<PAGE> 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 29, 1997
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
<PAGE> 2
Item 5. Other Events.
Filed as part of this Current Report on Form 8-K and incorporated by reference
herein are the consolidated balance sheet of The Seagram Company Ltd. (the
"Corporation") 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, the "Financial Statements"), together with the report of Price
Waterhouse LLP dated August 13, 1997 (the "Report").
Item 7. Financial Statements and Exhibits.
(c) Exhibits
(23) Consent of Price Waterhouse LLP, independent accountants.
(99) Financial Statements and Report.
2
<PAGE> 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 29, 1997
By: /s/ Daniel R. Paladino
-------------------------------------
Daniel R. Paladino
Executive Vice President -- Legal and
Environmental Affairs
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- ------ ---------------------- -------------
<S> <C> <C>
(23) Consent of Price Waterhouse LLP,
independent accountants.
(99) Financial Statements and Report.
</TABLE>
4
<PAGE> 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 relating to the consolidated
financial statements of The Seagram Company Ltd., which appears in the Current
Report on Form 8-K dated August 29, 1997.
/s/ Price Waterhouse
PRICE WATERHOUSE LLP
New York, New York
August 28, 1997
<PAGE> 1
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
U.S. Dollars in Millions, Except Per Share Amounts 1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $12,560 $ 5,013 $9,747 $ 6,399
Cost of revenues 7,683 3,186 6,122 3,654
Selling, general and administrative expenses 3,944 1,648 3,041 2,020
-------------------------------------------------------------
Operating Income 933 179 584 725
Interest, net and other 34 114 235 362
-------------------------------------------------------------
899 65 349 363
Provision (benefit) for income taxes 385 (15) 153 169
Minority interest charge (credit) 12 (5) 22 --
-------------------------------------------------------------
Income Before Discontinued DuPont Activities and
Cumulative Effect of Accounting Change 502 85 174 194
-------------------------------------------------------------
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
Income before discontinued DuPont activities
and cumulative effect of accounting change $ 1.36 $ .23 $ .46 $ .52
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 2
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, June 30, January 31,
U.S. Dollars in Millions 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and short-term investments at cost $ 504 $ 279 $ 254
Receivables, net 2,015 1,770 2,276
Inventories 2,974 3,142 2,914
Film costs, net of amortization 538 471 510
DuPont warrants - 440 -
Deferred income taxes 521 402 361
Prepaid expenses and other current assets 402 382 325
-----------------------------------
TOTAL CURRENT ASSETS 6,954 6,886 6,640
-----------------------------------
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 714 736 737
Property, plant and equipment, net 3,125 2,951 2,806
Investments in unconsolidated companies 2,097 2,162 1,936
Excess of cost over fair value of assets acquired 4,236 4,551 4,298
-----------------------------------
$20,936 $21,628 $21,355
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings and indebtedness payable within one year $ 255 $ 1,850 $ 936
Accrued royalties and participations 865 602 642
Payables and accrued liabilities 2,083 2,086 2,164
Income and other taxes 314 149 112
-----------------------------------
TOTAL CURRENT LIABILITIES 3,517 4,687 3,854
-----------------------------------
Long-term indebtedness 2,494 2,562 2,889
Accrued royalties and participations 364 388 404
Deferred income taxes 2,461 2,163 2,185
Other credits 827 784 851
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
-----------------------------------
$20,936 $21,628 $21,355
</TABLE>
The accompanying notes are an integral part of these financial statements.
