##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549





---




FORM 10-Q





---




QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





---




For the Quarterly Period Ended September 30, 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





---




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 October 23, 2002 was 249,523,796.





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##### Table of Contents

METRO-GOLDWYN-MAYER INC.





FORM 10-Q





September 30, 2002





INDEX





Page No.Part I.    Financial InformationItem 1.

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

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

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

3Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 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

16Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30Item 4.

Controls and Procedures

31Part II.    Other InformationItem 2.

Changes in Securities and Use of Proceeds

32Item 5.

Other Information

32Item 6.

Exhibits and Reports on Form 8-K

32Signatures

33Certifications

34







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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)





September 30,2002


December 31,2001(unaudited)ASSETSCash and cash equivalents

$
346,837


$
2,698Accounts and contracts receivable (net of allowance for doubtful accounts of $38,045 and $26,173,
respectively)


424,504



458,010Film and television costs, net


1,990,545



2,035,277Investments in and advances to affiliates


863,389



845,042Property and equipment, net


36,418



38,837Goodwill


516,706



516,706Other assets


25,765



26,594$
4,204,164


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

$
1,243,190


$
836,186Accounts payable and accrued liabilities


140,589



198,520Accrued participants share


227,877



243,836Income taxes payable


29,696



31,865Advances and deferred revenues


73,331



82,156Other liabilities


30,930



41,119Total liabilities


1,745,613



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


2,520



2,396Additional paid-in capital


3,914,243



3,717,767Deficit


(1,404,471
)


(1,203,565
)Accumulated other comprehensive loss


(20,448
)


(27,116
)Less: treasury stock, at cost, 2,687,015 shares


(33,293
)


Total stockholders equity


2,458,551



2,489,482$
4,204,164


$
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 September 30,


Nine Months Ended September 30,2002


2001


2002


2001Revenues

$
381,156


$
393,310


$
1,033,207


$
1,012,065Expenses:Operating


220,484



206,243



709,638



578,511Selling, general and administrative


132,012



177,849



451,083



461,602Depreciation and non-film amortization


4,928



8,249



14,405



24,250Total expenses


357,424



392,341



1,175,126



1,064,363Operating income (loss)


23,732



969



(141,919
)


(52,298
)Other income (expense):Equity in net earnings (losses) of affiliates


7,140



(2,169
)


6,325



(3,428
)Interest expense, net of amounts capitalized


(18,107
)


(14,287
)


(60,732
)


(37,215
)Interest and other income, net


2,339



1,769



3,964



8,906Total other expenses


(8,628
)


(14,687
)


(50,443
)


(31,737
)Income (loss) from operations before provision for income taxes


15,104



(13,718
)


(192,362
)


(84,035
)Income tax provision


(3,409
)


(2,257
)


(8,544
)


(10,766
)Net income (loss) before cumulative effect of accounting change


11,695



(15,975
)


(200,906
)


(94,801
)Cumulative effect of accounting change














(382,318
)Net income (loss)

$
11,695


$
(15,975
)

$
(200,906
)

$
(477,119
)Income (loss) per share:BasicNet income (loss) before cumulative effect of accounting change

$
0.05


$
(0.07
)

$
(0.81
)

$
(0.41
)Cumulative effect of accounting change














(1.67
)Net income (loss)

$
0.05


$
(0.07
)

$
(0.81
)

$
(2.08
)DilutedNet income (loss) before cumulative effect of accounting change

$
0.05


$
(0.07
)

$
(0.81
)

$
(0.41
)Cumulative effect of accounting change














(1.67
)Net income (loss)

$
0.05


$
(0.07
)

$
(0.81
)

$
(2.08
)Weighted average number of common shares outstanding:Basic


250,708,242



239,429,116



248,099,306



229,554,230Diluted


250,714,711



239,429,116



248,099,306



229,554,230





The accompanying Notes to Condensed Consolidated Financial Statements


are an integral part of these consolidated statements.




2




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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 Loss


Less: Treasury Stock


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


















164,771Acquisition of treasury stock, at cost, 2,383,000 shares



























(26,537
)


(26,537
)Contribution of common stock to deferred compensation plan, 383,940 shares



























(7,608
)


(7,608
)Common stock issued to directors, officers and employees, net






1,781,005


18


31,811














852



32,681Comprehensive income (loss):Net loss















(200,906
)


(200,906
)










(200,906
)Unrealized gain on derivative instruments



















7,494



7,494







7,494Unrealized loss on securities



















(853
)


(853
)






(853
)Foreign currency translation adjustments



















27



27







27Comprehensive loss



















(194,238
)










Balance September 30, 2002 (unaudited)



$


251,960,505

$
2,520

$
3,914,243

$
(1,404,471
)

$



$
(20,448
)

$
(33,293
)

$
2,458,551








The accompanying Notes to Condensed
Consolidated Financial Statements


are an integral part of these consolidated statements.




