-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYlL+IynpzcsmShiV/v0ujO31IXQL86CkqTTeOv2w0TirtjCotHTK6aTq7iGKzCw b5WNTpAlyvZRAspX7vcpng== 0000950123-98-007074.txt : 19980805 0000950123-98-007074.hdr.sgml : 19980805 ACCESSION NUMBER: 0000950123-98-007074 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980803 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980804 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAGRAM CO LTD CENTRAL INDEX KEY: 0000088188 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FISCAL YEAR END: 0701 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-02275 FILM NUMBER: 98676532 BUSINESS ADDRESS: STREET 1: 1430 PEEL ST STREET 2: H3A 1S9 CITY: MONTREAL QUEBEC CANA STATE: A8 BUSINESS PHONE: 5148495271 MAIL ADDRESS: STREET 1: C/O JOSEPH E SEAGRAM & SONS INC STREET 2: 375 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10152 8-K 1 THE SEAGRAM COMPANY LTD 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: August 4, 1998 THE SEAGRAM COMPANY LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Canada 1-2275 None (STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.) 1430 Peel Street, Montreal, Quebec, Canada H3A 1S9 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (514) 849-5271 2 Item 5. Other Events. On July 20, 1998, The Seagram Company Ltd. (the "Company") announced that it had agreed to sell Tropicana Products, Inc. and its global juice business ("Tropicana") to Pepsico, Inc. for a cash price of $3.3 billion. The transaction, which is subject to Hart-Scott-Rodino and other customary regulatory approvals, is expected to close by the end of August 1998. As a result of this proposed transaction, the Company has reclassified its financial statements to report Tropicana as discontinued operations. Accordingly, filed as part of this Current Report on Form 8-K and incorporated by reference herein are (i) the consolidated balance sheet of the Company as at June 30, 1997, June 30, 1996 and January 31, 1996 and the consolidated statements of income, shareholders' equity and cash flows for the fiscal year ended June 30, 1997, the five-month transition period ended June 30, 1996 and the fiscal years ended January 31, 1996 and 1995 and the notes thereto (collectively, "1997 Financial Statements"), together with the report of PricewaterhouseCoopers LLP dated August 13, 1997 except as to Note 17, which is as of July 20, 1998 (the "Report"), (ii) the unaudited consolidated balance sheet of the Company at March 31, 1998 and June 30, 1997 and the consolidated statements of income, shareholders' equity and cash flows for the fiscal quarters ended March 31, 1998 and March 31, 1997 and the nine months ended March 31, 1998 and March 31, 1997 (collectively, "March 31, 1998 Financial Statements"), (iii) the management's discussion and analysis relating to the 1997 Financial Statements, and (iv) the management's discussion and analysis relating to the March 31, 1998 Financial Statements. Item 7. Financial Statements and Exhibits. (c) Exhibits (23) Consent of PricewaterhouseCoopers LLP, independent accountants. (99.1) Management's Discussion and Analysis relating to the 1997 Financial Statements. (99.2) Management's Discussion and Analysis relating to the March 31, 1998 Financial Statements. (99.3) 1997 Financial Statements and Report. (99.4) March 31, 1998 Financial Statements. 2 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE SEAGRAM COMPANY LTD. (Registrant) Date: August 4, 1998 By: /s/ Neal B. Cravens ------------------------------------ Neal B. Cravens Senior Vice President -- Finance 3 4 EXHIBIT INDEX Exhibit Number Description of Exhibit - ------ ---------------------- (23) Consent of PricewaterhouseCoopers LLP, independent accountants. (99.1) Management's Discussion and Analysis relating to the 1997 Financial Statements. (99.2) Management's Discussion and Analysis relating to the March 31, 1998 Financial Statements. (99.3) 1997 Financial Statements and Report. (99.4) March 31, 1998 Financial Statements. 4 EX-23 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Numbers 2-99681, 33-42959, 33-42877, 33-67772, 333-4134 and 333-4136) and the Registration Statements on Form S-8 (Numbers 33-27194, 33-2043, 33-49096, 33-60606, 33-99122 and 333-19059) of our report dated August 13, 1997 except as to Note 17, which is as of July 20, 1998, which appears on page 23 of the 1997 Financial Statements of The Seagram Company Ltd., which is included in this Current Report on Form 8-K dated August 4,1998. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York August 4, 1998 EX-99.1 3 MANAGEMENT'S DISCUSSION & ANALYSIS-1997 FIN. STMT. 1 Exhibit 99.1 MANAGEMENT'S DISCUSSION AND ANALYSIS RELATING TO THE 1997 FINANCIAL STATEMENTS On July 20, 1998, Seagram announced that it had agreed to sell Tropicana Products, Inc. and its global juice business ("Tropicana") to PepsiCo, Inc. for a cash price of $3.3 billion. The sale is part of the Company's continuing effort to realign the Company's assets and to realize Tropicana's full value for Seagram shareholders. The transaction, which is subject to Hart-Scott-Rodino and other customary regulatory approvals, is expected to close by the end of August 1998. As a result of this proposed transaction, the Company's Consolidated Financial Statements and Management's Discussion and Analysis have been reclassified to report Tropicana as discontinued operations for all periods presented. Effective June 30, 1996, the Company changed its fiscal year-end from January 31 to June 30. The financial results for the twelve months ended June 30, 1997 represent the first full fiscal year on the new basis. The financial results for the period from February 1, 1996 to June 30, 1996 (the "Transition Period") are also included in this Report. Results for the Transition Period are not necessarily indicative of operations for a full year. Several events during the fiscal year ended June 30, 1997 have impacted the comparability of Seagram's financial statements. SALE OF THE 156 MILLION DUPONT EQUITY WARRANTS: On July 24, 1996, the Company sold its 156 million equity warrants of E.I. du Pont de Nemours and Company ("DuPont") to DuPont for $500 million in cash. The Company had an after-tax gain of $39 million and after-tax net proceeds of $479 million. SALE OF PUTNAM BERKLEY: On December 16, 1996, the Company completed the sale of The Putnam Berkley Group, Inc. ("Putnam"), the book publishing division of Universal Studios, Inc. for $330 million in cash. The Company had a $64 million pretax gain on the sale but no after-tax gain due to the write-off of goodwill allocated to Putnam, which has no associated tax benefit. SALE OF TIME WARNER SHARES: On May 28, 1997, Seagram sold 30 million shares of Time Warner Inc. ("Time Warner") common stock for $1.39 billion in cash. The Company had an after-tax gain of $100 million and after-tax net proceeds of $1.33 billion. At June 30, 1997 the Company continued to hold 26.8 million Time Warner shares. For each fiscal period presented, the following analysis includes an overview of revenues and operating income for the Company's two business segments, Beverages and Entertainment, and a more detailed discussion of the three lines of business within Entertainment - Filmed Entertainment, Music, and Recreation and Other. This discussion will address attributed revenues and attributed earnings before interest, taxes, depreciation and amortization ("EBITDA"). These amounts include Seagram's proportionate share of the revenues and EBITDA, respectively, of its equity companies. The adjustment for equity companies eliminates the proportionate share of the revenues or EBITDA of equity companies, and reflects the equity income as reported under U.S. generally accepted accounting principles. The Company believes cash flow, as defined by EBITDA, is an appropriate measure of the Company's operating performance, given the goodwill associated with the Company's acquisitions. In addition, financial analysts generally consider EBITDA to be an important measure of comparative operating performance. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flows and other measures of financial performance in accordance with generally accepted accounting principles. The following detailed analysis of operations should be read in conjunction with the 1997 Financial Statements included in this Form 8-K. 1 2 EARNINGS SUMMARY
Twelve Months Five Months Fiscal Year Ended June 30, Ended June 30, Ended January 31, U.S. Dollars in Millions Except per Share Amounts 1997 1996 1996 1995 1996 1995 - ------------------------ ---- ---- ---- ---- ---- ---- ATTRIBUTED REVENUES $11,763 $11,294 $4,779 $2,270 $8,780 $5,214 REPORTED REVENUES 10,644 10,215 4,251 2,093 8,052 5,008 EBITDA 1,413 1,296 440 331 1,187 809 OPERATING INCOME Beverages 677 338 182 207 361 689 Entertainment 242 174 1 32 205 - Corporate (138) (125) (55) (19) (84) (61) ------- ------- ------- ------- ------- ------ OPERATING INCOME 781 387 128 220 482 628 Interest, net and other (7) 238 99 56 195 317 Provision (benefit) for income taxes 331 35 (33) 54 121 141 Minority interest charge (credit) 12 14 (5) 3 22 - INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $445 $100 $67 $107 $144 $170 PER SHARE - BASIC $1.20 $.26 $.18 $.29 $.38 $.46 Income from Discontinued Tropicana Operations, after tax 57 42 18 10 30 24 Discontinued DuPont activities - - - 3,232 3,232 617 Income before cumulative effect ------- ------- ------- ------- ------- ------ of accounting change $502 $142 $85 $3,349 $3,406 $811 Cumulative effect of accounting change - - - - - (75) ------- ------- ------- ------- ------- ------ NET INCOME $502 $142 $85 $3,349 $3,406 $736 NET INCOME PER SHARE - BASIC $1.36 $.37 $.23 $8.99 $9.13 $1.98
Note: The Company's reported financial results for the five-month period ended June 30, 1996 and 1995 include six months of Universal (from January 1,1996 to June 30, 1996) and one month of Universal (from the acquisition date of June 5, 1995 to June 30, 1995), respectively. The Company's results for the fiscal year ended January 31, 1996 include seven months of Universal (from June 5, 1995 to December 31, 1995). RESULTS OF OPERATIONS FISCAL YEAR ENDED JUNE 30, 1997 VS. COMPARABLE PERIOD ENDED JUNE 30, 1996 Reported revenues and attributed revenues of $10.6 billion and $11.8 billion, respectively, increased from $10.2 billion and $11.3 billion, respectively, last year. Excluding the revenues of Putnam which was sold in December 1996, reported revenues and attributed revenues both increased five percent year-on-year. EBITDA was $1.4 billion compared with $1.3 billion last year. Excluding the contribution of Putnam, EBITDA increased 10 percent. Beverage EBITDA was nine percent higher. Entertainment EBITDA was 13 percent above last year, excluding the contribution of Putnam. Operating income, including a $64 million pretax gain on the sale of Putnam, was $781 million, up substantially from the prior year which included a $274 million pretax reengineering charge for Beverages operations. Excluding the unusual items, operating income rose eight percent year-on-year reflecting the growth in operations which was partially offset by higher depreciation and amortization and higher corporate expenses. The incremental depreciation and amortization principally results from higher goodwill amortization related to the Brillstein-Grey Entertainment, Interscope Records and Multimedia Entertainment acquisitions. The increase in corporate expenses to $138 million is largely due to the increase in the market value of the Company's shares during the fiscal year ended June 30, 1997 which resulted in the recognition of additional expenses associated with stock-based compensation. Interest, net and other in the fiscal year ended June 30, 1997 is net of the pretax gains on the sales of the DuPont warrants ($60 million) and the Time Warner shares ($154 million). Net interest expense of $247 million is also partially offset by $40 million of dividend income from Time Warner and DuPont. In the twelve months ended June 30, 1996, net interest expense of $277 million was partially offset by $39 million of dividend income. The net interest expense decrease largely reflects the repayment of debt with a portion of the proceeds from the sales of the DuPont warrants and Time Warner shares. 2 3 The underlying effective income tax rate for continuing operations (excluding one-time items) for the fiscal year ended June 30, 1997 was 38 percent compared with 41 percent in the comparable prior period. The income tax provision in fiscal 1997 also includes $21 million of taxes on the gain on the sale of the DuPont warrants, $64 million of taxes on the gain on the sale of Putnam and $54 million of taxes on the gain on the sale of the Time Warner shares. In the prior year, the income tax provision included a $73 million benefit on the reengineering charge and a $67 million benefit related to a settlement with the U.S. government regarding the recognition of a capital loss on the Company's 1981 exchange of shares of Conoco Inc. for common stock of DuPont. Income from continuing operations was $445 million or $1.20 per share in the fiscal year ended June 30, 1997, compared with $100 million or $0.26 per share in the comparable prior period. Excluding the after-tax gains on the sales of the DuPont warrants and the Time Warner shares, income from continuing operations in fiscal year 1997 was $306 million or $0.82 per share. In the comparable prior period, excluding the reengineering charge and the benefit associated with the tax settlement, income from continuing operations was $234 million or $0.63 per share. Income from discontinued Tropicana operations, after tax, was $57 million or $0.16 per share in the fiscal year ended June 30, 1997, compared with $42 million or $0.11 per share in the comparable prior period. Reported revenues from discontinued operations were $1.9 billion in the fiscal year ended June 30, 1997 and $1.8 billion in the comparable prior period. Operating income was $152 million in the fiscal year ended June 30, 1997 and $120 million in the comparable prior period. Results of discontinued operations include allocations of consolidated interest expense totaling $41 million and $38 million in the twelve months ended June 30, 1997 and 1996, respectively. The allocations were based on the ratio of net assets of discontinued operations to consolidated net assets. Net income was $502 million or $1.36 per share including discontinued operations in the fiscal year ended June 30, 1997, compared with $142 million or $0.37 per share in the comparable prior period. BEVERAGES Spirits and Wine revenues were adversely affected by difficult market conditions in both Europe and Asia Pacific. Attributed revenues declined two percent to $5.2 billion, while reported revenues were one percent weaker than last year at $5.05 billion. Excluding the impact of unfavorable foreign exchange, revenues would have been essentially even with last year. EBITDA increased nine percent to $810 million, driven largely by strong North American performance. The foreign exchange impact on EBITDA was negligible. EBITDA as a percent of attributed revenues rose from 14.0 percent to 15.4 percent reflecting benefits from reengineering and other cost-saving initiatives. Spirits and Wine case volumes decreased two percent in fiscal year 1997 as the performance of the Company's global brands was mixed. Volumes in North America were strong, in particular for Crown Royal Canadian Whisky, for which shipments grew eight percent, and Captain Morgan Rum, which increased volumes by 14 percent. Absolut Vodka, for which the Company gained distribution rights in major international markets beginning in 1994, had an 11 percent increase in shipments reflecting strong growth in all markets. 3 4 BEVERAGES
Twelve Months Five Months Fiscal Year Ended June 30, Ended June 30, Ended January 31, U.S. Dollars in Millions 1997 1996 1996 1995 1996 1995 - ------------------------ ---- ---- ---- ---- ---- ---- Attributed Revenues $ 5,249 $ 5,343 $ 2,007 $ 1,904 $ 5,235 $ 5,214 Adjustment for equity companies (198) (240) (116) (112) (236) (206) ------- ------- ------- ------- ------- ------- REPORTED REVENUE* $ 5,051 $ 5,103 $ 1,891 $ 1,792 $ 4,999 $ 5,008 ------- ------- ------- ------- ------- ------- EBITDA 810 746 244 265 767 809 Reengineering charge -- (274) -- -- (274) -- Adjustment for equity companies (10) (10) (5) (3) (8) (7) Depreciation and amortization (123) (124) (57) (55) (124) (113) ------- ------- ------- ------- ------- ------- OPERATING INCOME $ 677 $ 338 $ 182 $ 207 $ 361 $ 689 ------- ------- ------- ------- ------- -------
*Reported revenues include excise taxes of $808 million and $822 million in the twelve months ended June 30, 1997 and 1996, respectively, $296 million and $317 million in the five month periods ended June 30, 1996 and 1995, respectively, and $812 million and $836 million for the fiscal years ended June 31, 1996 and 1995, respectively. The $64 million EBITDA increase reflects significant growth in the Americas, which is partially offset by declines in the other geographic regions. The double-digit increase in the Americas was driven by strong volumes in North America, improvements in Brazil, Argentina and certain nonaffiliated markets, and benefits realized from the reengineering initiatives. EBITDA for Europe & Africa declined seven percent primarily due to the difficult conditions in the German and Italian markets. On a positive note, the U.K., Greece and Portugal all achieved growth year-on-year. In Asia Pacific, EBITDA declined five percent as difficult trading conditions in Greater China more than offset growth and reengineering savings in Japan and Korea. Attributed revenues and EBITDA generated outside of North America accounted for approximately 63 percent and 54 percent of total attributed revenues and EBITDA, respectively. Europe & Africa accounts for 34 percent of Spirits and Wine attributed revenues and 22 percent of EBITDA. Asia Pacific represents 20 percent of the total attributed revenues and 24 percent of EBITDA. Latin America accounts for the remaining nine percent of attributed revenues and eight percent of EBITDA. (This geographic breakdown, which is used by management to measure the performance of marketing affiliates, excludes excise taxes, assigns sales to the region in which the purchaser is located and includes our proportionate share of the revenues and EBITDA of equity company affiliates. The geographic data contained in Note 11 of the Notes to the Consolidated Financial Statements for the fiscal year ended June 30, 1997 include excise taxes as well as the Company's other operations, and are based upon the location of the legal entity which invoices the sale.) Despite the revenue decline, the Company continued to invest for future growth by supporting its brands. While total brand spending declined, in line with the volume shortfall, advertising rose six percent. The advertising growth reflects an increased emphasis on the consumer and is focused behind the core strategic brands and in key markets including the U.S., Greater China and Germany. Depreciation and amortization of assets was $101 million in fiscal year 1997 and $99 million in the comparable prior period. Amortization of goodwill was $22 million and $25 million in the twelve-month periods ended June 30, 1997 and 1996, respectively. Spirits and Wine capital expenditures were $187 million in fiscal year 1997 and total assets were $5,290 million at June 30, 1997. 4 5 ENTERTAINMENT
Fiscal Yr. Six Months Twelve Months Twelve Months Five Months Ended Ended Ended Ended June 30, Ended June 30, January 31 June 30, December 31, U.S. Dollars in Millions 1997 1996 1996 1995 1996 1995 1995 1994 - ------------------------ ---- ---- ---- ---- ---- ---- ---- ---- Attributed Revenues Filmed Entertainment $ 3,917 $ 3,671 $ 1,740 $ 193 $ 2,124 $ 1,556 $ 3,487 $ 3,313 Music 1,500 1,205 537 85 753 589 1,257 1,293 Recreation and Other 1,097 1,075 495 88 668 448 1,028 965 ------- ------- ------- ------- ------- ------- ------- ------- Attributed Revenues $ 6,514 $ 5,951 $ 2,772 $ 366 $ 3,545 $ 2,593 $ 5,772 $ 5,571 Gain on sale of Putnam 64 -- -- -- -- -- -- -- Adjustment for equity companies (985) (839) (412) (65) (492) (372) (798) (753) ------- ------- ------- ------- ------- ------- ------- ------- REPORTED REVENUES $ 5,593 $ 5,112 $ 2,360 $ 301 $ 3,053 $ 2,221 $ 4,974 $ 4,818 ------- ------- ------- ------- ------- ------- ------- ------- EBITDA Filmed Entertainment $ 373 $ 379 $ 176 $ 37 $ 240 $ 89 $ 292 $ 176 Music 72 24 (24) 11 59 75 123 192 Recreation and Other 158 147 44 18 121 75 178 165 ------- ------- ------- ------- ------- ------- ------- ------- EBITDA 603 550 196 66 420 239 593 533 ------- ------- ------- ------- ------- ------- ------- ------- Gain on sale of Putnam 64 -- -- -- -- Adjustment for equity companies (97) (92) (47) (11) (56) Depreciation and Amortization (328) (284) (148) (23) (159) ------- ------- ------- ------- ------- OPERATING INCOME $ 242 $ 174 $ 1 $ 32 $ 205 ------- ------- ------- ------- -------
Note: The Company's reported financial results for the five-month period ended June 30, 1996 include six months of Universal (from January 1, 1996 to June 30, 1996) and one month of Universal in the prior period (from the acquisition date of June 5, 1995 to June 30, 1995). The Company's results for the fiscal year ended January 31, 1996 include seven months of Universal (from June 5, 1995 to December 31, 1995). Universal's results for the six months ended June 30, 1995 and the twelve months ended December 31, 1995 and December 31, 1994 are provided for comparative purposes.