Approved by the Board
/s/ C.E. MEDLAND
EDGAR M. BRONFMAN C.E. MEDLAND
DIRECTOR DIRECTOR
54
<PAGE> 3
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
U.S. Dollars in Millions 1997 1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income Before Discontinued DuPont Activities and
Cumulative Effect of Accounting Change $ 502 $ 85 $ 174 $ 194
--------------------------------------------
Adjustments to Reconcile Income Before Discontinued
DuPont Activities and Cumulative Effect of
Accounting Change to Net Cash Provided:
Amortization of film costs 1,050 524 642 -
Depreciation and amortization of assets 353 158 255 138
Amortization of excess of cost over fair value of assets acquired 194 84 113 46
Gain on sale of Time Warner shares, DuPont warrants and Putnam,
before tax (278) - - -
Minority interest charged (credited) to income 12 (5) 22 -
Sundry 147 70 46 17
Changes in assets and liabilities:
Receivables, net (213) 532 (172) (157)
Inventories (8) (212) (137) (23)
Prepaid expenses and other current assets (65) (59) (19) (36)
Artists' contracts, advances and other entertainment assets (2) 1 66 -
Payables and accrued liabilities 322 (243) 140 363
Income and other taxes payable 161 55 (105) 38
Deferred income taxes (52) 15 14 (114)
Other credits 23 (102) (14) 53
--------------------------------------------
1,644 818 851 325
--------------------------------------------
Net Cash Provided by Continuing Operations 2,146 903 1,025 519
--------------------------------------------
INVESTING ACTIVITIES
Film production (1,356) (626) (684) -
Capital expenditures (507) (305) (433) (172)
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 Dole juice beverage business - - (273) -
Purchase of Time Warner common stock - - - (474)
Increase in DuPont investment related to 1981 transaction - - - (162)
Sundry (112) (117) (9) (93)
--------------------------------------------
Net Cash Provided by (Used for) Investing Activities 242 (1,329) 875 (637)
--------------------------------------------
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 (1,589) 916 (1,596) 610
--------------------------------------------
Net Cash (Used for) Provided by Financing Activities (2,163) 451 (1,803) 144
--------------------------------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS $ 225 $ 25 $ 97 $ 26
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE> 4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares Cumulative Cumulative
Without Par Value Currency Gain (Loss)
Number Translation on Equity Retained
U.S. Dollars in Millions, Except Per Share Amounts (thousands) Amount Adjustments Securities Earnings
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE> 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, fruit juices, 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 17. 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, wines and fruit juices. The cost of spirits,
wines and fruit juices 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.
57
<PAGE> 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.
58
<PAGE> 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.
<TABLE>
<CAPTION>
DUPONT FINANCIAL INFORMATION
Millions Year Ended December 31, 1994
- ----------------------------------------------------------------------------------
<S> <C>
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
- ----------------------------------------------------------------------------------
</TABLE>
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 retains 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.
59
<PAGE> 8
<TABLE>
<CAPTION>
PRO FORMA INCOME STATEMENT DATA
Fiscal Years
Ended January 31,
Millions, Except Per Share Amounts (Unaudited) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $11,667 $11,217
-------------------
Income before cumulative effect of accounting change $ 154 $ 346
Cumulative effect of accounting change - (75)
-------------------
Net income $ 154 $ 271
Per share data:
Income before cumulative effect of accounting change $ .41 $ .93
Cumulative effect of accounting change - (.20)
-------------------
Net income $ .41 $ .73
</TABLE>
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.
ACQUISITION OF THE JUICE BEVERAGE BUSINESS OF THE DOLE FOOD COMPANY, INC.
("DOLE") NOTE 5
On May 19, 1995, the Company acquired the worldwide juice and juice beverage
business of 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. 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 impact of this acquisition was not material to the consolidated
results of the Company.
INVESTMENTS IN UNCONSOLIDATED COMPANIES NOTE 6
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); 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 themed 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 themed 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
60
<PAGE> 9
distribution of distilled beverage alcohol and wines in Japan (50 percent
owned); and Kirin-Tropicana Inc., engaged in the manufacture, sale and
distribution, import and export of fruit juice beverages (50 percent owned).
Summarized financial information, derived from unaudited historical financial
information, is presented below for the Company's investments in unconsolidated
companies.
<TABLE>
<CAPTION>
SUMMARIZED BALANCE SHEET INFORMATION
June 30, June 30, January 31,
Millions 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $1,414 $1,290 $1,102
Noncurrent assets 2,569 2,317 2,219
------------------------------------
Total assets $3,983 $3,607 $3,321
------------------------------------
Current liabilities 1,205 $1,049 $ 920
Noncurrent liabilities 1,427 1,219 1,254
Equity 1,351 1,339 1,147
------------------------------------
Total liabilities and equity $3,983 $3,607 $3,321
------------------------------------
Proportionate share of net assets
of unconsolidated companies $ 624 $ 612 $ 549
</TABLE>
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.