3




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##### Table of Contents

METRO-GOLDWYN-MAYER INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Nine Months Ended September 30,2002


2001Net cash used in operating activities

$
(166,311
)

$
(79,621
)Investing activities:Investments in and advances to affiliates


(8,145
)


(834,334
)Additions to property and equipment


(12,025
)


(4,448
)Net cash used in investing activities


(20,170
)


(838,782
)Financing activities:Net proceeds from 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


2,138



6,195Acquisition of treasury stock


(26,537
)


Additions to borrowed funds


1,336,965



222,500Repayments of borrowed funds


(929,961
)


(2,790
)Financing fees and other


(16,823
)


Net cash provided by financing activities


530,553



861,544Net change in cash and cash equivalents from operating, investing and financing activities


344,072



(56,859
)Net increase (decrease) in cash due to foreign currency fluctuations


67



(354
)Net change in cash and cash equivalents


344,139



(57,213
)Cash and cash equivalents at beginning of the year


2,698



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

$
346,837


$
19,927








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




4




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##### Table of Contents

METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





September 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 prior year account balances have been reclassified to conform to the current year 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




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB No. 133. This statement establishes accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in contracts, and for hedging activities. The Company adopted SFAS No. 133 on January 1, 2001 and recorded a one-time, non-cash cumulative effect adjustment to stockholders equity and other
comprehensive income (loss) of $469,000. The adoption of SFAS No. 133 has not materially impacted the Companys results of operations.





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, including amounts related to equity investees, totaled $13,291,000 and $20,824,000 for the quarter and nine months ended September 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 nine months ended September 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):





Quarter Ended September 30,
2001


Nine Months Ended September 30, 2001Net Loss


Loss per Share


Net Loss


Loss per ShareNet loss before cumulative effect of accounting change, asreported

$
(15,975
)

$
(0.07
)

$
(94,801
)

$
(0.41
)Elimination of goodwill amortization


3,683



0.02



11,050



0.05Elimination of goodwill amortization related to equity investees


9,608



0.04



9,774



0.04Net loss before cumulative effect of accounting change, asadjusted

$
(2,684
)

$
(0.01
)

$
(73,977
)

$
(0.32
)Quarter Ended September 30,
2001


Nine Months Ended September
30, 2001Net Loss


Loss per Share


Net Loss


Loss per ShareNet loss, as reported

$
(15,975
)

$
(0.07
)

$
(477,119
)

$
(2.08
)Elimination of goodwill amortization


3,683



0.02



11,050



0.05Elimination of goodwill amortization related to equity investees


9,608



0.04



9,774



0.04Net loss, as adjusted

$
(2,684
)

$
(0.01
)

$
(456,295
)

$
(1.99
)





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 on January 1, 2002. The impact of such adoption did not have a
material effect on the Companys financial statements.





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





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





Quarters Ended September 30,


Nine Months Ended September 30,2002

2001


2002


2001Net income (loss)

$
11,695

$
(15,975
)

$
(200,906
)

$
(477,119
)Other comprehensive income (loss):Cumulative effect of accounting change for derivative instruments













469Unrealized gain (loss) on derivative instruments


1,531


(16,303
)


7,494



(29,846
)Unrealized gain (loss) on securities


369


30



(853
)


(271
)Cumulative foreign currency translation adjustments


10


53



27



(309
)Comprehensive income (loss)

$
13,605

$
(32,195
)

$
(194,238
)

$
(507,076
)





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




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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 September 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.





Note 3Film and Television Costs





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





September 30, 2002


December 31, 2001(unaudited)Theatrical productions:Released

$
3,811,125


$
3,515,842Less: accumulated amortization


(2,454,650
)


(2,117,116
)Released, net


1,356,475



1,398,726Completed not released


16,785



99,142In production


340,208



242,621In development


32,763



31,931Subtotal: theatrical productions


1,746,231



1,772,420Television programming:Released


902,989



861,826Less: accumulated amortization


(705,664
)


(626,686
)Released, net


197,325



235,140In production


45,639



25,968In development


1,350



1,749Subtotal: television programming


244,314



262,857$
1,990,545


$
2,035,277





Interest costs capitalized to theatrical productions were
$5,077,000 and $10,464,000 during the quarter and nine months ended September 30, 2002, and $5,248,000 and $18,609,000 during the quarter and nine months ended September 30, 2001, respectively.




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 4Investments In and Advances to Affiliates





Investments in and advances to affiliates are summarized as follows (in thousands):





September 30, 2002

December 31, 2001(unaudited)Domestic cable channels

$
834,747

$
822,502Foreign cable channels


15,400


15,351Joint ventures


13,092


7,039Others


150


150$
863,389

$
845,042





Domestic Cable Channels.    On April 2,
2001, the Company invested $825,000,000 in cash for a 20 percent interest in two general partnerships which own and operate the American Movie Classics, Bravo, the Independent Film Channel and WE: Womens Entertainment (formerly Romance
Classics) cable channels, 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 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 September 30, 2002, management has determined that there have been no permanent impairments.




9




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##### Table of Contents



METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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





As of June 30, 2002:Current assets

$
363,205Non-current assets

$
579,109Current liabilities

$
129,388Non-current liabilities

$
279,902For the quarter and nine months ended June 30, 2002:Quarter:Revenues, net

$
116,323Operating income

$
45,051Net income

$
44,121Nine Months:Revenues, net

$
352,812Operating income

$
105,621Net income

$
105,729





In the quarter and nine months ended September 30, 2002, the
Companys share of the Cable Channels net operating results was a profit of $8,824,000 and $12,370,000, respectively. The results for the nine months ended September 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). In the quarter ended September 30, 2001, the Companys share of the Cable Channels net operating results was a loss of $2,392,000 (including goodwill amortization of $9,525,000).