Five Month Fiscal Year Twelve Months Ended Ended Twelve Months Ended June 30, June 30, January 31, Ended December 31, U.S. Dollars in Millions 1997 1996 1996 1996 1995 1994 - ------------------------ ---- ---- ---- ---- ---- ---- Capital Expenditures Filmed Entertainment $ 44 $ 52 $ 33 $ 40 $ 59 $ 66 Music 47 37 24 26 33 30 Recreation and Other 115 180 79 109 137 123 ---- ---- ---- ---- ---- ---- $206 $269 $136 $175 $229 $219
Note: Capital expenditures for the five-month period ended June 30, 1996 include six months of Universal (from January 1, 1996 to June 30, 1996). Capital expenditures for the fiscal year ended January 31, 1996 include seven months of Universal (from June 5, 1995 to December 31, 1995). Universal's capital expenditures for the twelve months ended December 31, 1995 and December 31, 1994 are provided for comparative purposes. ENTERTAINMENT In the fiscal year ended June 30, 1997, Universal contributed $5.6 billion to reported revenues, up nine percent from the $5.1 billion contributed in the comparable prior period. Operating income, including the $64 million gain on the sale of Putnam, rose 39 percent to $242 million in fiscal year 1997. Excluding the operating contribution of Putnam and the gain on the sale, reported revenues and operating income increased 12 percent and four percent, respectively. FILMED ENTERTAINMENT In fiscal year 1997, attributed revenues increased seven percent and reported revenues increased six percent. The motion picture group accounted for over 60 percent of the $3.9 billion of attributed revenues, while 5 6 television accounted for approximately 20 percent. EBITDA declined slightly to $373 million. EBITDA as a percent of attributed revenues declined from 10.3 to 9.5 percent. The motion picture group's EBITDA was down despite the successful theatrical release of The Nutty Professor, Liar Liar and The Lost World: Jurassic Park, the latter two of which were released relatively late in the fiscal year. The results were negatively impacted by several disappointing releases, including Dante's Peak and McHale's Navy, and a one-time charge associated with the termination of The Bubble Factory production deal. The television group's results were even with last year as the contribution from the international pay and free television agreements and the Multimedia Entertainment and Brillstein-Grey Entertainment acquisitions were offset by higher deficit spending on new television series and the cancellation of several series which were in a profitable position, including Murder, She Wrote and Dream On. The EBITDA of USA Networks (50 percent-owned at June 30, 1997) was essentially even with the prior year. MUSIC In fiscal year 1997, the music group revenues benefited from the substantial investment in new artists and labels in the past two years. Attributed revenues and reported revenues increased 24 percent and 22 percent, respectively. The results reflect a considerably improved chart position. In the U.S., the music group's share of the current album releases rose more than six percentage points to over 14 percent in the first half of calendar year 1997. Major albums in release in 1997 included those by No Doubt, Bush, BLACKstreet, The Wallflowers, Counting Crows and Nirvana. Music EBITDA tripled to $72 million. EBITDA as a percent of attributed revenues rose from 2.0 percent to 4.8 percent. The margins in both periods were adversely impacted by the continued investment spending for new artists and labels and international expansion. RECREATION AND OTHER Attributed revenues for Recreation and Other increased two percent while reported revenues decreased three percent. EBITDA increased seven percent to $158 million. The comparison is impacted by the sale of Putnam during fiscal year 1997. Excluding the contribution of Putnam from both years, attributed revenues rose over 20 percent, reported revenues increased 18 percent and EBITDA climbed 22 percent. The recreation group's strong growth was driven by the successful opening of two new attractions: Jurassic Park - The Ride at Universal Studios Hollywood in June 1996, and Terminator 2: 3-D at Universal Studios Florida, its 50 percent-owned joint venture, in May 1996. Attendance and per capita spending rose at both theme parks. In Hollywood, attendance grew 18 percent and per capita spending rose eight percent. In Florida, attendance rose four percent while per capita spending increased eight percent. Spencer Gifts continued its strong performance during the period due to new store openings and a four percent increase in comparable store sales. The Universal Studios New Media Group had strong video game sales, principally Crash Bandicoot, offset by increased losses from the Company's equity investment in Interplay Productions. Also, the group incurred start-up costs in connection with the on-line and in-house software development operations in fiscal 1997. TRANSITION PERIOD VS. COMPARABLE PERIOD ENDED JUNE 30, 1995 Revenues were significantly higher than the comparable prior period reflecting the timing of the closing of the Universal acquisition in June 1995. EBITDA increased 33 percent to $440 million in the Transition Period. Entertainment EBITDA was $196 million compared with $66 million in the prior period, which represented one month of Universal results. Operating income declined to $128 million in the Transition Period reflecting a substantial increase in the depreciation and amortization expense associated with the Universal acquisition. Interest, net and other in the Transition Period was $99 million, $43 million higher than in the five months ended June 30, 1995. The prior period was net of $76 million of interest income largely earned from the temporary investment of the full proceeds from the DuPont redemption from April 1995 until the funding of the Universal acquisition in June 1995. 6 7 The income tax provision in the Transition Period included the $67 million benefit related to a settlement with the U.S. government regarding the 1981 exchange of shares of Conoco Inc. for common stock of DuPont. Excluding this tax benefit, the effective income tax rate of 117 percent was significantly higher than the prior year rate of 33 percent because of the non-deductibility of the goodwill amortization associated with the Universal acquisition and lower taxable earnings. Income from continuing operations was $67 million or $0.18 per share in the Transition Period. Excluding the $67 million benefit associated with the tax settlement, income from continuing operations was breakeven. In the five months ended June 30, 1995, income from continuing operations was $107 million or $0.29 per share. Income from discontinued Tropicana operations, after tax, was $18 million or $0.05 per share in the Transition Period, compared with $10 million or $0.03 per share in the five months ended June 30, 1995. Reported revenues from discontinued operations were $762 million in the Transition Period and $622 million in the five months ended June 30, 1995 comparable prior period. Operating income was $51 million in the Transition Period and $36 million in the five months ended June 30, 1995. Results of discontinued operations include allocations of consolidated interest expense totaling $15 million and $17 million in the five months ended June 30, 1996 and 1995, respectively. The allocations were based on the ratio of net assets of discontinued operations to consolidated net assets. Due to the redemption of most of the Company's DuPont shares on April 6, 1995, the Company discontinued accounting for its investment in DuPont under the equity method effective February 1, 1995. Earnings related to the DuPont investment are presented as discontinued activities in the prior period and include a $3.2 billion after-tax gain on the redemption of the 156 million shares and $68 million of after-tax dividend income earned on such shares prior to the redemption transaction. Net income was $85 million or $0.23 per share including discontinued operations in the Transition Period. In the five months ended June 30, 1995, net income was $3.3 billion or $8.99 per share. BEVERAGES In the Transition Period, Spirits and Wine attributed revenues grew five percent to $2.0 billion and reported revenues increased six percent to $1.9 billion largely driven by improvement in Europe. In the Transition Period, EBITDA decreased eight percent to $244 million primarily reflecting a decline in North America, which more than offset improvement in Europe & Africa and a substantial recovery in several Latin American affiliates. Asia Pacific's results were essentially unchanged. Spirits and Wine case volumes rose almost four percent in the Transition Period. Most of the Company's key premium brands grew, including Martell Cognac, Chivas Regal Scotch Whisky, Crown Royal Canadian Whisky, Mumm Sekt Sparkling Wines and Absolut Vodka. ENTERTAINMENT In the Transition Period, which includes Universal results from January 1, 1996 to June 30, 1996, Universal contributed $2.4 billion to reported revenues and $1 million to operating income, after significant amortization and depreciation expense. In the period ended June 30, 1995, the Company's results included one month of Universal from the acquisition date of June 5, 1995 until June 30, 1995. During that time, Universal had reported revenues of $301 million and operating income of $32 million. In order to provide a basis of comparison, the discussion that follows is based upon Universal results for the six months ended June 30, 1996 compared with the results for the six months ended June 30, 1995. FILMED ENTERTAINMENT In the six-month period ended June 30, 1996, attributed revenues and reported revenues each rose 12 percent and EBITDA almost doubled to $176 million versus the prior period. The motion picture group was driven by higher worldwide profits from prior year releases, particularly Babe and Casper. The television group had 7 8 improved results mainly because of the cancellation of several series which were in a deficit position. EBITDA of USA Networks (50 percent-owned at June 30, 1996) was essentially even with the prior period. MUSIC In the six-month period ended June 30, 1996, attributed and reported revenues each declined nine percent, while EBITDA was a loss of $24 million compared to income of $75 million in the comparable prior period. Lower revenues and EBITDA reflect difficult comparisons with the prior period as the six months ended June 30, 1995 included significant carryover business from the very strong fourth quarter of 1994. EBITDA was affected by a substantial investment program in 1996, which included increased spending for international expansion and investment in new artists and label ventures including Universal Records and Rising Tide/Nashville, and the acquisition of a 50 percent interest in Interscope Records. RECREATION AND OTHER Attributed revenues increased 10 percent and reported revenues increased eight percent during the six-month period ended June 30, 1996 but EBITDA declined from $75 million to $44 million. Attendance and per capita spending at both theme parks were higher in the period ended June 30, 1996 than the prior period. This is due in part to the successful openings of Terminator 2: 3-D at Universal Studios Florida, the Company's 50 percent-owned joint venture, in May 1996 and Jurassic Park - The Ride at Universal Studios Hollywood in June 1996. Recreation EBITDA was down substantially due largely to higher marketing spending and the timing of that spending in advance of the new attractions which opened comparatively late in the period. YEAR ENDED JANUARY 31, 1996 VS. YEAR ENDED JANUARY 31, 1995 Both reported revenues of $8.1 billion and attributed revenues of $8.8 billion were up substantially over the prior year largely due to the inclusion of partial year results of Universal. EBITDA was $1.2 billion compared with $809 million in the prior year. Entertainment contributed $420 million, while Spirits and Wine declined five percent. Corporate expenses increased to $84 million largely because the increase in the market value of the Company's shares in the year ended January 31, 1996 resulted in the recognition of additional expenses associated with stock-based compensation. Operating income, after a $274 million reengineering charge, declined to $482 million. Excluding this charge, operating income rose 20 percent to $756 million reflecting the contribution from Entertainment, partially offset by weaker Spirits and Wine results. The interest, net and other decrease in the year ended January 31, 1996 largely reflected the repayment of debt with a portion of the proceeds from the DuPont redemption and interest income earned from the temporary investment of the DuPont proceeds from April 1995 until the funding of the Universal Studios Holding I Corp. acquisition in June 1995. The effective income tax rate on continuing operations excluding the reengineering charge for the fiscal year ended January 31, 1996 was 35 percent compared with 24 percent (exclusive of the $65 million charge for the Company's 1981 exchange of shares of Conoco Inc. for common stock of DuPont) in the prior period. The higher effective tax rate resulted from the non-deductibility of goodwill amortization and the charge for reengineering activities, for which a tax benefit was not recognized in some countries where the charge was incurred. Income from continuing operations was $144 million or $0.38 per share in the fiscal year ended January 31, 1996 compared with $170 million or $0.46 per share in the prior year. Income from discontinued Tropicana operations, after tax, was $30 million or $0.08 per share in the fiscal year ended January 31, 1996, compared with $24 million or $0.06 per share in the prior year. Reported revenues from discontinued operations were $1.7 billion in the fiscal year ended January 31, 1996 and $1.4 billion in the prior year. Operating income was $102 million in the fiscal year ended January 31, 1996 and $97 million in the prior year. Results of discontinued operations include allocations of consolidated interest expense totaling $40 million and $45 million in the fiscal year ended January 31, 1996 and 1995, respectively. The allocations were based on the ratio of net assets of discontinued operations to consolidated net assets. 8 9 In the fiscal year ended January 31, 1996, income from discontinued DuPont activities included a $3.2 billion after-tax gain on the redemption of the 156 million DuPont shares and $68 million of after-tax dividend income. In the fiscal year ended January 31, 1995, income from the discontinued DuPont activities included $264 million of after-tax dividend income and $353 million of unremitted earnings (Seagram's share of DuPont's earnings not received as cash dividends). Net income was $3.4 billion or $9.13 per share including discontinued operations in the fiscal year ended January 31, 1996, compared with $736 million or $1.98 per share in the prior year, which included a $75 million after-tax charge for the cumulative effect of the adoption of FAS 112, relating to post-employment benefits. BEVERAGES Both attributed and reported Spirits and Wine revenues were essentially even with the prior year at $5.2 billion and $5.0 billion, respectively, while EBITDA decreased five percent to $767 million. EBITDA as a percent of attributed revenues declined from 15.5 percent to 14.7 percent. Spirits and Wine case volumes declined three percent in the year ended January 31, 1996 principally from the reduction of trade inventories in Europe, in particular for Mumm Sekt Sparkling Wines. However, a number of the Company's premium brands showed strong unit gains, including Chivas Regal Scotch Whisky, Martell Cognac and Crown Royal Canadian Whisky. Absolut Vodka showed growth in shipments in the U.S. and globally as the Company continued to expand its distribution of the brand. The EBITDA decline was attributable to a 20 percent shortfall in Europe & Africa, partially mitigated by strong performances in Asia Pacific and the Americas. The weakness in Europe & Africa resulted primarily from difficult trading conditions in Germany, Spain and Portugal. Asia Pacific continued its broad-based profit growth, particularly in Greater China and South Korea. North America's results were driven largely by growth in Crown Royal Canadian Whisky, Captain Morgan Original Spiced Rum and Absolut Vodka. The improved contribution from Latin America was mainly the result of significantly higher profits in Venezuela. REENGINEERING ACTIVITIES In connection with a program to better position its beverage operations for strategic growth, the Company recorded a pretax charge of $274 million in the quarter ended October 31, 1995. The charge related principally to the Company's global spirits and wine manufacturing, financial, marketing and distribution systems. After giving effect to the charge, Beverages reported operating income of $361 million compared with $689 million in the prior year. ENTERTAINMENT In the year ended January 31, 1996, Universal contributed $3.1 billion to reported revenues and $205 million to operating income, which represented Universal's results since the Company acquired its 80 percent interest in Universal in June 1995. Although the Company's reported financial results reflected only the partial year of Universal operations, in order to provide a basis of comparison, the discussion that follows is based upon Universal results for the twelve months ended December 31, 1995 compared with the prior year. FILMED ENTERTAINMENT Attributed revenues grew five percent to $3.5 billion, and EBITDA increased to $292 million from $176 million. The motion picture group was driven by the successful worldwide performance of Casper, Apollo 13 and Babe. Television operations benefited from higher sales of library product at improved margins, in addition to reduced losses on fewer new network and first-run syndication series. EBITDA of USA Networks (50 percent-owned at January 31, 1996), increased substantially due to higher advertising revenues, increased subscriber revenues and lower programming costs. 9 10 MUSIC The music group faced difficult comparisons due to an exceptionally strong performance in 1994. Attributed revenues declined three percent to $1,257 million, while EBITDA fell 36 percent to $123 million. New releases in 1995 included albums by Live and White Zombie, and the Dangerous Minds soundtrack, following successful new albums in 1994 by The Eagles, Counting Crows, Aerosmith and Nirvana. RECREATION AND OTHER Attributed revenues increased seven percent to $1,028 million in 1995, while EBITDA grew to $178 million from $165 million. Theme parks were solid, despite competitive pressure from new attractions and aggressive marketing efforts at other theme parks. Universal Studios Hollywood had a four percent increase in per capita spending and one percent growth in attendance. Per capita spending at Universal Studios Florida was up slightly and attendance was essentially unchanged. Book publishing was higher due to successful new releases by a number of authors including Tom Clancy, Patricia Cornwell, Amy Tan and Charles Kuralt. Spencer Gifts had a very strong year, with comparable store sales up over nine percent. LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK The Company's financial position strengthened during the fiscal year ended June 30, 1997. Net cash provided by operating activities was $2,020 million, following net cash provided of $941 million in the five months ended June 30, 1996. The results for the fiscal year included significant non-cash charges such as amortization of film costs, depreciation and amortization of assets and amortization of excess of cost over fair value of assets. In addition, cash was generated by a reduction in working capital requirements. Net cash provided by investing activities was $352 million in fiscal year 1997. The net cash provided includes gross proceeds from the sale of 30 million Time Warner shares ($1.39 billion), the sale of the DuPont warrants ($500 million) and the sale of Putnam ($330 million). These cash proceeds were partially offset by film production costs of $1.36 billion and capital expenditures of $393 million: Beverages - $187 million and Entertainment - $206 million. In the Transition Period, net cash used for investing activities was $1,217 million. The major items which required cash included the investment in Interscope Records of $200 million, the investment in Brillstein-Grey Entertainment of $81 million and investments in unconsolidated companies including Loews Cineplex Entertainment Corporation (formerly Cineplex Odeon Corporation) and SEGA GameWorks. In addition, film production costs were $626 million and capital expenditures were $245 million: Beverages - $108 million, Entertainment - $136 million and Corporate - $1 million. The Company has entered into an arrangement to sell to a third party substantially all films produced or acquired during the term of the agreement for amounts which approximate cost. The Company will serve as sole distributor and earn a distribution fee, which is variable and contingent upon the films' performance. In addition, the Company has the option to purchase the films at certain future dates. In the fiscal year ended June 30, 1997, the Company made dividend payments of $239 million and repurchased $416 million of the Company's common shares. The net result of the cash provided by operating activities and investing activities and the cash used for financing activities, was net cash provided by continuing operations of $197 million. In the fiscal year ended June 30, 1997, the discontinued Tropicana operations provided cash of $16 million. The net impact was a decline in short-term debt of $1,601 million and a $213 million increase in cash and short-term investments. In the five months ended June 30, 1996, continuing operations provided net cash of $173 million and discontinued Tropicana operations used cash of $126 million. In the Transition Period, net debt increased by $537 million largely due to the funding of entertainment investments. The Company's total long- and short-term debt, net of cash and short-term investments, decreased to $2.2 billion at June 30, 1997 from $4.1 billion at June 30, 1996. The Company's ratio of net debt to total capitalization (including minority interest) declined from 27 percent to 16 percent, reflecting the lower debt outstanding. In addition, the Company's liquidity was enhanced by the ownership of 26.8 million shares of Time Warner common stock which had a market value of $1.3 billion on June 30, 1997. 