索尼 (SONY) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Metro-Goldwyn-Mayer fourth quarter and year-end 2002 earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

If you have a question, please press the 1 followed by a four on your telephone.

As a reminder this conference is being recorded, Wednesday, February 5, 2003.

I would now like to turn the conference over to Joe Fitzgerald (ph), Executive Vice President, Investor Relations and Corporate Communications.

Please go ahead, sir.

Hello, everyone.

Alex Yemenidjian, Chris McGurk and Dan Taylor are here.

We're going to get started right away.

Just two things - one, the forward-looking statements - I'm sorry, the Safe Harbor language regarding forward-looking statements in our press release applies to this call.

And secondly, this call is being Webcast at both mgm.com and streetevents.com.

With that we'll get started with Alex.

Good morning, everyone.

As you have all seen by now we've reported strong fourth-quarter results.

Typically the second half of the year is stronger than the first half for us and the fourth quarter is usually the strongest.

Dan will explain why in a moment.

But I think that what this quarter's performance underscores yet again is that the only valid way to evaluate the financial performance of MGM is on an annual basis, not an a quarterly basis.

Income recognition and cash flow are always subject to timing differences in three of our four core businesses, in the film production business, TV production and in the film and video (inaudible) library.

So the annual picture is a lot more accurate and telling.

And of course, the only way to evaluate the performance of a slate of films is on an annual basis, thus taking into account all the seasons for film releases.

Our primary focus will be on generating and measuring cash flow.

The GAAP term is net proceeds provided by operating activities, which is essentially free cash flow before capital expenditures.

And in our company, as you all know, capital expenditures outside of film and TV production are minimal.

We started 2003 with a $600 million cash balance, which includes the proceeds from the sale of our 20 percent interest in the Bravo Network and also includes a 30 million cash distribution from the remaining Rainbow networks.

We expect to receive additional cash distributions from our Rainbow investment.

In fact, we just received another $10 million distribution yesterday.

Dan will give you more color on the numbers.

So let me jump over to our channels.

Last week we announced that we entered into an agreement with UPC Netherlands, Holland's largest cable operator, to launch our MGM branded channel on digital cable in the Netherlands.

Digital cable is a new rollout in the Netherlands, and we wanted to secure a (inaudible) on the expectation that the Dutch consumer transitions into higher-paying digital customer.

The carriage agreement is for a two-year term on the extended basic tier.

And with this new channel, MGM Networks now reaches close to 100 countries.

Our relationship with NBC continues to expand.

Two weeks ago we jointly announced with NBC that we have extended our international distribution agreement for an additional four years.

So under the new agreement we will continue to distribute all NBC studios programming across all territories outside of North America through the 2007-2008 television season.

For each show, MGM has a 15-year distribution term, so we expect to be distributing MGM studios programming at least until 2023.

In connection with our 10 million share stock buy-back authorization, so far we have purchased a total of just under 3 million shares at an average price of $11.44 per share.

One last item before I turn it over to Chris.

On January 30th, our principle shareholders sold 25 million shares for tax planning reasons.

The sale, which was made through Bear Stearns, was oversubscribed so the over subscription resulted in the underwriter exercising the green shoe for an additional 3.75 million shares.

As a result of this transaction, our company's public float increased by over * 50 percent to 85 million shares.

So our public flow now represents 34.2 percent of our outstanding stock.

When Chris and I came on board in April 1999, we stated that one of the critical steps in the transformation of MGM was increasing the public flow.

Since then, our public flow has grown from 16.1 million shares to 85.3 million shares, a 430 percent increase - Chris.

Thank you, Alex.

Building off of our very successful third-quarter results, all four of our core businesses generated strong operating performance in the fourth quarter.

First, in the feature film area, we are thrilled with the success of "Die Another Day," the 20th installment in the James Bond franchise.

After three years of careful development, production, and marketing planning, all designed to take the franchise to a higher performance level, "Die Another Day" opened on November 22nd to number one at the domestic box office at $47.1 million in its first weekend.

The biggest Bond opening ever.

The film is now approaching $160 million at the domestic box office.

Also a record.

And has broken additional franchise performance records in virtually every major country where it has opened overseas.

"Die Another Day" has now reached over $382 million at the worldwide box office -- also a new record.

With several major territories yet to go, we expect the film will generate over $425 million at the worldwide box office when it completes its theatrical run.