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 $731,000 and $2,828,000 in the quarter and nine months ended September
30, 2002, a profit of $322,000 in the quarter ended September 30, 2001 and a loss of $936,000 in the nine months ended September 30, 2001, respectively.





Joint Ventures.    On August 13, 2001, the Company, through its wholly-owned subsidiary, MGM On Demand Inc., acquired a 20 percent interest in a joint venture established to
create an on-demand movie service to offer a broad selection of theatrically-released motion pictures via digital delivery for broadband internet users in the United States. Other partners in the joint venture include Sony Pictures Entertainment,
Universal Studios, Warner Bros. and Paramount Pictures. The Company has funded $9,954,000 for its equity interest and its share of operating expenses of the joint venture as of September 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 nine months ended September 30, 2002, the Company recognized a net loss of $884,000 and $1,866,000 for its share of the operating results of the joint venture. In the quarter and nine months ended September 30, 2001, the Company recognized a net
loss of $181,000 from 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




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METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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 nine months ended September 30, 2002, the Company recognized a loss of $69,000 and $331,000 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 nine
months ended September 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):





September 30, 2002

December 31, 2001(unaudited)Revolving Facility

$


$
159,000Term Loans


1,150,000


668,500Production loans and other borrowings


93,190


8,686$
1,243,190

$
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 (4.54 percent at September 30, 2002). The Tranche B Loan bears interest at 3.00 percent over the Adjusted LIBOR rate (4.79 percent at September 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 nine months ended September 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
September 30, 2002, there are no outstanding loans or advances to the Company by such subsidiaries, nor have such




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METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




subsidiaries purchased any capital stock of the Company. Restricted net assets of MGM Studios and Orion at September 30, 2002 are approximately $2.0 billion. As of September 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 $575,000,000
at an average rate of approximately 5.92 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. The Company has also entered into additional interest rate swap agreements for a notional value of $100,000,000 at an average pay rate of approximately 2.34 percent,
which expire in January 2003. At September 30, 2002, the Company would be required to pay approximately $19,489,000 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 September 30, 2002, the Company has outstanding foreign currency forward contracts aggregating Canadian $19,975,000 and
£3,000,000. As of September 30, 2002, the Company would be required to pay approximately $238,000 if all such foreign currency forward contracts were terminated, and this amount has been included in other assets and accumulated other
comprehensive income (loss).





Note 7Stockholders Equity





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





On July 26, 2002, the Company announced a share repurchase program authorizing the Company to purchase up to 10,000,000 shares of its
common stock. The Company intends to fund the repurchase program from available cash on hand. As of September 30, 2002, the Company has repurchased 2,383,000 shares of common stock at an aggregate cost of $26,537,000.





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




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METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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.





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





Earnings Per Share (EPS).    Dilutive securities of 1,300,819 related to
stock options are not included in the calculation of diluted EPS in the nine months ended September 30, 2002, and dilutive securities of 2,764,058 and 3,374,980 are not included in the quarter and nine months ended September 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 consumer products, 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. The cable channels segment includes channels in which the Company holds both a majority and minority interest. 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 for the Companys reportable segments is shown in the following tables (in thousands, unaudited):





Quarters Ended September
30,


Nine Months Ended September
30,2002


2001


2002


2001RevenuesFeature films

$
305,716


$
350,672


$
883,727


$
881,813Television programs


67,331



34,997



122,507



108,187Cable channels


33,100



30,567



96,829



46,793Other


6,843



7,641



25,707



22,065Subtotal


412,990



423,877



1,128,770



1,058,858Less: unconsolidated companies


(31,834
)


(30,567
)


(95,563
)


(46,793
)Consolidated revenues

$
381,156


$
393,310


$
1,033,207


$
1,012,065Segment Income (Loss)Feature films

$
29,168


$
29,178


$
(89,225
)

$
18,746Television programs


16,410



2,996



8,079



13,962Cable channels


7,092



(2,607
)


6,005



(4,717
)Other


3,923



4,759



13,646



10,851Subtotal


56,593



34,326



(61,495
)


38,842Less: unconsolidated companies


(7,140
)


2,169



(6,325
)


3,428Consolidated segment income (loss)

$
49,453


$
36,495


$
(67,820
)

$
42,270




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METRO-GOLDWYN-MAYER INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following table presents the details of other operating segment income (loss):Quarters Ended September 30,


Nine Months Ended September 30 ,2002

2001


2002

2001Licensing and merchandising

$
2,705

$
2,689


$
4,498

$
5,133Interactive media


443


525



3,241


1,731Music


605


1,472



4,291


4,904Other


170


(365
)


1,616


(2,206
)$
3,923

$
4,321


$
13,646

$
9,562





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





Quarters Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001Segment income (loss)

$
49,453


$
36,495


$
(67,820
)

$
42,270General and administrative expenses


(20,793
)


(27,277
)


(59,694
)


