; (ii) 66 episodes (three seasons)
of Poltergeist: The Legacy of which 22 episodes remained to be aired as of
December 31, 1997; (iii) 88 episodes (four seasons) of Stargate-SG1 of which
76 episodes remained to be aired as of December 31, 1997; and (iv) three new
series (one of which series will be for a minimum commitment of 44 episodes
and two of which series will be for a minimum commitment of 22 episodes) to be
produced by the Company for Showtime, with one new series to commence
broadcast in each of 1999, 2000, and 2001. Showtime has also committed to a
two-hour pilot for Species, a possible television series based on the
theatrical motion picture of the same name. The Company has also acquired
worldwide (excluding Canada) distribution rights to the Showtime series Dead
Man's Gun (a Cable Ace nominee for Best Dramatic Series in 1997). Twenty-two
new episodes of such series will be produced, giving the Company a minimum of
44 episodes that have not previously been distributed outside North America.
Additionally, the Company has obtained a commitment from Fox Family Channel
to license 40 episodes of All Dogs Go to Heaven, a half-hour animated series,
which commitment includes a production order for 14 new
12
episodes. The series is scheduled to air beginning in fall 1998. The Company
has also entered into agreements to produce for U.S. broadcast syndication
(i.e. licenses to individual television stations) 40 half-hour episodes of
Robocop: Alpha Commando, an animated series based on the feature motion
picture Robocop, and 13 half-hour episodes of The Lionhearts, an animated
series based on Leo, the familiar MGM lion, and his cartoon "family."
Furthermore, the Company has produced 22 episodes of Fame L.A. for U.S.
broadcast syndication in markets throughout the U.S. comprising approximately
90 percent of television households.
The Company recently expanded its focus to produce series for network
television on a selective basis, which typically require deficit financing but
generally offer the potential for greater financial return. In its first sale
of a series to network television since 1994, the Company has produced a two-
hour pilot and eight episodes of The Magnificent Seven for CBS as a midseason
1997/98 series, with all of the episodes to air before the end of April 1998.
Also, the Company has obtained a commitment from Paxson Communications
("Paxson") to license 88 episodes of Flipper, a one-hour series, which
commitment includes a production order for 44 episodes. The series is
scheduled to air beginning in fall 1998 on Paxson's PAX NET network, comprised
principally of owned and operated stations which cover approximately 65
percent of television households.
Since the Company's ability to recover production costs and realize profits
on its television programs depends on various factors, including but not
limited to the programs' acceptance by the public, prevailing advertising
rates, and the ability to distribute the programs into licenses subsequent to
their first run license, there can be no assurance that the Company can
recover the production costs or realize profits on any television series.
DISTRIBUTION
THEATRICAL DISTRIBUTION
General. The initial step in the release of a motion picture is the booking
of engagements with theatrical exhibitors. The exhibitors retain a portion of
the admissions paid at the box office, which generally includes a fixed amount
per week, as well as a percentage of the admissions that escalates over time.
A studio's or other producer's (or third party distributor's) share is
approximately 50 percent of gross box office admissions, although such
percentage, which has generally decreased in recent years, varies depending
upon factors such as the number and box office performance of such studio's or
other producer's recent releases. Although the lack of production during the
Sale Period may have adversely affected the Company's relationship with major
domestic exhibitors, the Company believes that its exhibitor relationships and
negotiated share of box office receipts will improve to the extent that it
achieves box office success with the films in its 1998 release slate.
The Company intends to release a slate of films appealing to a wide variety
of audiences. By strategically timing the release of its motion pictures
throughout the year, the Company intends to avoid some of the risks posed when
a motion picture is inappropriately released during the most crowded and
competitive box office seasons. The Company believes that this strategy is
unlikely to have a negative impact on its ability to generate home video
rentals.
All motion pictures that are released theatrically by the Company in the
U.S. and Canada, whether produced by MGM Pictures or UA Pictures or third
parties, are marketed and distributed by Metro-Goldwyn-Mayer Distribution Co.
Additionally, the Company generally distributes its motion pictures in
theatrical markets outside of the U.S. and Canada through United International
Pictures ("UIP"), a partnership owned equally by the Company, Paramount and
Universal. UIP is the world's largest theatrical motion picture distribution
company outside the U.S., with distribution activities in over 50 countries.
UIP has a cost sharing arrangement that requires each partner to be
responsible for one-third of UIP's annual operating overhead. UIP charges each
partner a distribution fee of 35 percent of gross theatrical receipts until
the fee equals one-third of the annual operating costs of the partnership, and
thereafter a negotiated percentage of any additional gross receipts as a fee
for incremental use of the organization. Each partner bears all of its own
releasing costs and retains all cash flow from its pictures after payment of
fees.
13
The Company can elect to withdraw from UIP on November 1 of any year with at
least one year's prior notice (although the Company has no current intention
to withdraw). If the Company, or either other partner, withdraws, that partner
is entitled to one-third of the book value of UIP less one-third of the
estimated winding down costs of the partnership. Both Universal and Paramount
have agreed not to withdraw from the partnership until after 2001; however,
the Company believes that either party's exit from UIP would not have a
material adverse effect on the Company's financial condition or results of
operations, as the Company would expect to distribute its motion pictures in
these territories by either modifying and downsizing the UIP structure or
finding or developing satisfactory alternative methods for international
distribution. There can be no assurance, however, that such alternatives would
not result in decreased revenues or profitability. The partners are prohibited
from transferring their respective partnership interests. UIP has recently
received a "Statement of Objections" from the Competition Directorate of the
Commission of European Communities. See "--Regulation."
Co-Production and Distribution Agreements. In addition to producing feature
motion pictures independently, the Company occasionally enters into co-
production agreements under which the Company retains certain distribution
rights with respect to a picture and shares the cost of production with a
partner that obtains other rights (generally outside of the U.S. and Canada).
While such agreements limit the Company's risk relating to a motion picture's
performance as they reduce the Company's production costs, such agreements
also limit profitability. The Company also acquires rights to distribute films
through negative pickup arrangements under which the Company acquires a
completed motion picture, or certain rights therein, from a third party. Under
co-production or negative pickup arrangements, the Company may be committed to
spend specified amounts for prints and advertising. Additionally, the Company
occasionally enters into "rent-a-system" arrangements under which the Company
provides distribution services to an independent film company for a percentage
distribution fee. Under rent-a-system arrangements the independent film
company generally is responsible for all print and advertising costs. These
types of arrangements may be entered into before, during or after production
of a particular motion picture.
