##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549





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FORM 10-Q





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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





---




For the Quarterly Period Ended June 30, 2002





Commission File
No. 1-13481





METRO-GOLDWYN-MAYER INC.


(Exact name of registrant as specified in its charter)





---




Delaware

95-4605850(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)2500 Broadway Street, Santa Monica, CA

90404(Address of principal executive offices)

(Zip Code)





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





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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.  x  Yes  ̈ No





The number of shares of the Registrants common stock outstanding as
of July 23, 2002 were 251,795,200.





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##### Table of Contents




METRO-GOLDWYN-MAYER INC.





FORM 10-Q





June 30, 2002





INDEX





Page No.Part I.    Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001

1Condensed Consolidated Statements of Operations for the Quarters and Six Months ended June 30, 2002 and 2001 (unaudited)

2Condensed Consolidated Statement of Stockholders Equity for the Six Months ended June 30, 2002 (unaudited)

3Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001 (unaudited)

4Notes to Condensed Consolidated Financial Statements

5Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

15Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28Part II.    Other InformationItem 1.

Legal Proceedings

30Item 4.

Submission of Matters to a Vote of Security Holders

31Item 6.

Exhibits and Reports on Form 8-K

32Signatures

33




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##### Table of Contents

PART I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





METRO-GOLDWYN-MAYER INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)





June 30, 2002


December 31, 2001(unaudited)ASSETSCash and cash equivalents

$
446,860


$
2,698Accounts and contracts receivable (net of allowance for doubtful accounts of $40,088 and $26,173,
respectively)


370,537



458,010Film and television costs, net


1,982,446



2,035,277Investments in and advances to affiliates


851,270



845,042Property and equipment, net


34,538



38,837Goodwill


516,706



516,706Other assets


33,743



26,594$
4,236,100


$
3,923,164LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Bank and other debt

$
1,211,915


$
836,186Accounts payable and accrued liabilities


170,971



198,520Accrued participants' share


235,580



243,836Income taxes payable


29,152



31,865Advances and deferred revenues


77,520



82,156Other liabilities


33,901



41,119Total liabilities


1,759,039



1,433,682Commitments and contingenciesStockholders' equity:Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued






Common stock, $.01 par value, 500,000,000 shares authorized, 251,771,186 and 239,629,500 shares issued and
outstanding


2,518



2,396Additional paid-in capital


3,913,067



3,717,767Deficit


(1,416,166
)


(1,203,565
)Accumulated other comprehensive loss


(22,358
)


(27,116
)Total stockholders' equity


2,477,061



2,489,482$
4,236,100


$
3,923,164








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




1




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##### Table of Contents

METRO-GOLDWYN-MAYER INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)


(unaudited)





Quarters Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Revenues

$
336,923


$
274,859


$
652,051


$
618,755Expenses:Operating


264,961



181,975



489,154



372,268Selling, general and administrative


166,366



128,774



319,071



283,753Depreciation and non-film amortization


4,849



8,056



9,477



16,001Total expenses


436,176



318,805



817,702



672,022Operating loss


(99,253
)


(43,946
)


(165,651
)


(53,267
)Other income (expense):Equity in net earnings (losses) of affiliates


6,019



(1,147
)


(815
)


(1,259
)Interest expense, net of amounts capitalized


(26,530
)


(13,475
)


(42,625
)


(22,928
)Interest and other income, net


930



1,360



1,625



7,137Total other expenses


(19,581
)


(13,262
)


(41,815
)


(17,050
)Loss from operations before provision for income taxes


(118,834
)


(57,208
)


(207,466
)


(70,317
)Income tax provision


(2,975
)


(4,097
)


(5,135
)


(8,509
)Net loss before cumulative effect of accounting change


(121,809
)


(61,305
)


(212,601
)


(78,826
)Cumulative effect of accounting change














(382,318
)Net loss

$
(121,809
)

$
(61,305
)

$
(212,601
)

$
(461,144
)Loss per share:Basic and dilutedNet loss before cumulative effect of accounting change

$
(0.48
)

$
(0.26
)

$
(0.86
)

$
(0.35
)Cumulative effect of accounting change














(1.70
)Net loss

$
(0.48
)

$
(0.26
)

$
(0.86
)

$
(2.05
)Weighted average number of common shares outstanding:Basic and diluted


251,732,625



234,002,719



247,155,037



224,521,913








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




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##### Table of Contents

METRO-GOLDWYN-MAYER INC.





CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


(in thousands, except share data)





Preferred Stock

Common Stock

Add'l Paid-in Capital

Deficit


Comprehensive Income (Loss)


Accum. Other Comprehensive Income


Total Stockholders' EquityNo. of Shares

Par Value

No. of Shares

Par ValueBalance December 31, 2001



$


239,629,500

$
2,396

$
3,717,767

$
(1,203,565
)

$



$
(27,116
)

$
2,489,482Common stock issued to outside parties, net






10,550,000


106


164,665














164,771Common stock issued to related parties, net






1,591,686


16


30,635














30,651Comprehensive income (loss):Net loss















(212,601
)


(212,601
)






(212,601
)Unrealized gain on derivative instruments



















5,963



5,963



5,963Unrealized loss on securities



















(1,222
)


(1,222
)


(1,222
)Foreign currency translation adjustments



















17



17



17Comprehensive loss



















(207,843
)






Balance June 30, 2002 (unaudited)



$


251,771,186

$
2,518

$
3,913,067

$
(1,416,166
)

$



$
(22,358
)

$
2,477,061








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




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##### Table of Contents

METRO-GOLDWYN-MAYER INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Six Months Ended June
30,2002


2001Net cash used in operating activities

$
(67,732
)

$
(44,583
)Investing activities:Investments in Cable Channels






(825,185
)Additions to property and equipment


(5,200
)


(3,310
)Other investing activities


(7,715
)


(1,050
)Net cash used in investing activities


(12,915
)


(829,545
)Financing activities:Net proceeds for issuance of preferred stock to Tracinda






325,000Net proceeds from issuance of common stock to outside parties


164,771



310,639Net proceeds from issuance of common stock to related parties


1,118



4,801Additions to borrowed funds


1,305,197



171,500Repayments of borrowed funds


(929,468
)


(1,323
)Financing fees and other


(16,823
)


Net cash provided by financing activities


524,795



810,617Net change in cash and cash equivalents from operating, investing and financing activities


444,148



(63,511
)Net increase (decrease) in cash due to foreign currency fluctuations


14



(364
)Net change in cash and cash equivalents


444,162



(63,875
)Cash and cash equivalents at beginning of the year


2,698



77,140Cash and cash equivalents at end of the period

$
446,860


$
13,265











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




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##### Table of Contents




METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





June 30, 2002





Note 1Basis of Presentation





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





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial statements and the instructions to Form 10-Q related to interim period financial statements. Accordingly, these financial statements do not include certain information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. However, these financial statements contain all adjustments consisting only of normal recurring accruals which, in the opinion of management, are necessary in order to make the
financial statements not misleading. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction
with the Companys audited financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2001. As permitted by American Institute of Certified Public Accountants Statement of Position
(SOP) 00-2, Accounting by Producers or Distributors of Films, the Company has presented unclassified balance sheets. Certain reclassifications have been made to amounts presented in the prior year period to conform to the
current presentation.





New Accounting Pronouncements.    In June 2000, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 139, Rescission of FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89 and 121, which, effective for
financial statements for fiscal years beginning after December 15, 2000, rescinds SFAS No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. The companies that were previously subject to the requirements of
SFAS No. 53 now follow the guidance in SOP 00-2 issued in June 2000. SOP 00-2 establishes new accounting and reporting standards for all producers and distributors that own or hold the rights to distribute or exploit films. SOP 00-2 provides that
the cumulative effect of changes in accounting principles caused by its adoption should be included in the determination of net income in conformity with APB Opinion No. 20, Accounting Changes. The Company adopted SOP 00-2 on January 1,
2001 and recorded a one-time, non-cash cumulative effect charge to earnings of $382,318,000, primarily to reduce the carrying value of its film and television costs. The new rules also require that advertising costs be expensed as incurred as
opposed to the old rules which generally allowed advertising costs to be capitalized as part of film costs and amortized using the individual film forecast method. Due to the significant advertising costs incurred in the early stages of a
films release, the Company anticipates that the new rules will significantly impact its results of operations for the foreseeable future.





In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
ActivitiesDeferral of the Effective Date of FASB Statement No. 133, and by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB No. 133. This statement
establishes accounting and reporting standards for derivative instruments, including certain derivative




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




instruments embedded in contracts, and for hedging activities. The Company adopted SFAS No. 133 on January 1, 2001 and recorded a one-time, non-cash cumulative effect adjustment to
stockholders equity and other comprehensive income (loss) of $469,000. The adoption of SFAS No. 133 has not materially impacted the Companys results of operations.





In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement has eliminated the flexibility to account for some mergers and acquisitions as
pooling of interests, and effective as of July 1, 2001, all business combinations are to be accounted for using the purchase method. The Company adopted SFAS No. 141 as of July 1, 2001, and the impact of such adoption did not have a material
adverse impact on the Companys financial statements.





In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value based
test. Under SFAS No. 142, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows, which include feature film operations, television programming operations, cable channels and other businesses
(licensing and merchandising, music and interactive operations). The Company adopted SFAS No. 142 beginning January 1, 2002, and upon adoption the Company did not recognize any impairment of goodwill and other intangible assets already included in
the financial statements. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. Accordingly, beginning January 1, 2002, the Company has foregone all related amortization expense, which
totaled $3,683,000 and $7,367,000 for the quarter and six months ended June 30, 2001. Since the Company is recording its equity in net earnings of the Cable Channels (see Note 4) on a one-quarter lag, amortization of goodwill of the Cable Channels
($9,528,000 for the quarter ended March 31, 2002) is not included in the calculation of the Companys equity in the net earnings in this investment commencing with the quarter ended June 30, 2002.