Most importantly, it will be the most profitable Bond film ever. "Die Another Day's" release helped generate tremendous activity during the quarter on the Bond library in DVD and VHS, where we shipped over 10 million units.

In addition, the latest Bond interactive game "Night Fire" was released just prior to the film's opening and has now shipped over 3.3 million units.

We also expect very strong performance when "Die Another Day" hits the DVD and VHS market this June. "Die Another Day's" performance capped a remarkable turnaround for our theatrical division in 2002.

Following the missteps made in the first half of the year, the slate of films released by MGM and UA in the second half of the year performed exceptionally well, starting with the very profitable "Crocodile Hunter: Collision Course" in July and including successes like "Barbershop," "Bowling for Columbine" and "Igby (ph) Goes Down," as well as critical favorites like "Nicholas Nickleby (ph) and Evelyn" that did not meet our financial targets.

These second-half films helped lead the entire film slate to profitability for the full year.

This is the fourth consecutive year since Alex and I took over management of the MGM in 1999 that our full-year film slates have been profitable, generating just under a 10 percent combined first cycle return over that period before library value.

Our confidence in achieving an even higher return going forward is based on the fact that our film development strategy has now fully evolved from a financial, creative, and organizational standpoint.

We have 18 film releases from MGM and UA targeted in 2003, including three sequels - "Legally Blonde 2: Red White & Blonde," "Jeepers Creepers 2," and "Barbershop 2."

For the non-sequel MGM films, our average investment will be only about $20 million after financing activities.

Many of these non-sequel films like "Agent Cody Banks" and "Good Boy" share the same economic and marketability parameters as "Legally Blonde" and "Barbershop."

Low cost, high concept films with clearly defined target audiences.

That and success could become successful franchise properties for us with the potential for sequels, spinoffs, and TV series.

But we want to be very clear that our film strategy and slate for 2003 includes more than just these lower budget high concept movies.

Our production budgets for MGM films cover a very wide range of investment before taking into account the impact of our financing activities.

These films include blue-chip talent like Denzel Washington, Reese Witherspoon, Josh Hartnett, Brittany Murphy, Michael Douglas, Ice Cube, and Cedric the Entertainer.

In addition, we are close to moving forward on MGM films for 2004 with stars such as Halle Berry, and The Rock.

Overall, our film strategy is to be smarter about the financial parameters of our films, not smaller.

And our production philosophy includes paying talent for the right role in the right film at the right time.

Finally, I'd like to highlight the continued success and outlook for United Artists, our specialty film division. "Bowling for Columbine," Michael Moore's essay on occult gun violence in the U.S. was one of the best reviewed films of 2002 making over 150 year-end top 10 list and has now become the highest grossing narrated documentary in history.

"Igby Goes Down" was also a major critical and financial success for UA.

In addition, UA garnered three of our company's four Golden Globe nominations this year and just acquired "Pieces of April," a film which created a sensation at the Sundance Film Festival last month.

In the home entertainment area, where our operations have already been running on all cylinders for the last three years we had yet another in a long series of outstanding quarters.

Worldwide, our DVD unit shipments in the fourth quarter increased by 112 percent versus the prior year.

For the full year, our DVD shipments were close to 80 million units, a 79 percent increase over the prior year.

Combined, worldwide DVD and VHS shipments crossed 100 million unit level for the full year.

Our DVD library market share in 2002 is now 17 percent, second only to Warner Brothers and far ahead of all the other studios.

Our share has more than doubled from an 8 percent share in 2000.

Strong growth in DVD player sales and MGM's libraries depth and breadth are the key factors behind this dramatic increase in our library market share.

Besides the Bond library sales that I mentioned previously, key library titles that generated strong revenue during the quarter included diverse films such "Spaceballs," "Princess Bride," and "The Good, The Bad and The Ugly."

And the evergreen nature of our library DVD revenues is underscored by the following statistic: In 2002 we repromoted 44 library titles, including films like "The Great Escape," and "Quigley Down Under" that had been originally released onto DVD between 1998 and 2001.

These 44 titles generated $52 million in revenues for us during 2002, a full 40 percent increase over the revenues generated by these same 44 titles in 2001.

Again, innovative repromotions are making these previously released titles evergreen and growing generators of DVD revenues for MGM.