Theatrical Marketing. The Company's theatrical marketing department consists
of five functional groups: research, media planning, advertising, promotion
and publicity. The objective of the marketing department is to maximize the
Company's ROI on each motion picture by designing and implementing a marketing
campaign tailored to appeal to the picture's most receptive audience. The
marketing process begins with research before a motion picture is completed.
The research department determines, through audience screenings and focus
groups, a motion picture's appeal to its most likely target audience. The
marketing group begins to develop media plans and marketing materials well in
advance of a motion picture's scheduled theatrical release. The media campaign
generally begins six months before release with the circulation of teaser
trailers, posters and exhibitor advertising materials. The campaign becomes
more aggressive two to three months before release as full-length trailers are
released in theaters and more significant materials are sent to exhibitors.
Finally, a national campaign is launched four to five weeks before opening
day. This media campaign generally involves advertising a picture's release on
national television, including network prime time and syndication markets,
national cable and radio and in magazines, newspapers and specific target
markets, such as colleges. In addition, public appearances, such as television
talk shows, are arranged for a picture's stars in order to promote the film.
The entire process is managed by the Company's in-house staff, although
outside agencies are frequently retained to provide creative input.
HOME VIDEO DISTRIBUTION
The Company's marketing and distribution strategy in the home video market
domestically and internationally is to (i) market its motion picture and
television titles in cohesive packages, (ii) create branded product lines,
(iii) adapt to a maturing home video market and (iv) release new motion
pictures into the home entertainment market at the time of the year that it
believes will generate the most sales without diminishing revenues from other
markets. Under current management, the Company has repackaged and repriced a
number of Library titles through the creation of various branded lines.
Examples of these branded lines include MGM Movie Time, Contemporary Classics,
Screen Epics, Vintage Classics and Musicals. The Company believes this
strategy has resulted in increased shelf space in video retail stores and has
led to increased sales. Such strategy
14
will be carried over to the Orion library as Orion titles will be integrated
into two current MGM collections, Movie Time and Contemporary Classics. In
addition, new branded lines such as Soul Cinema and World Films will exploit
the strengths of the Orion library. Additionally, the Company will release the
Library films, or groups of the Library films, in connection with new films
which it releases into the market, in order to increase sales of both the
Library films and new releases. An example is the recent European James Bond
video campaign, whereby the Bond catalog has been repromoted in conjunction
with the theatrical release of Tomorrow Never Dies. The Company intends to
continue this strategy of packaging groups of films or film franchises and
releasing them in connection with the releases of its most highly visible new
films. The Company also intends to utilize new formats for home video sales,
such as the successful "infomercials" for James Bond and Elvis Presley videos,
the first in the motion picture business.
MGM Home Entertainment Inc. ("Home Entertainment") manages the marketing and
distribution of both current feature motion pictures and Library product of
MGM Studios and its subsidiaries in the home video and other home
entertainment markets. In addition, the Company has an agreement with Turner
pursuant to which the Company distributes the Turner library, the Old MGM
Library and all pre-1949 Warner titles in worldwide home video markets, for a
total of approximately 2,950 titles. The Company's rights under this agreement
with Turner expire in June 2001. As more fully described below, these titles
as well as the current pictures and Library product of MGM Studios and its
subsidiaries, and any theatrical motion picture in which MGM Studios or, with
certain exceptions, one of its affiliates acquires home video rights, are
serviced pursuant to the WHV Agreement (as defined below).
In 1990, as part of the acquisition of MGM/UA by Pathe, MGM-Pathe (the
predecessor in interest to MGM Studios), MGM/UA and UA Pictures, Inc.
(collectively, the "Parties") entered into an agreement (as amended, the "WHV
Agreement") with Warner Home Video, Inc. ("WHV"). Under the WHV Agreement, the
Parties have granted to WHV certain home video distribution rights with
respect to new motion pictures and the motion picture library of MGM/UA, UA
and their respective affiliates, subject to certain limited exceptions,
throughout the world for a distribution fee expressed as a percentage of
worldwide home video revenues (as determined under the WHV Agreement) and
reimbursement of certain distribution expenses. In general, the percentage
varies from 10 percent to 15 percent based upon the amount of worldwide home
video revenues in any calendar year and other factors. MGM Studios and its
affiliates maintain direct control of all significant elements of distribution
such as the determination of release dates, marketing, return policies and
pricing for these home video releases. Laser disc and digital video disc
("DVD") distribution rights are also covered by the WHV Agreement.
The WHV Agreement expires in May 2003, with the home video rights of each of
the films still covered by the WHV Agreement at that time reverting to MGM
Studios or its affiliates five years after the film's initial availability in
the U.S. home video market. Management believes that the Company will be able
to manage home video distribution in a more cost-effective manner and increase
sales and profitability upon the expiration of the WHV Agreement. Even with
the agreement in effect, the Company's home video sales have increased since
1993. From 1993 to 1997, the Company increased its annual worldwide home video
gross revenue from feature films by 44 percent, from $243.0 million to $350.5
million. The Company believes that this increase is a result of more effective
and efficient marketing by the Company, the renegotiation by the Company of
key vendor relationships and a reorganization of the Company's distribution
infrastructure. The Company continues to seek beneficial renegotiation of
vendor relationships. For example, the Company believes it will achieve cost
savings as a result of its renegotiated deal in December 1997 with the
Company's domestic video duplicator, MediaCopy. The Company believes that 1997
was a transitional period for the home video division as revenues were reduced
by the lack of first-run rental product resulting from the slowdown in
production that accompanied the sale of MGM Studios in 1996.
The WHV Agreement provides that it applies (with certain exceptions
discussed below) to (i) all motion pictures owned or controlled by the Parties
or their affiliates prior to the date of the WHV Agreement, (ii) new motion
pictures financed, developed, produced, owned and/or acquired by the Parties
or any of their present or future affiliates during the term of the agreement
and (iii) all other motion pictures as to which the Parties or any
15
of their present or future affiliates own, control or acquire any home video
rights during the term of the agreement. In general, the WHV Agreement
requires that the Parties and their present and future affiliates acquire home
video rights for any motion picture in which they acquire theatrical and/or
television rights in any given territory, unless WHV otherwise agrees. With
respect to licenses existing on such product prior to the date of acquisition,
the Parties have agreed to allow such rights to expire or terminate such
rights when and to the extent permitted. The Parties have limited termination
rights for WHV's failure to make certain payments or to provide certain
accountings.