10 11 The Company's working capital position is reinforced by available credit facilities of $3.8 billion. These facilities are used to support the Company's commercial paper borrowings and are available for general corporate purposes. The Company believes its internally-generated liquidity together with access to external capital resources will be sufficient to satisfy existing commitments and plans, and to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise. The Company is exposed to changes in financial market conditions in the normal course of its business operations due to its operations in different foreign currencies and its ongoing investing and funding activities. Market risk is the uncertainty to which future earnings or asset/liability values are exposed due to operating cash flows denominated in foreign currencies and various financial instruments used in the normal course of operations. The Company has established policies, procedures and internal processes governing its management of market risks and the use of financial instruments to manage its exposure to such risks. The Company is exposed to changes in interest rates primarily as a result of its borrowing and investing activities which include short-term investments and borrowings and long-term debt used to maintain liquidity and fund its business operations. The Company continues to utilize U.S. dollar-denominated commercial paper to fund seasonal working capital requirements in the U.S. and Canada. The Company also borrows in different currencies from other sources to meet the borrowing needs of its affiliates. The nature and amount of the Company's long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company's operating cash flows denominated in foreign currency as a result of its international business activities and certain of its borrowings are exposed to changes in foreign exchange rates. The Company continually evaluates its foreign currency exposure (primarily British pound, French franc, German mark and Swiss franc), based on current market conditions and the business environment. In order to mitigate the effect of foreign currency risk, the Company engages in hedging activities. The magnitude and nature of such hedging activities are explained further in Note 7 to the financial statements. The Company employs a variance/covariance approach in its calculation of Value at Risk (VaR), which measures the potential losses in fair value or earnings that could arise from changes in market conditions, using a 95 percent confidence level and assuming a one-day holding period. The VaR, which is the potential loss in fair value, attributable to those interest rate sensitive exposures associated with the Company's exposure to interest rates was $12 million at June 30, 1997 and the average VaR for the year then ended was $14 million. This exposure is primarily related to long-term debt with fixed interest rates. The VaR, which is the potential loss in earnings, at June 30, 1997 and the average VaR for the year then ended associated with the Company's exposure to foreign exchange rates primarily as a result of its foreign currency denominated debt was $2 million. The Company is subject to other foreign exchange market risk exposure as a result of non-financial instrument anticipated foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the Company's VaR calculation. QUARTERLY HIGH AND LOW SHARE PRICES
Fiscal Year Five Month Period Fiscal Year Ended Ended June 30, Ended June 30, January 31, 1997 1996 1996 1995 High Low High Low High Low High Low ---- --- ---- --- ---- --- ---- --- New York Stock Exchange US$ US$ US$ US$ US$ US$ US$ US$ First Quarter 38 3/8 30 7/8 38 3/8 31 3/4 32 3/8 25 5/8 31 27 Second Quarter 41 7/8 35 1/4 36 3/8 32 1/2 36 3/4 26 3/4 32 28 1/8 Third Quarter 42 3/4 38 38 1/8 34 1/4 32 5/8 29 1/8 Fourth Quarter 41 7/8 35 3/4 39 1/2 34 1/4 30 3/4 27 1/8 Canadian Stock Exchange C$ C$ C$ C$ C$ C$ C$ C$ First Quarter 52 1/4 42 1/4 52 1/2 43 1/8 45 1/4 35 1/2 42 1/2 37 1/4 Second Quarter 57 4/10 47 1/2 49 3/4 44 2/5 50 36 1/4 43 7/8 38 3/4 Third Quarter 57 3/10 51 9/10 52 46 1/4 44 5/8 39 1/4 Fourth Quarter 58 1/10 50 53 1/4 46 7/8 43 1/8 37 3/8
11 12 RETURN TO SHAREHOLDERS The Company had 7,586 registered shareholders at August 15, 1997. The Company's common shares are listed on the New York, Toronto, Montreal, Vancouver and London Stock Exchanges. Closing prices at June 30, 1997, on the New York and Toronto Stock Exchanges were $40.25 and C$55.50, respectively. In the fiscal year ended June 30, 1997, the Company paid dividends of $0.15 per share in the first quarter and $0.165 per share in each of the final three quarters. In the Transition Period dividends paid were $0.15 per share per quarter. In the year ended January 31, 1996, the Company also paid dividends of $0.15 per share in each of the four quarters. Dividends paid to shareholders totaled $239 million in fiscal year 1997, $112 million in the Transition Period and $224 million and $216 million in the years ended January 31, 1996 and 1995, respectively. 12 EX-99.2 4 MANAGEMENT'S DISCUSSION & ANALYSIS-MARCH 31, 1998 1 Exhibit 99.2 MANAGEMENT'S DISCUSSION AND ANALYSIS RELATING TO THE MARCH 31, 1998 FINANCIAL STATEMENTS On July 20, 1998, Seagram announced that it had agreed to sell Tropicana Products, Inc. and its global juice business ("Tropicana") to PepsiCo, Inc. for a cash price of $3.3 billion. The sale is part of the Company's continuing effort to realign the Company's assets and to realize Tropicana's full value for Seagram shareholders. The transaction, which is subject to Hart-Scott-Rodino and other customary regulatory approvals, is expected to close by the end of August 1998. As a result of this proposed transaction, the Company's Consolidated Financial Statements and Management's Discussion and Analysis have been reclassified to report Tropicana as discontinued operations for all periods. The discussion of business unit performance includes attributed revenues which reflect the Company's proportionate share of the revenues of the Company's equity companies and attributed earnings before interest, taxes, depreciation and amortization ("EBITDA") for the Company's operations which reflects the proportionate share of the EBITDA of the Company's equity companies. The adjustment for equity companies eliminates the Company's proportionate share of the EBITDA in order to reflect equity income as calculated under generally accepted accounting principles. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance. However, EBITDA should be considered in addition to, not as a substitute for operating income, net income, cash flows and other measures of financial performance in accordance with generally accepted accounting principles.
QUARTER ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ---- ---- ---- ---- (millions) Reported Revenues $ 2,036 $ 2,357 $ 7,546 $ 8,098 ======= ======= ------- ------- Attributed Revenues $ 2,439 $ 2,667 $ 8,595 $ 8,915 ======= ======= ======= ======= Beverages - EBITDA Before Charge for Asia Spirits and Wine Operations 81 143 527 636 Charge for Asia Spirits and Wine Operations -- -- (60) -- ------- ------- ------- ------- Total Beverages EBITDA 81 143 467 636 Adjustment for Equity Companies (1) (1) (5) (6) Depreciation and Amortization (30) (33) (91) (95) ------- ------- ------- ------- Beverages - Operating Income 50 109 371 535 Entertainment - EBITDA Filmed Entertainment 115 87 386 304 Music Entertainment 12 10 77 62 Recreation and Other 22 17 124 132 ------- ------- ------- ------- Total Entertainment EBITDA 149 114 587 498 Gain on Sale of Putnam -- -- -- 64 Adjustment for Equity Companies (50) (25) (118) (72) Depreciation and Amortization (97) (77) (283) (242) ------- ------- ------- ------- Entertainment - Operating Income 2 12 186 248
1 2 Corporate Expenses (20) (23) (59) (93) -------- ------- -------- -------- TOTAL OPERATING INCOME $ 32 $ 98 $ 498 $ 690 ======== ======= ======== ========
2 3 RESULTS OF OPERATIONS The Company's results continued to be severely impacted by the economic and currency crises in Asia which hampered business performance and resulted in a $60 million charge to Spirits and Wine operations in the second quarter of the fiscal year. Reported revenues for the third quarter and nine months ended March 31, 1998 declined 14 percent and seven percent, respectively, due primarily to declines in Spirits and Wine revenues resulting from the extremely difficult market conditions in Asia and the unfavorable impact of foreign exchange. The current year nine months was also impacted by the absence of the contribution from Putnam (Universal's publishing business that was sold in December 1996). Operating income for the quarter fell 67 percent to $32 million and was 28 percent lower for the nine months, at $498 million. Strong growth experienced at Universal and by the North America Spirits and Wine business was offset by the deterioration of the Spirits and Wine results in Asia. Attributed revenues for the third quarter, at $2.4 billion, were nine percent lower than in the prior year while EBITDA declined 11 percent to $230 million. For the nine months, attributed revenues showed a four percent decline, but fell only two percent if the Putnam revenues are excluded from the prior year. EBITDA for the nine months decreased seven percent to $1.1 billion. Excluding the charge for the Spirits and Wine operations in Asia and the prior year contribution from Putnam, EBITDA for the nine months increased one percent year-on-year. Beverage Operations In the quarter ended March 31, 1998, Spirits and Wine contributed $883 million to reported revenues and $50 million to operating income versus $1.1 billion of reported revenues and $109 million of operating income in the prior year. Nine months reported revenues for Spirits and Wine were $3.5 billion while operating income was $371 million compared to prior year reported revenues of $3.8 billion and operating income of $535 million. In the third quarter, reported revenues and attributed revenues declined 17 percent and 20 percent, respectively. Excluding the unfavorable impact of foreign exchange, reported revenues declined 13 percent. Attributed revenues in Asia were down 61 percent reflecting the significant impact of foreign exchange, lower shipments in order to reduce distributor inventories, particularly in Greater China, and diminished consumer demand, particularly in the Duty Free market, which was affected by reduced travel in the region. Revenues in North America increased nine percent in the quarter but revenues in Europe were down 15 percent. Excluding the foreign exchange impact, Europe's revenues would have decreased five percent primarily as a result of the continuing decline of Mumm Sekt. The weakness in Germany offset improvement in the U.K., Spain and Italy. These results are in line with the forecast of Spirits and Wine results for the fiscal year ending June 30, 1998 which was provided by the Company in February 1998. Spirits and Wine case volumes fell four percent as the performance of global brands was mixed. Key North American brands were very strong led by Crown Royal, up 21 percent, Captain Morgan, up 11 percent, and Absolut (which the Company distributes in major international markets), up five percent. While some of the volume growth in the quarter resulted from a buy-in ahead of price increases, year-to-date shipments and depletions for these brands were very strong. Several global brands declined due to the market conditions in Asia, including Chivas Regal, Martell and Royal Salute. EBITDA declined $62 million in the third quarter, to $81 million. This reduction is attributable to the situation in Asia and reflects the decline in revenues as well as lower margins as demand has shifted from imported products to less expensive, locally-produced products. EBITDA for North America increased 20 percent driven by higher revenues and margin increases from improved mix. EBITDA for Europe declined slightly but would have climbed 12 percent excluding the impact of foreign exchange. The nine months results include a $60 million charge related to operations in Asia. The charge was comprised of approximately $30 million for increased bad debt reserves, $15 million for severance and related costs, and the balance reflects other asset write-downs. 3 4 Entertainment In the third quarter, reported and attributed revenues decreased 11 percent and one percent, respectively. For the nine months ended March 31, 1998, reported revenues fell five percent while attributed revenues increased two percent year-on-year. Excluding the contribution of Putnam in the prior year, attributed revenues increased five percent in the nine months. Despite improved results in all segments, operating income declined $10 million to $2 million for the quarter and $62 million to $186 million for the nine months due to the inclusion of the Putnam operations and gain on sale of Putnam in the prior year results, and to higher amortization expense in the current year. Excluding Putnam from the prior year results, operating income increased $23 million for the nine months. As a result of the sale of Putnam in December 1996, the Entertainment segment's operations are presented in three components: Filmed Entertainment, Music Entertainment and Recreation and Other. Recreation and Other principally includes recreation operations, retail stores and new media ventures as well as publishing results through December 16, 1996. Filmed Entertainment Reported revenues for the quarter decreased 17 percent while attributed revenues increased one percent. For the nine months, reported revenues were flat and attributed revenues rose eight percent. As a result of the transactions described in Note 2 to the Consolidated Financial Statements for the nine months ended March 31, 1998, the third quarter includes 100 percent of USA Networks' results through February 11, 1998 and Universal's 45.8 percent equity interest in the earnings of USANi LLC thereafter. EBITDA rose 32 percent or $28 million in the quarter principally due to the impact of these transactions and to the strong performance of USA Networks. Excluding the incremental contribution from USA Networks and USANi LLC, EBITDA declined in the quarter reflecting the disappointing box office performance of Universal's recent releases, including Blues Brothers 2000 and Primary Colors, offset partly by higher library sales to foreign Pay TV and domestic video. USA Networks' strong performance resulted from higher advertising and affiliate revenues and lower make-good requirements. Music Entertainment Reported and attributed revenues decreased four percent and nine percent, respectively, in the quarter as compared to the prior year. For the nine months, reported and attributed revenues declined three and two percent, respectively. These declines are due to the impact of unfavorable foreign exchange on international revenues, and to lower concert revenues. EBITDA increased $2 million compared with a very strong quarter last year. The growth results from strong sales of releases by Aqua, Chumbawamba, and Erykah Badu, as well as top-selling artists in Spain, Brazil and Mexico. Margins continue to improve, driven primarily by better mix. Recreation and Other For the third quarter, reported and attributed revenues increased seven percent and five percent, respectively. For the nine months, reported and attributed revenues were, respectively, 26 percent and 20 percent below the prior year, reflecting the sale of Putnam. Excluding the results of Putnam from the prior year, reported and attributed revenues increased two percent and three percent, respectively, in the nine months. EBITDA for the third quarter showed a $5 million improvement due largely to the Florida theme park and the success of the Crash Bandicoot 2 video game. In Florida, per capita spending was unchanged and paid attendance declined two percent versus the prior year which benefited from the opening of Terminator-2: 3-D. However, EBITDA increased because of a promotion for second day free admission, which resulted in higher revenues and margins from the increased turnstile attendance. As expected, attendance at the Hollywood theme park declined 20 percent in the quarter due to the impact of El Nino and to higher attendance in the prior year as a result of the opening of Jurassic Park - The Ride. Per capita spending in Hollywood increased five percent due to an increase in the admission price. Corporate Expenses and Interest, Net and Other Corporate expenses were $20 million in the current quarter as compared to $23 million in the prior year and $59 million for nine months compared to $93 million last year. The decrease in the quarter is primarily due to the timing of expenses and reduced reengineering expenditures while the year-on-year decline at nine months resulted from the timing of expenses, lower reengineering activities and reduced costs associated with stock-based compensation. Interest, net and other for the quarter was $730 million of income. This included net interest expense of $69 million, which was more than offset by $6 million in dividend income from the DuPont and Time Warner investments, a pre-tax gain of $433 million on the sale of 15 million shares of Time Warner common stock, and a pre-tax gain of $360 million on the USAi 4 5 transaction. In the prior year, Interest, net and other was $51 million which was comprised of net interest expense of $61 million offset by $10 million of dividend income from DuPont and Time Warner. Interest, net and other for the nine months was $610 million of income as compared to expense of $102 million for the prior year which included a $60 million pre-tax gain on the sale of DuPont warrants. The increase in interest expense in the quarter versus the prior year is due primarily to a higher average debt balance, which reflects the funding of the Company's purchase of the incremental 50 percent interest in USA Networks on October 21, 1997 and share repurchases in previous quarters pursuant to Seagram's ongoing share repurchase program, partially offset by the receipt of proceeds from the sale of the Time Warner shares and from the transaction with USAi in the third quarter. Net Income In the third quarter, income from continuing operations was $447 million or $1.30 per share compared with income from continuing operations of $20 million, or $0.05 per share, in the prior year. Excluding the $281 million after-tax gain on sale of Time Warner shares and the $187 million gain on the transaction with USAi (after-taxes and minority interest), a loss from continuing operations of $21 million, or $(0.06) per share, was realized in the quarter. For the nine months, income from continuing operations was $571 million or $1.63 per share compared to $310 million or $0.84 per share in the prior year. Excluding the $50 million after-tax charge for the Spirits and Wine operations in Asia, the after-tax gain on sale of the Time Warner shares and the gain on the USAi transaction after taxes and minority interest from the current year and the $39 million after-tax gain on the sale of DuPont warrants from the prior year, income from continuing operations for the nine months was $153 million or $0.44 per share compared to $271 million or $0.73 per share last year. Income from discontinued Tropicana operations, after tax, was $14 million or $0.04 per share in the third quarter, compared with $7 million or $0.02 per share in the prior year. Income from discontinued Tropicana operations, after tax, was $51 million or $0.14 per share in the nine months, compared with $44 million or $0.12 per share in the prior year. Reported revenues from discontinued operations were $498 million and $490 million in the third quarter and prior year, respectively, and $1,468 million and $1,442 million in the nine months and