(70,318
)Depreciation and non-film amortization


(4,928
)


(8,249
)


(14,405
)


(24,250
)Operating income (loss)


23,732



969



(141,919
)


(52,298
)Equity in net earnings (losses) of affiliates


7,140



(2,169
)


6,325



(3,428
)Interest expense, net of amounts capitalized


(18,107
)


(14,287
)


(60,732
)


(37,215
)Interest and other income, net


2,339



1,769



3,964



8,906Income (loss) from operations before provision for income taxes

$
15,104


$
(13,718
)

$
(192,362
)

$
(84,035
)








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








December 31, 2001

Increase (Decrease)


September 30, 2002(unaudited)Feature films

$
2,183,488

$
(61,390
)

$
2,122,098Television programs


334,886


(6,717
)


328,169Cable channels


845,042


18,996



864,038Other


9,857


(7,292
)


2,565Total reportable segment assets

$
3,373,273

$
(56,403
)

$
3,316,870





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





September 30, 2002

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

$
3,316,870

$
3,373,273Goodwill not allocated to segments


516,706


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


370,588


33,185Consolidated total assets

$
4,204,164

$
3,923,164




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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
September 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 $46,141,000 and $30,798,000 during the nine months ended September 30, 2002 and
2001, respectively. The Company paid income taxes of $11,106,000 and $10,819,000 during the nine months ended September 30, 2002 and 2001, respectively.




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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 $600.0 million revolving credit facility, a five-year $300.0 million term loan and a six-year $850.0 million 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 Classics, Bravo, the Independent Film Channel and WE: Womens Entertainment (formerly Romance Classics) cable channels. 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 September 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 nine months
ended September 30, 2002, our share of




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##### Table of Contents

the cable channels net operating results was a profit of $8.8 million and $12.4 million, respectively. The nine-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 $10.0 million for our equity interest and our share of the operating expenses of the joint venture as of September 30, 2002. We financed our
investment through borrowings under our credit facilities and utilization of cash on hand. We are accounting for our interest in the joint venture under the equity method. In the quarter and nine months ended September 30, 2002, we recognized a net
loss of $0.9 million and $1.9 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 nine months ended September 30, 2002,
we recognized a loss of $0.1 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 nine months ended September 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




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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 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




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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.





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. 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, including amounts related to our equity investees, totaled $13.3 million and $20.8 million for the quarter and nine months ended September 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.





In June 2002, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement of Financial Accounting Standards No. 146 nullifies Emerging Issues Task Force Issue No 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), and will be applied prospectively to exit or disposal activities initiated after December 31, 2002. We will
implement Statement of Financial Accounting Standards No. 146 on January 1, 2003. The impact of such adoption is not anticipated to 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 September 30, 2002 (the 2002 Quarter) and the quarter ended September 30, 2001 (the 2001 Quarter), as well as the
nine months ended September 30, 2002 (the 2002 Period) and September 30, 2001 (the 2001 Period):





Quarters Ended September 30,


Nine Months EndedSeptember 30,2002


2001


2002


2001(in thousands, unaudited)Revenues:Feature films

$
305,716


$
350,672


$
883,727


$
881,813Television programs


67,331



34,997



122,507



108,187Other


8,109



7,641



26,973



22,065Total revenues

$
381,156


$
393,310


$
1,033,207


$
1,012,065Operating income (loss):Feature films

$
29,168


$
29,178


$
(89,225
)

$
18,746Television programs


16,410



2,996



8,079



13,962Other


3,875



4,321



13,326



9,562General and administrative expenses


(20,793
)


(27,277
)


(59,694
)


(70,318
)Depreciation and non-film amortization


(4,928
)


(8,249
)


(14,405
)


(24,250
)Operating income (loss)


23,732



969



(141,919
)


(52,298
)Equity in net earnings (losses) of affiliates


7,140



(2,169
)


6,325



(3,428
)Interest expense, net of amounts capitalized


(18,107
)


(14,287
)


(60,732
)


(37,215
)Interest and other income, net


2,339



1,769



3,964



8,906Income (loss) before provision for income taxes


15,104



(13,718
)


(192,362
)


(84,035
)Income tax provision


(3,409
)


(2,257
)


(8,544
)


(10,766
)Net income (loss) before cumulative effect of accounting change


11,695



(15,975
)


(200,906
)


(94,801
)Cumulative effect of accounting change














(382,318
)Net income (loss)

$
11,695


$
(15,975
)

$
(200,906
)

$
(477,119
)





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.




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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 over 90 countries, the majority of which are
accounted for under the equity method. Consolidated and unconsolidated companies revenues, operating income (loss) and EBITDA are as follows:





Quarters Ended September 30,


Nine Months EndedSeptember 30,2002

2001


2002


2001(in thousands, unaudited)Revenues:Consolidated companies

$
381,156

$
393,310


$
1,033,207


$
1,012,065Unconsolidated companies


31,834


30,567



95,563



46,793Total

$
412,990

$
423,877


$
1,128,770


$
1,058,858Operating income (loss):Consolidated companies

$
23,732

$
969


$
(141,919
)

$
(52,298
)Unconsolidated companies


6,630


(1,683
)


5,768



(1,869
)Total

$
30,362

$
(714
)

$
(136,151
)

$
(54,167
)EBITDA:Consolidated companies

$
28,660

$
9,218


$
(127,514
)

$
(28,048
)Unconsolidated companies


7,988


8,572



18,564



8,729Total

$
36,648

$
17,790


$
(108,950
)

$
(19,319
)





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 $1.4 million and $12.8 million for the quarter and nine months ended September 30, 2002, and $10.3 million and $10.6 million for the quarter and nine months ended September 30, 2001, respectively.