Orion manages the marketing and distribution of both current feature motion
pictures and library product of the Orion Companies in the home video markets,
except for the library product of Goldwyn. Goldwyn has licensed to Hallmark
Entertainment Distribution Company, Inc. ("Hallmark") the right to distribute
in the U.S. home video market substantially all of the Goldwyn library. The
term of Hallmark's license of each of its library pictures expires on the
later of five and a half years after the date of the picture's initial
availability in the U.S. home video market or Hallmark's recoupment of its
advance under the license, but no later than June 30, 2005. In November 1997
the Company and Hallmark terminated an output agreement with Hallmark which
covered feature motion pictures produced or acquired by Goldwyn between May
1995 and April 2000.
The WHV Agreement expressly provides that WHV's rights do not extend to,
among other things, motion pictures owned, produced or released by any of a
defined list of other major studios in the event that any of the Parties or
any of their affiliates acquires control of any such major studio (so long as
substantially the same quality and quantity of motion pictures are produced
that are covered by the WHV Agreement following the acquisition as prior to
the acquisition) and specifically names Orion as well as others as major
studios. Despite this provision, MGM Studios has received correspondence from
WHV alleging that the Orion Companies' future production and library is
subject to the WHV Agreement. The Company has responded by referring to the
express Orion exclusion and is currently in discussions with WHV about this
matter. No assurance can be made as to the outcome of this matter. To the
extent that the future production and library films of the Orion Companies, or
any future affiliate of MGM Studios, were determined to be subject to the WHV
Agreement, there would likely be a reduction in the revenue and profits from
the distribution of that product.
As of February 1998, Home Entertainment has completed the release of the
first slate of Orion rental product, including the titles 8 Heads in a Duffel
Bag, City of Industry and Gang Related. Additionally, Home Entertainment has
also acquired and distributed the sell-through release of Garth Brooks Live in
Central Park under the Orion label.
The Company intends to capitalize on developing technologies such as DVD, a
high-quality mass-produced delivery system for video and audio data. The
Company believes that DVD is a promising technology that could generate
significant incremental profits for the industry because the cost of
manufacturing DVDs is substantially less than the cost of manufacturing
videocassettes and the format may be more attractive to retail purchasers than
videocassettes. The Company was among the first major studios to make titles
available on DVD. The Company's GoldenEye was the second highest selling DVD
title in consumer sales across all distributors through December 1997. The
Company believes that it is well positioned to benefit if DVD is successful,
since the high quality of DVD is expected to create additional demand for the
many classic or familiar "collectible" titles in the Library. As DVD is a
developing technology, it is uncertain when and if DVD will become viable and,
therefore, the Company has only projected modest incremental revenue in its
1998 business plan from the technology.
PAY AND FREE TELEVISION DISTRIBUTION
General. The Company generally licenses its current theatrical motion
pictures for pay and free television through output agreements pursuant to
which films not yet produced are pre-licensed for a specified fee paid on
delivery. The Company believes that output agreements with international
distributors with recognized expertise are beneficial as they assure that a
significant advance will be received for a given territory and that a
prominent distributor with recognized distribution and marketing capabilities
will distribute the picture in such territory.
16
The Company currently has a long-term output agreement with a subsidiary of
Seven. See "Item 13. Certain Relationships and Related Transactions."
The Company expects to enter into relatively short-term licenses of its
Library motion pictures for pay and free television in packages that are
strategically designed for the relevant marketplace. The Company has created a
proprietary database for use by its salesforce which contains detailed
information on each of the Company's films, including dates of availability,
media controlled by the Company, sales history, genre, format, length, stars,
soundtrack, etc. This information can be utilized by the sales force in order
to create strategically designed packages of motion pictures based on one or
more various criteria. The Company believes that this system is the most
advanced in the entertainment business and provides its sales force with an
advantage in a competitive marketplace that requires large amounts of diverse
content and is becoming more receptive to packaged programming.
Previously, the Company had distributed its motion pictures in pay
television markets outside of the U.S. and Canada through UIP. However, as
part of an agreement reached between UIP and the competition authorities of
the European Union in 1997, UIP agreed that it will no longer engage in the
licensing or marketing of motion picture product for pay television, and the
Company now licenses its motion pictures to such markets directly. See "--
Regulation."
Domestic Pay Television. The Company and Showtime have entered into a
theatrical motion picture output agreement requiring the Company's future
theatrical motion pictures to air on Showtime's pay television network. The
first output period expires upon the first to occur of August 31, 2001 or the
delivery of 150 pictures (other than specialty pictures) under the agreement.
As of December 31, 1997, the Company had delivered 27 pictures to Showtime.
The second output period commences on September 1, 2001 and expires upon the
first to occur of December 31, 2003 or the delivery of 65 additional pictures
(other than specialty pictures). Additionally, the agreement requires the
Company's future specialty pictures (i.e., pictures released under the Goldwyn
logo) to air on Showtime's pay television network. The output period for
specialty motion pictures expires upon the first to occur of December 31, 2003
or the delivery of 50 specialty motion pictures. The license fees for each
picture are determined according to a formula based on U.S. theatrical rentals
of such picture, with special provisions applicable to the specialty motion
pictures.
Orion and Home Box Office ("HBO") have entered into a theatrical motion
picture output agreement requiring future theatrical motion pictures produced
and distributed by the Orion Companies (excluding pictures produced by Goldwyn
and distributed under both the prior and current Goldwyn logo) to air on HBO's
pay television network. The license fees for each picture are determined
according to a formula based on U.S. theatrical rentals of such picture. The
agreement expires on December 31, 2001, but HBO has the right to extend the
agreement through December 31, 2006.
Domestic Free Television. The Company distributes its feature motion
pictures to U.S. and Canadian networks, local television stations in the U.S.
and Canada and basic cable networks. The Company also generates rrevenue by
granting syndication licenses on a barter basis. Barter syndication allows the
television stations to license the Company's product in exchange for a portion
of the local commercial air time. The Company, in turn, sells the inventory of
commercial air time to advertisers on a national basis, while the television
stations retain a portion of the commercial air time for local advertisers.
The Company has used outside barter companies to sell television spots to
advertisers in the past, but the Company commenced its own barter sales
business in 1996.
In connection with the acquisition of MGM/UA by Pathe in November 1990, MGM-
Pathe licensed the domestic free television rights to a substantial portion of
its library (the UA library and the post-1986 MGM/UA titles in theatrical
release at the time) and selected television programs to Turner for a period
of ten years beginning from the availability of each such product in that
market. The license excludes motion pictures released theatrically after 1987.
