MGM sees more red ink in future

Pix pull down profits

NEW YORK — Metro-Goldwyn-Mayer is continuing to bleed, warning Monday it will report a “significant operating loss” in the third quarter, which ends Wednesday, due to $33 million in film write-downs and downsizing costs.

The operating loss will be on top of an operating loss of $31.6 million in the first half of the year and a net loss of $73.6 million for the same period (net loss is after interest and taxes).

MGM said in an SEC filing Monday it expected to write down about $20 million on two pics released during the quarter, believed to be “Disturbing Behavior” and “Music From Another Room.” The latest writedowns bring to $53.6 million lost by the Lion on pics released since Jan. 1, including such bombs as “Species 2” and “Dirty Work.”

“Disturbing Behavior,” which had grossed $17.3 million as of last weekend, accounted for the bulk of the third quarter writedown. The low-budget “Music From Another Room” was only released in a few test markets and did very poorly, prompting MGM to abandon further theatrical release.

Severance expenses

Additionally, MGM said it had severance expenses of about $13 million related to layoffs of about 80 staffers in recent weeks aimed at reducing overhead. MGM said the layoffs followed a “review of the company’s business practices and competitiveness.”

That review followed a liquidity crunch at the Lion in the past couple of months that prompted its majority shareholder Kirk Kerkorian to underwrite a $500 million stock offering. Monday’s SEC filing contained the latest amendments to the filing, which is expected to be cleared by the SEC within days, allowing pricing and marketing of the offering to go ahead.

The money raised from the stock offering will be used to pay down MGM’s revolving credit facility, which was used up almost to its limit of $1.3 billion last month. MGM said in the SEC filing Monday it expects its total debt to drop to $713 million after the offering, although it plans to draw down on the facility again to fund its future operations.

Still, the latest film writedowns highlight MGM’s continued problems in getting back on its feet. Only two of the Lion’s 11 releases this year, “Tomorrow Never Dies” and “Man in the Iron Mask,” have been successful although this weekend’s opening of “Ronin” suggests it will also do reasonably well.

Those two successful pics carried MGM to earnings before interest, taxes, depreciation and amortization from film of $18.1 million, even after writedowns totaling $33.6 million on loss-making pics. The latest writedowns suggest film will have a total cash flow loss for the nine months to Sept. 30, leaving aside the impact of “Ronin,” which will make its biggest contribution in the fourth quarter.

Stock drops

Wall Street analysts had little reaction to the latest profit warning Monday, as most are not preparing profit estimates on a quarterly basis for MGM as they do other companies. Still, Furman Selz analyst Stewart Halpern said MGM’s performance from its film releases this year, other than the Bond pic and “Man in the Iron Mask,” had been “disappointing.” MGM stock fell 12¢ Monday to $15.50.

As for the downsizing, MGM said it “expects that the reductions will result in ongoing overhead savings” although it did not quantify the amount of the savings. MGM declined to comment further on the filing.

The Lion is expected to set the price for its rights offering next week and to begin marketing the offering on a roadshow. That is the reverse order from the usual course of business for stock offerings, when marketing precedes pricing of an offering, but a rights offering is not a standard way for U.S. companies to raise equity.

And as Kerkorian, who owns 90% of MGM’s outstanding stock, has underwritten the offering, the marketing is somewhat academic although Kerkorian would surely like all the public shareholders to take up their rights.

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