See further details of operating changes under segments discussion below.





Feature Films





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





Quarters Ended September 30,

Nine Months Ended September 30,2002

2001

2002


2001(in thousands, unaudited)Revenues

$
305,716

$
350,672

$
883,727


$
881,813Operating income (loss) and EBITDA

$
29,168

$
29,178

$
(89,225
)

$
18,746




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##### Table of Contents




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





Revenues.    Feature film revenues decreased by $45.0 million, or 13 percent, to
$305.7 million in the 2002 Quarter as compared to the 2001 Quarter.





Worldwide theatrical revenues decreased by
$21.8 million, or 32 percent, to $47.4 million in the 2002 Quarter. Although we had the successful releases of Barbershop, Crocodile Hunter and Igby GoesDown in the 2002 Quarter, these films generated lower theatrical
revenues than Legally Blonde and Jeepers Creepers in the 2001 Quarter, partially due to the timing of the releases during the quarter. Overall, in the 2002 Quarter, we released four new feature films domestically and one new film
internationally. In the 2001 Quarter, we released five new feature films domestically and two new films internationally.





Worldwide home video revenues decreased by $26.9 million, or 16 percent, to $139.6 million in the 2002 Quarter. In the 2002 Quarter, we released Harts War and Deuces Wild in the domestic home video
marketplace, as well as continuing to benefit from the release of Bandits and Legally Blonde in international markets, and various library sales promotions. In the 2001 Quarter, significantly higher home video revenues were generated
by the release of Hannibal and re-promotion of Silence of the Lambs in the domestic marketplace. In the 2002 Quarter, worldwide DVD sales were $101.6 million compared to $116.2 million in the 2001 Quarter, which included the promotions
of Hannibaland Silence of the Lambs.





Worldwide pay television revenues from feature films
decreased by $24.1 million, or 36 percent, to $42.4 million in the 2002 Quarter. The 2001 Quarter included a significant new license of library product to cable television in the domestic marketplace, as well as increased sales in international
markets of The World Is Not Enough. There were no comparable licenses in the 2002 Quarter. Network television revenues, however, increased by $24.3 million, or 100 percent, in the 2002 Quarter, principally due to the delivery to network
television of The World Is Not Enough with no comparable licenses in the 2001 Quarter. Worldwide syndicated television revenues from feature films increased by $3.4 million, or seven percent, to $50.8 million in the 2002 Quarter, principally
due to the licensing of The Thomas Crown Affair in the domestic marketplace, as well as sales of The World Is Not Enough and The Thomas Crown Affair in international markets.





Other revenues increased by $0.1 million, or 11 percent, to $1.2 million in the 2002 Quarter reflecting higher third party royalties collected in the period.





Operating Results.    Operating income and EBITDA from feature films was $29.2 million
in each of the 2002 Quarter and the 2001 Quarter, respectively. In the 2002 Quarter, we benefited from lower advertising costs incurred than in the 2001 Quarter. However, this benefit was offset by the decrease in revenues in the 2002 Quarter
discussed above.





Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001





Revenues.    Feature film revenues increased by $1.9 million, or one percent, to
$883.7 million in the 2002 Period as compared to the 2001 Period.





Worldwide theatrical revenues decreased by
$92.5 million, or 49 percent, to $98.1 million in the 2002 Period, principally due to the disappointing performances of certain of our domestic theatrical releases, including Rollerball, Harts WarandWindtalkers, which generated
lower theatrical revenues than the releases in the 2001 Period, which included Hannibal, Legally BlondeandJeepers Creepers, among others. However, this decrease was partially offset by the successful performances of Barbershopand Crocodile Hunter in the 2002 Period. Overall, in the 2002 Period, we released 13 new feature films domestically and three films internationally. In the 2001 Period, we released nine feature films domestically and five films
internationally.





Worldwide home video revenues increased by $108.0 million, or 27 percent, to $501.5 million in
the 2002 Period. In the 2002 Period, we released Bandits, Rollerball, Jeepers Creepers, Harts War, Whats The Worst




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##### Table of Contents

That CouldHappen, Original Sin,Ghost World and Deuces Wild in the domestic home video marketplace, as well as benefited 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 Hannibal, Autumn in New York and Antitrust,as well as the re-promotion ofSilence of the Lambs, in the domestic marketplace. In the 2002 Period, worldwide DVD sales increased to $350.7 million, or 35 percent, from $259.2 million in the 2001 Period.