With respect to most of the motion pictures and television programming covered
by the license, the domestic free television rights revert to the Company
between 2000 and 2003. The Company
17
expects to receive relatively little revenue from the licensing of the product
covered by the agreement with Turner in the domestic free television market
until 2000. The Company believes that, due to the significant increases in
licensing fees for domestic television since 1990, the expiration of the
Turner license and the subsequent ability of the Company to freely license the
Library in this market will generate incremental revenue for the Company,
however there can be no assurance that sales or profitability will increase
after these agreements expire.
International Pay and Free Television. The Company currently distributes its
motion pictures through pay television licenses in over 90 territories. The
Company has output agreements with licensees in major territories, including
the United Kingdom, Spain, Italy, Germany, Japan and Brazil. In 1997 the
Company received $58.8 million in revenue from international pay television
distribution, accounting for seven percent of the Company's total revenue for
the year.
The Company currently distributes its motion pictures and television product
through free television licenses in over 100 territories. In 1997 the Company
received $120.1 million in revenues under these agreements, accounting for 14
percent of the Company's total revenues for the year. These license
arrangements typically provide licensees with the right to exhibit the
licensed motion pictures on television for a specific number of airings over a
period of three to seven years.
However, in connection with the acquisition of MGM/UA by Pathe in November
1990, MGM-Pathe entered into long-term licenses of pay and free television
rights for theatrical and television movies and, in some cases, television
series in its Library at that time with United Communications (France) and
F.O.R.T.A. (Spain). A similar agreement had been entered into in 1984 with
Degeto Film (Germany). Substantially all of the license fees under these long-
term licenses have already been paid to the Company, and, therefore, the
Company does not expect to receive significant revenue from these licenses in
future periods. With respect to most of the motion pictures licensed to United
Communications, the rights granted revert to the Company between 2000 and
2003. The James Bond features were excluded from such license. With respect to
most of the motion pictures licensed to F.O.R.T.A., the free television rights
revert to the Company between 1997 and 2000. With respect to most of the
motion pictures and television series licensed to Degeto Film, the
distribution rights granted revert to the Company between 1999 and 2010.
Additionally, Orion has entered into certain long-term licenses covering a
significant number of its library motion pictures in the international free
and pay television markets. Orion has already received substantially all of
the license fees under these licenses, and therefore, the Company does not
expect significant revenue from these licenses in future periods. Orion has
licensed titles to Capitol Film and TV International (Germany), Compagnie
Luxembourgeoise de Telediffusion (France), British Sky Broadcasting (the
United Kingdom), Film Finance Group, Inc. and Principal Network Limited
(Italy) and Televisio de Catalunya, S.A. (Spain). The distribution rights
granted to Capitol Film and TV International revert to Orion in 2025. The
distribution rights granted to Compagnie Luxembourgeoise de Telediffusion
revert to Orion between 2003 and 2013. The distribution rights granted to
British Sky Broadcasting are currently reverting to Orion, with such reversion
being complete in 2002. The distribution rights granted to Film Finance Group,
Inc. and Principal Network Limited revert to Orion between 1999 and 2012. The
distribution rights granted to Televisio de Catalunya, S.A. are currently
reverting to Orion, with such reversion being complete in 2010. The Company
believes that, due to the importance of France, Spain, Germany, the United
Kingdom and Italy and the significant increases in licensing fees for
television in these markets since 1990, the expiration of these licenses and
subsequent ability of the Company to freely license its Library in these
markets could create substantial incremental revenue for the Company. However,
there can be no assurance that sales or profitability will increase after
these agreements expire.
The MGM/UA and Orion licenses discussed above (in "--Domestic Free
Television" and "--International Pay and Free Television") cover many of the
most valuable motion pictures in the Library. Although the Company exploits
the remaining titles in the Library in these markets, they do not generate
significant revenues.
18
In addition to licensing packages of films, the Company holds equity
positions ranging from 12.5 percent to 25 percent in joint ventures such as
CineCanal, Telecine, Star Channel (through UIP) and MovieVision, which are
emerging international cable television networks broadcasting in different
territories around the world. The Company has entered into license agreements
with respect to each of CineCanal, Telecine, Star Channel and MovieVision,
licensing theatrical and television motion pictures and, in some cases,
television series to each of the ventures.
The Company believes its strategy of providing strategically pooled, branded
MGM programming through the licensing of programming packages to cable
networks and television broadcasters, as well as through the development of
new channels of distribution that deliver the Company's programming, will
provide opportunities in the international marketplace as foreign countries
continue to develop cable television infrastructures and satellite television
becomes more available.
In June 1996 the Company announced the creation of MGM Gold (Asia), a 24-
hour satellite and cable delivered Hollywood entertainment television channel
serving certain Southeast Asian territories as well as Hong Kong, Taiwan,
China and India. MGM Gold (Asia) features primarily movie product from the
Library. MGM Gold (Asia) is a joint venture between the Company and Encore
International, an indirect subsidiary of Tele-Communications, Inc., in which
each of the joint venturers shares equally in the profits of the venture and
each is obligated to fund 50 percent of the joint venture's expenses up to a
maximum of $23.3 million each, of which the Company had funded $11.3 million
as of December 31, 1997. Additionally, the Company's share of start-up losses
for the venture had totaled approximately $11.8 million as of December 31,
1997. As of December 31, 1997, MGM Gold (Asia) was being delivered to
approximately 1.9 million subscribers in Hong Kong, Indonesia, Malaysia, the
Philippines, Singapore, Thailand and Taiwan. The Company has entered into a
license agreement with MGM Gold (Asia) to license certain motion pictures and
trademarks to the venture. The recent deterioration in general economic
conditions in much of Asia poses a business risk to the venture. The future
direction of the venture is therefore subject to management's ongoing
evaluation of such risk and of the venture's performance to date.
The Company launched MGM Gold (Brazil), a 24-hour satellite and cable
delivered channel which features MGM film and television programming, on
December 14, 1997. MGM Gold (Brazil) is wholly owned by the Company. The
Company has entered into a distribution agreement with Net Brasil, the largest
cable owner and operator in Brazil presently serving approximately 70 percent
of current cable television households. The Company has recently entered into
an agreement with TVA Sistema de Televisao, the second largest cable owner and
operator in Brazil. In addition, the Company has agreements with Sky Latin
American and Galaxy Latin America, Brazil's two leading direct-to home
satellite services. With these four agreements in place, MGM Gold (Brazil)
will have access to distribution systems serving more than 90 percent of
Brazil's multi-channel television households.