For the quarter and six months ended June 30, 2001, the reconciliation of reported net loss and net loss per share to adjusted net loss
and adjusted net loss per share reflecting the elimination of goodwill amortization is as follows (in thousands, unaudited):





Quarters Ended June 30,
2001


Six Months Ended June 30, 2001Net Loss


Loss per Share


Net Loss


Loss per ShareNet loss before cumulative effect of accounting change, as reported

$
(61,305
)

$
(0.26
)

$
(78,826
)

$
(0.35
)Elimination of goodwill amortization


3,683



0.02



7,367



0.03Net loss before cumulative effect of accounting change, as adjusted

$
(57,622
)

$
(0.24
)

$
(71,459
)

$
(0.32
)








Quarters Ended June 30,
2001


Six Months Ended June 30,
2001Loss Net


Loss per Share


Net Loss


Loss per ShareNet loss, as reported

$
(61,305
)

$
(0.26
)

$
(461,144
)

$
(2.05
)Elimination of goodwill amortization


3,683



0.02



7,367



0.03Net loss, as adjusted

$
(57,622
)

$
(0.24
)

$
(453,777
)

$
(2.02
)





In June 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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





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





Comprehensive
Loss.    Comprehensive loss for the Company includes net loss and other comprehensive income (loss) items, including unrealized gain (loss) on derivative instruments, unrealized loss on securities and cumulative foreign
currency translation adjustments. Components of comprehensive loss are shown below (in thousands, unaudited):





Quarters Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Net loss

$
(121,809
)

$
(61,305
)

$
(212,601
)

$
(461,144
)Other comprehensive income (loss):Cumulative effect of accounting change for derivative instruments














469Unrealized gain (loss) on derivative instruments


304



(702
)


5,963



(13,543
)Unrealized loss on securities


(1,144
)


(119
)


(1,222
)


(301
)Cumulative foreign currency translation adjustments


114



(214
)


17



(362
)Comprehensive loss

$
(122,535
)

$
(62,340
)

$
(207,843
)

$
(474,881
)





Note 2Restructuring and Other Charges





Restructuring and Other Charges.    In June 1999, the Company incurred certain restructuring and other charges,
in association with a change in senior management and a corresponding review of the Companys operations, aggregating $214,559,000, including (i) a $129,388,000 reserve for pre-release film cost write-downs and certain other charges regarding a
re-evaluation of film properties in various stages of development and production, and (ii) $85,171,000 of severance and other related costs, as well as the estimated costs of withdrawing from the Companys arrangements with United International
Pictures B.V. (UIP) on November 1, 2000. The severance charge in 1999 included the termination of 46 employees, including the Companys former Chairman and Vice Chairman, across all divisions of the Company.





As of June 30, 2002, the Company has utilized all $129,388,000 of the pre-release film cost write-down reserves and has paid $54,844,000
of the severance and related costs. In June 2000, the Company reduced previously charged reserves by $5,000,000 due to a negotiated settlement with UIP regarding the Companys withdrawal from the joint venture. In January and February 2002, in
accordance with certain agreements with the Companys former Chairman and Vice Chairman, $16,964,000 of the severance and related costs were converted into 863,499 shares of common stock of the Company.




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 3Film and Television Costs





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





June 30, 2002


December 31, 2001(unaudited)Theatrical productions:Released

$
3,785,455


$
3,515,842Less: accumulated amortization


(2,369,600
)


(2,117,116
)Released, net


1,415,855



1,398,726Completed not released


29,895



99,142In production


248,786



242,621In development


37,862



31,931Subtotal: theatrical productions


1,732,398



1,772,420Television programming:Released


890,764



861,826Less: accumulated amortization


(668,567
)


(626,686
)Released, net


222,197



235,140In production


25,984



25,968In development


1,867



1,749Subtotal: television programming


250,048



262,857$
1,982,446


$
2,035,277





Interest costs capitalized to theatrical productions were
$3,522,000 and $5,387,000 during the quarter and six months ended June 30, 2002, and $6,030,000 and $13,361,000 during the quarter and six months ended June 30, 2001, respectively.





Note 4Investments In and Advances to Affiliates





Investments are summarized as follows (in thousands):





June 30, 2002

December 31, 2001(unaudited)Domestic cable channels

$
825,908

$
822,502Foreign cable channels


15,205


15,351Joint ventures


10,007


7,039Others


150


150$
851,270

$
845,042





Domestic Cable Channels.    On April 2,
2001, the Company invested $825,000,000 in cash for a 20 percent interest in two general partnerships which own and operate the American Movie Channel, Bravo, the Independent Film Channel and WE: Womens Entertainment (formerly Romance
Classics), collectively referred to as the Cable Channels. These partnerships were wholly-owned by Rainbow Media Holdings, Inc., a 74 percent subsidiary of Cablevision Systems Corporation (Rainbow Media). The proceeds of the
$825,000,000




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




investment were used as follows: (i) $365,000,000 was used to repay bank debt of the partnerships; (ii) $295,500,000 was used to repay intercompany loans from Cablevision and its affiliates;
and (iii) $164,500,000 was added to the working capital of the partnerships. The Company financed the investment through the sale of equity securities (see Note 7), which provided aggregate net proceeds of approximately $635,600,000, and borrowings
under the Companys credit facilities. Based upon certain assumptions that management of the Company believes are reasonable, the Companys determination of the difference between the Companys cost basis in their investment in the
Cable Channels and the Companys share of the underlying equity in net assets (referred to as goodwill) is approximately $762,000,000.





The Company is accounting for its investment in the Cable Channels in accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. In accordance
with APB Opinion No. 18, management continually reviews its equity investments to determine if any permanent impairment has occurred. If, in managements judgment, an investment has sustained an other-than-temporary decline in its value, the
investment is written down to its fair value by a charge to earnings. Such determination is dependent on the specific facts and circumstances, including the financial condition of the investee, subscriber demand and growth, demand for advertising
time and space, the intent and ability to retain the investment, and general economic conditions in the areas in which the investee operates. As of June 30, 2002, management has determined that there have been no permanent impairments.





Pursuant to the requirements of APB No. 18, the Company is recording its share of the earnings and losses in the Cable Channels
based on the most recently available financial statements received from the Cable Channels. Due to a lag in the receipt of the financial statements from the Cable Channels, the Company is reporting its interest in the Cable Channels on a one-quarter
lag. Summarized financial information for the Cable Channels as of March 31, 2002, and for the quarter and six months ended March 31, 2002, were as follows (in thousands):





As of March 31, 2002:Current assets

$
318,314Non-current assets

$
583,975Current liabilities

$
129,300Non-current liabilities

$
279,929For the quarter and six months ended March 31, 2002:QuarterRevenues, net

$
120,126Operating income

$
36,747Six MonthsRevenues, net

$
236,489Operating income

$
60,570





In the quarter and six months ended June 30, 2002, the
Companys share of the Cable Channels net operating results was a profit of $7,277,000 and $3,546,000, respectively. The results for the six months ended June 30, 2002 were reduced by the amortization of goodwill of $9,528,000 for the
period from January 1 to March 31, 2002 (see Note 1).





Foreign Cable Channels.    The
Company holds minority equity interests in various television channels located in certain international territories for which the Company realized its share of the channels net operating results, which aggregated a loss of $371,000 and
$2,096,000 in the quarter and six months ended June 30, 2002, and $1,147,000 and $1,259,000 in the quarter and six months ended June 30, 2001, respectively.




9




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Joint Ventures.    On August 13, 2001, the
Company, through its wholly-owned subsidiary, MGM On Demand Inc., acquired a 20 percent interest in a joint venture established to create an on-demand movie service to offer a broad selection of theatrically-released motion pictures via digital
delivery for broadband internet users in the United States. Other partners in the joint venture include Sony Pictures Entertainment, Universal Studios, Warner Bros. and Paramount Pictures. The Company has funded $8,641,000 for its equity interest
and its share of operating expenses of the joint venture as of June 30, 2002. The Company financed its investment through borrowings under its credit facilities. The Company is committed to fund its share of the operating expenses of the joint
venture, as required. The Company is accounting for its interest in the joint venture under the equity method. In the quarter and six months ended June 30, 2002, the Company recognized a net loss of $690,000 and $982,000 for its share of the
operating results of the joint venture.





In February 2002, the Company, through its wholly-owned subsidiary MGM
Domestic Television Distribution Inc., and NBC Enterprises, Inc. formed a new media sales company, MGM-NBC Media Sales, LLC (MGM-NBC Media Sales), to distribute off-network feature film and television series and first-run syndication
programming from each company in the television barter sales markets. The joint venture recognizes income from distribution fees of ten percent earned on each companys barter sales, and incurs overhead costs to operate the joint venture, which
are shared between the companies. Each company is entitled to its share of the net profits or losses of MGM-NBC Media Sales based on a contractual formula as specified in the agreement. In the quarter and six months ended June 30, 2002, the Company
recognized a loss of $196,000 and $262,000 for its share of the operating results of the joint venture.





On March
27, 2002, the Company, through its wholly-owned subsidiary MGM Digital Development Inc. (MGM Digital), acquired a one-seventh interest in NDC, LLC (NDC), a partnership created with the six other major studios to (i) develop
and/or ratify standards for digital motion picture equipment and for digital cinema technology to be used in the delivery of high quality in-theatre digital cinema, and (ii) update and deploy a limited amount of new digital motion picture equipment
in theatres. MGM Digital contributed $979,000 for its initial interest in NDC. The agreement has an initial term expiring on March 27, 2004. In the six months ended June 30, 2002, the Company recognized a loss of $1,020,000 representing its
aggregate investment in the joint venture.