Worldwide pay television revenues from feature films decreased by $23.2 million, or 17 percent, to $114.5 million in the 2002 Period. The 2001 Period included a
significant new license of library product to cable television in the domestic marketplace, as well as increased sales in international markets of The World Is Not Enough. There were no comparable licenses in the 2002 Period. Network
television revenues increased by $30.7 million, or 1,481 percent, to $32.8 million in the 2002 Period, principally due to the delivery of The World Is Not Enough and The Thomas Crown Affair, with no comparable licenses in the 2001
Period. Worldwide syndicated television revenues from feature films decreased by $23.5 million, or 16 percent, to $128.0 million in the 2002 Period, principally due to fewer new releases in domestic and international markets, as compared to the 2001
Period.





Other revenues increased by $2.5 million, or 39 percent, to $8.8 million in the 2002 Period due to higher
third party royalties, rebates and audit recoveries collected in the period.





Operating
Results.    Operating income and EBITDA from feature films decreased by $108.0 million, or 576 percent, to a loss of $89.2 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 War and Deuces Wild. We incurred increased feature film write-downs of $68.6 million in the 2002 Period
as compared to write-downs of $17.5 million in the 2001 Period. Additionally, we incurred higher bad debt expenses in the 2002 Period, resulting in additional charges of $16.4 million compared to the 2001 Period. The 2001 Period also benefited from
the successful theatrical performances of Legally Blonde, HannibalandJeepers Creepers. Correspondingly, the 2002 Period benefited from the successful theatrical performances of Barbershopand Crocodile Hunter.
Partially offsetting these comparisons was the significant improvement in home video performance in the 2002 Period mentioned above.





Television Programming





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





Quarters Ended September 30,

Nine Months Ended September 30,2002

2001

2002

2001(in thousands, unaudited)Revenues

$
67,331

$
34,997

$
122,507

$
108,187Operating income and EBITDA

$
16,410

$
2,996

$
8,079

$
13,962





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





Revenues.    Television programming revenues increased by $32.3
million, or 92 percent, to $67.3 million in the 2002 Quarter compared to the 2001 Quarter.





Worldwide pay and
network television revenues decreased by $1.4 million, or 27 percent, to $3.7 million in the 2002 Quarter, principally due to the timing of deliveries of new episodes of the series Jeremiah in the 2002 Quarter as compared to Stargate
SG-1 in the 2001 Quarter. Worldwide syndicated television programming revenues increased by $29.9 million, or 114 percent, to $56.2 million in the 2002 Quarter, primarily due to the sale to basic cable of Stargate SG-1in the domestic
marketplace. In the 2001 Quarter, we had no comparable licenses. Worldwide home video revenues with respect to television programming increased by $3.8 million, or 105 percent, to $7.4 million in the 2002 Quarter, primarily due to higher domestic
sales of Stargate SG-1, The Outer Limitsand one television movie.




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##### Table of Contents




Operating Results.    Operating income and EBITDA from
television programming increased by $13.4 million, or 448 percent, to $16.4 million in the 2002 Quarter as compared to the 2001 Quarter, principally due to the increase in revenues described above.





Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001





Revenues.    Television programming revenues increased by $14.3 million, or 13 percent, to $122.5 million in
the 2002 Period compared to the 2001 Period.





Worldwide pay and network television revenues increased by $3.5
million, or 24 percent, to $18.3 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 increased by $3.9 million, or five
percent, to $86.7 million in the 2002 Period, primarily due to the sale to basic cable of Stargate SG-1in the domestic marketplace. Worldwide home video revenues with respect to television programming increased by $6.1 million, or 59
percent, to $16.4 million in the 2002 Period, primarily due to increased sales of Stargate SG-1 and The Outer Limits.





Other revenues increased by $0.7 million, or 186 percent, to $1.1 million in the 2002 Period due to higher third party royalties collected in the period.





Operating Results.    Operating income and EBITDA from television programming decreased by $5.9 million, or 42 percent, to $8.1 million in the
2002 Period as compared to the 2001 Period, principally due to increased write-downs on new series as well as higher bad debt expenses.





Other Businesses





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





Quarters Ended September 30,

Nine Months Ended September 30,2002

2001

2002

2001(in thousands, unaudited)Revenues

$
8,109

$
7,641

$
26,973

$
22,065Operating income and EBITDA

$
3,875

$
4,321

$
13,326

$
9,562





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





Revenues.    Revenues from other businesses increased by $0.5
million, or six percent, to $8.1 million in the 2002 Quarter as compared to the 2001 Quarter. Operating results in the 2002 Quarter included consumer products revenue of $4.0 million and music soundtrack and royalty revenue of $1.1 million, as
compared to consumer products revenue of $4.5 million and music soundtrack and royalty revenue of $2.2 million in the 2001 Quarter. Interactive media revenues were $1.1 million in the 2002 Quarter as compared to revenues of $0.6 million in the 2001
Quarter. Branded programming services revenues aggregated $1.3 million in the 2002 Quarter. There were no such revenues in the 2001 Quarter. Additionally, revenues from other businesses in the 2002 Quarter include the receipt of $0.6 million in
third party audit recoveries and other miscellaneous income as compared to recoveries of $0.2 million in the 2001 Quarter.