TRADEMARKS AND CONSUMER PRODUCTS
The Company owns the registered trademarks Metro-Goldwyn-Mayer, MGM, United
Artists, UA, Orion and variations thereof, as well as trademarks, logos and
other representations of characters, such as The Pink Panther, from motion
pictures and television series produced or distributed by the Company. In
1997, the Company received $9.5 million in revenue from the licensing of these
trademarks, logos and other representations.
The Company believes that the MGM name and its lion logo are among the most
recognized in the world, evoking images of classic Hollywood. The Company
believes that the name and logo represent assets the value of which has been
substantially unrealized in the past. The Company plans to pursue a focused
branded strategy that will capitalize upon the Company's name and logo and
seek licensing opportunities for such name and logo, as well as other
trademarks of the Company, in a range of high quality product categories
(including gifts and apparel), distribution channels and venues.
In February 1980 Old MGM granted to a predecessor-in-interest to MGM Grand,
Inc., an affiliate of Tracinda, an exclusive open-ended royalty-free license
to use certain trademarks and trade names that include
19
the letters "MGM," as well as logos consisting of a stylized depiction of a
lion, in MGM Grand, Inc.'s hotel/gaming business and businesses that are not
entertainment-related. In 1986 MGM/UA granted MGM Grand Air, Inc. ("Grand
Air"), an affiliate of Tracinda, an exclusive open-ended royalty-free license
to use one of its logos consisting of a stylized depiction of a lion in Grand
Air's airline business. See "Item 13. Certain Relationships and Related
Transactions."
In June 1985 Old MGM granted to Walt Disney Productions ("Disney
Productions") an exclusive long-term worldwide license (the "Disney License")
to use all trademarks, trade names and logos of MGM Studios that do not
include "United Artists" or "UA" and materials from certain MGM and UA motion
pictures and television programming in movie theme parks of Disney Productions
that include a working movie production studio, as long as Disney Productions
makes the annual license payments. The Disney License becomes non-exclusive
with respect to the licensed trademarks, trade names and logos on May 1, 2004
and is subject to early termination under certain circumstances. Additionally,
if Disney Productions did not develop a movie theme park in any given
territory by June 27, 1994, the Disney License requires that Disney
Productions reconvey all the licensed rights in that territory to MGM Studios.
MGM Studios has requested the reconveyance of the licensed rights in all
territories except the U.S., and Disney Productions reconveyed those rights in
1995 for all territories except the U.S. and Western European territories in
1995. The Company filed a lawsuit against Disney Enterprises, Inc. ("Disney")
to compel the reconveyance of the licensed rights in Western Europe and for
termination of the Disney License, and, on November 5, 1997, received a jury
verdict in its favor with respect to the rights in Western Europe. The court
granted summary adjudication in favor of Disney denying the Company the right
to terminate Disney's U.S. rights under the Disney License. The Company has
appealed this aspect of the decision. See "Item 3. Legal Proceedings."
COMPETITION
Motion picture production and distribution are highly competitive
businesses. The Company faces competition from companies within the
entertainment business, as well as alternative forms of leisure entertainment.
The Company competes with the other major studios, numerous independent motion
picture and television production companies, television networks and pay
television systems for the acquisition of literary properties, the services of
performing artists, directors, producers and other creative and technical
personnel and production financing. Numerous organizations with which the
Company competes in the motion picture industry have significantly greater
financial and other resources than does the Company, while the independent
production companies may have less overhead than the Company. Most of the
other major studios are part of large diversified corporate groups with a
variety of other operations, including television networks and cable channels,
which can provide both means of distributing their products and stable sources
of earnings that offset the fluctuations in the financial performance of their
motion picture and television operations. See "--Distribution--Pay and Free
Television Distribution."
In addition, the Company's motion pictures compete for audience acceptance
and exhibition outlets with motion pictures produced and distributed by other
companies. As a result, the success of any of the Company's motion pictures is
dependent not only on the quality and acceptance of a particular picture, but
also on the quality and acceptance of other competing motion pictures released
into the marketplace at or near the same time. The number of films released by
the Company's competitors, particularly the other major film studios, in any
given period may create an oversupply of product in the market, thereby
potentially reducing the Company's share of gross box office admissions and
may make it more difficult for the Company's films to succeed.
Competition is also intense within the television industry. There are
numerous suppliers of television programming, including the networks, the
television production divisions of the major studios and independent
producers, all of which compete actively for the limited number of available
broadcast hours. The Company's programming competes with first-run
programming, network reruns and programs produced by local television
stations. Competition is also intense in supplying motion pictures and other
programming for the pay television and home video markets. Numerous
organizations with which the Company competes in the television industry have
significantly greater financial and other resources than does the Company.
20
The entertainment industry continues to undergo significant changes,
primarily due to technological developments. Due to this rapid growth in
technology, shifting consumer tastes and the popularity and availability of
other forms of entertainment, it is impossible to predict the overall effect
these factors will have on the potential revenue from and profitability of
feature-length motion pictures and television programming.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1020 full-time and
part-time regular employees in its worldwide operations. Of that total,
approximately 135 were primarily engaged in production and development,
approximately 315 were primarily engaged in sales, marketing and distribution
and approximately 565 were primarily engaged in management and administration.
Approximately 165 of the Company's employees are currently covered by
employment contracts. The Company also hires additional employees on a
picture-by-picture basis in connection with the production of the Company's
motion pictures and television programming. The salaries of these additional
employees, as well as portions of the salaries of certain full-time employees
of the Company who provide direct production services, are typically allocated
to the capitalized cost of the related motion pictures or television
programming. The Company believes that its employee and labor relations are
good.
Approximately 45 of the Company's current employees (and many of the
employees that the Company hires on a project-by-project basis) are
represented under industry-wide collective bargaining agreements with various
unions, including the Writers Guild of America ("WGA"), the Directors Guild of
America ("DGA"), the Screen Actors Guild ("SAG") and the International
Alliance of Theatrical Stage Employees. A strike, job action or labor
disturbance by the members of any of these organizations may have a material
adverse effect on the production of a motion picture or television program
within the U.S.
The collective bargaining agreement between SAG and the major studios
(including the Company) and other producers of motion pictures and television
product that are signatories to that agreement expires June 30, 1998. It is
possible that a new agreement may not be concluded between SAG and such
studios and other producers prior to such expiration, and, in such event, a
strike by the members of SAG may result. The Company may seek to adjust its
production schedule so as to reduce the impact of any strike. However, any
such strike, particularly if protracted, could have a material adverse effect
on the Company's business, financial condition and results of operations.