Note 5Bank and Other Debt





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





June 30, 2002

December 31, 2001(unaudited)Revolving Facility

$


$
159,000Term Loans


1,150,000


668,500Production loans and other borrowings


61,915


8,686$
1,211,915

$
836,186





On June 11, 2002, the Company entered into a third amended and
restated credit facility with a syndicate of banks, which amended a pre-existing credit facility, aggregating $1.75 billion (the Amended Credit Facility) consisting of a five-year $600,000,000 revolving credit facility (the
Revolving Facility), a five-year $300,000,000 term loan (Tranche A Loan) and a six-year $850,000,000 term loan (Tranche B Loan) (collectively, the Term Loans). The Revolving Facility and the Tranche A
Loan bear interest at 2.75 percent over the Adjusted LIBOR rate, as defined (4.61 percent at June 30, 2002). The Tranche B Loan bears interest at




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




3.00 percent over the Adjusted LIBOR rate (4.86 percent at June 30, 2002). Scheduled amortization of the Term Loans under the Amended Credit Facility is $16,411,000 in 2003, $65,643,000 in each
of 2004, 2005 and 2006, $122,786,000 in 2007 and $813,875,000 in 2008. The Revolving Facility matures on June 30, 2007. In connection with the amendment of the pre-existing credit facility, the Company expensed previously deferred financing costs
aggregating approximately $12,000,000, which have been included in interest expense for the quarter and six months ended June 30, 2002.





The Companys borrowings under the Amended Credit Facility are secured by substantially all the assets of the Company, with the exception of the copyrights in the James Bond series of motion pictures. The Amended Credit
Facility contains various covenants including limitations on dividends, capital expenditures and indebtedness, and the maintenance of certain financial ratios. The Amended Credit Facility limits the amount of the investment in the Company which may
be made by MGM Studios and Orion in the form of loans or advances, or purchases of capital stock of the Company, up to a maximum aggregate amount of $500,000,000 (or a maximum aggregate amount of $300,000,000 in the event that MGM Studios elects to
release its investment in the Cable Channels from the loan collateral, as permitted under the Amended Credit Facility). As of June 30, 2002, there are no outstanding loans or advances to the Company by such subsidiaries, nor have such subsidiaries
purchased any capital stock of the Company. Restricted net assets of MGM Studios and Orion at June 30, 2002 are approximately $2.0 billion. As of June 30, 2002, the Company was in compliance with all applicable covenants.





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





Note 6Financial
Instruments





The Company is exposed to the impact of interest rate changes as a result of its variable rate
long-term debt. Accordingly, the Company had previously entered into three-year fixed interest rate swap agreements whereby the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and
floating-rate amounts calculated by reference to an agreed notional principal amount. The swap agreements aggregate a notional value of $585,000,000 at an average rate of approximately 5.91 percent and expire in July 2003. Because these swap
agreements carry interest rates that currently exceed the Companys borrowing rates under the Amended Credit Facility (see Note 5), the Company will recognize additional interest costs, which will be charged against future earnings. We have
also entered into additional interest rate swap agreements for a notional value of $100,000,000 at an average pay rate of approximately 2.34 percent, which expire in January 2003. At June 30, 2002, the Company would be required to pay approximately
$21,820,000 if all such swap agreements were terminated, and this amount has been included in other liabilities and accumulated other comprehensive income (loss).





The Company is subject to market risks resulting from fluctuations in foreign currency exchange rates because approximately 25 percent of the Companys revenues are
denominated, and the Company incurs certain operating and production costs, in foreign currencies. In certain instances, the Company enters into foreign currency exchange forward contracts in order to reduce exposure to changes in foreign currency
exchange rates that affect the value of the Companys firm commitments and certain anticipated foreign currency cash flows. The Company currently intends to continue to enter into such contracts to hedge against future material foreign currency
exchange rate risks. As of June 30 2002, the Company has outstanding foreign currency forward contracts aggregating Canadian $28,500,000 and £2,750,000. As of June 30, 2002, the Company would be entitled to receive approximately $512,000 if
all such foreign currency forward contracts were terminated, and this amount has been included in other assets and accumulated other comprehensive income (loss).




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METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 7Stockholders Equity





Public Offering.    On March 18, 2002, pursuant to a Form S-3 shelf registration statement filed with the
Securities and Exchange Commission, the Company completed the sale of 10,550,000 shares of common stock of the Company at $16.50 per share, less an underwriting discount of $0.825 per share, in an underwritten public offering for aggregate net
proceeds of $164,771,000. The Company used the net proceeds from the stock offering for general corporate purposes, including reduction of the revolving portion of its credit facility and financing of business operations.





Earnings Per Share (EPS).    Dilutive securities of 684,283 and 1,947,994 related to stock options
are not included in the calculation of diluted EPS in the quarter and six months ended June 30, 2002, and dilutive securities of 4,101,574 and 3,537,124 are not included in the quarter and six months ended June 30, 2001, respectively, because they
are antidilutive.





Note 8Segment Information





The Company applies the disclosure provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Companys business
units have been aggregated into four reportable operating segments: feature films, television programming, cable channels and other (principally licensing and merchandising, interactive media and music). Due to the significant acquisitions of cable
channels in 2001, the Company has separated cable channels as a reportable operating segment, and reclassified such amounts from the other operating segments in prior-year periods. The factors for determining the reportable segments were based on
the distinct nature of their operations. They are managed as separate business units because each requires and is responsible for executing a unique business strategy. Income or losses of industry segments and geographic areas, other than those
accounted for under the equity method, exclude interest income, interest expense, goodwill amortization, income taxes and other unallocated corporate expenses. Identifiable assets are those assets used in the operations of the segments. Corporate
assets consist of cash, certain corporate receivables and goodwill. Summarized financial information concerning the Companys reportable segments is shown in the following tables (in thousands, unaudited):





Quarters Ended June
30,


Six Months Ended June 30,2002


2001


2002


2001RevenuesFeature films

$
297,365


$
230,588


$
578,011


$
531,141Television programs


30,055



36,182



55,176



73,190Cable channels


31,977



8,497



63,728



16,226Other


9,503



8,089



18,864



14,424Subtotal


368,900



283,356



715,779



634,981Less: unconsolidated companies


(31,977
)


(8,497
)


(63,728
)


(16,226
)Consolidated revenues

$
336,923


$
274,859


$
652,051


$
618,755Segment Income (Loss)Feature films

$
(73,642
)

$
(22,421
)

$
(118,393
)

$
(10,432
)Television programs


(3,941
)


4,640



(8,331
)


10,966Cable channels


6,019



(1,147
)


(814
)


(1,259
)Other


5,821



4,503



9,451



5,241Subtotal


(65,743
)


(14,425
)


(118,087
)


4,516Less: unconsolidated companies


(6,019
)


1,147



814



1,259Consolidated segment income (loss)

$
(71,762
)

$
(13,278
)

$
(117,273
)

$
5,775




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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





Quarters Ended June
30,


Six Months Ended June 30,2002

2001


2002

2001Licensing and merchandising

$
1,336

$
1,551


$
2,293

$
2,444Interactive media


505


690



2,798


1,206Music


2,986


2,842



3,699


3,432Other


994


(580
)


661


(1,841
)$
5,821

$
4,503


$
9,451

$
5,241





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





Quarters Ended June
30,


Six Months Ended June 30,2002


2001


2002


2001Segment income (loss)

$
(71,762
)

$
(13,278
)

$
(117,273
)

$
5,775General and administrative expenses


(22,642
)


(22,612
)


(38,901
)


(43,041
)Depreciation and non-film amortization


(4,849
)


(8,056
)


(9,477
)


(16,001
)Operating loss


(99,253
)


(43,946
)


(165,651
)


(53,267
)Equity in net earnings (losses) of affiliates


6,019



(1,147
)


(815
)


(1,259
)Interest expense, net of amounts capitalized


(26,530
)


(13,475
)


(42,625
)


(22,928
)Interest and other income, net


930



1,360



1,625



7,137Loss from operations before provision for income taxes

$
(118,834
)

$
(57,208
)

$
(207,466
)

$
(70,317
)





The following is a reconciliation of the change in reportable
segment assets:





December 31, 2001

Increase (Decrease)


June 30, 2002(unaudited)Feature films

$
2,183,488

$
(105,730
)

$
2,077,758Television programs


334,886


(33,464
)


301,422Cable channels


845,042


6,225



851,267Other


9,857


(6,580
)


3,277Total reportable segment assets

$
3,373,273

$
(139,549
)

$
3,233,724





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





June 30, 2002

December 31, 2001(unaudited)Total assets for reportable segments

$
3,233,724

$
3,373,273Goodwill not allocated to segments


516,706


516,706Other unallocated amounts, including cash and cash equivalents


485,670


33,185Consolidated total assets

$
4,236,100

$
3,923,164




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 9Commitments and Contingencies





The Company, together with other major companies in the filmed entertainment industry, has been subject to numerous antitrust suits
brought by various motion picture exhibitors, producers and others. In addition, various legal proceedings involving alleged breaches of contract, antitrust violations, copyright infringement and other claims are now pending, which the Company
considers routine to its business activities.





The Company has provided an accrual for pending litigation as of
June 30, 2002 in accordance with SFAS No. 5, Accounting for Contingencies. In the opinion of Company management, any liability under pending litigation is not expected to be material in relation to the Companys financial condition
or results of operations.





Note 10Supplementary Cash Flow Information





The Company paid interest, net of capitalized interest, of $29,657,000 and $18,299,000 during the six months ended June 30, 2002 and 2001, respectively. The Company
paid income taxes of $8,128,000 and $7,896,000 during the six months ended June 30, 2002 and 2001, respectively.




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##### Table of Contents

Item 2.    
Managements Discussion and Analysis of Financial Condition and Results of Operations





This report includes forward-looking statements. Generally, the words believes, anticipates, may, will, should, expect, intend, estimate,
continue, and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in
this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these
forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.





The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this
Form 10-Q.





General





We are engaged primarily in the development, production and worldwide distribution of theatrical motion pictures and television programming.





Recent Developments





Amended Credit Facility.On June 11, 2002, we entered into a third amended and restated credit facility with a syndicate of banks, which amended a pre-existing credit facility, aggregating $1.75 billion
consisting of a five-year $600,000,000 revolving credit facility, a five-year $300,000,000 term loan and a six-year $850,000,000 term loan. For further details, seeLiquidity and Capital ResourcesBank Borrowings.