And our home entertainment group does just a spectacular job on our new film releases.

In 2002 driven by titles like "Crocodile Hunter: Collision Course" and "Jeepers Creepers," MGM performed at an average of 20 percent higher than the industry in DVD and VHS sales for new films with performance standardized at similar box office levels.

And we believe our home entertainment performance for both library and new films will be further enhanced by our recapture of distribution in several key territories around the globe.

As you know, our self-distribution results in the U.S. since we took over control from Warners in 2000 have been nothing short of spectacular.

In addition, we experienced a 30 percent contribution uplift in the U.K. when we took over control from Fox in 2001.

Now by the middle of 2003, we will also have full self-distribution capability in Canada and full sales and marketing control in Germany and France.

This distribution recapture will give us control of over 88 percent of our worldwide DVD and VHS volume, which should contribute significant growth.

In the TV arena, besides the extension of the NBC distribution joint venture that Alex mentioned, there have been several other very positive developments. "Stargate: SG1" in its sixth season continues to be the highest rated original series on the Sci-Fi Network and has been the number one weekly original action hour in syndication.

A seventh season has already been ordered which will bring our total episodes to 154.

"She Spies," our new syndicated show had a very successful first season.

It was the number one new weekly syndicated hour.

We now have three series on Showtime - "Jeremiah" in its second season and two new series ordered, "Dead Like Me," which we are producing, and "Earthlings," which we are distributing internationally.

Both debut this spring.

And as we have discussed previously, we have several properties based on our MGM library where recent franchise films that we are developing for network television.

These include the "Thomas Crown affair," "Barbershop," and "Legally Blonde."

We have been very carefully in developing our TV production business, leveraging quality properties and franchise vehicles to establish deal structures that avoid heavy deficit financing while creating significant downside protection.

As with our film strategy, Alex and I are very confident that our creative and financing strategy in TV has now fully evolved, and we expect strong performance going forward.

Including the positive developments in our MGM channels business, which Alex described, all four of our core businesses are now in very strong operational positions.

We also have a superb management team and we think 2003 is going to be a great year for us - Dan.

Thanks, Chris.

Good morning, everyone.

My comments this morning will focus on our December 31st, 2002 balance sheet and guidance for 2003.

Our strong balance sheet became even stronger in the fourth quarter.

Our cash at year-end was $600 million.

Net debt was $550 million.

Our net debt to capitalization ratio was 15 percent compared to 25 percent at year-end 2001.

As Alex mentioned, we received $250 million from NBC in early December from the sale of our equity interest in Bravo, and we realized a gain of $32.5 million on this sale.

And now for more detail on our 2003 guidance.

Let's start with cash flow.

As a result of the full evolution of our core business strategy, as Chris just described, we expect 2003 to be the first year of significant cash generation and continuing for the foreseeable future.

The cash flow guidance I'm about to give you is defined in accordance with generally accepted accounting principles, which is net cash provided by operating AK activities.

From 2003 to 2006, we expect to generate approximately $900 million in cash flow should our films perform at a 13 percent IRR.

Should our film perform at break-even we still expect to generate about $600 million in cash flow over the same period.

We expect to generate approximately 100 to $150 million of this total in 2003.

We also expect significantly higher cash flow in 2004, at least 50 percent higher than 2003.

Now, with respect to revenues, we expect an overall revenue gain of 3 percent to 5 percent.

All of our operations are expected to show revenue improvement.

We plan to release 18 films in 2003, of which 10 will be under the MGM label, compared to 19 films in 2002 of which 6 were MGM films.

On net income, our preliminary guidance was that we would report a loss of 28 cents to 38 cents per share.

To reconcile these results with our free cash flow, you should know that film amortization will exceed cash production spending by approximately 300 million to $350 million in 2003.

Should our production plans remain intact for the rest of the year.

We expect this same relationship between film amortization and production spending to be true in 2004 as well.

We expect to incur total interest costs in 2003 of about 65 to $70 million of which about $10 million will be capitalized to film cost.

Cash taxes are expected to be 15 to $20 million.

We expect EBITDA to be between negative 25 million and break-even.

Again, to reconcile EBITDA with our free cash flow, I remind you that film amortization will exceed cash production spending by approximately $300 million to $350 million in 2003 based on our current release schedule.

Finally, on quarterly comparisons, I want to make a couple points that might be helpful.