REGULATION
In 1994 the U.S. was unable to reach agreement with its major international
trading partners to include audiovisual works, such as television programs and
motion pictures, under the terms of the General Agreement on Trade and Tariffs
Treaty ("GATT"). The failure to include audiovisual works under GATT allows
many countries (including members of the European Union, which consists of
Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg,
The Netherlands, Portugal and the United Kingdom) to continue enforcing quotas
that restrict the amount of U.S. produced television programming which may be
aired on television in such countries. The European Union Council of Ministers
has adopted a directive requiring all member states of the European Union to
enact laws specifying that broadcasters must reserve a majority of their
transmission time (exclusive of news, sports, game shows and advertising) for
European works. The directive does not itself constitute law, but must be
implemented by appropriate legislation in each member country. In addition,
France requires that original French programming constitute a certain portion
of all programming aired on French television. These quotas generally apply
only to television programming and not to theatrical exhibition of motion
pictures, but quotas on the theatrical exhibition of motion pictures could
also be enacted in the future. There can be no assurance that additional or
more restrictive theatrical or television quotas will not be enacted or that
countries with existing quotas will not more strictly enforce such quotas.
Additional or more restrictive quotas or more stringent enforcement of
existing quotas could materially and adversely affect the business of the
Company by limiting the ability of the Company to exploit fully its motion
pictures internationally and, consequently, to finance such motion pictures.
21
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the U.S. and most foreign countries, which laws provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. The Company seeks to take appropriate and
reasonable measures to secure, protect and maintain or obtain agreements to
secure, protect and maintain copyright protection for all of its motion
pictures or television programming under the laws of applicable jurisdictions.
Motion picture piracy is an international as well as a domestic problem.
Motion picture piracy is extensive in many parts of the world, including South
America, Asia (including Korea, China and Taiwan), the countries of the former
Soviet Union and other former Eastern bloc countries. In addition to the
Motion Picture Association of America (the "MPAA"), the Motion Picture
Association, the American Film Marketing Association and the American Film
Export Association monitor the progress and efforts made by various countries
to limit or prevent piracy. In the past, these various trade associations have
enacted voluntary embargoes of motion picture exports to certain countries in
order to pressure the governments of those countries to become more aggressive
in preventing motion picture piracy. In addition, the U.S. government has
publicly considered trade sanctions against specific countries which do not
take steps to prevent copyright infringement of U.S. produced motion pictures.
There can be no assurance that voluntary industry embargoes or U.S. government
trade sanctions will be enacted. If enacted, such actions could impact the
amount of revenue that the Company realizes from the international
exploitation of its motion pictures depending upon the countries subject to
such action and the duration of such action. If not enacted or if other
measures are not taken, the motion picture industry (including the Company)
may continue to lose an indeterminate amount of revenues as a result of motion
picture piracy.
Article 85(1) of the Treaty of Rome prohibits certain agreements and
concerted practices which prevent, restrict or distort trade within the
European Union. In 1989 after several years of proceedings before the European
Commission, UIP received an exemption from Article 85(1) with respect to its
theatrical distribution activities in the European Union. In connection with
this exemption, UIP gave certain undertakings to the European Commission. The
1989 exemption expired in 1993 and, although UIP has filed an application
seeking renewal of such exemption, such renewal has not yet been granted. In
July 1996 the European Commission conducted unannounced visits of four of
UIP's offices in Europe, interviewing officers and copying documents. These
visits were based on complaints submitted to the European Commission by third
parties, to the effect that UIP was acting in an anti-competitive manner and
was not complying with certain of the undertakings given by it in connection
with receiving the 1989 exemption. In addition, on January 16, 1998, in
response to UIP's renewal application, the Competition Directorate of the
Commission of the European Communities issued a Statement of Objections. The
Statement of Objections indicates that, although a final decision has not been
taken, the Commission is of the opinion that the exemption granted to UIP in
1989 should not be extended and that UIP should be required to cease
operations in the European Union. There can be no assurances that the 1989
exemption will be renewed or renewed on terms acceptable to UIP. If the 1989
exemption is not renewed at all or not renewed on terms satisfactory to UIP
and UIP ceased operations, the Company believes that it would be able to find
or develop satisfactory alternative methods for international distribution,
although such alternatives may result in decreased revenues and profitability
from such distribution. See "--Distribution--Theatrical Distribution."
The Code and Ratings Administration of the MPAA assigns ratings indicating
age-group suitability for theatrical distribution of motion pictures. The
Company has followed and will continue to follow the practice of submitting
its pictures for such ratings. As a substantial number of the Company's films
are rated "R," under rules enforced by theatrical exhibitors, children under
certain ages may attend the applicable motion picture only if accompanied by
an adult.
United States television stations and networks as well as foreign
governments impose content restrictions on motion pictures which may restrict
in whole or in part exhibition on television or in a particular territory.
There can be no assurance that such restrictions will not limit or alter the
Company's ability to exhibit certain motion pictures in such media or markets.
22
ITEM 2. PROPERTIES
The Company leases approximately 300,000 square feet of office space, as
well as related parking facilities, for its corporate headquarters in Santa
Monica, California under several leases which generally expire in May 2003.
The Company also leases approximately 27,000 square feet in New York City for
its East Coast publicity, marketing and theatrical and television distribution
offices under a lease that expires in June 2004. Additionally, the Company
leases approximately 96,000 square feet of office space in Los Angeles,
California, which has been used by Orion, under a lease that expires in
January 2004. The monthly rent for the above properties is approximately $1.2
million in the aggregate (in addition to taxes, insurance and certain expenses
paid by the Company). The Company is in the process of subleasing the office
space used by Orion. In addition, the Company maintains relatively small
domestic theatrical and television distribution branches in Boca Raton,
Chicago, Montreal, San Juan and Toronto and has small international theatrical
and television distribution offices in London and Sydney. The Company recently
closed its Paris office and moved its European distribution operations to
London. The Company also leases studio facilities and stages from unaffiliated
parties on an "as-needed" basis in connection with the production of specific
motion picture and television projects.
The Company believes that its current facilities are adequate to conduct its
business operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
MGM Pictures and UA Pictures are named defendants in a matter entitled
Estate of Jim Garrison, et al v. Warner Bros., Inc., et al, which was filed as
a putative class action in the Los Angeles County Superior Court in November
1995. Warner, Paramount, Fox, Universal, Sony, Columbia Pictures Inc., Disney,
Disney Productions, Touchstone Pictures Inc., Hollywood Pictures Inc., Tri-
Star Pictures Inc. and the MPAA were also named as defendants in the action.