Cable Investment.On April 2, 2001, we invested $825.0 million in cash for a 20
percent interest in two general partnerships which own and operate the American Movie Channel, Bravo, the Independent Film Channel and WE: Womens Entertainment (formerly Romance Classics). These partnerships were wholly-owned by Rainbow Media
Holdings, Inc., a 74 percent subsidiary of Cablevision Systems Corporation. The proceeds of the $825.0 million investment were used as follows: (i) $365.0 million was used to repay bank debt of the partnerships; (ii) $295.5 million was used to repay
intercompany loans from Cablevision and its affiliates; and (iii) $164.5 million was added to the working capital of the partnerships. We financed the investment through the sale of equity securities and borrowings under our credit facilities. See
Liquidity and Capital Resources. Based upon certain assumptions that management believes are reasonable, our determination of the difference between our cost basis in our investment in the cable channels and our share of the underlying
equity in net assets is approximately $762 million.





We are accounting for our investment in the cable
channels in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. In accordance with APB Opinion No. 18, management continually reviews its equity investments to
determine if any permanent impairment has occurred. If, in managements judgment, an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings. Such
determination is dependent on the specific facts and circumstances, including the financial condition of the investee, subscriber demand and growth, demand for advertising time and space, the intent and ability to retain the investment, and general
economic conditions in the areas in which the investee operates. As of June 30, 2002, management has determined that there have been no permanent impairments.





Pursuant to the requirements of this pronouncement, we are recording our share of the earnings and losses in the cable channels based on the most recently available financial statements received from
the cable channels. Due to a lag in the receipt of the financial statements from the cable channels, we will be reporting our interest in the cable channels on a one-quarter lag. In the quarter and six months ended June 30, 2002, our share of the
cable




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##### Table of Contents

channels net operating results was a profit of $7.3 million and $3.5 million, respectively. The six-month period results were reduced by amortization of goodwill of $9.5 million.





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





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





Joint Ventures.    On August 13, 2001, a wholly-owned subsidiary, MGM On Demand Inc., acquired a 20 percent interest in a joint venture
established to create an on-demand movie service to offer a broad selection of theatrically-released motion pictures via digital delivery for broadband internet users in the United States. Other partners in the joint venture include Sony Pictures
Entertainment, Universal Studios, Warner Bros. and Paramount Pictures. We have funded approximately $8.6 million for our equity interest and our share of the operating expenses of the joint venture as of June 30, 2002. We financed our investment
through borrowings under our credit facilities. We are accounting for our interest in the joint venture under the equity method. In the quarter and six months ended June 30, 2002, we recognized a net loss of $0.7 million and $1.0 million for our
share of the operating results of the joint venture.





In February 2002, a wholly-owned subsidiary, MGM Domestic
Television Distribution Inc., and NBC Enterprises, Inc. formed a new media sales company, MGM-NBC Media Sales, LLC, to distribute off-network feature film and television series and first-run syndication programming from each company in the
television barter sales markets. The joint venture recognizes income from distribution fees of ten percent earned on each companys barter sales, and incurs overhead costs to operate the joint venture, which are shared between the companies.
Each company is entitled to its share of the net profits or losses of MGM-NBC Media Sales, LLC based on a contractual formula as specified in the agreement. In the quarter and six months ended June 30, 2002, we recognized a loss of $0.2 million and
$0.3 million for our share of the operating results of the joint venture.





On March 27, 2002, a wholly-owned
subsidiary, MGM Digital Development Inc., acquired a one-seventh interest in NDC, LLC, a partnership created with the six other major studios to (i) develop and/or ratify standards for digital motion picture equipment and for digital cinema
technology to be used in the delivery of high quality in-theatre digital cinema, and (ii) update and deploy a limited amount of new digital motion picture equipment in theatres. We have contributed $1.0 million for our equity interest in the joint
venture. The agreement has an initial term expiring on March 27, 2004. In the six months ended June 30, 2002, we recognized a loss of $1.0 million representing our aggregate investment in the joint venture.





Collective Bargaining Agreements.    The motion picture and television programs produced by MGM Studios, and
the other major studios in the United States, generally employ actors, writers and directors who are members of the Screen Actors Guild, Writers Guild of America, and Directors Guild of America, pursuant to industry-wide collective bargaining
agreements. The collective bargaining agreement with Writers Guild of America was successfully renegotiated and became effective beginning May 2, 2001 for a term of three years. Negotiations regarding the collective bargaining agreement with Screen
Actors Guild were successfully




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##### Table of Contents

completed on July 3, 2001 and the agreement was ratified effective as of July 1, 2001 for a term of three years. The Directors Guild of America collective bargaining agreement was successfully
renegotiated and has been ratified with a term of three years from July 1, 2002. Many productions also employ members of a number of other unions, including without limitation the International Alliance of Theatrical and Stage Employees and the
Teamsters. A strike by one or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of
time involved, could cause delay or interruption in our release of new motion pictures and television programs and thereby could adversely affect our cash flow and revenues. Our revenues from motion pictures and television programs in our library
should not be affected and may partially offset the effects of a strike to the extent, if any, that television exhibitors buy more library product to compensate for interruption in their first-run programming.





Accounting for Motion Picture and Television Costs.    In accordance with accounting principles generally
accepted in the United States and industry practice (see Industry Accounting Practices), we amortize the costs of production, including capitalized interest and overhead, as well as participations and talent residuals, for feature
films and television programming using the individual-film-forecast method under which such costs are amortized for each film or television program in the ratio that revenue earned in the current period for such title bears to managements
estimate of the total revenues to be realized from all media and markets for such title. Effective January 1, 2001, all exploitation costs, including advertising and marketing costs, are expensed as incurred. Theatrical print costs are amortized
over the periods of theatrical release of the respective territories.





Management regularly reviews, and revises
when necessary, its total revenue estimates on a title-by-title basis, which may result in a change in the rate of amortization and/or a write-down of the film or television asset to estimated fair value. These revisions can result in significant
quarter-to-quarter and year-to-year fluctuations in film write-downs and amortization. A typical film or television program recognizes a substantial portion of its ultimate revenues within the first two years of release. By then, a film has been
exploited in the domestic and international theatrical markets and the domestic and international home video markets, as well as the domestic and international pay television and pay-per-view markets, and a television program has been exploited on
network television or in first-run syndication. A similar portion of the films or television programs capitalized costs should be expected to be amortized accordingly, assuming the film or television program is profitable.





The commercial potential of individual motion pictures and television programming varies dramatically, and is not directly
correlated with production or acquisition costs. Therefore, it is difficult to predict or project a trend of our income or loss. However, the likelihood that we report losses, particularly in the year of a motion pictures release, is increased
by the industrys method of accounting which requires the immediate recognition of the entire loss (through increased amortization) in instances where it is estimated the ultimate revenues of a motion picture or television program will not
recover our capitalized costs. On the other hand, the profit of a profitable motion picture or television program must be deferred and recognized over the entire revenue stream generated by that motion picture or television program. This method of
accounting may also result in significant fluctuations in reported income or loss, particularly on a quarterly basis, depending on our release schedule, the timing of advertising campaigns and the relative performance of individual motion pictures
or television programs.





Industry Accounting Practices.    Beginning January 1, 2001 we
adopted new accounting rules (see New Accounting Pronouncements below) which require, among other changes, that exploitation costs, including advertising and marketing costs, be expensed as incurred. Theatrical print costs are
amortized over the periods of theatrical release of the respective territories. Under accounting rules in effect for periods prior to January 1, 2001, such costs were capitalized as a part of film costs and amortized over the life of the film using
the individual-film-forecast method. The current practice dramatically increases the likelihood of reporting losses upon a films theatrical release, but will provide for increased returns when a film is released in the ancillary markets of
home video and television, when we incur a much lower proportion of advertising costs. Additional provisions under the new accounting rules include changes in revenue recognition and accounting for development costs and overhead, and reduced
amortization periods for film costs.




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New Accounting Pronouncements.    In June 2000, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 139, Rescission of FASB No. 53 and Amendments to FASB Statements No. 63, 89 and 121, which, effective for financial statements for fiscal years
beginning after December 15, 2000, rescinds Statement of Financial Accounting Standards No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. The companies that were previously subject to the requirements of
Statement of Financial Accounting Standards No. 53 are following the guidance in American Institute of Certified Public Accountants Statement of Position 00-2, Accounting by Producers or Distributors of Films, issued in June 2000.
Statement of Position 00-2 establishes new accounting and reporting standards for all producers and distributors that own or hold the rights to distribute or exploit films. Statement of Position 00-2 provides that the cumulative effect of changes in
accounting principles caused by its adoption should be included in the determination of net income in conformity with Accounting Principles Board Opinion No. 20, Accounting Changes. We adopted the statement of position on January 1,
2001, and recorded a one-time, non-cash cumulative effect charge to earnings of $382.3 million, primarily to reduce the carrying value of our film and television costs. The new rules also require that advertising costs be expensed as incurred as
opposed to the old rules which generally allowed advertising costs to be capitalized as part of film costs and amortized using the individual-film-forecast method. Due to the significant advertising costs incurred in the early stages of a
films release, we anticipate that the new rules will significantly impact our results of operations for the foreseeable future.





In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of Financial Accounting Standards Board No. 133, and by Statement of Financial Accounting Standards No.
138, Accounting for Certain Derivative Instruments and Certain Hedging Activities-an Amendment of Financial Accounting Standards Board Statement No. 133, which is effective for all quarters of fiscal years beginning after June 15, 2000.
This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We adopted Statement of Financial Accounting Standards No.
133 beginning January 1, 2001, and recorded a one-time, non-cash cumulative effect adjustment in stockholders equity and other comprehensive income of $0.5 million. The adoption of Statement of Financial Accounting Standards No. 133 did not
materially impact our results of operations.





In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141, Business Combinations. This statement has eliminated the flexibility to account for some mergers and acquisitions as pooling of interests, and effective as of July 1, 2001, all
business combinations are to be accounted for using the purchase method. We adopted this statement as of July 1, 2001, and the impact of such adoption did not have a material adverse impact on our financial statements.