As you've seen in the past, there are two main reasons why our performance improved as the year progresses.

First, TV revenues are skewed towards the third and fourth quarters due to the season at of the business. -- seasonality of the business and secondly, library DVD sales improve steadily through the year culminating with the Christmas season.

In addition our results in 2003 in particular will be better in.

The second half of the year as releasing costs for new films will be higher in the first half of the year.

And we do expect the fourth quarter of 2003 to be profitable.

So that's our guidance for 2003.

Our commitment to delivering $600 million to $900 million in cash flow over the next four years is our top priority.

And that's why we're providing cash flow guidance for the first time.

Operator, you can now open the call for questions, please.

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered, and you would like to withdraw your registration, please press the one followed by the three.

If you are using a speaker phone, please lift up your handset before entering your request.

One moment, please, for the first question.

Our first question comes from the line of David Miller with Sanders Morris Harris.

Please proceed with your question.

Good morning, guys.

Congratulations on the quarter.

Alex, I was wondering if you could expound on your comments regard to the -- with regard to the MGM Networks, if you can talk about what might be on docket for some other MGM channel launches if in fact you have them planned, perhaps, over the next two to three quarters and then with, also, if you can remind us how many total subscribers you have in the MGM Network's platform, that would be wonderful.

Thanks.

Sure, David.

Obviously, you've seen we've been rather political in the last three years in (inaudible) international channels.

We can never preannounce additional launches, but we're very excited about the fact that lately we have been penetrating the European continent which is something that has eluded us in the past.

We started with Portugal and followed with Germany and now with the Netherlands.

It's something that we're very excited about.

And we're also in the mode in addition to launching new channels internationally in trying to increase our subscriber base.

Do you have a current count with you, Dan?

No, we haven't got the count for the fourth quarter yet.

We were in excess of 40 million subs in the third quarter of last year.

So if you want, David, we'll have a conversation with you offline and give you the update for the fourth quarter.

That would be great.

Thanks very much.

Our next question comes from the line of Jill Krutick with Salomon Smith Barney.

Please proceed with your question.

Thanks very much.

Good morning.

Could you please give us a sense of how much profit from Bond and what kind of film return is factored into your 150 million operating cash flow?

Hi, Jill.

This is Dan.

Hi.

The Bond movie performed substantially above our planned expectations.

And as Chris mentioned, it will be the most profitable film we've ever had.

In 2003, we will have the tail of both the domestic and international theatrical results.

And then in June of '03, as Chris mentioned, the video release.

So we will have a marketing campaign and video cost that we will use to finance that video release.

But the cash flow from Bond in '03 will be quite strong.

As you know, though, we don't comment on specific films in terms of profitability in cash flow with numbers.

But it is contributing to our 2003 results (inaudible) and just to reiterate it is the most profitable Bond film ever.

Right.

Okay.

Could you elaborate perhaps on what some of your uses of your growing cash arsenal is?

What are we going to do with our strong cash position going forward strategically?

We, Jill, as you know, we have always articulated our desire to grow as a company.

So our first choice is to use our strong balance sheet to finance the growth of the company.

Having said that, we've always said that we want to grow in a smart way, so whatever transaction we do will be governed by reason, and you can rest assured of that.

If we do not see opportunities for the growth of the company that I think are smart for our shareholders, then our options are to either reduce debt or to return the money to our shareholders in some form, either in a buyback or a tender or some other transaction.

So we're going to take them in that order in terms of our priorities.

Okay.

And last question.

On DVD, could you give us a sense of how much of your overall library's been converted into DVD or released and what you see as sort of the pricing outlook for DVD's going forward?

Sure, Jill.

This is Dan.

By the end of 2002, we had released approximately 750 titles on DVD.

We will have new releases of slightly in excess of 200 titles for DVD in 2003, bringing our total to roughly 950 to 1,000 titles.

But, of again, you know, we want to point out, given the evergreen nature of the library, the growing nature of the DVD industry, and the fact that consumers have proven that this is a collectible and we expect that to continue, we see growth in the DVD market for the foreseeable future.

As you know, so far there's only been about a40 percent penetration into U.S. households for DVD hardware.

As that penetration continues to grow, that just gives us a larger base of consumers to sell as well as to a new base of consumers that regards all of our DVD issues really as new titles as we continue to repromote these titles in our catalog activity.