The plaintiffs in the action are the heirs of Jim Garrison, the former New
Orleans District Attorney who wrote the book "On The Trail of the Assassins"
upon which the Warner film JFK was based. The plaintiffs claim that the
defendant studios had conspired to fix the price and terms of contingent
compensation payable by the studios to actors, directors, producers, writers
and other "rights holders" (collectively identified as "talent"), through the
use of "standard net profits" provisions in contracts entered into with
respect to motion pictures produced by the defendant studios between January
1, 1988 and the date of the complaint.
In December 1995 the defendants removed the Garrison action to the U.S.
District Court for the Central District of California. MGM Pictures and UA
Pictures have denied all of the material allegations of the complaint and have
asserted 33 separate and additional defenses. The other studio defendants have
responded similarly. The court denied class certification with respect to the
plaintiffs' claims for breach of contract, breach of implied covenant, unjust
enrichment, imposition of constructive trust and declaratory relief, but
granted class certification with respect to the plaintiffs' claims for price
fixing under the Sherman Antitrust Act, price fixing under state law,
boycott/concerted refusal to deal under the Sherman Antitrust Act and
boycott/concerted refusal to deal under state law. The court subsequently has
announced that its grant of the plaintiffs' class certification motion may
have been "inadvertent," and has issued an order on its own motion requesting
briefing on the issue whether the class should be decertified. The briefing is
to be completed by March 9, 1998, and the court is expected to decide the
decertification issue by March 30, 1998.
The plaintiffs have not yet quantified their claim for damages, nor has the
size and membership of the class been determined. Based upon the information
available to date, the Company's management does not believe that any adverse
determination in the Garrison matter is likely to have a material adverse
effect on the financial condition or results of operations of the Company.
MGM Studios is a defendant in an action filed in the Los Angeles County
Superior Court in March 1994, entitled Parretti v. CLBN, MGM et al. The
complaint seeks damages totaling $3.9 billion dollars for breach of Mr.
Parretti's employment contract and other relief. MGM Studios' motions for
final judgment have been granted
23
on all grounds. A notice of appeal was filed in August 1997 by Mr. Parretti.
Mr. Parretti's counsel withdrew from the case in February 1997 and there is,
at the moment, no schedule for briefs to be submitted by the parties. MGM
Studios believes that the appeal is without merit. MGM Studios has
indemnification from liability in the Parretti proceeding from CDR.
Accordingly, the Company's management does not believe that any adverse
determination in the Parretti litigation will have any material adverse effect
on the Company's financial condition or results of operations.
In May 1996 MGM Studios initiated an action in Los Angeles County Superior
Court against Disney to compel the reconveyance of rights granted with respect
to Western European territories to Disney Productions under the Disney
License. See "Item 1. Business--Trademarks and Consumer Products." MGM Studios
also claims that Disney Productions' breach of the reconveyance obligation
entitles MGM Studios under the terms of the Disney License to terminate the
Disney License altogether. On November 5, 1997 the Company received a jury
verdict in its favor with respect to the Western European rights. The court
granted summary adjudication in favor of Disney denying the Company the right
to terminate Disney's U.S. rights under the Disney License. The Company has
appealed this aspect of the decision.
MGM Studios, as successor in interest to UA, is a defendant in an action
originally filed in Georgia state court entitled Turner Broadcasting System
Inc., et al. v. Metro-Goldwyn-Mayer Inc., et al. Turner alleges that, as a
result of the 1986 acquisition of Old MGM by Turner, UA was unjustly enriched
by reason of a tax benefit in excess of $260 million to which Turner was
entitled but was actually utilized by Tracinda. MGM removed the action to
federal court, and the court granted MGM's motion to transfer the case to the
United States District Court for the District of Nevada. The action has since
been consolidated with a virtually identical action by Turner against
Tracinda. Management believes that UA did not receive any benefit from these
transactions and accordingly that it is unlikely that the Turner matter would
have a material adverse effect on the Company's financial condition or results
of operations.
Certain subsidiaries of the Company are defendants in an action pending in
the Commercial Court of Brussels, Belgium entitled Credit General Foncier et
Mobilier S.A. ("Cregefon") et al. v. Canon International V.O.F., Canon
International N.V., Canon Film Distribution Nederland B.V. and Pathe
Entertainment N.V. The action involves a suit by the bankruptcy trustee of
Cregefon to recover a 1990 loan made to Canon International V.O.F., as a
depository for Comfinance S.A. (a company associated with Mr. Parretti). The
suit seeks damages of up to approximately $60 million. The Company has
indemnification from CDR with respect to this matter. As a result, management
believes that the Cregefon litigation will not have any material adverse
effect on the Company's financial condition or results of operations. The
terms for a settlement regarding this action were reached between the parties
in January 1998 for approximately $9 million and are pending court approval.
The full amount of this settlement will be funded by CDR.
Orion is a defendant in a matter entitled Sidney Sapsowitz et al. v. John W.
Kluge, Metromedia International Inc., and Orion Pictures Corp., et al., which
was filed in June 1997. The plaintiffs claim a "finder's fee" of $28.5 million
in connection with the Orion Acquisition. There have been no material
developments in the Sapsowitz case to date. Pursuant to the terms of
agreements executed in connection with the Orion Acquisition, the Company has
indemnification from Metromedia International Group, Inc. with respect to the
payment of any finder's fee. As a result, management believes that the
Sapsowitz litigation will not have any material adverse effect on the
Company's financial condition or results of operations.
The Company is a defendant in an action entitled Samuel Goldwyn, Jr., et al.
v. Metro-Goldwyn-Mayer Inc., et al., pending in the Los Angeles County
Superior Court, which alleges claims for, among other things, fraud and
deceit, breach of various agreements, breach of fiduciary duty, trademark
infringement, and unfair competition. The complaint was served on the Company
on October 30, 1997, and no responsive pleading is due until March 1998. The
complaint seeks, among other relief, damages in excess of $5 million, an
injunction against the defendants' use of certain trademarks, injunctive
relief preventing the Company from using the "Goldwyn" name in connection with
the licensing or exhibition of any new film that has not been acquired by the
Company's Goldwyn subsidiary, termination of a distribution agreement and
unspecified punitive damages.
24
The Company intends to contest the litigation vigorously and believes that
this action will not have a material adverse effect on the Company's financial
condition or results of operations.