prior year, respectively. Operating income was $33 million and $28 million in the third quarter and prior year, respectively, and $126 million and $122 million in the nine months and prior year, respectively. Results of discontinued operations include allocations of interest expense totaling $8 million and $10 million in the third quarter and prior year, respectively, and $26 million and $32 million in the nine months and prior year, respectively. The allocations were based on the ratio of net assets of discontinued operations to consolidated net assets. Net income was $461 million or $1.34 per share in the third quarter, compared with $27 million or $0.07 per share in the prior year. Net income was $622 million or $1.77 per share in the nine months, compared with $354 million or $0.96 per share in the prior year. The effective tax rate for the nine months ended March 31, 1998 was 44 percent as compared to an effective tax rate of 45 percent in the prior year. The 1998 fiscal year effective tax rate on continuing operations (excluding one-time items) has increased to 56 percent reflecting reduced earnings in the relatively low tax jurisdictions in Asia. The impact of the gains on the sale of Time Warner and USAi, which are taxed at statutory rates, reduces the effective tax rate to 44 percent. Liquidity and Capital Resources The increase in Current assets to $7.0 billion at March 31, 1998 from $6.1 billion at June 30, 1997 is due primarily to additional Cash and short-term investments of $942 million resulting from the proceeds received from the sale of the Time Warner shares and the USAi transaction, offset by the use of funds for share repurchases. Current liabilities of $5.1 billion at March 31, 1998 were $2.0 billion higher than at June 30, 1997 due primarily to an increase in short-term borrowings to fund the $1.7 billion acquisition of the incremental share in USA Networks. Shareholders' equity was $9.2 billion at March 31, 1998 compared to $9.4 billion at June 30, 1997. Net debt was $2.6 billion compared to $2.2 billion at June 30, 1997. Net cash of $18 million was provided by operating activities in the nine months ended March 31, 1998, compared to $553 million in the prior year period, largely reflecting the decline in income from ongoing operations in the current year. Cash provided by investing activities was $339 million in the nine months ended March 31, 1998 due to the proceeds received from the transaction with USAi ($1.3 billion) combined with the proceeds from the 5 6 sale of 15 million Time Warner shares ($958 million), offset by the $1.7 billion acquisition of the remaining 50 percent of USA Networks. In addition, capital expenditures were $257 million. In the prior year, cash provided by investing activities of $366 million reflected proceeds of $500 million on the sale of the DuPont warrants, proceeds of $330 million on the sale of Putnam, offset by capital expenditures of $251 million and the acquisition of Multimedia Entertainment for $55 million. The Company's liquidity was enhanced by its remaining investment in Time Warner stock which had a market value of $847 million on March 31, 1998. On May 27, 1998, the Company sold the remaining 11.8 million shares for pretax proceeds of $905 million ($732 million after tax). Financing activities in the nine months ended March 31, 1998 reflect an increase in short-term borrowings of $1.4 billion used to finance the acquisition of the incremental interest in USA Networks. The Company used funds to repurchase its shares for $753 million, and to pay dividends of $173 million. In the comparable prior year period, financing activities reflected a decrease in short-term borrowings due to the receipt of proceeds from the sale of the DuPont warrants and the sale of Putnam offset by the Company's repurchase of shares at a cost of $210 million and dividend payments totaling $178 million. The net result of the cash provided by operating activities, investing activities and financing activities in the nine months ended March 31, 1998 was net cash provided by continuing operations of $828 million. In the nine months ended March 31, 1998, the discontinued operations provided cash of $114 million. The net impact was an increase in cash and short-term investments of $942 million. In the nine months ended March 31, 1997, continuing operations provided net cash of $92 million and discontinued operations provided cash of $49 million. The Company's financial condition remains strong. Management believes that its strong financial position provides it with sufficient financial flexibility to meet future financial obligations. Year 2000 Issue The Company has established a Year 2000 Program which includes the identification, evaluation and implementation of changes to the Company's computer systems and applications aimed at ensuring that such systems and applications will function properly beyond 1999. Expenditures relating to software modifications for Year 2000 compliance are currently estimated to be approximately $50 million and are not expected to have a material adverse effect on the Company's financial condition, operations or liquidity. While the Company is currently communicating with its key suppliers, customers and other constituents, at this time the Company can not reasonably estimate the potential impact on its financial position and operations if key suppliers, customers and other constituents do not become Year 2000-compliant on a timely basis. Cautionary Statement Concerning Forward-Looking Statements The statements herein relating to matters that are not historical facts are forward-looking statements that are not guarantees of future performance and involve risks and uncertainties, including but not limited to future global economic conditions, foreign exchange rates, the actions of competitors and other factors beyond control of the Company. 6 EX-99.3 5 1997 FINANCIAL STATEMENTS 1 EXHIBIT 99.3 CONSOLIDATED STATEMENT OF INCOME
Fiscal Transition Year Ended Period Ended Fiscal Years US dollars in millions, except per share June 30, June 30, Ended January 31, amounts 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------------------------- Revenues $ 10,644 $ 4,251 $ 8,052 $ 5,008 Cost of Revenues 6,369 2,671 4,865 2,674 Selling, general and administrative expenses 3,494 1,452 2,705 1,706 ---------------------------------------------- Operating Income 781 128 482 628 Interest, net and other (7) 99 195 317 ---------------------------------------------- 788 29 287 311 Provision (benefit) for income taxes 331 (33) 121 141 Minority interest charge (credit) 12 (5) 22 -- ---------------------------------------------- Income from Continuing Operations before Cumulative Effect of Accounting Change 445 67 144 170 ---------------------------------------------- Income from Discontinued Tropicana Operations, after tax 57 18 30 24 ---------------------------------------------- Discontinued DuPont Activities: Dividends, after tax -- -- 68 264 Unremitted earnings -- -- -- 353 Gain on redemption of 156 million shares, after tax -- -- 3,164 -- ---------------------------------------------- -- -- 3,232 617 ---------------------------------------------- Income Before Cumulative Effect of Accounting Change 502 85 3,406 811 Cumulative effect of accounting change, after tax -- -- -- (75) ---------------------------------------------- Net Income $ 502 $ 85 $ 3,406 $ 736 ---------------------------------------------- Earnings Per Share - Basic Income from continuing operations before cumulative effect of accounting change $ 1.20 $ .18 $ .38 $ .46 Discontinued Tropicana operations, after tax .16 .05 .08 .06 Discontinued DuPont activities, after tax -- -- 8.67 1.66 ---------------------------------------------- Income Before Cumulative Effect of Accounting Change 1.36 .23 9.13 2.18 Cumulative effect of accounting change, after tax -- -- -- (.20) ---------------------------------------------- Net Income $ 1.36 $ .23 $ 9.13 $ 1.98 ---------------------------------------------- Earnings Per Share - Diluted Income from continuing operations before cumulative effect of accounting change $ 1.20 $ .18 $ .38 $ .46 Discontinued Tropicana operations, after tax .15 .05 .08 .06 Discontinued DuPont activities, after tax -- -- 8.54 1.64 ---------------------------------------------- Income Before Cumulative Effect of Accounting Change 1.35 .23 9.00 2.16 Cumulative effect of accounting change, after tax -- -- -- (.20) ---------------------------------------------- Net Income $ 1.35 $ .23 $ 9.00 $ 1.96 ----------------------------------------------
The accompanying notes are an integral part of these financial statements. 1 2 CONSOLIDATED BALANCE SHEET
June 30, June 30, January 31, US dollars in millions 1997 1996 1996 - ---------------------------------------------------------------------------------------- ASSETS Current Assets Cash and short-term investments at cost $ 490 $ 277 $ 230 Receivables, net 1,865 1,595 2,109 Inventories 2,584 2,767 2,687 Film costs, net of amortization 538 471 510 DuPont warrants -- 440 -- Deferred income taxes 512 394 353 Prepaid expenses and other current assets 377 363 305 ---------------------------------- TOTAL CURRENT ASSETS 6,366 6,307 6,194 ---------------------------------- Common stock of DuPont 1,034 651 631 DuPont warrants -- -- 440 Common stock of Time Warner 1,291 2,228 2,356 Film costs, net of amortization 840 783 790 Artists' contracts, advances and other entertainment assets 645 680 721 Deferred charges and other assets 610 620 631 Property, plant and equipment, net 2,559 2,436 2,312 Investments in unconsolidated companies 2,097 2,162 1,936 Excess of cost over fair value of assets acquired 3,355 3,647 3,400 Net assets of discontinued Tropicana operations 1,734 1,693 1,549 ---------------------------------- $ 20,531 $ 21,207 $ 20,960 ---------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings and indebtedness payable within one year $ 239 $ 1,846 $ 935 Accrued royalties and participations 865 602 642 Payables and accrued liabilities 1,824 1,791 1,874 Income and other taxes 304 144 106 ---------------------------------- TOTAL CURRENT LIABILITIES 3,232 4,383 3,557 ---------------------------------- Long-term indebtedness 2,478 2,562 2,889 Accrued royalties and participations 364 388 404 Deferred income taxes 2,426 2,130 2,170 Other credits 758 700 768 Minority interest 1,851 1,839 1,844 Shareholders' Equity Shares without par value 809 725 709 Cumulative currency translation adjustments (427) (246) (268) Cumulative gain on equity securities, after tax 781 337 407 Retained earnings 8,259 8,389 8,480 ---------------------------------- TOTAL SHAREHOLDERS' EQUITY 9,422 9,205 9,328 ---------------------------------- $ 20,531 $ 21,207 $ 20,960
The accompanying notes are an integral part of these financial statements 2 3 CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Transition Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, US dollars in millions 1997 1996 1996 1995 - --------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Income from Continuing Operations before Cumulative Effect of Accounting Change $ 445 $ 67 $ 144 $ 170 ------------------------------------------- Adjustments to Reconcile Income from Continuing Operations before Cumulative Effect of Accounting Change to Net Cash Provided: Depreciation and amortization of assets 290 134 201 95 Amortization of film costs 1,050 524 642 - Amortization of excess of cost over fair value of assets acquired 165 73 86 22 Gain on sale of Time Warner shares, DuPont warrants and Putnam, before tax (278) - - - Minority interest charged (credited) to income 12 (5) 22 - Sundry 128 - 11 19 Changes in assets and liabilities: Receivables, net (238) 540 (145) (148) Inventories 6 (65) (130) 22 Prepaid expenses and other current assets (59) (60) (30) (31) Artists' contracts, advances and other entertainment assets (2) 1 66 - Payables and accrued liabilities 357 (248) 115 356 Income and other taxes payable 156 56 (106) 38 Deferred income taxes (53) (4) 26 (170) Other credits 41 (72) 4 (3) ------------------------------------------- 1,575 874 762 200 ------------------------------------------- Net Cash Provided by Operating Activities 2,020 941 906 370 ------------------------------------------- INVESTING ACTIVITIES Film production (1,356) (626) (684) - Capital expenditures (393) (245) (349) (124) Proceeds from sale of Time Warner shares, DuPont warrants and Putnam 2,217 - - - Investment in Interscope Records - (200) - - Investment in Brillstein-Grey Entertainment - (81) - - Discontinued DuPont activities: Dividends, net of taxes paid - - 68 264 Proceeds from redemption of shares, net of taxes paid - - 7,729 - Purchase of 80 percent interest in Universal - - (5,523) - Purchase of Time Warner common stock - - - (474) Increase in DuPont investment related to 1981 transaction - - - (162) Sundry (116) (65) (14) 31 ------------------------------------------- Net Cash Provided by (Used for) Investing Activities 352 (1,217) 1,227 (465) ------------------------------------------- FINANCING ACTIVITIES Dividends paid (239) (112) (224) (216) Issuance of shares upon exercise of stock options and conversion of LYONs 107 20 72 22 Shares purchased and retired (416) (68) (18) (23) Increase in long-term indebtedness 3 36 214 3 Decrease in long-term indebtedness (29) (341) (251) (252) (Decrease) increase in short-term borrowings and indebtedness payable within one year (1,601) 914 (1,595) 610 ------------------------------------------- Net Cash (Used for) Provided by Financing Activities (2,175) 449 (1,802) 144 ------------------------------------------- Net Cash Provided by Continuing Operations 197 173 331 49 Net Cash Provided by (Used for) Discontinued Tropicana Operations 16 (126) (249) (28) ------------------------------------------- Net Increase in Cash and Short-term Investments $ 213 $ 47 $ 82 $ 21 -------------------------------------------
The accompanying notes are an integral part of these financial statements. 3 4 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Shares Without Par Value Cumulative Cumulative Currency Gain (Loss) U.S. dollars in millions, except per share amounts Number Translation on Equity Retained (Thousands Amount Adjustments Securities Earnings - -------------------------------------------------------------------------------------------------------------------------- January 31, 1994 372,489 $617 $(479) $ 46 $4,817 Fiscal year ended January 31, 1995 Net income before cumulative effect of accounting change 811 Cumulative effect of accounting change (75) Dividends paid ($.58 per share) (216) Change in currency translation adjustments 120 Change in market value of equity securities, net of $70 tax benefit (131) Shares issued - exercise of stock options 827 21 - conversion of LYONs 31 1 Shares purchased and retired (810) (1) (22) -------------------------------------------------------------- January 31, 1995 372,537 638 (359) (85) 5,315 Fiscal year ended January 31, 1996 Net income 3,406 Dividends paid ($.60 per share) (224) Change in currency translation adjustments 91 Change in market value of equity securities, net of $265 tax 492 Shares issued - exercise of stock options 2,056 57 - conversion of LYONs 550 15 Shares purchased and retired (681) (1) (17) -------------------------------------------------------------- January 31, 1996 374,462 709 (268) 407 8,480 Transition period ended June 30, 1996 Net Income 85 Dividends paid ($.30 per share) (112) Change in currency translation adjustments 22 Change in market value of equity securities, net of $38 tax benefit (70) Shares issued - exercise of stock options 612 18 - conversion of LYONs 57 2 Shares purchased and retired (2,072) (4) (64) -------------------------------------------------------------- June 30, 1996 373,059 725 (246) 337 8,389 Fiscal year ended June 30, 1997 Net income 502 Dividends paid ($.645 per share) (239) Change in currency translation adjustments (181) Change in market value of equity securities, net of $239 tax 444 Shares issued - exercise of stock options 3,243 98 - conversion of LYONs 296 9 Shares purchased and retired (11,317) (23) (393) -------------------------------------------------------------- June 30, 1997 365,281 $809 $(427) $781 $8,259 --------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 4 5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE SEAGRAM COMPANY LTD. operates in two global business segments: beverages and entertainment. The beverage businesses are engaged principally in the production and marketing of distilled spirits, wines, coolers, beers and mixers. The entertainment company, Universal Studios, Inc. ("Universal"), formerly known as MCA INC., produces and distributes motion picture, television and home video products, and recorded music; and operates theme parks and retail stores. The Company sold its book publishing unit during the fiscal year ended June 30, 1997 (Note 4). More than 50 percent of the Company's shares are held by U.S. residents and, therefore, the Company has prepared its consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) which, in their application to the Company, conform in all material respects to Canadian GAAP. Differences between U.S. and Canadian GAAP and the magnitude thereof are discussed in Note 16. Should a material difference arise in the future, financial statements will be provided under both U.S. and Canadian GAAP. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of The Seagram Company Ltd. and its subsidiaries. The equity method is used to account for unconsolidated affiliates owned 20 percent or more. In conformity with GAAP, management has made estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION Except for operations in highly inflationary economies, affiliates outside the U.S. operating in the beverages segment use the local currency as the functional currency. For affiliates in countries considered to have a highly inflationary economy, inventories and property, plant and equipment are translated at historical exchange rates and translation effects are included in net income. Affiliates outside the U.S. operating in the entertainment segment principally use the U.S. dollar as the functional currency. INVENTORIES Inventories are stated at cost, which is not in excess of market, and consist principally of spirits and wines. The cost of spirits and wines inventories is determined by either the last-in, first-out (LIFO) method or the identified cost method. The cost of music, publishing, retail and home video inventories is determined by the first-in, first-out (FIFO) method. In accordance with industry practice, current assets include spirits and wines which, in the Company's normal business cycle, are aged for varying periods of years. REVENUES AND COSTS FILM Generally, theatrical films are first distributed in the worldwide theatrical and home video markets. Subsequently, theatrical films are made available for worldwide pay television, network exhibition, television syndication and basic cable television. Generally, television films are first licensed for network exhibition and foreign syndication or home video, and subsequently for domestic syndication or cable television. Certain television films are produced and/or distributed directly for initial exhibition by local television stations, advertiser-supported cable television, pay television and/or home video. Revenues from the theatrical distribution of films are recognized as the films are exhibited. Revenues from television and pay television licensing agreements are recognized when the films are available for telecast. Revenues from the sale of home video product, net of provision for estimated returns and allowances, are recognized upon availability of product for retail sale. Generally, the estimated ultimate costs of completed theatrical and television film productions (including applicable capitalized overhead) are amortized and participation expenses are accrued for each production in the proportion of revenue recognized by the Company during the year to the total estimated future revenue to be received from all sources, under the individual film forecast method. Estimated ultimate revenues and costs are reviewed quarterly and revisions to amortization rates or write-downs to net realizable value may occur. Film costs, net of amortization, classified as current assets include the portion of unamortized costs of completed theatrical films allocated to theatrical, home video and pay television distribution markets; television films in production which are under contract of sale; and a portion of costs of completed television films. The allocated portion of released film costs expected to be realized from secondary markets or other exploitation is reported as a noncurrent asset. Other costs relating to film production, including the purchase price of literary properties and related film development costs, and the film library are classified as noncurrent assets. Abandoned story and development costs are charged to film production overhead. Film costs are stated at the lower of unamortized cost or estimated net realizable value as periodically determined on a film-by-film basis. Approximately $300 million of the cost of the Universal acquisition was allocated to the film library and is being amortized on a straight-line basis principally over a 20-year life. 5 6 Recorded Music and Book Publishing Revenues from the sale of recorded music and books, net of provision for estimated returns and allowances, are recognized upon shipment. Advances to established recording artists and writers and direct costs associated with the creation of record masters and books are capitalized and are charged to expense as the related royalties are earned or when the amounts are determined to be unrecoverable. The advances are expensed when past performance or current popularity does not provide a sound basis for estimating that the advance will be recouped from royalties to be earned. Approximately $400 million of the cost of the Universal acquisition was allocated to artists' contracts, music catalogs and copyrights and is being amortized, on an accelerated basis, over a 14 to 20-year life. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at cost. Depreciation is determined for financial reporting purposes using the straight-line method over estimated useful asset lives, generally at annual rates of 2-10 percent for buildings, 4-33 percent for machinery and equipment and 2-20 percent for other assets. EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS The unallocated excess of cost of purchased businesses over the fair value of assets acquired, the excess of investments in unconsolidated companies over the underlying equity in tangible net assets acquired and other intangible assets are being amortized on a straight-line basis over various periods from six to 40 years from the date of acquisition. The Company reviews the carrying value of goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Measurement of any impairment would include a comparison of discounted estimated future operating cash flows anticipated to be generated during the remaining amortization period of the goodwill to the net carrying value of goodwill. INCOME TAXES Deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. Deferred taxes are not provided for that portion of undistributed earnings of foreign subsidiaries which is considered to be permanently reinvested. BENEFIT PLANS Retirement pensions are provided for substantially all of the Company's employees through either defined benefit or defined contribution plans sponsored by the Company or unions representing employees. For Company-sponsored defined benefit plans, pension expense and plan contributions are determined by independent consulting actuaries; pension benefits under defined benefit plans generally are based on years of service and compensation levels near the end of employee service. The funding policy for tax-qualified pension plans is consistent with statutory funding requirements and regulations. Contributions to defined contribution plans are funded and expensed currently. Postretirement health care and life insurance are provided to a majority of nonunion employees in the U.S. Postemployment programs, principally severance, are provided for the majority of nonunion employees. The cost of these programs is accrued based on actuarial studies. There is no advance funding for postretirement or postemployment benefits. STOCK-BASED COMPENSATION Compensation cost attributable to stock option and similar plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant over the exercise price of the option. The Company does not issue options at prices below market value at date of grant. FINANCIAL INSTRUMENTS The Company occasionally uses foreign exchange contracts to hedge a portion of its foreign indebtedness. In addition, the Company hedges foreign currency risk on intercompany payments through currency forwards and options which offset the exposure being hedged. Gains and losses on forward contracts are deferred and offset against foreign exchange gains and losses on the underlying hedged transaction. Gains and losses on forward contracts used to hedge foreign debt and intercompany payments are recorded in the income statement in selling, general and administrative expenses. COMPREHENSIVE INCOME The Financial Accounting Standards Board recently issued FAS 130, Reporting Comprehensive Income, which is effective for the Company's fiscal year beginning July 1, 1998. The Company is still evaluating the presentation requirements of this pronouncement. RECLASSIFICATIONS Certain prior period amounts in the financial statements and notes have been reclassified to conform with the current year presentation. 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TIME WARNER INC. ("TIME WARNER") INVESTMENT NOTE 1 On May 28, 1997, the Company sold 30 million of its 56.8 million shares of Time Warner common stock for pre-tax proceeds of $1.39 billion. The gain on the sale of the shares, included in interest, net and other, was $154 million ($100 million after tax) in accordance with the specific identification method. At June 30, 1997, the Company's remaining 26.8 million Time Warner shares, which are accounted for at market value, had a total cost of $937 million. DUPONT SHARE REDEMPTION AND REMAINING DUPONT INVESTMENT NOTE 2 On April 6, 1995, E.I. du Pont de Nemours and Company ("DuPont") redeemed 156 million shares of its common stock owned by the Company for $8.336 billion plus share purchase warrants which the Company valued as of the date of the transaction at $440 million. The Company received after-tax proceeds of approximately $7.7 billion from the transaction. The $3.2 billion gain on the transaction was net of a $2 billion tax provision of which $1.5 billion was deferred. The Company has retained 16.4 million shares of DuPont common stock, post-split (on June 12, 1997, DuPont common stock was split two-for-one), which were carried at their market value of $1.03 billion at June 30, 1997. The underlying historical value of the remaining DuPont shares is $187 million which represents the historical cost of the retained shares plus unremitted earnings related to those shares. The warrants were sold to DuPont for $500 million on July 24, 1996. The gain on the sale of the warrants was $60 million ($39 million after tax) and is reflected in interest, net and other in the fiscal year ended June 30, 1997. During the fiscal year ended January 31, 1995, the Company owned 164.2 million shares, pre-split, (approximately 24 percent) of the outstanding common stock of DuPont and accounted for its interest in DuPont using the equity method, whereby its proportionate share of DuPont's earnings was included in income. Financial information for DuPont for its year ended December 31, 1994 follows. DUPONT FINANCIAL INFORMATION
Year Ended December 31, millions 1994 - -------------------------------------------------------------------------- Sales and other income $ 40,259 Cost of goods sold and all other expenses 35,877 Provision for income taxes 1,655 ----- Net income $ 2,727 - -------------------------------------------------------------------------
ACQUISITION OF 80 PERCENT INTEREST IN UNIVERSAL STUDIOS HOLDING I CORP. NOTE 3 On June 5, 1995, the Company completed its purchase of an 80 percent interest in Universal Studios Holding I Corp. ("Universal"), formerly MCA Holding I Corp., the indirect parent of Universal Studios, Inc., formerly MCA INC., from Matsushita Electric Industrial Co., Ltd. ("Matsushita") for $5.7 billion. Matsushita retained a 20 percent interest in Universal. The acquisition has been accounted for under the purchase method of accounting. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. This valuation resulted in $2.6 billion of unallocated excess of cost over fair value of assets acquired which is being amortized over 40 years. The unaudited condensed pro forma income statement data which follows assumes the Universal acquisition and the redemption of 156 million shares of DuPont common stock occurred at the beginning of each period presented. The unaudited condensed pro forma income statement data were prepared based upon the historical consolidated income statements of the Company for the fiscal years ended January 31, 1996 and 1995, and of Universal for the five months ended May 31, 1995 and the twelve months ended December 31, 1994, adjusted to reflect purchase accounting. Financial results for Universal for the seven-month period June 1995 through December 1995 were included in the Company's results for the fiscal year ended January 31, 1996. The unaudited pro forma information is not necessarily indicative of the combined results of operations of the Company and Universal that would have resulted if the transactions had occurred on the dates previously indicated, nor is it necessarily indicative of future operating results of the Company. 7 8 PRO FORMA INCOME STATEMENT DATA
Fiscal Years Ended January 31, millions, except per share amounts (unaudited) 1996 1995 - ----------------------------------------------------------------------------------- Revenues $ 9,972 $ 9,826 ------------------- Income from continuing operations before cumulative effect of accounting change $ 124 $ 322 Discontinued Tropicana operations 30 24 ------------------- Income before cumulative effect of accounting change 154 346 ------------------- Cumulative effect of accounting change -- (75) ------------------- Net income $ 154 $ 271 ------------------- BASIC EARNINGS PER SHARE Income from continuing operations before cumulative effect of accounting change $ .33 $ .87 Discontinued Tropicana operations .08 .06 Cumulative effect of accounting change (.20) ------------------- Net income $ .41 $ .73 ------------------- DILUTED EARNINGS PER SHARE Income from continuing operations before cumulative effect of accounting change $ .33 $ .87 Discontinued Tropicana operations .08 .06 Cumulative effect of accounting change -- (.20) ------------------- Net income $ .41 $ .73 -------------------
The above pro forma presentation excludes the $3.2 billion after-tax gain on the redemption of the DuPont shares. SALE OF PUBLISHING GROUP NOTE 4 On December 16, 1996, the Company completed the sale of its book publishing unit, The Putnam Berkley Group, Inc. ("Putnam"). Proceeds from the sale were $330 million, resulting in a $64 million pre-tax gain on the disposition. There was no after-tax gain or loss due to the write-off of non-tax-deductible goodwill associated with Putnam. The operating results of Putnam through December 16, 1996 are included in operating income. INVESTMENTS IN UNCONSOLIDATED COMPANIES NOTE 5 The Company has a number of investments in unconsolidated companies which are 50 percent or less owned or controlled and are carried in the consolidated balance sheet on the equity method. ENTERTAINMENT SEGMENT Significant investments at June 30, 1997 include USA Networks, owner of three advertiser-supported cable television services, USA Network, the Sci-Fi Channel, and Sci-Fi Europe (50 percent owned); Loews Cineplex Entertainment Corporation (formally known as Cineplex Odeon Corporation), primarily engaged in theatrical exhibition of motion pictures in the U.S. and Canada (42 percent owned); United International Pictures, a distributor of theatrical and pay television product outside the U.S. and Canada (33 percent owned); Cinema International BV, primarily engaged in marketing of home video product outside the U.S. and Canada (49 percent owned); Cinema International Corporation and United Cinemas International, both engaged in theatrical exhibition of motion pictures in territories outside the U.S. and Canada (49 percent owned); Brillstein-Grey Entertainment (49.5 percent owned) which owns 50 percent of Brillstein-Grey Communications, a producer of network television series; Universal City Florida Partners, which owns Universal Studios Florida, a motion picture and television theme tourist attraction and production facility in Orlando, Florida (50 percent owned); Universal City Development Partners, which has begun development on land adjacent to Universal Studios Florida of an additional theme tourist attraction, Universal Islands of Adventure, and commercial real estate (50 percent owned); USJ Co., Ltd., which has begun development of a motion picture themed tourist attraction, Universal Studios Japan, and commercial real estate in Osaka, Japan (11 percent owned at June 30, 1997; ownership increased to 21 percent in July 1997 and is committed to increase further to 24 percent in fiscal 1998); SEGA GameWorks, which designs, develops and operates location-based entertainment centers (31 percent owned); and Interplay Productions, an entertainment software developer (48 percent owned). BEVERAGES SEGMENT Significant investments at June 30, 1997 include Doosan Seagram Co., Ltd., which is engaged in the production and marketing of whisky products in South Korea (50 percent owned); Seagram (Thailand) Limited, an importer and distributor of spirits and wines (49 percent owned); Kirin-Seagram Limited, engaged in the manufacture, sale and distribution of distilled beverage alcohol and wines in Japan (50 percent owned). 8 9 Summarized financial information, derived from unaudited historical financial information, is presented below for the Company's investments in unconsolidated companies. SUMMARIZED BALANCE SHEET INFORMATION
June 30, June 30, January 31, millions 1997 1996 1996 - ----------------------------------------------------------------- Current assets $1,402 $1,278 $1,088 Noncurrent assets 2,569 2,317 2,219 -------------------------- Total assets $3,971 $3,595 $3,307 ========================== Current liabilities $1,186 $1,028 $ 904 Noncurrent liabilities 1,427 1,214 1,244 Equity 1,358 1,353 1,159 -------------------------- Total liabilities and equity $3,971 $3,595 $3,307 ========================== Proportionate share of net assets of unconsolidated companies $ 627 $ 619 $ 555 --------------------------
Approximately $1.5 billion of the cost of the Universal acquisition was allocated to the investment in unconsolidated companies and is being amortized on a straight-line basis over 40 years. SUMMARIZED STATEMENT OF OPERATIONS
Fiscal Year Transition Fiscal Year Ended Period Ended Ended June 30, June 30, January 31, millions 1997 1996 1996 - --------------------------------------------------------------------------------------------- Revenues $ 4,782 $ 2,134 $ 2,730 Earnings before interest and taxes 351 191 208 Net income 229 130 132 - -------------------------------------------------------------------------------------------
The Company's operating income includes $124 million, $58 million and $69 million in equity in the earnings of unconsolidated companies for the fiscal year ended June 30, 1997, the Transition Period ended June 30, 1996, and the fiscal year ended January 31, 1996, respectively, principally in the entertainment segment. LONG-TERM INDEBTEDNESS AND CREDIT ARRANGEMENTS NOTE 6 LONG-TERM INDEBTEDNESS
millions June 30, June 30, January 31, 1997 1996 1996 - ------------------------------------------------------------------------------------------------- 9% Debentures due December 15, 1998 (C$200 million)* $ 156 $ 156 $ 156 Unsecured term bank loans, due 1997 to 1999, with a weighted average interest rate of 4.77% 190 251 267 6.5% Debentures due April 1, 2003 200 200 200 8.35% Debentures due November 15, 2006 200 200 200 8-3/8% Guaranteed Debentures due February 15, 2007 200 200 200 7% Guaranteed Debentures due April 15, 2008 200 200 200 8-7/8% Guaranteed Debentures due September 15, 2011 223 223 223 9.65% Guaranteed Debentures due August 15, 2018 249 249 249 9% Guaranteed Debentures due August 15, 2021 198 198 198 8.35% Debentures due January 15, 2022 199 199 199 6.875% Debentures due September 1, 2023 200 200 200 6% Swiss Franc Bonds due September 30, 2085 (SF 250 million) 171 200 206 Sundry 131 217 444 ------------------------------- 2,517 2,693 2,942 Indebtedness payable within one year (39) (131) (53) ------------------------------- $ 2,478 $ 2,562 $ 2,889 -------------------------------
*All principal and interest payments for these 9% Debentures were converted at issuance through a series of currency exchange contracts from Canadian dollars to U.S. dollars with an effective interest rate of 7.7%. The Company's unused lines of credit totaled $3.8 billion and have varying terms of up to five years. At June 30, 1997, short-term borrowings comprised $200 million of bank borrowings bearing interest at market rates. 9 10 Interest expense on long-term indebtedness was $218 million in the fiscal year ended June 30, 1997, $96 million in the Transition Period ended June 30, 1996, and $236 million and $246 million in the fiscal years ended January 31, 1996 and 1995, respectively. Annual repayments and redemptions of long-term indebtedness for the five fiscal years subsequent to June 30, 1997 are: 1998 - $39 million; 1999 - $289 million; 2000 - $30 million; 2001 - $1 million; and 2002 - $0. Joseph E. Seagram & Sons, Inc. ("JES"), the Company's U.S. spirits and wine subsidiary, has outstanding $10 million of Liquid Yield Option Notes (LYONs), which are zero coupon notes with no interest payments due until maturity on March 5, 2006. Each $1,000 face amount LYON may be converted, at the holder's option, into 18.44 of the Company's common shares (353,146 shares at June 30, 1997). The Company has guaranteed the LYONs on a subordinated basis. In addition, the Company has unconditionally guaranteed JES's 8-3/8 percent Debentures due February 15, 2007, 7 percent Debentures due April 15, 2008, 8-7/8 percent Debentures due September 15, 2011, 9.65 percent Debentures due August 15, 2018 and 9 percent Debentures due August 15, 2021. Summarized below is the JES financial information:
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------ Revenues $2,291 $ 790 $ 2,710 $ 3,310 Cost of revenues 1,423 528 1,742 1,949 Income from continuing operations before cumulative effect of accounting change 76 55 48 54 Discontinued Tropicana operations 11 2 (5) 6 Discontinued DuPont activities, after tax - - 3,232 617 Cumulative effect of accounting change - - - (56) --------------------------------------------- Net Income $ 87 $ 57 $3,275 $ 621 =============================================
June 30, June 30, January 31, 1997 1996 1996 - --------------------------------------------------------------------- Current assets $ 821 $ 1,251 $ 1,279 Noncurrent assets 12,662 11,780 11,431 ------------------------------ $13,483 $13,031 $12,710 ------------------------------ Current liabilities $ 542 $ 1,013 $ 567 Noncurrent liabilities 3,798 3,171 3,366 Shareholders' equity 9,143 8,847 8,777 ------------------------------ $13,483 $13,031 $12,710 ==============================
FINANCIAL INSTRUMENTS AND EQUITY SECURITIES NOTE 7 The Company selectively uses foreign currency forward and option contracts to offset the effects of exchange rate changes on cash flow exposures denominated in foreign currencies. These exposures include intercompany trade accounts, service fees, intercompany loans and third-party debt. The Company does not use derivative financial instruments for trading or speculative purposes. The notional amount of forward exchange contracts and options is the amount of foreign currency bought or sold at maturity and is not a measure of the Company's exposure through its use of derivatives. At June 30, 1997, the Company held foreign currency forward contracts and options to purchase and sell foreign currencies, including cross-currency contracts and options to sell one foreign currency for another currency, with notional amounts totalling $781 million ($304 million at June 30, 1996). The notional amounts of these contracts, which mature at various dates through December 1998, are summarized below:
June 30, 1997 June 30, 1996 millions Buy Sell Buy Sell - ------------------------------------------------------------------------------------ Canadian dollar $ 164 $ -- $ 177 $ -- British pound -- 126 -- 14 U.S. dollar -- 244 42 3 New Zealand dollar 25 -- 20 -- French franc -- 131 -- 6 Japanese yen -- 38 -- -- Italian lira -- 22 -- 20 German mark -- 9 -- 8 Other currencies -- 22 -- 14 -------------------------------------- $ 189 $ 592 $ 239 $ 65 ======================================
10 11 The Company minimizes its credit exposure to counterparties by entering into contracts only with highly rated commercial banks or financial institutions and by distributing the transactions among the selected institutions. Although the Company's credit risk is the replacement cost at the then-estimated fair value of the instrument, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. The market risk related to the foreign exchange agreements should be offset by changes in the valuation of the underlying items being hedged. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. CASH AND SHORT-TERM INVESTMENTS The carrying amount reported in the balance sheet for cash and short-term investments approximates their fair value. FOREIGN CURRENCY EXCHANGE CONTRACTS The fair value of forward exchange contracts is based on quoted market prices from banks. SHORT- AND LONG-TERM DEBT The carrying amounts of commercial paper and short-term bank loans approximate their fair value. The fair value of the Company's long-term debt is estimated based on the quoted market prices for similar issues.