This is Chris.

If I could just add to what Dan said.

Internationally, the DVD base right now, DVD player base is about half of that in the U.S.

And again, that is one of the underpinnings of our strategy that I mentioned in my remarks to recapture control over distribution on a worldwide basis.

As I said, by the middle of the year, we'll have 88 percent of our total volume in DVD and VHS under our control going forward.

Great.

Thank you.

Our next question comes from the line of Jeff Logsdon with Gerard Klauer & Mattison.

Please proceed with your question.

Thank you.

Dan, could you discuss the dynamics around the improved cash flow in 2004, kind of what are the components that would drive that?

Sure, Jeff.

There's a couple things going on.

First of all, as Chris discussed about our core businesses, we are now completely operational and working on all four cylinders in all of our businesses.

We've had strong release (inaudible) over the last several years that are in all windows in all markets.

We're seeing the benefit of that for the first time in 2003.

Library revenue growth and contribution has been strong and the DVD market has been explosive.

We're seeing the benefits of that.

So what we have is cash flow coming in from all operations.

We've leveled off on the spend on production, so now we're starting to see the cash flow benefits come to the bottom line.

Our advertising cost will be higher in 2003.

As a result of having more wide releases.

We have a couple notice in the artists wide releases in "Dark Blue" coming out later this month as well as "Jeepers Creepers" later in the year, which is the seek well to the first successful movie.

So higher advertising costs are offset by much higher cash flow from the ancillary markets and everything that we're seeing the benefit of that this year and that will continue for the foreseeable future.

Dan, what -- the aggregate production costs for '03 and how that compares with '02?

In '02, our aggregate production cost was roughly $280 million.

That's MGM's investment in the films.

In '03, the number is a little bit lower than that, but we are also receiving money for third parties for some of the films that were produced in '02 that will be released in '03.

These include out of time and "Dark Blue."

And perhaps finally, Chris or Dan, if you could maybe go through and just talk about, as you do a second cycle in DVD with some of these titles, these are the ones you mentioned or either other higher profile titles, what are kind of the sales numbers the first time around and what are you seeing as you go into the second cycle of that, especially as you've changed price points?

Well, Jeff, it's not really changing price points.

It's really just an expanded consumer base.

In fact, some of our titles, the second release, the price point has been higher because we've done a special edition.

It's really more about the expanding consumer base and it's about, you know, promoting into that larger consumer base as well as our improved relationship particularly with the mass retailers that we've accomplished as our self-distribution strategy has evolved over the last couple of years.

So we have a much higher market share relative to the box office performance of our films, and we really have the state-of-the-art distribution organization, you know.

We're effectively the last studio to build distribution.

We learned from the -- from our competitors and we have a very strong, very current group here in terms of their expertise and the fact that we've also outsource certain operations and stuff in our home video distribution allows us to keep abreast of the latest developments in retail or distribution strategies.

We think we have the best home entertainment operation in the business domestically.

And the two facts again that I underscored in my presentation are DVD library market share has gone from 8 percent to 17 percent in the last two years.

That shows their ability basically to handle the library.

And they've done 20 percent better than the industry average in terms of new film releases in DVD and VHS.

And that kind of performance in and those kind of statistics are what really have given us the confidence to aggressively go out and recapture self-distribution on a worldwide basis in the U.S. and Canada and the U.K., Germany, and France.

Thank you.

Our next question comes from the line of Mike Gallant (ph) with CIBC World Markets.

Please proceed with your question.

You said you're going to spend a little bit less on a negative cost basis net to MGM.

Your P&A costs have to be down quite a bit in '03 versus '02.

Assuming the film slate is more successful in '03 versus '02, which I think there's a very high probability of that, it would seem that you're probably going to show a better than $75 million improvement in EBITDA.

Is that line of thinking perhaps correct as you're being conservative early in the year and there's some room for upside with the successful film slate?

Mike, this is Dan.

Net production costs that I spoke of a few minutes ago refers to the cash expenditures for production, which is -- you know, at this stage of the game is just a little bit of remaining spend on our 2 to 2003 production, but primarily starting to develop our 2004 slate.

And that will continue into the first part of next year.

Print and advertising costs will be higher in 2003 than in 2002, and I say by about 20 percent or so.

And that's a result of more wide releases, as I mentioned, a couple of UA wide releases plus MGM wide releases.