In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value-based test. Under this
statement, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows, which include feature film operations, television programming operations, cable channels and other businesses (licensing and
merchandising, music and interactive operations). We adopted this statement beginning January 1, 2002, and upon adoption we did not recognize any impairment of goodwill already included in the financial statements. We expect to receive future
benefits from previously acquired goodwill over an indefinite period of time. Accordingly, beginning January 1, 2002, we have foregone all related amortization expense, which totaled $3.7 million and $7.4 million for the quarter and six months ended
June 30, 2001. Since we are recording our equity in net earnings of the cable channels on a one-quarter lag, amortization of goodwill of the cable channels ($9.5 million for the quarter ended March 31, 2002) is not included in the calculation of our
equity in the net earnings in this investment commencing with the quarter ended June 30, 2002.




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





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




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Results of Operations





The following table sets forth our reported operating results for the quarter ended June 30, 2002 (the 2002 Quarter) and the quarter ended June 30, 2001 (the
2001 Quarter), as well as the six months ended June 30, 2002 (the 2002 Period) and June 30, 2001 (the 2001 Period):





Quarters Ended June
30,


Six Months Ended June 30,2002


2001


2002


2001(in thousands, unaudited)Revenues:Feature films

$
297,365


$
230,588


$
578,011


$
531,141Television programs


30,055



36,182



55,176



73,190Other


9,503



8,089



18,864



14,424Total revenues

$
336,923



274,859


$
652,051


$
618,755Operating income (loss):Feature films

$
(73,642
)

$
(22,421
)

$
(118,393
)

$
(10,432
)Television programs


(3,941
)


4,640



(8,331
)


10,966Other


5,821



4,503



9,451



5,241General and administrative expenses


(22,642
)


(22,612
)


(38,901
)


(43,041
)Depreciation and non-film amortization


(4,849
)


(8,056
)


(9,477
)


(16,001
)Operating loss


(99,253
)


(43,946
)


(165,651
)


(53,267
)Equity in net earnings (losses) of affiliates


6,019



(1,147
)


(815
)


(1,259
)Interest expense, net of amounts capitalized


(26,530
)


(13,475
)


(42,625
)


(22,928
)Interest and other income, net


930



1,360



1,625



7,137Loss before provision for income taxes


(118,834
)


(57,208
)


(207,466
)


(70,317
)Income tax provision


(2,975
)


(4,097
)


(5,135
)


(8,509
)Net loss before cumulative effect of accounting change


(121,809
)


(61,305
)


(212,601
)


(78,826
)Cumulative effect of accounting change














(382,318
)Net loss

$
(121,809
)

$
(61,305
)

$
(212,601
)

$
(461,144
)





As discussed above, on January 1, 2001 we adopted Statement of
Position 00-2, which established new accounting and reporting standards for all producers and distributors that own or hold the rights to distribute or exploit films (see Industry Accounting Practices). As a result of the adoption
of the new accounting rules, as of January 1, 2001 we recorded a one-time, non-cash cumulative effect charge to the consolidated statement of operations of $382.3 million, primarily to reduce the carrying value of our film and television inventory.





Unconsolidated companies include our investment in the Rainbow Media Group cable channels and our investment in
joint ventures acquired in 2001 and 2002 (see Recent Developments above), as well as various interests in international cable channels located in 40 countries, the majority of which are accounted for under the




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equity method. Consolidated and unconsolidated companies revenues, operating income (loss) and EBITDA are as follows:





Quarters Ended June
30,


Six Months Ended June 30,2002


2001


2002


2001(in thousands, unaudited)Revenues:Consolidated companies

$
336,923


$
274,859


$
652,051


$
618,755Unconsolidated companies


31,977



8,497



63,728



16,226Total

$
368,900


$
283,356


$
715,779


$
634,981Operating income (loss):Consolidated companies

$
(99,253
)

$
(43,946
)

$
(165,651
)

$
(53,267
)Unconsolidated companies


6,446



(504
)


(862
)


(186
)Total

$
(92,807
)

$
(44,450
)

$
(166,513
)

$
(53,453
)EBITDA:Consolidated companies

$
(94,404
)

$
(35,890
)

$
(156,174
)

$
(37,266
)Unconsolidated companies


7,783



(331
)


10,576



157Total

$
(86,621
)

$
(36,221
)

$
(145,598
)

$
(37,109
)





While management considers EBITDA to be an important measure of
comparative operating performance, it should be considered in addition to, but not as a substitute for or superior to, operating income, net earnings, cash flow and other measures of financial performance prepared in accordance with accounting
principles generally accepted in the United States. EBITDA does not reflect cash available to fund cash requirements, and the items excluded from EBITDA, such as depreciation and non-film amortization, are significant components in assessing our
financial performance. Other significant uses of cash flows are required before cash will be available to us, including debt service, taxes and cash expenditures for various long-term assets. Our calculation of EBITDA may be different from the
calculation used by other companies and, therefore, comparability may be limited. For purposes of our calculation, unconsolidated EBITDA includes unconsolidated operating income (loss) and the add-back of depreciation expense and amortization of
goodwill of $1.3 million and $11.4 million for the quarter and six months ended June 30, 2002, and $0.2 million and $0.3 million for the quarter and six months ended June 30, 2001, respectively.





See further details of operating changes under segments discussion below.





Feature Films





Consolidated feature films revenues,
operating income and EBITDA are as follows:





Quarters Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001(in thousands, unaudited)Revenues

$
297,365


$
230,588


$
578,011


$
531,141Operating loss and EBITDA

$
(73,642
)

$
(22,421
)

$
(118,393
)

$
(10,432
)





Quarter Ended June 30, 2002 Compared to Quarter Ended June 30,
2001





Revenues.    Feature film revenues increased by $66.8 million, or 29 percent,
to $297.4 million in the 2002 Quarter compared to the 2001 Quarter.




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Worldwide theatrical revenues decreased by $1.6 million, or six percent, to $25.9
million in the 2002 Quarter, principally due to the performance of our domestic theatrical releases WindtalkersandDeuces Wild. In the 2001 Quarter, we released Whats The Worst That Could Happen,as well as
benefiting from continued theatrical receipts fromHannibalandHeartbreakerswhich were released in the first quarter of 2001. Overall, in the 2002 Quarter, we released four new feature films domestically and one new film
internationally. In the 2001 Quarter, we released one new feature film domestically and two new films internationally.





Worldwide home video revenues increased by $76.7 million, or 70 percent, to $187.1 million in the 2002 Quarter. In the 2002 Quarter, we released Bandits, Rollerball and No Mans Land in the domestic home
video marketplace, as well benefiting from the release of Banditsand Legally Blonde in international markets, and various library sales promotions. In the 2001 Quarter, our home video releases included Antitrust in the domestic
marketplace. In the 2002 Quarter, DVD sales increased to $131.6 million, or 77 percent, from $74.5 million in the 2001 Quarter.





Worldwide pay television revenues from feature films were $39.7 million in each of the 2002 Quarter and the 2001 Quarter. We recognized higher domestic pay revenues in the 2002 Quarter due to the delivery of Legally Blonde and
Heartbreakers, as compared to the delivery of Return To Me in the domestic market in the 2001 Quarter. International pay television revenues, however, were lower in the 2002 Quarter due to significant license fees realized in the 2001
Quarter for The World Is Not Enough and The Thomas Crown Affair. Network television revenues decreased by $1.4 million, or 69 percent, to $0.7 million in the 2002 Quarter, principally due to the delivery of For Your Eyes Only in
the 2001 Quarter with no comparable licenses in the 2002 Quarter. Worldwide syndicated television revenues from feature films decreased by $9.3 million, or 19 percent, to $38.7 million in the 2002 Quarter, principally due to fewer new releases in
international markets, as compared to the licensing in the 2001 Quarter of The World Is Not Enough, Tomorrow Never Dies and Species 2 in international markets, among others.





Operating Results.    Operating income and EBITDA from feature films decreased by $51.2 million, or 228 percent, to a loss of $73.6 million
in the 2002 Quarter from a loss of $22.4 million in the 2001 Quarter. The decrease in operating income and EBITDA from feature films reflected the less than anticipated theatrical performance of Windtalkers, as well as increased distribution
expenses which were $43.0 million higher than the 2001 Quarter. Additionally, feature film write-downs in the 2002 Quarter were $41.8 million compared to write-downs of $19.1 million in the 2001 Quarter. These decreases were partially offset by the
aforementioned improvement in home video performance in the 2002 Quarter.





Six Months Ended June 30, 2002
Compared to Six Months Ended June 30, 2001





Revenues.    Feature film revenues
increased by $46.9 million, or nine percent, to $578.0 million in the 2002 Period compared to the 2001 Period.





Worldwide theatrical revenues decreased by $70.7 million, or 58 percent, to $50.7 million in the 2002 Period, principally due to the performance of our domestic theatrical releases Windtalkers,Rollerball and
Harts War, which generated lower theatrical revenues than the releases of Hannibal,Heartbreakers and Whats The Worst That Could Happen in the 2001 Period. Overall, in the 2002 Period, we released nine new
feature films domestically and two films internationally. In the 2001 Period, we released four feature films domestically and internationally.





Worldwide home video revenues increased by $134.8 million, or 59 percent, to $361.9 million in the 2002 Period. In 2002, we released Bandits, Rollerball, Jeepers Creepers, Whats The
Worst That Could Happen,Original Sin and Ghost World in the domestic home video marketplace, as well as benefiting from the continuing sales of Hannibal and Legally Blonde, among others, and various library sales
promotions. In the 2001 Period, our home video releases included Autumn in New YorkandAntitrust in the domestic marketplace. In the 2002 Period, DVD sales increased to $254.6 million, or 75 percent, from $145.1 million in the 2001
Period.