June 30, 1997 June 30, 1996 Carrying Fair Carrying Fair millions Amount Value Amount Value - -------------------------------------------------------------------------------------------- Cash and short-term investments $ 490 $ 490 $ 277 $ 277 Foreign currency exchange contracts (10) (13) (15) (15) Short-term debt 239 239 1,846 1,846 Long-term debt 2,478 2,680 2,562 2,741 - --------------------------------------------------------------------------------------------
EQUITY SECURITIES The following is a summary of available-for-sale securities comprised of the common stock of DuPont and Time Warner and Dupont Warrants:
June 30, June 30, January 31, millions 1997 1996 1996 - ------------------------------------------------------------------------------------ Cost $ 1,124 $ 2,357 $ 2,357 Gross Unrealized Gain 1,201 522 630 Fair Value 2,325 2,879 2,987 - ------------------------------------------------------------------------------------
COMMON SHARES, EARNINGS PER SHARE AND STOCK OPTIONS NOTE 8 The Company is authorized to issue an unlimited number of common and preferred shares without nominal or par value. At June 30, 1997, 33,314,272 common shares were potentially issuable upon the conversion of the LYONs and the exercise of employee stock options. Basic net income per share was based on the following weighted average number of shares outstanding during the fiscal period ended June 30, 1997 - 369,682,224; June 30, 1996 - 373,857,915; January 31, 1996 - 373,116,794 and 1995 - 372,499,060. Diluted net income per share was based on the following weighted average number of shares outstanding during the fiscal period ended June 30, 1997 - 374,268,746; June 30, 1996 - 377,562,104; January 31, 1996 - 378,683,450 and 1995 - 376,550,448. In the fiscal year ended January 31, 1996, the Company granted 66,500 restricted shares with a weighted average grant-date fair value of $35.69 per share. These shares have voting and dividend rights; however, sale of the shares is restricted prior to vesting. Restrictions on 33,250 of the restricted shares lapsed on October 1, 1996, the balance will lapse on October 1, 1997. STOCK OPTION PLANS Under the Company's employee stock option plans, options may be granted to purchase the Company's common shares at not less than the fair market value of the shares on the date of the grant. Currently outstanding options become exercisable one to five years from the grant date and expire ten years after the grant date. 11 12 The Company has adopted FAS 123, Accounting for Stock-Based Compensation. In accordance with the provisions of FAS 123, the Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the fair value methodology prescribed by FAS 123, the Company's net income and earnings per share would be reduced to the pro forma amounts indicated below:
Fiscal Transition Fiscal Year Ended Period Ended Year Ended June 30, June 30, January 31, millions, except per share amounts 1997 1996 1996 - -------------------------------------------------------------------------------- Net Income: As reported $ 502 $ 85 $ 3,406 Pro forma 469 73 3,383 Basic earnings per common share: As reported $ 1.36 $ .23 $ 9.13 Pro forma 1.27 .19 9.07 Diluted earnings per common share: As reported $ 1.35 $ .23 $ 9.00 Pro forma 1.26 .19 8.94 - --------------------------------------------------------------------------------
These pro forma amounts may not be representative of future disclosures. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the fiscal year ended June 30, 1997, the Transition Period ended June 30, 1996 and the fiscal year ended January 31, 1996, respectively: dividend yields of 1.6, 1.8 and 1.9 percent; expected volatility of 24, 22 and 20 percent; risk-free interest rates of 6.7, 6.0 and 6.6 percent; and expected life of six years for all periods. The weighted average fair value of options granted during the fiscal year ended June 30, 1997, the transition period ended June 30, 1996 and the fiscal year ended January 31, 1996 for which the exercise price equals the market price on the grant date was $12.18, $9.70 and $9.23, respectively. The weighted average fair value of options granted during the Transition Period ended June 30, 1996 for which the exercise price exceeded the market price on the grant date was $6.91. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Transactions involving stock options are summarized as follows:
Weighted Average Exercise Price Stock Options of Options Description Outstanding Outstanding - --------------------------------------------------------- Balance, January 31, 1994 16,274,027 $ 24.40 Granted 3,677,695 30.56 Exercised (827,040) 23.42 Cancelled (219,880) 28.85 ------------------------ Balance, January 31, 1995 18,904,802 25.59 Granted 6,293,023 31.94 Exercised (2,055,830) 24.37 Cancelled (140,840) 29.96 ------------------------ Balance, January 31, 1996 23,001,155 27.45 Granted 6,757,978 35.41 Exercised (611,855) 25.97 Cancelled (61,040) 31.56 ------------------------ Balance, June 30, 1996 29,086,238 29.33 Granted 7,366,978 38.97 Exercised (3,242,766) 25.93 Cancelled (249,324) 33.02 ------------------------ Balance, June 30, 1997 32,961,126 31.79 ======================================================
12 13 The following table summarizes information concerning currently outstanding and exercisable stock options:
Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price - -------------------------------------------------------------------------------------- $10-$20 2,319,117 2.2 yrs $18.15 2,319,117 $18.15 $20-$30 9,370,980 5.1 27.03 8,480,980 26.97 $30-$40 20,486,029 8.6 34.91 8,197,735 31.59 $40-$50 785,000 8.8 47.37 150,000 47.70 ----------- ----------- 32,961,126 19,147,832 =====================================================================================
INCOME TAXES NOTE 9 The following tables summarize the sources of pretax income and the resulting income tax expense. GEOGRAPHIC COMPONENTS OF PRETAX INCOME
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------------- U.S. $ 159 $ (164) $ 22 $ (77) Canada 68 (24) 12 14 Other jurisdictions 561 217 253 374 --------------------------------------------- Income before minority interest, discontinued Tropicana operations and discontinued DuPont activities 788 29 287 311 Discontinued Tropicana operations 111 36 62 52 Discontinued DuPont activities - - 5,283 637 --------------------------------------------- Income before minority interest $ 899 $ 65 $ 5,632 $ 1,000 ==============================================
COMPONENTS OF INCOME TAX EXPENSE
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------ Income tax expense (benefit) applicable to: Continuing Operations $ 331 $ 34 $ 121 $ 76 1981 transaction* - (67) - 65 Discontinued Tropicana operations 54 18 32 28 Discontinued DuPont activities - - 2,051 20 --------------------------------------------- Total income tax expense (benefit) $ 385 $ (15) $2,204 $ 189 =============================================
* The 1981 transaction relates to a loss disallowed by the U.S. Tax court on the exchange of common stock of Conoco Inc. for DuPont. In June, 1996, the Company and the IRS reached a settlement whereby a portion of the original loss was allowed. Current Continuing operations Federal $ 184 $ (9) $ (7) $ (36) State and local 35 3 15 (3) 1981 transaction - (105) - 188 Other jurisdictions 165 81 87 108 ---------------------------------------------- 384 (30) 95 257 Discontinued Tropicana operations 53 - 44 26 Discontinued DuPont activities - - 612 20 ---------------------------------------------- 437 (30) 751 303 ---------------------------------------------- Deferred Continuing operations Federal (25) (26) 43 2 State and local (19) (2) (2) - 1981 transaction - 38 - (123) Other jurisdictions (9) (13) (15) 5 ---------------------------------------------- (53) (3) 26 (116) Discontinued Tropicana operations 1 18 (12) 2 Discontinued DuPont activities - - 1,439 - ---------------------------------------------- (52) 15 1,453 (114) ---------------------------------------------- Total income tax expense (benefit) $ 385 $ (15) $ 2,204 $ 189 ================================================================================================
13 14 COMPONENTS OF NET DEFERRED TAX LIABILITY
June 30, June 30, January 31, millions 1997 1996 1996 - ----------------------------------------------------------------------------------- Basis and amortization differences $ 498 $ 415 $ 386 DuPont share redemption 1,540 1,540 1,489 Time Warner and DuPont investments 420 183 220 Unremitted foreign earnings 59 27 17 Other, net 27 94 95 ------------------------------- Deferred tax liabilities 2,544 2,259 2,207 ------------------------------- Deferred revenue (132) - - Employee benefits (103) (88) (87) Tax credit carryovers (49) (172) (150) Valuation, doubtful accounts and return reserves (260) (318) (263) Other, net (128) (95) (24) ------------------------------- Deferred tax assets (672) (673) (524) Valuation Allowance 42 150 134 ------------------------------- (630) (523) (390) ------------------------------- Net deferred tax liability $ 1,914 $ 1,736 $ 1,817 - -----------------------------------------------------------------------------------
The Company has U.S. tax credit carryovers of $49 million; $13 million of which has no expiration date and $36 million of which have expiration dates through 2009. The valuation allowance arises from uncertainty as to the realization of certain U.S. tax credit carryforwards. If realized, these benefits would be applied to reduce the Universal unallocated excess purchase price. EFFECTIVE INCOME TAX RATE - CONTINUING OPERATIONS
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------- U.S. statutory rate 35% 35% 35% 35% 1981 transaction - (231) - 21 State and local 1 4 3 - Dividends received deduction (1) (17) (3) (3) Goodwill amortization 7 85 10 2 Other - 10 (3) (10) ------------------------------------------- Effective income tax rate - continuing operations 42% ( 114%) 42% 45% ===============================================================================================
Various taxation authorities have proposed or levied assessments for additional income taxes of prior years. Management believes that settlements will not have a material effect on the results of operations, financial position or liquidity of the Company. BENEFIT PLANS NOTE 10 PENSION Pension costs were $46 million for the fiscal year ended June 30, 1997, $25 million for the Transition Period ended June 30, 1996 and $41 million and $21 million for the fiscal years ended January 31, 1996 and 1995, respectively. The Company has defined benefit pension plans which cover certain U.S. employees. The net cost of the Company's U.S. pension plans was based on an expected long-term return on plan assets of 10.75 percent for the fiscal year ended June 30, 1997, 10 percent for the Transition Period ended June 30, 1996 and 10.75 percent for each of the fiscal years ended January 31, 1996 and 1995. A discount rate of 7.75 percent was used in determining the actuarial present value of the projected benefit obligation at June 30, 1997 and 1996; a discount rate of 7.0 percent was used at January 31, 1996. The assumed rates of increase in future compensation levels were five to six percent for the fiscal year ended June 30, 1997 and the Transition Period ended June 30, 1996, 4.5 to 5.5 percent for the fiscal year ended January 31, 1996, and six to seven percent for the fiscal year ended January 31, 1995. Plans outside the U.S. used assumptions in determining the actuarial present value of projected benefit obligations that reflect the economic environments within the various countries, and therefore are consistent with (but not identical to) those of the U.S. plans. 14 15 The majority of the pension arrangements for the Company's employees of affiliates outside the U.S., the U.K. and Canada are either insured or government sponsored. In those affiliates outside of the U.S. where defined benefit plans exist (U.K., Canada and France), the net periodic pension cost was $6 million for the fiscal year ended June 30, 1997, $3 million for the Transition Period ended June 30, 1996 and $6 million for each of the fiscal years ended January 31, 1996 and 1995. At June 30, 1997, the present value of these plans' projected benefit obligation was $309 million, $283 million of which was for vested benefits; the fair value of plan assets was $361 million. NET COST OF U.S. DEFINED BENEFIT PENSION PLANS
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 14 $ 5 $ 12 $ 13 Interest cost on Projected Benefit Obligation 45 18 44 40 Return on plan assets Actual (gain) loss (145) (46) (171) 9 Deferred actuarial gain (loss) 78 22 124 (64) Net amortization 2 2 3 4 ---------------------------------------------- Net pension (income) cost $ (6) $ 1 $ 12 $ 2 =================================================================================================
STATUS OF U.S. DEFINED BENEFIT PENSION PLANS
June 30, 1997 June 30, 1996 Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Exceed Accumulated Benefits Exceed millions Benefits Assets Benefits Assets - -------------------------------------------------------------------------------------------------------------- Actuarial present value of : Vested Benefit Obligation $(422) $ (81) $(415) $(77) ---------------------------------------------------------------- Accumulated Benefit Obligation $(442) $ (84) $(433) $(80) ---------------------------------------------------------------- Projected Benefit Obligation $(498) $(107) $(494) $(103) Plan assets at fair value, principally equity securities 741 - 631 - ----------------------------------------------------------------- Plan assets in excess of (less than) Projected Benefit Obligation 243 (107) 137 (103) Deferred net actuarial gain (loss) (175) 34 (90) 38 Unamortized prior service cost 4 4 4 5 Unamortized transition obligation - 2 - 3 Recognition of minimum liability - (17) - (23) ---------------------------------------------------------------- Prepaid (accrued) pension cost $ 72 $ (84) $ 51 $ (80) ----------------------------------------------------------------
January 31, 1996 Assets Exceed Accumulated Accumulated Benefits Exceed Benefits Assets --------------------------------- Actuarial present value of : Vested Benefit Obligation $ (465) $ (81) -------------------------- Accumulated Benefit Obligation $ (465) $ (83) -------------------------- Projected Benefit Obligation $ (528) $(108) -------------------------- Plan assets at fair value, principally equity securities 600 - -------------------------- Plan assets in excess of (less than) Projected Benefit Obligation 72 (108) Deferred net actuarial gain (loss) (30) 46 Unamortized prior service cost 4 5 Unamortized transition obligation - 3 Recognition of minimum liability - (30) ------------------------- Prepaid (accrued) pension cost $ 46 $(84) -------------------------
The Company has defined contribution plans covering certain U.S. employees. Contributions made to these plans are included in consolidated pension costs. POSTRETIREMENT The Company provides retiree health care and life insurance benefits covering certain retirees. Certain U.S. salaried and certain hourly employees are eligible for benefits upon retirement and completion of a specified number of years of service. The components of net periodic postretirement benefit cost are as follows:
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 2 $ 1 $ 2 $ 1 Interest cost on accumulated postretirement benefit obligation 11 5 12 9 Amortization of prior service cost (3) (2) (3) (3) ----------------------------------------- Net postretirement benefit cost $10 $ 4 $ 11 $ 7 - --------------------------------------------------------------------------------------------
15 16 The accumulated postretirement benefit obligation, included in other credits in the accompanying balance sheet, comprises the following:
June 30, June 30, January 31, millions 1997 1996 1996 - ------------------------------------------------------------------------------------- Retirees $ 100 $ 111 $ 117 Fully eligible active plan participants 23 21 22 Other active plan participants 29 28 31 Unrecognized: Actuarial gain (loss) 16 6 (4) Prior service cost 22 25 27 --------------------------------------- Accrued postretirement benefit obligation $ 190 $ 191 $ 193 =====================================================================================
Future benefit costs were estimated assuming medical costs would increase at an 8.8 percent annual rate, decreasing to a 5.5 percent annual growth rate ratably over the next five years, and then remaining at a 5.5 percent growth rate thereafter. A one-percentage-point increase in this annual trend rate would have increased the postretirement benefit obligation at June 30, 1997 by $5 million ($3 million after tax), with no increase in pretax expense for the fiscal year ended June 30, 1997. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation was 7.75 percent at June 30, 1997 and 1996 and 7.0 percent at January 31, 1996. POSTEMPLOYMENT The Company adopted Financial Accounting Standard No. 112, Employers' Accounting for Postemployment Benefits (FAS 112), in the first quarter of the fiscal year ended January 31, 1995, resulting in a $75 million charge, net of $40 million of deferred tax benefit. FAS 112 requires that the expected cost of postemployment benefits be recognized when they are earned rather than when they are paid. The postemployment obligation was increased to reflect the reengineering activities described in Note 13. 16 17 BUSINESS SEGMENT AND GEOGRAPHIC DATA NOTE 11 BUSINESS SEGMENT DATA
millions Beverages(1) Entertainment Corporate(2) Total(1) - -------- ------------ ------------- ------------ -------- JUNE 30, 1997 Revenues $5,051 $5,593 -- $10,644 Depreciation and amortization of assets 101 185 4 290 Amortization of goodwill 22 143 -- 165 Operating income (expense) 677 242 (138) 781 Identifiable assets 5,290 10,670 2,837 18,797 Capital expenditures 187 206 -- 393 JUNE 30, 1996 (TRANSITION PERIOD) Revenues $1,891 $ 2,360 $-- $ 4,251 Depreciation and amortization of assets 46 86 2 134 Amortization of goodwill 11 62 -- 73 Operating income (expense) 182 1 (55) 128 Identifiable assets 5,551 10,269 3,694 19,514 Capital expenditures 108 136 1 245 JANUARY 31, 1996 Revenues $4,999 $ 3,053 $ -- $ 8,052 Depreciation and amortization of assets 100 97 4 201 Amortization of goodwill 24 62 -- 86 Operating income (expense) 361(3) 205 (84) 482 Identifiable assets 5,659 9,997 3,755 19,411 Capital expenditures 173 175 1 349 JANUARY 31, 1995 Revenues $5,008 $ -- $ 5,008 Depreciation and amortization of assets 91 4 95 Amortization of goodwill 22 -- 22 Operating income (expense) 689 (61) 628 Identifiable assets 5,460 5,964 11,424 Capital expenditures 108 16 124 --------------------------------------------------------
(1) Excludes discontinued Tropicana operations. (2) Includes (i) corporate expenses and assets not identifiable with either business segment, and (ii) DuPont and Time Warner holdings, which represented 82%, 90%, 91% and 96% of corporate assets at June 30, 1997 and 1996 and January 31, 1996 and 1995, respectively. (3) Includes a $274 million charge related to reengineering activities. The Financial Accounting Standards Board recently issued FAS 131, Disclosures about Segments of an Enterprise and Related Information, which is effective for the Company's fiscal year beginning July 1, 1998. The Company is still evaluating the impact of adopting this pronouncement. 17 18 GEOGRAPHIC DATA
Revenues(1,2) Unrelated Inter- Operating Total millions Parties company Income(2) Assets(2,3) - ------------------------------------------------------------------------------------------------- JUNE 30, 1997 U.S. $ 5,499 $ 54 $ (15) $11,292 Europe 3,434 390 540 3,947 Asia Pacific 943 -- 48 514 Latin America 480 27 37 355 Canada 288 235 171 364 ------- ----- -------- ------- $10,644 $ 706 $ 781 $16,472 ======= ===== ======== ======= JUNE 30, 1996 (TRANSITION PERIOD) U.S. $ 2,122 $ 31 $ (151) $10,923 Europe 1,480 176 231 4,161 Asia Pacific 390 -- (5) 419 Latin America 144 13 22 288 Canada 115 61 31 404 ------- ----- -------- ------- $ 4,251 $ 281 $ 128 $16,195 ======= ===== ======== ======= JANUARY 31, 1996 U.S. $ 3,785 $ 56 $ 35 $10,468 Europe 2,806 456 272 4,357 Asia Pacific 853 (0) 28 453 Latin America 406 29 16 324 Canada 202 212 131 382 ------- ----- -------- ------- $ 8,052 $ 753 $ 482 $15,984 ======= ===== ======== ======= JANUARY 31, 1995 U.S. $ 1,601 $ 30 $ 63 $ 1,006 Europe 2,134 396 366 3,688 Asia Pacific 746 -- 15 395 Latin America 435 30 43 388 Canada 92 207 141 234 ------- ----- -------- ------- $ 5,008 $ 663 $ 628 $ 5,711 ======= ===== ======== =======
(1) Revenues are classified based upon the location of the legal entity which invoices the customer rather than the location of the customer. Revenues among geographic areas include intercompany transactions on a current market price basis. (2) Excludes discontinued Tropicana operations. (3) Excludes DuPont and Time Warner holdings. FISCAL YEAR CHANGE NOTE 12 Effective June 30, 1996, the Company changed its fiscal year-end from January 31 to June 30. Accordingly, the consolidated financial statements include the results of operations for the Transition Period, which are not necessarily indicative of operations for a full year. Results for the comparable prior year period are summarized below.