And generating, you know, the release pattern for movies that, you know, we had produced last year and still spend --we're finishing up the production cost for those this year.

So there's a bit of a lag between our production spend and when you see that on the screen.

The other thing we have is we are, as I mentioned, receiving some third-party funds from the right sales that we've done on some of the movies that were produced last year that will be released during the 2003 slate.

And again we feel very comfortable as I said about our 2003 film slate.

We feel the strategy is fully evolved at this point.

We have three sequels in the release plan.

We have an average investment of non-sequels of $20 million.

We've got highly marketable high contest films that we think have clearly defined targeted audiences, and fit the "Barbershop" and "Legally Blonde" profile.

So Alex and I are very comfortable about the film slate for MGM and UA this year.

Are you ready for the next question?

Yes.

Our next question comes from the line of Robert Routh with Arnhold and Bleichroeder.

Please go ahead with your question.

Yes, good morning.

A few quick questions.

Earlier in the call you mentioned you had received some distributions from Rainbow, I think it was 40 million in the fourth quarter and another 10 so far.

I'm wonder if anything you can give us a little more detail on exactly how the MGM is able to get distributions from the investments in those networks and how much you expect to receive in total in 2003 if in the form of such distributions.

Yes, Robert.

This is Alex.

We have an agreement with our partners at Rainbow that provides that all excess cash flow in excess or in reasonable capital reserve has to be distributed to the partners.

And as you know, AMC in particular has been generating a lot of excess free cash flow, continues to do so, and because of that, we expect to continue to receive cash distributions from AMC in particular.

The exact amount hasn't been determined.

Again, it's something that our partners and us talk about on a go-forward basis.

But he we have so far received since distribution started about $40 million, as you point out.

And we expect to continue to -- 40, yeah, 40 million.

We expect to continue to receive more in the future.

Okay.

Great.

And as far as rumors have obviously been circulating that you may be interested in certain assets of a (inaudible) universal entertainment if they are sold.

Obviously AMC and some of the cable networks fit well with your strategy.

I'm curious if you can give us any sense as to it is there any truth to the rumors of you looking at things other than the Rainbow assets and if so, what particular assets fit the best with your strategy and any sense as to pricing talk if you can comment on that?

Robert, of course we have never commented on rumors or on speculation or on specific opportunities for that matter.

The only thing I can confirm for you is the following - we are looking at things other than AMC.

We have consistently been doing that for the past two or three years.

And again, we want to grow the company in a smart way for our shareholders.

It's very important us to us.

And that's why the one thing we can promise you that whatever transaction we do will be governed by reason.

It will not be a transaction that we think will sound good on day one and then our shareholders will regret down the line.

Okay.

Great.

And one follow-up to that.

In light of that and where your stock is today and given the strength of your balance sheet where you've been, where it looks like you're going on a going-forward basis, you have considered taking the company private?

Because it seems as though that might be the best use of the company's cash at this point.

Well, we'll see.

We'll see what happens to the price of our stock.

I think that our focus has been, as you know, on actually growing, growing the company, growing the revenue streams, giving the company more scale, being more vertically integrated and increasing the public flow.

However,, you know, given current world economic and geopolitical conditions, I think it's not smart for anybody to rule anything out.

Great.

Thank you very much.

Our next question comes from the line of Raymond Katz with Bear Stearns.

Please proceed with your question.

Hi.

Good morning.

Thank you.

It's Katie Mangliss (ph) for Ray Katz.

A couple of questions.

The first one is, what is your steady state cash flow from operations that we can expect once the film amortization costs and the cash production spending costs become sort of more aligned as we kind of move forward from the period where you had higher production cash costs?

And the second question is, could you give us a sense of what age of your home video -- what percentage of your home video DVD revenue comes from the rental market giving you a rental share agreement with Blockbuster?

We were just wondering how that's working out.

Thank you.

Katie, hi.

This is Dan.

In terms of steady state cash flow, I provided some guidance looking forward for the next four years, both in terms of '03 and the fact that '03 continues to ramp up as we move into '04.

In terms of amortization versus cash production costs, we have acquired libraries on our books.

We have film - total film inventory costs in the neighborhood of about $2 billion.

Amortization will always exceed production costs at this company for the -- or at least for the foreseeable future until that high base of previously capitalized both production costs and purchase cost is amortized off our books.