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Worldwide pay television revenues from feature films increased by $0.9 million,
or one percent, to $72.1 million in the 2002 Period, principally due to the delivery of Hannibal, Legally Blonde and Heartbreakers to domestic pay television as compared to the delivery of Return To Me and Supernova in the 2001
Period. This increase was partially offset by the timing of international television licenses in the 2002 Period. Network television revenues increased by $6.4 million, or 311 percent, to $8.5 million in the 2002 Period, principally due to the
delivery of The Thomas Crown Affairin 2002. Worldwide syndicated television revenues from feature films decreased by $26.9 million, or 26 percent, to $77.2 million in the 2002 Period, principally due to fewer new releases in domestic and
international markets, as compared to the licensing in the 2001 Period of Roninand Species 2 in domestic markets, and sales in international markets for The World Is Not Enough, Tomorrow Never Dies,Species 2 and
The Man In The Iron Mask,among others.





Operating Results.    Operating income
and EBITDA from feature films decreased by $108.0 million, or 1,035 percent, to a loss of $118.4 million in the 2002 Period as compared to the 2001 Period. The decrease in operating income and EBITDA from feature films reflected the disappointing
theatrical performances of Windtalkers, Rollerball,Harts WarandDeuces Wild,as well as increased distribution expenses which were $30.5 million higher than in the 2001 Period. Additionally, in the 2001
Period we benefited from the successful theatrical performance of Hannibal. Partially offsetting these comparisons was the significant improvement in home video performance in the 2002 Period mentioned above. Overall, we incurred feature film
write-downs of $74.1 million in the 2002 Period as compared to write-downs of $19.1 million in the 2001 Period. Additionally, we incurred higher bad debt expenses in the 2002 Period, resulting in additional charges of $15.3 million compared to the
2001 Period.





Television Programming





Consolidated television programming revenues, operating income (loss) and EBITDA are as follows:





Quarters Ended June 30,

Six Months Ended June 30,2002


2001

2002


2001(in thousands, unaudited)Revenues

$
30,055


$
36,182

$
55,176


$
73,190Operating income (loss) and EBITDA

$
(3,941
)

$
4,640

$
(8,331
)

$
10,966





Quarter Ended June 30, 2002 Compared to Quarter Ended June 30,
2001





Revenues.    Television programming revenues decreased by $6.1 million, or 17
percent, to $30.1 million in the 2002 Quarter compared to the 2001 Quarter.





Worldwide pay television revenues
increased by $3.7 million, or 72 percent, to $9.0 million in the 2002 Quarter, principally due to the addition of the new series Jeremiah airing on domestic pay television. Worldwide syndicated television programming revenues decreased by
$9.3 million, or 35 percent, to $17.0 million in the 2002 Quarter, primarily due to fewer series in syndication in domestic markets. In the 2002 Quarter, we had two series in syndication as compared to four series in the 2001 Quarter.Worldwide home video revenues with respect to television programming decreased by $0.3 million, or six percent, to $4.0 million in the 2002 Quarter, primarily due to higher sales of Stargate SG-1in the 2001 Quarter.





Operating Results.    Operating income and EBITDA from television programming decreased by $8.6
million, or 185 percent, to a loss of $3.9 million in the 2002 Quarter, principally due to the decrease in revenues described above as well as increased write-downs on new series.





Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001





Revenues.    Television programming revenues decreased by $18.0 million, or 25 percent, to $55.2 million in the 2002 Period compared to the 2001 Period.




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Worldwide pay television revenues increased by $4.9 million, or 51 percent, to
$14.5 million in the 2002 Period, principally due to the addition of the new series Jeremiah airing on domestic pay television. Worldwide syndicated television programming revenues decreased by $26.0 million, or 46 percent, to $30.5 million
in the 2002 Period, primarily due to fewer series in syndication in domestic markets. In the 2002 Period, we had two series in syndication as compared to four series in the 2001 Period.Worldwide home video revenues with respect to television
programming increased by $2.3 million, or 35 percent, to $9.0 million in the 2002 Period, primarily due to increased international sales of Stargate SG-1.





Operating Results.    Operating income and EBITDA from television programming decreased by $19.3 million, or 176 percent, to a loss of $8.3 million in the 2002 Period,
principally due to the decrease in revenues described above as well as increased write-downs on new series than in the 2001 Period.





Other Businesses





Consolidated revenues, operating income and EBITDA from
other businesses, including consumer products, interactive media and branded programming services, music soundtrack and royalty income, are as follows:





Quarters Ended June 30,

Six Months Ended June 30,2002

2001

2002

2001(in thousands, unaudited)Revenues

$
9,503

$
8,089

$
18,864

$
14,424Operating income and EBITDA

$
5,821

$
4,503

$
9,451

$
5,241





Quarter Ended June 30, 2002 Compared to Quarter Ended June 30,
2001





Revenues.    Revenues from other businesses increased by $1.4 million, or 17
percent, to $9.5 million in the 2002 Quarter as compared to the 2001 Quarter. Operating results in the 2002 Quarter included consumer products revenue of $3.3 million and music soundtrack and royalty revenue of $3.2 million, as compared to consumer
products revenue of $2.8 million and music soundtrack and royalty revenue of $3.4 million in the 2001 Quarter. Interactive media revenues were $2.1 million in the 2002 Quarter as compared to revenues of $1.6 million in the 2001 Quarter.
Additionally, revenues from other businesses in the 2002 Quarter include the receipt of $0.9 million in third party audit recoveries and other miscellaneous income as compared to recoveries of $0.3 million in the 2001 Quarter.





Operating Results.    Operating income and EBITDA from other businesses increased by $1.3 million,
or 29 percent, to $5.8 million in the 2002 Quarter, principally due to the increased revenues mentioned above and lower overhead costs. Expenses for other businesses include interactive product costs of $1.6 million in the 2002 Quarter as compared
to $0.9 million of such costs in the 2001 Quarter. Consumer products cost of sales were $1.0 million in the 2002 Quarter and $0.6 million in the 2001 Quarter. Overhead costs related to other businesses aggregated $1.1 million in the 2002 Quarter and
$2.0 million in the 2001 Quarter. The decrease in overhead costs principally reflected reduced spending on our website.





Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001





Revenues.    Revenues from other businesses increased by $4.4 million, or 31 percent, to $18.9 million in the 2002 Period as compared to the 2001 Period. Operating results in the 2002 Period included
consumer products revenue of $5.5 million and music soundtrack and royalty revenue of $4.5 million, as compared to consumer products revenue of $4.8 million and music soundtrack and royalty revenue of $4.8 million in the 2001 Period. Interactive
media revenues were $7.2 million in the 2002 Period, which included royalties from the interactive game007-Agent Under Fire, as compared to revenues of $3.8 million in the 2001 Period. Additionally, revenues from other businesses in
the 2002 Period include the receipt of $1.7 million in third party audit recoveries and other miscellaneous income as compared to recoveries of $1.1 million in the 2001 Period.




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Operating Results.    Operating income and EBITDA from
other businesses increased by $4.2 million, or 80 percent, to $9.5 million in the 2002 Period, principally due to the favorable interactive game revenues as well as lower overhead costs. Expenses for other businesses include interactive product
costs of $4.3 million in the 2002 Period as compared to $2.4 million of such costs in the 2001 Period. Consumer products cost of sales were $1.7 million in the 2002 Period and $1.0 million in the 2001 Period. Overhead costs related to other
businesses aggregated $2.7 million in the 2002 Period and $4.2 million in the 2001 Period. The decrease in overhead costs principally reflected reduced spending on our website. Other expenses aggregated $0.7 million in the 2002 Period and $1.6
million in the 2001 Period. Such expenses include distribution costs associated with music and branded programming services, as well as foreign currency transaction losses.





Corporate and Other





Quarter Ended June 30, 2002
Compared to Quarter Ended June 30, 2001





General and Administrative
Expenses.    General and administrative expenses were $22.6 million in each of the 2002 Quarter and the 2001 Quarter. In the 2002 Quarter, we benefited from significantly lower incentive plan costs, both for our current
employees and related to certain of our former senior executives (associated with the change in the price of our common stock), partially offset by higher employee severance costs.





Depreciation and Non-Film Amortization.    Depreciation and non-film amortization in the 2002 Quarter decreased by $3.2 million, or 40 percent,
to $4.8 million, as compared to the 2001 Quarter, due to the elimination of the amortization of our goodwill in 2002 ($3.7 million for the 2001 Quarter) in accordance with the adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets on January 1, 2002 (see New Accounting Pronouncements).





Equity in Net Earnings (Losses) of Affiliates.    Equity in net earnings (losses) of affiliates include our interest in the Rainbow Media Group cable channels acquired on April 2, 2001 and our investment in
joint ventures acquired in 2001 and 2002, as well as various interests in international cable channels located in 40 countries. Earnings in the Rainbow Media Group cable channels are being reported on a one-quarter lag. See Recent
Developments.





In the 2002 Quarter, EBITDA from unconsolidated companies was $7.8 million, operating
earnings were $6.4 million and net earnings were $6.0 million, respectively. In the 2002 Quarter, we benefited from the inclusion of our share of the operating results of the Rainbow Media Group cable channels, which contributed $8.2 million in
EBITDA. In the 2001 Quarter, EBITDA from unconsolidated companies was a loss of $0.3 million, operating losses were $0.5 million and net losses were $1.1 million, respectively.





Interest Expense, Net of Amounts Capitalized.    Net interest expense in the 2002 Quarter increased by $13.1 million, or 97 percent, to $26.5
million, as compared to the 2001 Quarter, primarily due to the write-off of deferred loan fees of $12.0 million associated with our credit facility, which was amended during the period, as well as lower interest capitalized on film production in the
period.





Interest and Other Income, Net.    Interest and other income in the 2002
Quarter decreased by $0.4 million, or 32 percent, to $0.9 million, as compared to the 2001 Quarter due to miscellaneous corporate expenses incurred in the 2002 Quarter.





Income Tax Provision.    The provision for income taxes in the 2002 Quarter decreased by $1.1 million, or 27 percent, to $3.0 million, as
compared to the 2001 Quarter, principally due to lower foreign remittance taxes attributable to decreased international distribution revenues.





Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001





General and Administrative Expenses.    In the 2002 Period, general and administrative expenses decreased by $4.1 million, or ten percent, to $38.9 million, as compared to the 2001 Period. The decrease
reflected




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significantly lower incentive plan costs, both for our current employees and related to certain of our former senior executives (associated with the change in the price of our common stock),
partially offset by increased professional fees.





Depreciation and Non-Film
Amortization.    Depreciation and non-film amortization in the 2002 Period decreased by $6.5 million, or 41 percent, to $9.5 million, as compared to the 2001 Period, due to the elimination of the amortization of our goodwill
in 2002 ($7.4 million for the 2001 Period) in accordance with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets on January 1, 2002 (see New Accounting
Pronouncements).





Equity in Net Earnings (Losses) of Affiliates.    In the
2002 Period, EBITDA from unconsolidated companies was $10.6 million, operating losses were $0.9 million and net losses were $0.8 million, respectively. In the 2002 Period, we benefited from the inclusion of our share of the operating results of the
Rainbow Media Group cable channels, which contributed $13.4 million in EBITDA. On a net basis, due to the one quarter lag in reporting of this investment, the 2002 Period results were offset by amortization of goodwill of $9.5 million related to our
investment in the cable channels. In the 2001 Period, EBITDA from unconsolidated companies was $0.2 million, operating losses were $0.2 million and net losses were $1.3 million, respectively.





Interest Expense, Net of Amounts Capitalized.    Net interest expense in the 2002 Period increased by $19.7 million, or 86 percent, to $42.6
million, as compared to the 2001 Period, primarily due to the write-off of deferred loan fees of $12.0 million associated with our credit facility, which was amended during the period, as well as borrowings for our operating activities.





Interest and Other Income, Net.    Interest and other income in the 2002 Period
decreased by $5.5 million, or 77 percent, to $1.6 million, as compared to the 2001 Period due to lower interest income earned on our short-term investments. We had higher average invested balances in the 2001 Period than in the 2002 Period, due to
cash investments we were holding until April 2, 2001 when we acquired our interest in the Rainbow Media Group cable channels.





Income Tax Provision.    The provision for income taxes in the 2002 Period decreased by $3.4 million, or 40 percent, to $5.1 million, as compared to the 2001 Period, principally due to lower foreign
remittance taxes attributable to decreased international distribution revenues.





Liquidity and Capital Resources





General.    Our operations are capital intensive. In recent years we have funded our operations
primarily from (i) the sale of equity securities, (ii) bank borrowings and (iii) internally generated funds. During the 2002 Period, the net cash used in operating activities was $67.7 million, which included film and television production and
distribution costs of $367.5 million; net cash used in investing activities was $12.9 million; and net cash provided by financing activities was $524.8 million, including net advances under bank borrowings of $375.7 million and net proceeds from the
sale of common stock of $165.9 million.





Public Offering.    On March 18, 2002,
pursuant to a Form S-3 shelf registration statement filed with the Securities and Exchange Commission, we completed the sale of 10,550,000 shares of common stock at $16.50 per share, less an underwriting discount of $0.825 per share, in an
underwritten public offering for aggregate net proceeds of $164,771,000. We intend to use the net proceeds from the stock offering for general corporate purposes, including reduction of the revolving portion of our credit facility, financing of
business operations and potential acquisitions.





Bank Borrowings.    On June 11, 2002,
we successfully renegotiated our pre-existing credit facility with a syndicate of banks resulting in a $1.75 billion third amended and restated syndicated credit facility consisting of (i) a five-year $600.0 million revolving credit facility, (ii) a
five-year $300.0 million term loan and (iii) a six-year




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$850.0 million term loan. As of July 23, 2002, $579.9 million, including outstanding letters of credit, was available under our credit facility. Additionally, as of July 23, 2002, we have cash on
hand of approximately $417.4 million.





Currently, the revolving facility and the $300.0 million five-year term
loan bear interest at 2.75 percent over the Adjusted LIBOR rate, as defined therein (4.60 percent at July 23, 2002), and the $850.0 million six-year term loan bears interest at 3.00 percent over the Adjusted LIBOR rate (4.85 percent at July 23,
2002). We have entered into three-year fixed interest rate swap contracts in relation to a portion of our credit facility for a notional value of $585.0 million at an average rate of approximately 5.91 percent, which expire in July 2003. Because
these swap agreements carry interest rates that currently exceed our borrowing rates under our credit facilities, we will recognize additional interest costs, which will be charged against future earnings. We have also entered into additional
forward interest rate swap contracts for a notional value of $100.0 million at an average rate of approximately 2.34 percent, which expire in January 2003.





As of July 23, 2002, the term loans had an outstanding balance of $1.15 billion. Scheduled amortization of the term loans under our credit facility is as follows: $16.4 million in 2003, $65.6 million
in each of 2004, 2005 and 2006, $122.8 million in 2007, and $813.9 million in 2008. The revolving facility matures on June 30, 2007.





Our credit facility contains various covenants, including limitations on indebtedness, dividends and capital expenditures, and maintenance of certain financial ratios. Our credit facility limits the amount of the investment
in MGM which may be made by Metro-Goldwyn-Mayer Studios Inc. and Orion Pictures Corporation, both of which are wholly-owned subsidiaries, in the form of loans or advances, or purchases of capital stock of MGM, up to a maximum aggregate amount of
$500.0 million (or a maximum aggregate amount of $300.0 million in the event that MGM Studios elects to release its investment in the cable channels from the loan collateral, as permitted under the credit facility). As of June 30, 2002, there are no
outstanding loans or advances to MGM by such subsidiaries, nor have such subsidiaries purchased any capital stock of MGM. Restricted net assets of Metro-Goldwyn-Mayer Studios Inc. and Orion Pictures Corporation at June 30, 2002 are approximately
$2.0 billion. Although we are in compliance with all terms of our credit facility, there can be no assurances that we will remain in compliance with such covenants or other conditions under our credit facility in the future. We anticipate
substantial continued borrowing under our credit facility.





Cash Used in Operating
Activities.    In the 2002 Period, cash used in operating activities was $67.7 million compared to cash used in operating activities of $44.6 million in the 2001 Period. Included in cash used in operating activities were film
and television production and distribution costs of $367.5 million in the 2002 Period and $376.3 million in the 2001 Period.





Cash Used in Investing Activities.    In the 2002 Period, cash used in investing activities was $12.9 million compared to cash used in investing activities of $829.5 million in the 2001 Period, which
included the purchase of our equity interest in Rainbow Medias cable channels for $825.0 million.





Cash
Provided by Financing Activities.    In the 2002 Period, cash provided by financing activities was $524.8 million, which included net advances under bank borrowings of $375.7 million and net proceeds from the sale of common
stock of $165.9 million. In the 2001 Period, cash provided by financing activities was $810.6 million, consisting of $640.4 million in net proceeds from the sale of equity securities as well as $170.2 million in net advances under bank borrowings.




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Commitments.    Future minimum annual commitments
under bank and other debt agreements, non-cancelable operating leases, employment agreements, creative talent agreements and letters of credit as of June 30, 2002 are as follows (in thousands, unaudited):





2002

2003

2004

2005

2006

There- after

TotalBank and other debt

$
55,560

$
22,100

$
66,309

$
65,643

$
65,643

$
936,660

$
1,211,915Operating leases


5,488


14,826


16,394


16,455


17,042


238,931


309,136Employment agreements


18,243


24,852


9,484


18


2





52,599Creative talent agreements


7,999


8,882


688











17,569Letters of credit


20,038


90














20,128Total

$
107,328

$
70,750

$
92,875

$
82,116

$
82,687

$
1,175,591

$
1,611,347





We do not expect our obligations for property and equipment
expenditures, including the purchase of computer systems and equipment and leasehold improvements, to exceed $35.0 million per year.





We are obligated to fund 50 percent of the expenses of MGM Networks Latin America up to a maximum of approximately $24.3 million. We have funded approximately $24.0 million under such obligation as of June 30, 2002.





We are committed to fund our share of the operating expenses of certain joint ventures, as required. See
Recent Developments.





Anticipated Needs.    Our current strategy and
business plan call for substantial ongoing investments in the production of new feature films and television programs. Furthermore, we may wish to continue to make investments in new distribution channels to further exploit our motion picture and
television library. We plan to continue to evaluate the level of such investments in the context of the capital available to us and changing market conditions. Currently, we would require additional sources of financing if we decided to make any
additional significant investments in new distribution channels.





We believe that the amounts available under the
revolving facility and cash flow from operations will be adequate for us to conduct our operations in accordance with our business plan for at least the next 12 months. This belief is based in part on the assumption that our future releases will
perform as planned. Any significant decline in the performance of our films could adversely impact our cash flows and require us to obtain additional sources of funds. In addition to the foregoing sources of liquidity, we are currently considering
various film financing alternatives.





If necessary in order to manage our cash needs, we may also delay or alter
production or release schedules or seek to reduce our aggregate investment in new film and television production costs. There can be no assurance that any such steps would be adequate or timely, or that acceptable arrangements could be reached with
third parties if necessary. In addition, although these steps would improve our short-term cash flow and, in the case of partnering, reduce our exposure should a motion picture perform below expectations, such steps could adversely affect long-term
cash flow and results of operations in subsequent periods.





We intend to continue to pursue our goal of becoming
an integrated global entertainment content company. In connection with our pursuit of this goal, we may consider various strategic alternatives, such as business combinations with companies with strengths complementary to those of ours, other
acquisitions and joint ventures, as opportunities arise. The nature, size and structure of any such transaction could require us to seek additional financing.





Item 3.    
Quantitative and Qualitative Disclosures about Market Risk





We are exposed to the impact
of interest rate changes as a result of our variable rate long-term debt. Accordingly, we have entered into several interest rate swap agreements whereby we agree with other parties to




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exchange, at specified intervals, the difference between fixed-rate and floating-rate amounts calculated by reference to an agreed notional principal amount. The swap agreements expire in July
2003. We will continue to evaluate strategies to manage the impact of interest rate changes on earnings and cash flows.