Five Months Ended millions, except per share amounts (unaudited) June 30, 1995 - ---------------------------------------------------------------------- Revenues $2,093 Operating income 220 Provision for income taxes 54 Income from continuing operations 107 Discontinued Tropicana operations, after tax 10 Discontinued DuPont activities, after tax 3,232 Net income 3,349
EARNINGS PER SHARE Basic Diluted - ---------------------------------------------------------------------- Income from continuing operations $.29 $.29 Discontinued Tropicana operations, after tax .03 .03 Discontinued DuPont activities, after tax 8.67 8.60 Net Income 8.99 8.92 ---- -----
18 19 REENGINEERING ACTIVITIES NOTE 13 In connection with a program to better position its beverage operations to achieve its strategic growth objectives, the Company recorded a pretax charge of $274 million in the fiscal year ended January 31, 1996. The charge related principally to the Company's global spirits and wine manufacturing, financial, marketing and distribution systems and includes rationalization of facilities in the U.S. and Europe and other costs related to the redesign of processes associated with the fulfillment of customer orders and the organizational structure under which the spirits and wine business operates The components of the $274 million charge reflected approximately a $100 million provision for severance costs, $104 million for asset write-downs/impairments and $70 million for facility rationalization, including lease terminations, and other reengineering programs. ADDITIONAL FINANCIAL INFORMATION NOTE 14 INCOME STATEMENT AND CASH FLOW DATA
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------------- INTEREST, NET AND OTHER Interest expense $ 285 $ 136 $ 338 $ 363 Interest income (34) (13) (102) (10) Dividend income (40) (19) (38) (34) Capitalized interest (4) (5) (3) (2) Gain on sale of Time Warner shares (154) Gain on sale of DuPont warrants (60) ----- ----- ------- ----- $ (7) $ 99 $ 195 $ 317 ===== ====== ======= ===== EXCISE TAXES (included in revenues and cost of revenues) $ 793 $ 288 $ 804 $ 815 CASH FLOW DATA Interest paid, net $ 252 $ 98 $ 222 $ 316 Income taxes paid (refunded) $ 85 $ (37) $ 1,039 $ 76 ===== ====== ======= =====
19 20 BALANCE SHEET DATA
- ------------------------------------------------------------------------------ June 30, June 30, January 31, millions 1997 1996 1996 - ------------------------------------------------------------------------------ RECEIVABLES Trade $ 1,762 $ 1,707 $ 2,204 Other 412 242 185 ------- ------- ------- 2,174 1,949 2,389 Allowance for doubtful accounts and other valuation accounts (309) (354) (280) ------- ------- ------- $ 1,865 $ 1,595 $ 2,109 ======= ======= ======= INVENTORIES Beverages $ 2,359 $ 2,493 $ 2,417 Materials, supplies and other 225 274 270 ------- ------- ------- $ 2,584 $ 2,767 $ 2,687 ======= ======= ======= LIFO INVENTORIES Estimated replacement cost $ 342 $ 392 $ 292 Excess of replacement cost over LIFO carrying value (181) (180) (157) ------- ------- ------- $ 161 $ 212 $ 135 ======= ======= ======= FILM COSTS, NET OF AMORTIZATION THEATRICAL FILM COSTS Released $ 468 $ 490 $ 588 In process and unreleased 501 386 295 ------- ------- ------- 969 876 883 ======= ======= ======= TELEVISION FILM COSTS Released 368 368 391 In process and unreleased 41 10 26 ------- ------- ------- 409 378 417 ------- ------- ------- $ 1,378 $ 1,254 $ 1,300 ======= ======= =======
Unamortized costs related to released theatrical and television films aggregated $836 million at June 30, 1997. Excluding the portion of the purchase price allocated to the film library which is being amortized over a 20- year life, the Company currently anticipates that approximately 81 percent of the unamortized released film costs will be amortized under the individual film forecast method during the three years ending June 30, 2000.
June 30, June 30, January 31, Millions 1997 1996 1996 - ------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land $ 493 $ 494 $ 478 Buildings and improvements 1,425 1,218 1,151 Machinery and equipment 1,104 1,071 1,057 Furniture and fixtures 298 305 274 Construction in progress 262 231 178 ------- ------- ------- 3,582 3,319 3,138 Accumulated depreciation (1,023) (883) (826) ------- ------- ------- $ 2,559 $ 2,436 $ 2,312 ======= ======= ======= PAYABLES AND ACCRUED LIABILITIES Trade $ 381 $ 454 $ 504 Other 1,443 1,337 1,370 ------- ------- ------- $ 1,824 $ 1,791 $ 1,874 ======= ======= =======
COMMITMENTS AND CONTINGENCIES NOTE 15 The Company has various commitments for the purchase or construction of property, plant and equipment, materials, supplies and items of investment related to the ordinary conduct of business. 20 21 The Company has entered into an arrangement to sell to a third party substantially all films produced or acquired during the term of the agreement for amounts which approximate cost. The Company will serve as sole distributor and earns a distribution fee, which is variable and contingent upon the films' performance. In addition, the Company has the option to purchase the films at certain future dates. The Company is involved in various lawsuits, claims and inquiries. Management believes that the resolution of these matters will not have a material adverse effect on the results of operations, financial position or liquidity of the Company. DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES NOTE 16 Differences between U.S. and Canadian GAAP for these financial statements are: (i) The common stock in DuPont and Time Warner would be carried at cost under Canadian GAAP, thereby reducing shareholders' equity by $781 million or eight percent at June 30, 1997. There is no effect on net income. (ii) The gain on the sale of the Time Warner shares would be computed according to the average cost method under Canadian GAAP. The after-tax gain would be increased by $58 million under this method. (iii)The deferred tax liability at June 30, 1997 under Canadian GAAP, rather than under FAS 109, would be approximately $30 million lower and shareholders' equity $30 million higher. (A draft accounting standard has been issued in Canada which, if adopted, will eliminate this difference.) (iv) Proportionate consolidation of joint ventures under Canadian GAAP would increase assets and liabilities by approximately $1.0 billion and increase working capital by approximately $117 million at June 30, 1997. There is no effect on net income. (v) The cumulative effect of the accounting change in the fiscal year ended January 31, 1995 would be excluded from net income and taken directly to retained earnings under Canadian GAAP. (vi) Other differences between U.S. and Canadian GAAP are immaterial. 21 22 DISCONTINUED TROPICANA OPERATIONS NOTE 17 Discontinued operations are composed of the business of Tropicana Products, Inc. and Seagram's global fruit juice business ("Tropicana"). Tropicana produces, markets and distributes Tropicana, Dole* and other branded fruit juices and juice beverages. On July 20, 1998, the Company announced that it had agreed to sell Tropicana to Pepsico, Inc. for $3.3 billion in cash. Proceeds from the sale will be used to partially fund the acquisition of PolyGram N.V., currently scheduled to close during the second quarter of the Company's fiscal year ending June 30, 1999. Commencing in June 1998, Seagram, together with its subsidiaries and affiliates, began transferring to Tropicana all shares of subsidiaries and other assets and liabilities of Seagram's juice business that had not previously been owned by Tropicana (the "Reorganization"). The Company believes that the Reorganization will be substantially completed by the closing of the sale of Tropicana to Pepsico, Inc., which is subject to Hart Scott Rodino and other customary regulatory approvals, and is scheduled to occur by the end of August 1998. Certain assets relating to the business of Tropicana which, in the aggregate, are not material to Tropicana's business may continue to be held by Seagram or its affiliates at the closing date, pending receipt of consents or approvals or satisfaction of other applicable requirements necessary for the transfer of such assets. Summarized below is the Tropicana financial information:
Fiscal Transition Year Ended Period Ended Fiscal Years June 30, June 30, Ended January 31, millions 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------------------- Revenues $1,916 $762 $1,695 $1,391 Cost of revenues 1,314 515 1,257 980 Selling, general and administrative expenses 450 196 336 314 ------ ---- ------ ------ Operating income 152 51 102 97 Interest, net and other 41 15 40 45 Provision for income taxes 54 18 32 28 ------ ---- ------ ------ Income from discontinued operations $ 57 $ 18 $ 30 $ 24 ====== ==== ====== ======
Results of the discontinued Tropicana business include the allocation of consolidated interest expense totaling $41 million for the fiscal year ended June 30, 1997, $15 million for the transition period ended June 30, 1996 and $40 million and $45 million for the fiscal years ended January 31, 1996 and January 31, 1995, respectively. The allocations were based on the ratio of net assets of discontinued operations to consolidated net assets.
June 30, June 30, January 31, millions 1997 1996 1996 - ------------------------------------------------------------------- Current assets $ 588 $ 579 $ 446 Noncurrent assets 1,551 1,535 1,498 ------ ------ ------ $2,139 $2,114 $1,944 ------ ------ ------ Current liabilities 285 304 297 Noncurrent liabilities 120 117 98 Shareholders' equity 1,734 1,693 1,549 ------ ------ ------ $2,139 $2,114 $1,944 ====== ====== ======
On May 19, 1995, Tropicana acquired the worldwide juice and juice beverage business of Dole Food Company, Inc. ("Dole") for $276 million. The transaction excluded Dole's canned pineapple juice business. The reported operating results for the fiscal year ended January 31, 1996 reflect the results of operations of the acquired business from the acquisition date. The acquisition has been accounted for under the purchase method of accounting and is included in discontinued Tropicana operations presented in the consolidated results of the Company. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. This valuation resulted in $134 million of unallocated excess cost over fair value of assets acquired which is being amortized over 40 years. *The Dole brand name is licensed from Dole. 22 23 MANAGEMENT'S REPORT The Company's management is responsible for the preparation of the accompanying financial statements in accordance with generally accepted accounting principles, including the estimates and judgments required for such preparation. The Company has a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and financial records underlying the financial statements properly reflect all transactions. The system contains self-monitoring mechanisms, including a program of internal audits, which allow management to be reasonably confident that such controls, as well as the Company's administrative procedures and internal reporting requirements, operate effectively. Management believes that its long-standing emphasis on the highest standards of conduct and business ethics, as set forth in written policy statements, serves to reinforce the system of internal accounting controls. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error or the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. The Company's independent accountants, PricewaterhouseCoopers LLP, review the system of internal accounting controls to the extent they consider necessary to evaluate the system as required by generally accepted auditing standards. Their report covering their audits of the financial statements is presented below. The Audit Committee of the Board of Directors, solely comprising Directors who are not officers or employees of the Company, meets with the independent accountants, the internal auditors and management to ensure that each is discharging its respective responsibilities relating to the financial statements. The independent accountants and the internal auditors have direct access to the Audit Committee to discuss, without management present, the results of their audit work and any matters they believe should be brought to the Committee's attention. /S/ EDGAR BRONFMAN, JR. /S/ ROBERT W. MATSCHULLAT - ------------------------------------- ----------------------------------------- EDGAR BRONFMAN, JR. ROBERT W. MATSCHULLAT PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER August 13, 1997 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS OF THE SEAGRAM COMPANY LTD. We have audited the accompanying consolidated balance sheet of The Seagram Company Ltd. and its subsidiaries as of June 30, 1997 and 1996 and January 31, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal year ended June 30, 1997, the Transition Period ended June 30, 1996 and for each of the two fiscal years in the period ended January 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the U.S. and Canada. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of the Company and its subsidiaries as of June 30, 1997 and 1996 and January 31, 1996 and the results of their operations and their cash flows for the fiscal year ended June 30, 1997, the Transition Period ended June 30, 1996 and for each of the two fiscal years in the period ended January 31, 1996, in accordance with generally accepted accounting principles in the U.S. which, in their application to the Company, conform in all material respects with generally accepted accounting principles in Canada. The Company changed its accounting for postemployment benefits other than pensions, under generally accepted accounting principles in the U.S., during the fiscal year ended January 31, 1995, as described in Note 10. /s/ PricewaterhouseCoopers LLP -------------------------- PricewaterhouseCoopers LLP New York, New York August 13, 1997, except as to Note 17, which is as of July 20, 1998 23 24 QUARTERLY DATA
Fiscal Year US Dollars in Millions First Second Third Fourth Ended Except for Share Amounts (Unaudited) Quarter Quarter Quarter Quarter 6/30/97(3) - ------------------------------------------------------------------------------------------------------------------------------- Revenues $ 2,449 $ 3,292 $ 2,357 $ 2,546 $ 10,644 Operating income 239 353 98 91 781 Income from continuing operations, after tax $ 148 $ 142 $ 20 $ 135 $ 445 Income from discontinued Tropicana operations, after tax 18 19 7 13 57 Net income $ 166(1) $ 161 $ 27 $ 148(2) $ 502 PER SHARE DATA EARNINGS PER SHARE - BASIC Continuing operations $ 0.40 $ 0.38 $ 0.05 $ 0.36 $ 1.20 Discontinued Tropicana operations, after tax 0.05 0.05 0.02 0.04 0.16 Net income $ 0.45 $ 0.43 $ 0.07 $ 0.40 $ 1.36 EARNINGS PER SHARE - DILUTED Continuing operations $ 0.40 $ 0.38 $ 0.05 $ 0.36 $ 1.20 Discontinued Tropicana operations, after tax 0.05 0.05 0.02 0.04 0.15 Net income $ 0.45 $ 0.43 $ 0.07 $ 0.40 $ 1.35
Transition Two Months Period First Ended Ended Quarter June 30 6/30/96(3) - ------------------------------------------------------------------------------------------------------------ Revenues $ 2,056 $ 2,195 $ 4,251 Operating income 104 24 128 Income from continuing Operations $ 10 $ 57 $ 67 Income from discontinued Tropicana operations, after tax 13 5 18 Net income $ 23 $ 62(4) $ 85 PER SHARE DATA EARNINGS PER SHARE - BASIC Continuing operations $ 0.03 $ 0.15 $ 0.18 Discontinued Tropicana operations, after tax 0.03 0.02 0.05 Net income $ 0.06 $ 0.17 $ 0.23 EARNINGS PER SHARE - DILUTED Continuing operations $ 0.03 $ 0.15 $ 0.18 Discontinued Tropicana Operations, after tax 0.03 0.02 0.05 Net income $ 0.06 $ 0.17 $ 0.23
Fiscal Year First Second Third Fourth Ended Quarter Quarter Quarter Quarter 1/31/96(3) - --------------------------------------------------------------------------------------------------------------------------------- Revenues $ 910 $ 1,450 $ 2,485 $ 3,207 $ 8,052 Operating income 125 142 15 200 482 Income from continuing operations $ 50 $ 76 $ (63)(5) $ 81 $ 144 Income from discontinued Tropicana operations, after tax 9 13 8 -- 30 Discontinued DuPont activities, after tax 3,232 -- -- -- 3,232 Net Income $ 3,291 $ 89 $ (55) $ 81 $ 3,406 PER SHARE DATA EARNINGS PER SHARE - BASIC Continuing operations $ 0.14 $ 0.20 $ (.17) $ 0.21 $ 0.38 Discontinued Tropicana operations, after tax 0.02 0.04 0.02 -- 0.08 Discontinued DuPont activities, after tax 8.67 -- -- -- 8.67 Net income $ 8.83 $ 0.24 $ (.15) $ 0.21 $ 9.13 EARNINGS PER SHARE - DILUTED Continuing operations $ 0.14 $ 0.20 $ (.16) 0.21 $ 0.38 Discontinued Tropicana operations, after tax 0.02 0.04 0.02 -- 0.08 Discontinued DuPont activities, after tax 8.58 -- -- -- 8.54 Net income $ 8.74 $ 0.24 $ (.14) $ 0.21 $ 9.00
(1) Includes a $39 million after-tax gain on the sale of Dupont warrants (2) Includes a $100 million after-tax gain on the sale of Time Warner shares. (3) For earnings per share data, each quarter is calculated as a discrete period and the sum of the four quarters does not equal the full year amount. (4) Includes a $67 million tax benefit relating to a settlement with the U.S. government regarding the recognition of a capital loss on the Company's 1981 exchange of shares of Conoco Inc. for common stock of Dupont. (5) Includes a $274 million pretax charge for reengineering activities. 24 25 FINANCIAL SUMMARY
Fiscal Transition Year Ended Period Ended June 30, June 30, Fiscal Year Ended January 31, (US$ in millions, except per share amounts) 1997 1996 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Revenues $ 10,644 $ 4,251 $ 8,052 $ 5,008 $ 4,742 $ 4,891 Operating Income 781 128 482 628 640 674 Interest, Net and Other (7) 99 195 317 275 251 Income from Continuing Operations Before Cumulative Effect of Accounting Change 445 67 144 170 249 291 Income (Loss) from Discontinued Tropicana Operations, After Tax 57 18 30 24 34 2 Discontinued DuPont Activities, After Tax -- -- 3,232 617 96 181 --------- -------- -------- -------- -------- -------- Income Before Cum. Effect of Accounting Change 502 85 3,406 811 379 474 Cumulative Effect of Accounting Change, After Tax -- -- -- (75) -- (1,374) --------- -------- -------- -------- -------- --------- Net Income $ 502 $ 85 $ 3,406 $ 736 $ 379 $ (900) --------- --------- --------- --------- --------- --------- FINANCIAL POSITION Current Assets 6,366 6,307 6,194 3,938 3,532 3,597 Common Stock of DuPont 1,034 651 631 3,670 3,154 3,315 Common Stock of Time Warner 1,291 2,228 2,356 2,043 1,769 -- Other Noncurrent Assets 10,106 10,328 10,230 1,773 1,754 1,687 Net Assets of Discontinued Tropicana Operations 1,734 1,693 1,549 1,270 1,220 1,237 --------- --------- --------- --------- --------- --------- Total Assets $ 20,531 $ 21,207 $ 20,960 $ 12,694 $ 11,429 $ 9,836 --------- --------- --------- --------- --------- --------- Current Liabilities 3,232 4,383 3,557 3,865 2,776 1,805 Long Term Indebtedness 2,478 2,562 2,889 2,838 3,051 2,556 Total Liabilities 9,258 10,163 9,788 7,174 6,428 4,906 Minority Interest 1,851 1,839 1,844 11 -- -- Shareholders Equity 9,422 9,205 9,328 5,509 5,001 4,930 --------- --------- --------- --------- --------- --------- Total Liabilities & Shareholders' Equity $ 20,531 $ 21,207 $ 20,960 $ 12,694 $ 11,429 $ 9,836 --------- --------- --------- --------- --------- --------- CASH FLOW DATA Cash Flow from Operating Activities 2,020 941 906 370 370 229 Capital Expenditures (393) (245) (349) (124) (118) (143) Other Investing Activities, Net 745 (972) 1,576 (341) (1,556) 119 Dividends Paid (239) (112) (224) (216) (209) (205) PER SHARE DATA EARNINGS PER SHARE - BASIC Continuing Operations $ 1.20 $ 0.18 $ 0.38 $ 0.46 $ 0.67 $ 0.78 Discontinued Tropicana Operations, After Tax 0.16 0.05 0.08 0.06 0.09 -- Discontinued DuPont Activities, After Tax -- -- 8.67 1.66 0.26 0.48 --------- --------- --------- --------- --------- --------- Income Before Cum. Effect of Accounting Change 1.36 0.23 9.13 2.18 1.02 1.26 Cumulative Effect of Accounting Change, After Tax -- -- -- (0.20) -- (3.64) --------- --------- --------- --------- --------- --------- Net Income (Loss) $ 1.36 $ 0.23 $ 9.13 $ 1.98 $ 1.02 $ (2.38) --------- --------- ---------- --------- --------- --------- EARNINGS PER SHARE - DILUTED Continuing Operations $ 1.20 $ 0.18 $ 0.38 $ 0.46 $ 0.66 $ 0.77 Discontinued Tropicana Operations, After Tax 0.15 0.05 0.08 0.06 0.09 -- Discontinued DuPont Activities, After Tax -- -- 8.54 1.64 0.25 0.48 --------- --------- --------- --------- --------- --------- Income Before Cum. Effect of Accounting Change 1.35 0.23 9.00 2.16 1.00 1.25 Cumulative Effect of Accounting Change, After Tax -- -- -- (0.20) -- (3.62) --------- --------- --------- --------- --------- --------- Net Income (Loss) $ 1.35 $ 0.23 $ 9.00 $ 1.96 $ 1.00 $ (2.37) --------- --------- --------- --------- --------- --------- Dividends Paid $ 0.65 $ 0.30 $ 0.60 $ 0.58 $ 0.56 $ 0.55 Shareholders' Equity 25.79 24.67 24.91 14.79 13.43 13.19 End of Year Share Price New York Stock Exchange (US$) $ 40.25 $ 33.63 $ 36.38 $ 28.75 $ 30.75 $ 25.13 Canadian Stock Exchange (Cdn$) 55.50 45.75 49.75 40.50 40.63 32.00 Average Shares Outstanding (thousands) 369,682 373,858 373,117 372,499 373,051 375,871 Shares Outstanding at Year End (thousands) 365,281 373,059 374,462 372,537 372,489 373,690