That will continue for awhile.

So amortization will continue with -- you know, the noncash costs associated with amortization for the foreseeable future.

In terms of the AGG rental market, about 60 percent of our AGG revenues come from the sell-through market and about 4040 percent from the rental market.

Thank you.

Our next question comes from the line of Richard Simon (ph) with Goldman Sachs.

Please proceed with your question.

Hi, guys.

Earlier, you had mentioned that you had a 10 percent return on first cycle production.

And I assume by that first cycle is six or seven years of production or of the life of the film.

Was that return accumulative return or was it some type of other return?

Orin other words if you invested $1,000, did you get $1,100 back over the first cycle period or was it somehow calculated differently?

Hi, Richard.

This is Dan.

The 10 percent is calculated as the cash on cash return over the expected 10-year ultimates for the films.

As you know, it's very easy in our business to project ultimates once films have been released.

These are the accounting ultimates that we use for this purpose which, you know, accounting ultimates.

So they're very carefully calculated and considered.

Although we use 10-year all the mitts, most of the revenue does come in within the first six to seven years.

You know, particularly once we've hit the network -- the pretelevision window, if you will, that's the last major window to open, which is about 3 1/2 years after -- 3, 3 1/2 years after theatrical.

Okay.

So the return then is a 10 percent return over that 7-ish, 10-ish year period.

Correct.

Thank you.

Our next question comes from the line of William Drury (ph) from CSFB.

Please proceed with your question.

Good morning.

It's Deborah Schwartz (ph) on for Bill.

Wonder if anything you could just quickly touch on home video margins and particularly if you could quantify the impact of DVD's in the quarter as well as what you can expect going into '03.

Home video margins have been consistently strong.

The blended margin is running in the upper 40 percent.

We expect that margin to continue in 2003.

The fourth quarter was very strong in the home video business, as.

As you know, we had new releases like crocodile hunter out there and wind talkers as wells very strong library performance.

All right.

Thanks.

Our next question comes from the line of Michael Kupinski with AG Edwards.

Thank you, and congratulations on your quarter.

Are there any network TV movies scheduled to run in 2003, and if so, when?

And I know you stated that the Bond DVD sell-through will be in June.

In your guidance for 2003, do you anticipate that virtually all of the windows for that Bond film including Pay-Per-View so forth are in the 2003 year?

And then I just have one quick follow-up.

Michael, this is Dan.

In terms of network movies, nothing -- I honestly can't think of anything off the top of my head that we are releasing in '03. "Carrie" was our last network movie which came out in November '02 during the sweeps. "Dead Like Me" will have a two-hour pilot launching the series this spring other than that I'm not aware of any ...

... films going to the network or movie of the week.

I think you mean feature films.

Right, feature films.

Feature films going to network.

Yeah.

Gosh, I can't think of anything.

Okay.

I'm just drawing a blank.

We'll get back to you with some information on that.

Okay.

I don't have the schedule sitting in front of me.

In terms of your second question, was ...

Regarding Bond in terms of all the windows.

Are they all falling this year?

No.

Video and Pay-Per-View will fall this year and we'll be generating revenue and cash flow associated with those windows, which will spill over at least on a cash basis into 204.

Pay-Per-View -- I'm sorry, pay television will be fourth quarter '03 for revenue but for cash will be in 2004.

Okay.

And network is 2005.

Okay.

And then on -- could you add a little bit more color on the development for barbershop as a TV comedy.

Any timeline there, what your negotiation and so forth?

And then also any up dates on the "Legally Blonde" television program.

Okay.

With "Legally Blonde," you know, we have a deal in place right now with ABC.

And that deal basically allows us to determine when it would go forward with the network.

And right now again, we're trying to sequence it so that we can have the sequel come out on the fourth of July ort his summer.

And they be you know tentatively we're talking about mid season, a pickup for this series on NBC.

Okay.

On ABC, sorry.

And on "Barbershop" we're in discussions with one network.

We're finalizing a deal with that network.

And we're sort of on the same timeline.

We're targeting barber shop, the sequel to come out on the fourth quarter of this year.

Okay.

And then we're considering (inaudible) the network - with the network launching the "Barbershop" television show as amid season pickup in 2004 or the following fall.

What we're trying to work the thing in a way that we maximize the overall value of the franchise and obviously to sequence a TV show after the theatrical sequel comes out seems to be the right course of action.