Operating Results.    Operating income and EBITDA from other businesses decreased by $0.4 million, or ten percent, to $3.9 million in the 2002 Quarter as compared to the 2001 Quarter, principally due to
increased interactive product costs. Expenses for other businesses include interactive product costs of $0.6 million in the 2002 Quarter as compared to $0.1 million of such costs in the 2001 Quarter. Consumer products cost of sales were $0.7 million
in the 2002 Quarter and $1.2 million in the 2001 Quarter. Branded programming services costs




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##### Table of Contents

aggregated $0.9 million in the 2002 Quarter, with no corresponding costs in the 2001 Quarter. Overhead costs related to other businesses aggregated $1.4 million in the 2002 Quarter and $1.9
million in the 2001 Quarter.





Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001





Revenues.    Revenues from other businesses increased by $4.9 million, or 22
percent, to $27.0 million in the 2002 Period as compared to the 2001 Period. Operating results in the 2002 Period included consumer products revenue of $9.5 million and music soundtrack and royalty revenue of $5.5 million, as compared to consumer
products revenue of $9.4 million and music soundtrack and royalty revenue of $7.0 million in the 2001 Period. Interactive media revenues were $8.4 million in the 2002 Period, which included increased royalties from the interactive game 007-Agent
Under Fire, as compared to revenues of $4.4 million in the 2001 Period. Branded programming services revenues aggregated $1.3 million in the 2002 Period. There were no such revenues in the 2001 Period. Additionally, revenues from other
businesses in the 2002 Period include the receipt of $2.3 million in third party audit recoveries and other miscellaneous income as compared to recoveries of $1.3 million in the 2001 Period.





Operating Results.    Operating income and EBITDA from other businesses increased by $3.8 million, or 39 percent, to $13.3 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 $4.9 million in the 2002 Period as compared to $2.5 million of such costs in the
2001 Period. Consumer products cost of sales were $2.4 million in the 2002 Period and $2.2 million in the 2001 Period. Overhead costs related to other businesses aggregated $4.1 million in the 2002 Period and $6.1 million in the 2001 Period. The
decrease in overhead costs principally reflected reduced spending on our website. Other expenses aggregated $2.2 million in the 2002 Period and $1.7 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 September 30, 2002 Compared to Quarter Ended September 30, 2001





General and Administrative Expenses.    General and administrative expenses decreased by $6.5 million, or 24 percent, to $20.8 million in
the 2002 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).





Depreciation and Non-Film Amortization.    Depreciation and non-film amortization in
the 2002 Quarter decreased by $3.3 million, or 40 percent, to $4.9 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), partially offset by increased depreciation expense on fixed asset
purchases.





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
over 90 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 $8.0 million, operating earnings were $6.6 million and net earnings were $7.1 million, respectively. In the 2002 Quarter, we benefited
from our share of improved operating results of the Rainbow Media Group cable channels, which contributed $9.3 million in EBITDA. In the 2001 Quarter, EBITDA from unconsolidated companies was $8.6 million, operating losses, including amortization of
goodwill of $9.6 million, were $1.7 million and net losses were $2.2 million, respectively.




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Interest Expense, Net of Amounts Capitalized.    Net
interest expense in the 2002 Quarter increased by $3.8 million, or 27 percent, to $18.1 million, as compared to the 2001 Quarter, primarily due to increased bank borrowings associated with the refinancing of our credit arrangements and lower
interest capitalized on film production in the period.





Interest and Other Income,
Net.    Interest and other income in the 2002 Quarter increased by $0.6 million, or 32 percent, to $2.3 million, as compared to the 2001 Quarter, primarily due to higher invested cash balances in the 2002 Quarter due to the
refinancing of our credit arrangements.





Income Tax Provision.    The provision for
income taxes in the 2002 Quarter increased by $1.2 million, or 51 percent, to $3.4 million, as compared to the 2001 Quarter, principally due to a benefit realized in the prior year period as a result of a reduction in our effective tax rate
associated with foreign remittance taxes.





Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001





General and Administrative Expenses.    In the 2002 Period,
general and administrative expenses decreased by $10.6 million, or 15 percent, to $59.7 million, as compared to the 2001 Period. The decrease reflected 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 $9.8 million, or 41 percent, to $14.4 million, as compared
to the 2001 Period, due to the elimination of the amortization of our goodwill in 2002 ($11.1 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), partially offset by increased depreciation expense on fixed asset purchases.





Equity in Net Earnings (Losses) of Affiliates.    In the 2002 Period, EBITDA from unconsolidated companies was $18.6 million, operating income
was $5.8 million and net income was $6.3 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 $22.8 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 $8.7 million, operating losses, including amortization of goodwill of $9.8 million, were $1.9 million and net losses were $3.4 million, respectively.





Interest Expense, Net of Amounts Capitalized.    Net interest expense in the 2002 Period increased by $23.5 million, or 63 percent, to $60.7
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 additional borrowings associated with the refinancing
of our credit arrangements and for our operating activities.





Interest and Other Income,
Net.    Interest and other income in the 2002 Period decreased by $4.9 million, or 55 percent, to $4.0 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 $2.2 million, or 21
percent, to $8.5 million, as compared to the 2001 Period, principally due to lower foreign remittance taxes attributable to decreased international distribution revenues.




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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 $166.3 million, which included film and television production and distribution costs of $599.1 million; net cash used in
investing activities was $20.2 million; and net cash provided by financing activities was $530.6 million, including net advances under bank borrowings of $407.0 million and net proceeds from the sale of common stock of $166.9 million.