25 EX-99.4 6 MARCH 31, 1998 FINANCIAL STATEMENTS 1 Exhibit 99.4 THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (United States dollars in millions, except per share amounts)
QUARTER NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1998 1997 1998 1997 --------- --------- --------- --------- Revenues $ 2,036 $ 2,357 $ 7,546 $ 8,098 Cost of revenues 1,187 1,416 4,393 4,793 Selling, general and administrative expenses 817 843 2,655 2,615 --------- --------- --------- --------- OPERATING INCOME 32 98 498 690 Interest, net and other (730) 51 (610) 102 --------- --------- --------- --------- 762 47 1,108 588 Provision for income taxes 282 23 489 266 Minority interest 33 4 48 12 --------- --------- --------- --------- Income from continuing operations 447 20 571 310 Income from discontinued Tropicana operations 14 7 51 44 --------- --------- --------- --------- NET INCOME $ 461 $ 27 $ 622 $ 354 Retained earnings at beginning of period 7,597 8,450 8,259 8,389 Dividends paid (57) (61) (173) (178) Shares purchased and retired -- (50) (707) (199) --------- --------- --------- --------- Retained earnings at end of period $ 8,001 $ 8,366 $ 8,001 $ 8,366 ========= ========= ========= ========= Earnings per share - Basic Income from continuing operations $ 1.30 $ .05 $ 1.63 $ .84 Discontinued Tropicana operations .04 .02 .14 .12 --------- --------- --------- --------- $ 1.34 $ 0.07 $ 1.77 $ 0.96 ========= ========= ========= ========= Earnings per share - Diluted Income from continuing operations $ 1.28 $ .05 $ 1.62 $ .83 Discontinued Tropicana operations .04 .02 .14 .12 --------- --------- --------- --------- $ 1.32 $ 0.07 $ 1.76 $ 0.95 ========= ========= ========= ========= Dividends paid per share $ 0.165 $ 0.165 $ 0.495 $ 0.48 ========= ========= ========= ========= Weighted average shares outstanding (thousands) 345,372 370,659 350,967 370,520 Dilutive potential common shares (thousands) 3,502 5,102 3,232 4,540 --------- --------- --------- --------- Adjusted weighted average shares outstanding (thousands) 348,874 375,761 354,199 375,060 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 1 2 THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (United States dollars in millions)
MARCH 31, JUNE 30, 1998 1997 -------- -------- ASSETS Current Assets Cash and short-term investments at cost $ 1,432 $ 490 Receivables, net 1,922 1,781 Inventories 2,552 2,584 Film costs, net of amortization 154 387 Deferred income taxes 531 512 Prepaid expenses and other current assets 410 377 -------- -------- TOTAL CURRENT ASSETS 7,001 6,131 -------- -------- Common stock of DuPont 1,118 1,034 Common stock of Time Warner 847 1,291 Common stock of USAi 322 -- Investment in USA Networks, held for sale -- 794 Film costs, net of amortization 1,042 991 Artists' contracts, advances and other entertainment assets 688 645 Deferred charges and other assets 625 610 Property, plant and equipment, net 2,615 2,559 Investments in unconsolidated companies 3,292 1,303 Excess of cost over fair value of assets acquired 3,112 3,355 Net assets of discontinued Tropicana operations 1,672 1,734 -------- -------- $ 22,334 $ 20,447 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings and indebtedness payable within one year $ 1,889 $ 239 Accrued royalties and participations 698 726 Payables and accrued liabilities 1,848 1,818 Income and other taxes 657 304 -------- -------- TOTAL CURRENT LIABILITIES 5,092 3,087 -------- -------- Long-term indebtedness 2,152 2,478 Accrued royalties and participations 454 339 Deferred income taxes 2,503 2,426 Other credits 1,009 844 Minority interest 1,902 1,851 Shareholders' Equity Shares without par value (346,081,355 and 365,280,735 shares, respectively) 814 809 Cumulative currency translation adjustments (515) (427) Cumulative gain on equity securities, net of tax 922 781 Retained earnings 8,001 8,259 -------- -------- TOTAL SHAREHOLDERS' EQUITY 9,222 9,422 -------- -------- $ 22,334 $ 20,447 ======== ========
The accompanying notes are an integral part of these financial statements. 2 3 THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (United States dollars in millions)
NINE MONTHS ENDED MARCH 31, 1998 1997 ------- ----- OPERATING ACTIVITIES Income from continuing operations $ 571 $ 310 ------- ----- Adjustments to reconcile Income from continuing operations to net cash provided: Depreciation and amortization of assets 215 215 Amortization of excess of cost over fair value of assets acquired 164 123 Gain on sale of Time Warner shares, pre-tax (433) -- Gain on sale of USA Networks and Universal television assets to USAi, pre-tax (360) -- Gain on sale of DuPont warrants, pre-tax -- (60) Gain on sale of Putnam, pre-tax -- (64) Minority interest charged to income 48 12 Sundry (69) 61 Changes in assets and liabilities Receivables (149) (249) Inventories (31) 22 Film costs, net of amortization 9 (175) Prepaid expenses and other current assets (69) 11 Artists' contracts, advances and other entertainment assets (106) 63 Payables and accrued liabilities (327) 121 Income and other taxes 406 149 Deferred income taxes (21) 4 Other credits 170 10 ------- ----- (553) 243 ------- ----- Net cash provided by operating activities 18 553 ------- ----- INVESTING ACTIVITIES Acquisition of 50% interest in USA Networks (1,700) -- Proceeds from sale of USA Networks and Universal television assets to USAi 1,332 -- Proceeds from sale of Time Warner shares 958 -- Capital expenditures (257) (251) Proceeds from sale of DuPont warrants -- 500 Proceeds from sale of Putnam -- 330 Acquisition of Multimedia Entertainment assets -- (55) Sundry 6 (158) ------- ----- Net cash provided by investing activities 339 366 ------- ----- FINANCING ACTIVITIES Dividends paid (173) (178) Issuance of shares upon exercise of stock options and conversion of LYONs 51 75 Shares purchased and retired (753) (210) Increase in long-term indebtedness 5 7 Decrease in long-term indebtedness (12) (32) Increase (decrease) in short-term borrowings and indebtedness payable within one year 1,353 (489) ------- ----- Net cash provided by (used for) financing activities 471 (827) ------- ----- Net cash provided by continuing operations $ 828 $ 92 Net cash provided by discontinued Tropicana operations 114 49 ------- ----- NET INCREASE IN CASH AND SHORT TERM INVESTMENTS $ 942 $ 141 ======= =====
The accompanying notes are an integral part of these financial statements. 3 4 THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited interim financial statements have been prepared in accordance with the requirements of Form 10-Q and, therefore, do not include all information and notes necessary for a presentation of results of operations, financial position and cash flows in conformity with generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended June 30, 1997 which are also included in this filing. In the opinion of the Company, the unaudited interim financial statements include all adjustments, comprising only normal recurring adjustments, necessary for a fair presentation of operating results. Results of operations for the nine months are not necessarily indicative of those expected for the fiscal year. Certain prior period amounts have been reclassified to conform with the current year's presentation. 2. Purchase of USA Networks and combination with USA Networks, Inc. ("USAi"), formerly HSN, Inc. On September 22, 1997, the Company and Viacom Inc. ("Viacom") announced their agreement to resolve all litigation regarding jointly-owned USA Networks. Under the terms of the agreement, Universal Studios, Inc. ("Universal"), on October 21, 1997, acquired Viacom's 50% interest in USA Networks, including the Sci-Fi Channel, for $1.7 billion in cash. The acquisition was accounted for under the purchase method of accounting. The cost of the acquisition was allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. This valuation resulted in $1.6 billion of unallocated excess of cost over fair value of assets acquired which was being amortized over 40 years. The minority shareholder in Universal, Matsushita Electric Industrial Co., Ltd. ("Matsushita") declined to contribute the additional capital required to fund their proportionate share of this acquisition. As a result, the Company's ownership of Universal has increased from 80 percent to approximately 84 percent. On February 12, 1998, Universal sold its acquired 50% interest in USA Networks to USAi and contributed its original 50% interest in USA Networks and the majority of its television assets, including substantially all of its domestic operations and 50% of the international operations of USA Networks, to USANi LLC (the "LLC") in a transaction ("the transaction") in which Universal received $1,332 million in cash, 13.5 million shares of USAi (after giving effect to the 2 for 1 split of USAi stock on March 26, 1998) consisting of 7.1 million shares of USAi common stock and 6.4 million shares of USAi Class B common stock which in aggregate represents a 10.7% interest in USAi, and a 45.8% interest (118,633,172 shares at March 31, 1998) in the LLC (a subsidiary of USAi) which is exchangeable for USAi common stock and Class B common stock. Universal recognized a gain of $360 million ($222 million after tax) on the transaction, included in Interest, net and other on the consolidated statement of income and retained earnings. The transaction resulted in $82 million of unallocated excess cost over fair value of assets acquired which is being amortized over 40 years. The investment in the 7.1 million shares of USAi common stock held by Universal at March 31, 1998 is accounted for at market value ($194 million at March 31, 1998) and has an underlying historical cost of $142 million. The investment in the 6.4 million shares of Class B common stock of USAi is carried at its historical cost of $128 million. The investment in the LLC is included in Investments in unconsolidated companies on the consolidated balance sheet and is accounted for under the equity method. The unaudited condensed pro forma results of operations data presented below assume that both the purchase of the acquired 50% interest in USA Networks and the transaction occurred at the beginning of each period presented. These pro forma results of operations were prepared based upon the historical consolidated statements of operations of the Company and the pro forma results of operations of USAi for the nine months ended March 31, 1998 and 1997, adjusted to reflect purchase accounting. The unaudited pro forma information is not necessarily indicative of the results of operations of the Company that would have occurred if the transactions had been in effect since the assumed dates, nor is it necessarily indicative of future operating results of the Company. 4 5 Pro Forma Income Statement Data (millions, except per share amounts)
NINE MONTHS ENDED MARCH 31, 1998 1997 --------- --------- Revenues $ 7,183 $ 7,866 --------- --------- Income from continuing operations 587 288 Income from discontinued Tropicana operations 51 44 --------- --------- Net income $ 638 $ 332 ========= ========= EARNINGS PER SHARE - BASIC Income from continuing operations $ 1.68 $ 0.78 Income from discontinued Tropicana operations 0.14 0.12 --------- --------- $ 1.82 $ 0.90 ========= ========= EARNINGS PER SHARE - DILUTED Income from continuing operations $ 1.66 $ 0.77 Income from discontinued Tropicana operations 0.14 0.12 --------- --------- $ 1.80 $ 0.89 ========= =========
3. Sale of the Warrants of E.I. du Pont de Nemours ("DuPont") On July 24, 1996, DuPont repurchased the 156 million equity warrants owned by the Company for $500 million in cash. The Company had received the warrants in April, 1995 when DuPont redeemed 156 million shares of its common stock owned by the Company. The warrants were valued at $440 million at the date of the 1995 transaction. The results for the nine months ended March 31, 1997 include a $60 million pre-tax gain ($39 million after-tax) from the sale of the warrants. The pre-tax gain is included in Interest, net and other on the consolidated statement of income and retained earnings. 4. Investment in DuPont At March 31, 1998, the Company owned 16.4 million shares of the outstanding common stock of DuPont. The Company accounts for the investment at market value. The underlying historical book value of the DuPont shares is $187 million. 5. Investment in Time Warner Inc. ("Time Warner") On February 5, 1998, the Company sold 15 million of its 26.8 million shares of Time Warner common stock for pre-tax proceeds of $958 million. The gain on the sale of the shares, included in Interest, net and other on the consolidated statement of income and retained earnings, was $433 million ($281 million after tax) in accordance with the average cost method. At March 31, 1998, the Company's remaining 11.8 million Time Warner shares, which are accounted for at market value, had a total cost of $411 million. On May 27, 1998, the Company sold the remaining 11.8 million shares for pretax proceeds of $905 million, the gain on the sale of the shares to be included in the fourth quarter of the fiscal year ended June 30, 1998, was $493 million ($320 million after tax) in accordance with the average cost method. 5 6 6. Supplementary Financial Statement Information MARCH 31, JUNE 30, 1998 1997 ------- ------- (millions) INVENTORIES Beverages $ 2,232 $ 2,359 Materials, supplies and other 320 225 ------- ------- $ 2,552 $ 2,584 ======= ======= PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, at cost $ 3,750 $ 3,582 Accumulated depreciation (1,135) (1,023) ------- ------- $ 2,615 $ 2,559 ======= =======
QUARTER NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1998 1997 1998 1997 ----- ----- ----- ---- (millions) EXCISE TAXES (included in revenues and cost of revenues) $ 144 $ 150 $ 562 $605 ----- ----- ----- ----
7. Long-Term Debt and Debt Guarantees Joseph E. Seagram & Sons, Inc. ("JES"), the Company's U.S. spirits and wine subsidiary, has outstanding debt securities guaranteed by the Company. JES issued Liquid Yield Option Notes (LYONs), which are zero coupon notes with no interest payments due until maturity on March 5, 2006. Each $1,000 face amount LYON may be converted, at the option of the holder, into 18.44 of the Company's common shares (314,238 shares at March 31, 1998) The Company has guaranteed the LYONs on a subordinated basis. In addition, the Company has unconditionally guaranteed JES's 8 3/8% Debentures due February 15, 2007, 7% Debentures due April 15, 2008, 8 7/8% Debentures due September 15, 2011, 9.65% Debentures due August 15, 2018, and 9% Debentures due August 15, 2021. Summarized financial information for JES and its subsidiaries follows:
QUARTER NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1998 1997 1998 1997 ----- ----- ------- ------ (millions) Revenues $ 362 $ 519 $ 1,708 $1,720 Cost of revenues $ 188 $ 292 $ 1,077 $1,057 Income(loss) from continuing operations $ (14) $ (13) $ 39 $ 70 Income(loss) from discontinued Tropicana operations $ (2) $ 29 $ (18) $ 30 Net income $ (16) $ 16 $ 21 $ 100
6 7 Consolidated Balance Sheet information for JES follows:
MARCH 31, JUNE 30, 1998 1997 ------- ------- (millions) Current assets $ 2,381 $ 821 Noncurrent assets 11,896 12,662 ------- ------- $14,277 $13,483 ======= ======= Current liabilities $ 1,161 $ 542 Noncurrent liabilities 3,872 3,798 Shareholder's equity 9,244 9,143 ------- ------- $14,277 $13,483 ======= =======
8. Earnings Per Share and Common Shares At March 31, 1998, there were 39,106,659 common shares potentially issuable upon the conversion of the LYONs described in Note 7 and the exercise of outstanding employee stock options. The dilutive effect on the Company's earnings per share from the assumed issuance of these shares is reflected in Diluted earnings per share on the income statement. In the nine months ended March, 1998, the Company canceled 20,948,200 common shares which were purchased on the open market and issued 1,748,820 shares upon the exercise of employee stock options and the conversion of LYONs. The Company adopted FAS 128, Earnings per Share, effective with the quarter and six months ended December 31, 1997. The prior year earnings per share amounts have been restated in accordance with FAS 128. 9. Discontinued Tropicana Operations Discontinued operations are composed of the business of Tropicana Products, Inc. and Seagram's global fruit juice business ("Tropicana"). Tropicana produces, markets and distributes Tropicana, Dole* and other branded fruit juices and juice beverages. On July 20, 1998, the Company announced that it had agreed to sell Tropicana to PepsiCo, Inc. for $3.3 billion in cash. Proceeds from the sale will be used to partially fund the acquisition of PolyGram N.V., currently scheduled to close during the second quarter of the Company's fiscal year ending June 30, 1999. Commencing in June 1998, Seagram, together with its subsidiaries and affiliates, began transferring to Tropicana all shares of subsidiaries and other assets and liabilities of Seagram's juice business that had not previously been owned by Tropicana (the "Reorganization"). The Company believes that the Reorganization will be substantially completed by the closing of the sale of Tropicana to Pepsico, Inc., which is subject to Hart Scott Rodino and other customary regulatory approvals, and is scheduled to occur by the end of August 1998. Certain assets relating to the business of Tropicana which, in the aggregate, are not material to Tropicana's business may continue to be held by Seagram or its affiliates at the closing date, pending receipt of consents or approvals or satisfaction of other applicable requirements necessary for the transfer of such assets. * The Dole brand name is licensed from Dole Food Company, Inc. 7 8 Income from discontinued Tropicana operations:
QUARTER ENDED SEPTEMBER 30, DECEMBER 31, MARCH 31, 1997 1997 1998 - ------------------------------------------------------------------------------------------ Revenues $494 $476 $498 Cost of revenues 355 314 342 Selling, general and administrative expenses 96 112 123 ---- ---- ---- Operating income 43 50 33 Interest, net and other 9 9 8 Provision for income taxes 17 21 11 ---- ---- ---- Net income $ 17 $ 20 $ 14 ==== ==== ==== Earnings per share - Basic $.05 $.06 $.04 ==== ==== ==== Earnings per share - Diluted $.05 $.06 $.04 ==== ==== ====
10. Acquisition of PolyGram On June 22, 1998, the Company announced that it has signed definitive agreements with Koninklijke Philips Electronics N.V. ("Philips") and Polygram N.V. ("PolyGram") to acquire PolyGram in a transaction valued at $10.4 billion. The Company will acquire Philips' 75 percent interest in PolyGram through a tender offer for all issued shares, including publicly-held shares, for NLG115, or approximately U.S.$57 per share in cash or, at the shareholders' election, for a mixture of cash and the Company's common shares, based on an exchange ratio of 1.3772 Seagram shares for each PolyGram share. The agreements relating to this proposed transaction call for the Company to issue a maximum of approximately 47.9 million common shares (12 percent of the outstanding shares after the transaction), or $2 billion in value. Philips will tender all its PolyGram shares into the Company's tender offer, acquire as many of the Company's shares as may be available to it in the tender offer (taking into account the election by the public shareholders), and hold its shares of the Company for no less than two years. The PolyGram transaction which is subject to the receipt of certain regulatory approvals, is expected to close during the second quarter of the Company's fiscal year ending June 30, 1999. 8 -----END PRIVACY-ENHANCED MESSAGE-----