Okay.

Great.

Thank you.

Ladies and gentlemen, as a reminder to register for a question, please press the one followed by the four on your telephone.

David Miller with Sanders Morris Harris, please go ahead with your follow-up question.

Thanks a lot.

Alex, you had said you had so far repurchased 3 million shares I believe at an average price, I want to make sure I heard correctly, of $11.22 out of a 10 million share buyback program. (inaudible) stock a -- since your average price is in the 11's can we assume you're going to take advantage of these prices and perhaps buy back more shares here?

Let me give you the exact numbers.

It's -- we have bought 2,922,800 shares at an average price of 11.44 dollars (ph).

Okay.

That's the answer to your first question.

And with respect to your second question, we do consider the stock an unbelievable bargain at this level.

So when we're allowed to go -- if the market conditions are the same when we're able to buy back, you can expect us to do so.

All right.

Thanks.

Our next question comes from Jeff Logsdon with Gerard Klauer Mattison.

Go ahead with your question.

This one's for Dan.

Correct me if you're wrong but you've got $75 million a year in step-up amortization from the Orion pictures Sam Goldwyn acquisition.

Somewhere between 20 cents and 30 cents a share, isn't it?

Well, doing the math, Jeff, the numbers actually since our library has been performing so well and we expect it to continue to do so, the numbers actually between $80 million to $90 million now.

And it's probably 30-plus cents a share in terms of the charge.

That is a step up associated with the Orion and Polygram acquisitions as well as the original MGM library that we acquired in '96.

Figure about 36 cents a share.

So just to clarify, so every year you - or at least this next year or this year you're starting out the year 36 cents in the hole no matter what anything else does.

Yes, Jeff, regretfully, that's the case.

No, I think I just -- I'm trying to make the case that, you know, in many companies, as analysts we don't look at net EPS.

Yes.

To really guide for the health of a company.

I'm not trying to be critical on it.

I'm just - you know, when people look at the guidance for 2003 and trying if to figure out we've got this negative EPS number, what am I missing?

Yeah.

I'm trying to fill in the gap for my own thinking, this is an area where we can't look so much at the EPS number to guide our thinking about the health of the company.

Yes, that's correct, Jeff.

That is one of the things that we -- that's an expense, a noncash expense that we continue to amortize against our results, against EBITDA, too, that our competitors don't share the same issue.

Jeff, this is Alex.

If you take that sort of consistent, you know, $80 million to $90 million worth of purchase price accounting amortization that we carry from having acquired the film libraries that you mentioned, when you combine that with Dan's statement that with respect to current production also, amortization exceeds production costs, I think those two items explain a very big part of the difference as to why for book purposes we end up showing an EPS loss at least for the time being and for cash flow generating purposes we're so healthy.

So that's -- I think that's a very important thing to sort of point out.

In addition, you know, the new accounting rules that we have in our industry now in reality, they don't make that much sense, because under the old rules, the matching of revenue and expense was much better than it is under the new rules.

And, of course, over time, that timing difference will catch up.

But that's right, I think your observation about the amortization expense is very telling.

But it just seems like most of the other companies put it under the impairment charge and just write off millions of dollars.

So sorry you get the pain every quarter.

That's all.

Thank you.

Thanks, Jeff.

Our last question comes from the line of Mike Gallant with CIBC World Markets.

Please go ahead with your follow-up question.

Yeah, can you talk about what your expected working capital changes we might see in operating cash flow this year, '03, versus '02?

And then also kind of what the NOL position looks like at year-end.

I'll take your second question first.

The NOL at year-end is approximately $460 million.

With respect to working capital changes, we expect some growth in networking capital on our balance sheet (inaudible) as a result of the normal growth of our business, particularly the expanse of the AGG self-distribution operations and the revenue top line revenue will (inaudible) higher receivables there.

Inventory for home video should actually stay flat to a little bit down.

And other than that, there shouldn't be anything particularly surprising in our balance sheet.

Great.

Thanks.

If there are no more questions, we'll end the call.

Thank you, everyone.

We'll be in Santa Monica if you have follow-up questions.

All right.

Thank you.

Thank you one and all.

We'll talk to you soon.

Ladies and gentlemen, that does conclude your conference call for today.

You may all disconnect, and thank you for participating.