At July 23, 2002, $465.0 million of our term debt was exposed to interest rate risk.





The
following table provides information about our interest rate swaps outstanding at June 30, 2002:





Amounts scheduled for
maturity for the year ending December 31,
2003


Estimated fair value at June 30, 2002Interest Rate SwapsVariable to fixed:Notional value (in thousands)

$
585,000


$
(21,602
)Average pay rate


5.910
%Spot rate


1.909
%Variable to fixed:Notional value (in thousands)

$
100,000


$
(218
)Average pay rate


2.340
%Spot rate


1.840
%





We are subject to market risks resulting from fluctuations in
foreign currency exchange rates because approximately 25 percent of our revenues are denominated, and we incur certain operating and production costs, in foreign currencies. In certain instances, we enter into foreign currency exchange contracts in
order to reduce exposure to changes in foreign currency exchange rates that affect the value of our firm commitments and certain anticipated foreign currency cash flows. We currently intend to continue to enter into such contracts to hedge against
future material foreign currency exchange rate risks. The following table provides information about our foreign currency forward contracts outstanding at June 30, 2002:





Amounts scheduled for
maturity for the year ending December 31,
2002

Estimated fair value at June 30, 2002Foreign Currency Forward ContractsContract amount (in thousands) (receive CAD, pay $US)

$
18,445

$
337Spot rate


1.5452Forward rate


1.5169Contract amount (in thousands) (receive GBP, pay $US)

$
4,033

$
175Spot rate


1.4666Forward rate


1.5320




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PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





On November 17, 1997, MGM and Danjaq filed an action entitled
Danjaq, LLC, et al. v. Sony Corporation, Kevin McClory,et al. in federal court in Los Angeles (Case No. 97-8414ER (Mcx)) relating to a press release issued by Sony Pictures announcing plans to produce a series of new James Bond
feature films based on alleged rights that Sony had acquired from Kevin McClory. Mr. McClory had been a producer of Thunderball. On July 29, 1998, the court preliminarily enjoined Sony Pictures and the other defendants from the
production, preparation, distribution, advertising or other exploitation in the United States of a James Bond motion picture in any medium and from using the James Bond and the James Bond 007 trademarks in the United States.
On March 29, 1999, MGM and Danjaq entered into a settlement agreement with Sony Pictures and related parties that provided for a payment by the Sony parties and an agreement by the Sony parties which effectively makes permanent the courts July
1998 preliminary injunction. Under the terms of a separate agreement entered into on March 29, 1999, MGM and Danjaq acquired from Columbia all of Columbias rights to Casino Royale and the Sony parties agreed to broaden the contractual
prohibition regarding making or distributing James Bond films and the James Bond trademarks, as described above, throughout the world. Mr. McClory did not participate in the settlement and retained a counterclaim against MGM and Danjaq for copyright
infringement. The trial with Mr. McClory commenced on March 28, 2000. On that date, the judge bifurcated the case to hear MGMs and Danjaqs laches defense before commencing the jury trial on Mr. McClorys counterclaim. The judge
issued his ruling on this defense on March 31, 2000, finding that Mr. McClorys claim was barred by laches as a matter of law, and dismissed the entire case with prejudice. On May 2, 2000, Mr. McClory appealed the courts decision. On
August 27, 2001, the Ninth Circuit Court of Appeals upheld the District Courts dismissal of the case. On September 16, 2001, Mr. McClory filed a petition for rehearing. On December 19, 2001 the Ninth Circuit Court of Appeals denied the
petition for rehearing. Mr. McClorys time for all appeals has lapsed.





On January 19, 2000, a complaint was
filed naming Metro-Goldwyn-Mayer Home Entertainment Inc. as a defendant in a matter entitled Ronald Cleveland d/b/a Lone Star Videotronics, et al. v. Viacom Inc., et al.(Case No. 99CA0783-EP). The case was filed as a putative class action in
the United States District Court for the Western District of Texas San Antonio Division, but on March 16, 2001, the Court denied plaintiffs motion to certify a class. Viacom Inc., Paramount Home Video, Inc., Buena Vista Home Entertainment,
Inc., Time Warner Entertainment Company, L.P. d/b/a Warner Home Video, Columbia Tri-Star Home Video, Inc., Universal Studios Home Video, Inc., and Twentieth Century Fox Home Entertainment, Inc. are also named as defendants in the action, which was
originally filed against them on July 21, 1999. The plaintiffs claim that the defendant studios conspired with each other and with Blockbuster Inc. with respect to their home video rental distribution arrangements to discriminate illegally against
independent video retailers in favor of Blockbuster in violation of the Sherman Antitrust Act, the California Cartwright Act, the California Unfair Practices Act, and the California Unfair Competition Statute. This case was settled by agreement
dated as of May 6, 2002, the terms of which are confidential. In the opinion of management, the required settlement payment was not material in relation to our financial condition or results of operations.





On April 16, 2001, over two hundred video retailers, including plaintiffs in the Clevelandcase noted above, sued Sumner Redstone,
Viacom Inc., Blockbuster Inc., and several studio Home Entertainment entities, including Metro-Goldwyn-Mayer Home Entertainment Inc., in Superior Court in Los Angeles, California, in a matter entitled John Merchant d/b/a 49er Video, et al.
v. Redstone, et al. (Case No. BC 244270).The case is styled as a representative action, as well as an individual action, and also was originally styled as a putative class action. On January 9, 2002, the Court denied plaintiffs motion to
certify a class. The plaintiffs claim that defendants conspired with each other and Blockbuster Inc. with respect to their home video rental distribution arrangements to discriminate illegally against independent video retails in favor of
Blockbuster in violation of the California Cartwright Act, the California Unfair Practice Act, and the California Unfair Competition Statute. This case was settled by agreement dated as of May 6, 2002, the terms of which are confidential. In the
opinion of management, the required settlement payment was not material in relation to our financial condition or results of operations.





On October 9, 2000, MGM Studios was served with the complaint in Citizens for Fair Treatment v. Time Warner Entertainment, et al.(Case No. 063137), an industry-wide action brought by a public interest




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organization, which claims that the seven major studios and New Line Cinema have violated California laws prohibiting deceptive, unfair and unlawful business practices by allegedly marketing
R rated films to children under 17 years of age. The basis for the complaint is the findings of the Federal Trade Commissions September 2000 report concerning studio marketing practices. The complaint seeks restitution and
disgorgement of all monies attributable to the alleged wrong-doing, as well as an injunction restraining and enjoining defendants from targeting and marketing R-rated films to children under 17. The studios, including MGM, filed demurrers to the
complaint and, alternatively, motions to strike the complaint, based on our contention that the studios actions about which plaintiff complains constitute speech that is protected by the United States and California constitutions. On February
20, 2001, the trial court denied the studios motions to dismiss and, alternatively, to strike the complaint. The studios, including MGM, filed petitions for writ of mandate challenging the denial of their demurrers and appealed the denial of
their motions to strike. On April 13, 2001, the court of appeal denied the studios petitions for a writ of mandate and the California Supreme Court subsequently declined review of that decision. On February 19, 2002, the court of appeal filed
its opinion and order, unanimously reversing the trial courts decision and directing the trial court to grant the studios motion to strike the complaint in its entirety. Plaintiffs then petitioned for rehearing by the court of appeal and
for review by the California Supreme Court, both of which were denied. On July 5, 2002, the order of the court of appeal became final and the case has been remanded to the trial court for dismissal of the complaint.





Item 4.Submission of Matters to a Vote of Security Holders





At the Annual Meeting of
Stockholders held on May 6, 2002, three proposals were submitted to our stockholders. Our nominees for directors were elected and each of the other proposals was approved. A brief description of those proposals and the results of the voting are as
follows:





Proposal OneElection of twelve (12) directors to serve for a one-year term





Nominee

Votes For

Votes WithheldJames D. Aljian

223,602,136

8,684,377Francis Ford Coppola

231,855,166

431,347Willie D. Davis

231,852,254

434,259Alexander M. Haig, Jr.

231,822,149

464,364Michael R. Gleason

223,602,043

8,684,470Kirk Kerkorian

223,602,676

8,683,837Frank G. Mancuso

231,834,198

452,315Christopher J. McGurk

223,602,600

8,683,913Priscilla Presley

231,839,199

447,314Henry D. Winterstern

231,847,071

439,442Alex Yemenidjian

223,618,555

8,667,958Jerome B. York

231,836,608

449,905





Proposal TwoApproval of amendment to the Amended and Restated 1996 Stock
Incentive Plan





Voting ResultsFor

214,173,551Against

17,908,668Abstain

204,294Broker Non-Votes

0




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Proposal ThreeRatification of appointment of Arthur Andersen LLP as independent auditors of the
Company for the fiscal year ending December 31, 2002





Voting ResultsFor

230,947,782Against

1,289,454Abstain

49,277Broker Non-Votes

0





Item 6.     
Exhibits and Reports on Form 8-K





(a)  Exhibits





Exhibit No.

Document Description10.1

Third Amended and Restated Credit Agreement dated as of June 11, 2002, among MGM Studios, Orion, Bank of America, as
administrative agent, certain lenders and certain L/C issuers*





(b)  Reports on Form 8-K and Form 8-K/A





Date:

Relating to:June 12, 2002

Item 5. Amendment to credit facilityJune 17, 2002

Item 4. Change in Registrants Certifying AccountantJune 17, 2002 8-K/A

Item 4. Change in Registrants Certifying Accountant


---

|* |  | without schedules
|- |  | -----------------



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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





July 25, 2002





METRO-GOLDWYN-MAYER INC.By:

/s/    ALEX YEMENIDJIANAlex Yemenidjian Chairman of the Board of
Directors and Chief Executive Officer





By:

/s/    DANIEL J. TAYLORDaniel J. Taylor Senior Executive Vice
President and Chief Financial Officer




33