Treasury Stock.    On July 26, 2002, we announced a share repurchase program authorizing the
purchase of up to 10,000,000 shares of our common stock. We intend to fund the repurchase program from available cash on hand. As of September 30, 2002, we have repurchased 2,383,000 shares of common stock at an aggregate cost of $26.5 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 $164.8 million. 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 $850.0 million term loan. As of October 23, 2002, $579.9 million, including outstanding letters of credit, was available under our credit facility. Additionally, as of October 23, 2002, we have cash on hand of approximately $339.8
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 (4.59 percent at October 23, 2002), and the $850.0 million six-year term loan bears interest at 3.00 percent over the Adjusted LIBOR rate (4.84 percent at October 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 $575.0 million at an average rate of approximately 5.92 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 October 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 Metro-Goldwyn-Mayer Studios Inc. elects to release its investment in the cable channels from the loan collateral, as permitted under the credit facility). As of September 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 September 30,




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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 $166.3 million compared to cash used in operating activities of $79.6 million in the 2001 Period.
Included in cash used in operating activities were film and television production and distribution costs of $599.1 million in the 2002 Period and $537.5 million in the 2001 Period.





Cash Used in Investing Activities.    In the 2002 Period, cash used in investing activities was $20.2 million compared to cash used in investing
activities of $838.8 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 $530.6 million, which included net advances under bank borrowings of
$407.0 million and net proceeds from the sale of common stock of $166.9 million, less the cost of acquisition of treasury stock of $26.5 million and refinancing fees for our credit facilities of $16.8 million. In the 2001 Period, cash provided by
financing activities was $861.5 million, consisting of $641.8 million in net proceeds from the sale of equity securities as well as $219.7 million in net advances under bank borrowings.





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 September 30, 2002 are as follows (in thousands, unaudited):





2002

2003

2004

2005

2006

There- after

TotalBank and other debt

$
870

$
108,065

$
66,309

$
65,643

$
65,643

$
936,660

$
1,243,190Operating leases


2,744


14,826


16,394


16,455


17,042


238,931


306,392Employment agreements


9,122


24,852


9,484


18


2





43,478Creative talent agreements


6,684


10,318


688











17,690Letters of credit


19,553


90


485











20,128Total

$
38,973

$
158,151

$
93,360

$
82,116

$
82,687

$
1,175,591

$
1,630,878





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 $25.25 million. We have funded approximately $24.75 million under such obligation as of September 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.




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##### Table of Contents

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 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.





As of October 23, 2002, $475.0 million of our term debt was exposed to interest rate risk.





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





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


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

$
575,000


$
(19,322
)Average pay rate


5.923
%Spot rate


1.761
%Variable to fixed:Notional value (in thousands)

$
100,000


$
(167
)Average pay rate


2.340
%Spot rate


1.810
%




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##### Table of Contents




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 September 30, 2002:





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

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

$
12,768

$
(194
)Spot rate


1.5860Forward rate


1.5645Contract amount (in thousands) (receive GBP, pay $US)

$
4,663

$
(44
)Spot rate


1.5688Forward rate


1.5544





Item 4.    Controls and Procedures





Based on their evaluation, as
of a date within 90 days of the filing date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.




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##### Table of Contents

PART II.    OTHER INFORMATION





Item 2.    Changes in Securities and Use of Proceeds





During the
period commencing August 16, 2002 through September 27, 2002, Celsus Financial Corp., an entity wholly-owned by one of our directors, exercised options to acquire 177,814 shares of our common stock (as adjusted) at an exercise price
of $5.63 per share (as adjusted) for total proceeds of $1,001,000. We relied upon the exemption under Section 4(2) of the Securities Act of 1933, as amended.





Item 5.    
Other Information





In accordance with Section 202 of the Sarbanes-Oxley Act of 2002,
the Audit Committee of our Board of Directors, on August 21, 2002 and August 30, 2002, pre-approved the engagement of Ernst & Young LLP, our independent auditors, to perform certain permissible non-audit services (such as tax advisory and
external auditing services) for MGM and a wholly-owned subsidiary of MGM. We estimate the annual fees for these services to be approximately $500,000.





Item 6.    
Exhibits and Reports on Form 8-K





(a)  Exhibits





Exhibit No.

Document Description99.1

Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 200299.2

Certification of CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002





(b)  Reports on Form 8-K





Date

Relating toJuly 26, 2002

Item 5. Other Information




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##### Table of Contents

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.





October 24, 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




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##### Table of Contents

CERTIFICATIONS





I, Alex Yemenidjian, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Metro-Goldwyn-Mayer Inc.;
| | -- |  | -------------------------------------------------------------------------------




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




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




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: October 24, 2002





/s/    ALEX
YEMENIDJIANAlex Yemenidjian Chief Executive
Officer




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##### Table of Contents

I, Daniel J. Taylor, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Metro-Goldwyn-Mayer Inc.;
| | -- |  | -------------------------------------------------------------------------------




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




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




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: October 24, 2002





/s/    DANIEL J.
TAYLORDaniel J. Taylor Chief Financial
Officer




35