On November 17, 1997, the Company and Danjaq filed an action in federal
court in Los Angeles against Sony Corporation, Sony Pictures Entertainment
Inc., Columbia Pictures Industries, Inc. ("Columbia"), John Calley, Kevin
McClory and Spectre Associates, Inc. seeking declaratory and injunctive relief
and/or damages for copyright infringement, trademark dilution, slander of
title, unfair competition, inducing breach of contract and breach of fiduciary
duties, and misappropriation of trade secrets, based on Sony's publicized
assertion on October 13, 1997 that it had the right (together with Mr.
McClory) to create its own James Bond film franchise. The complaint seeks
various forms of legal relief based on the Company's position that the
defendants do not have any legal right to produce or distribute a franchise of
James Bond films, or any James Bond films, in the United States. On January
23, 1998, the Company and Danjaq filed an amended complaint adding claims for
trademark infringement, federal unfair competition and California trademark
dilution. The Company and Danjaq contend not only that Mr. McClory's rights
were limited to remaking Thunderball but that even those rights have expired
under U.S. law pursuant to the doctrine of Stewart v. Abend, 495 U.S. 207
(1990) and that Mr. McClory's rights have been recently acquired by Danjaq.
They also contend that Mr. Calley misappropriated trade secret information
about the James Bond franchise when he left UA Pictures for Sony. On
February 12, 1998, Sony Pictures Entertainment Inc. and Columbia filed an
answer and counterclaim asserting, among other things, that Mr. McClory owns
the rights to materials he claims were the genesis of the cinematic James
Bond, and that Sony is the assignee of those rights and that they are
therefore owed an accounting of profits on all James Bond films Danjaq and the
Company have produced and marketed in the United States. See "Item 1.
Business--The Motion Picture and Television Industry." The Company intends
vigorously to assert both substantive and procedural defenses to all of Sony's
claims and to pursue its own remedies fully. The Company believes that a
remake of Thunderball by Mr. McClory, Sony or others would not have a material
adverse effect on the Company's business or results of operations. However, a
determination that Mr. McClory, Sony or others have broader rights to produce
or exploit other films, television programs or other similar programs that are
based, in whole or in part, on the James Bond character or that such persons
have a right to any of the profits from the James Bond films that Danjaq and
the Company have produced could have a material adverse effect on the
Company's business and results of operations.
On December 10, 1997, plaintiffs Nova Entertainment, GmbH and HAT
International, GmbH filed suit in the United States District Court for the
Central District of California, against the Company, for claims arising out of
the Company's decision in 1997 not to enter into a financing, production and
distribution arrangement with the plaintiffs. The complaint seeks damages in
excess of $90 million in fees the plaintiffs claim they would have received
from an alleged production of nine motion pictures over three years, along
with punitive damages in an unstated amount. While no assurance can be given
regarding the outcome of this matter, the Company believes it had no agreement
or binding arrangement with the plaintiffs, whether legal or equitable, and no
obligation to enter into one, and that it has strong and meritorious defenses
to all of the claims asserted in the complaint. The Company plans to
vigorously defend itself against such claims.
In addition, from time to time the Company becomes involved in other
litigation arising in the normal course of business, and the Company believes
that none of such other litigation as is currently pending will have a
material adverse effect on the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
25
ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY
Frank G. Mancuso (age 64). Mr. Mancuso has been the Chairman of the Board
and Chief Executive Officer of the Company since October 1996 and has been the
Chairman of the Board and Chief Executive Officer of MGM Studios since July
1993. Prior to joining MGM Studios, Mr. Mancuso was the Chairman and Chief
Executive Officer of Paramount from September 1984 to March 1991, having
served Paramount in numerous other capacities beginning in 1963, and was an
entertainment industry consultant and private investor from March 1991 to July
1993. Mr. Mancuso has served on the board of directors of MGM Grand, Inc.
since December 1997.
A. Robert Pisano (age 55). Mr. Pisano was appointed as a director and Vice
Chairman of the Board of Directors of the Company in December 1997. Mr. Pisano
has served as Vice Chairman of the Company and MGM Studios since March 1997
and, prior thereto, served as Executive Vice President of MGM Studios from
August 1993 to March 1997. Prior to joining MGM Studios, Mr. Pisano was
Executive Vice President of Paramount from June 1985 to May 1991, where he
served as General Counsel and a member of the Office of the Chairman. Prior to
1985 and from February 1992 to August 1993, Mr. Pisano was a partner with the
law firm of O'Melveny & Myers LLP.
Michael G. Corrigan (age 40). Mr. Corrigan has been Senior Executive Vice
President and Chief Financial Officer of the Company and MGM Studios since
July 1997. From 1978 until July 1997, Mr. Corrigan was with Price Waterhouse
LLP, an independent accounting firm, most recently as a senior partner with
the entertainment, media and communications practice group.
David G. Johnson (age 41). Mr. Johnson has been Senior Executive Vice
President and General Counsel of the Company and MGM Studios since June 1997
and, prior thereto, was Executive Vice President and General Counsel of MGM
Studios since January 1995. From September 1990 until January 1995 Mr. Johnson
was with the law firm of White & Case, most recently as a partner in its Los
Angeles office.
William A. Jones (age 56). Mr. Jones has been Senior Executive Vice
President and Secretary of the Company and MGM Studios since June 1997 and,
prior thereto, served as Executive Vice President--Corporate Affairs and
Secretary of MGM Studios since January 1995. Mr. Jones served as Executive
Vice President, General Counsel and Secretary of MGM-Pathe and MGM Studios
from May 1991 to January 1995 and as General Counsel and Secretary of
predecessors to the Company since 1983. Mr. Jones was a director of MGM-Pathe
from June 1991 to January 1992.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Common Stock is listed with, and trades on, the New York Stock
Exchange ("NYSE") under the symbol "MGM." On March 11, 1998 the closing sale
price per share of the Common Stock on the NYSE, as reported by the Dow Jones
News Retrieval, was $23.00. The following table sets forth the high and low
closing sale prices of the Common Stock on the NYSE, as reported by the Dow
Jones News Retrieval, for the period from the date of commencement of trading
of the Company's Common Stock on the NYSE, November 13, 1997 through
December 31, 1997.
PERIOD HIGH LOW
------ ------- -------
November 13, 1997--December 31, 1997...................... $21 7/8 $19 3/8
As of March 11, 1998, there were 65,779,852 shares issued and outstanding
and in excess of 2,000 beneficial holders of the Company's Common Stock,
including individual participants in security position listings.
The Company has not paid any dividends to date on the Common Stock and
currently intends to retain any earnings to provide funds for the operation
and expansion of its business and for the servicing and repayment of
indebtedness. Therefore, the Company does not intend to pay cash dividends on
its Common Stock for the foreseeable future. Furthermore, as a holding company
with no independent operations,