<TABLE>
<CAPTION>
SUMMARIZED STATEMENT OF OPERATIONS
Fiscal Year Transition Fiscal Year
Ended Period Ended Ended
June 30, June 30, January 31,
Millions 1997 1996 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $4,920 $2,168 $2,851
Earnings before interest and taxes 357 188 214
Net income 235 129 137
</TABLE>
The Company's operating income includes $127 million, $57 million and $72
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.
<TABLE>
<CAPTION>
LONG-TERM INDEBTEDNESS AND CREDIT ARRANGEMENTS NOTE 7
LONG-TERM INDEBTEDNESS
June 30, June 30, January 31,
Millions 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 147 217 444
----------------------------------
2,533 2,693 2,942
Indebtedness payable within one year (39) (131) (53)
----------------------------------
$2,494 $2,562 $2,889
</TABLE>
*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 $216
million of bank borrowings bearing interest at market rates.
61
<PAGE> 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:
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
Millions 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $3,754 $1,362 $4,031 $4,566
Cost of revenues 2,790 1,062 2,976 3,125
Income before discontinued DuPont activities
and cumulative effect of accounting change 87 57 43 60
Discontinued DuPont activities, after tax - - 3,232 617
Cumulative effect of accounting change - - - (56)
----------------------------------------------
Net income $ 87 $ 57 $3,275 $ 621
----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30, January 31,
1997 1996 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 957 $ 1,348 $ 1,412
Noncurrent assets 12,666 11,702 11,442
--------------------------------------
$13,623 $13,050 $12,854
--------------------------------------
Current liabilities $ 671 $ 1,028 $ 720
Noncurrent liabilities 3,809 3,175 3,357
Shareholder's equity 9,143 8,847 8,777
--------------------------------------
$13,623 $13,050 $12,854
--------------------------------------
</TABLE>
FINANCIAL INSTRUMENTS AND EQUITY SECURITIES NOTE 8
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:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
Millions Buy Sell Buy Sell
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
-------------------------------------
</TABLE>
62
<PAGE> 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.
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
Carrying Fair Carrying Fair
Millions Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 504 $ 504 $ 279 $ 279
Foreign currency exchange contracts (10) (13) (15) (15)
Short-term debt 255 255 1,850 1,850
Long-term debt 2,494 2,695 2,562 2,741
</TABLE>
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:
<TABLE>
<CAPTION>
June 30, June 30, January 31,
Millions 1997 1996 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost $1,124 $2,357 $2,357
Gross Unrealized Gain 1,201 522 630
Fair Value 2,325 2,879 2,987
</TABLE>
COMMON SHARES, EARNINGS PER SHARE AND STOCK OPTIONS NOTE 9
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. The dilutive effect on earnings per share from the
assumed issuance of these shares would be less than three percent. 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.
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.
The Company plans to implement FAS 128, Earnings per Share, effective with the
second quarter of the fiscal year ending June 30, 1998. Had FAS 128 been
implemented as of July 1, 1996, the Company would have reported Basic earnings
per share of $1.36 and Diluted earnings per share of $1.35 for the fiscal year
ended June 30, 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.
63
<PAGE> 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:
<TABLE>
<CAPTION>
Fiscal Transition Fiscal
Year Ended Period Ended Year Ended
June 30, June 30, January 31,
Millions, except per share amounts 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $ 502 $ 85 $3,406
Pro forma 469 73 3,383
Earnings per common share:
As reported $1.36 $.23 $ 9.13
Pro forma 1.27 .19 9.07
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Stock Options of Options
Description Outstanding Outstanding
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
64
<PAGE> 13
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
========== ==========
</TABLE>
INCOME TAXES NOTE 10
The following tables summarize the sources of pretax income and the resulting
income tax expense.
GEOGRAPHIC COMPONENTS OF PRETAX INCOME
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
Millions 1997 1996 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. $ 255 $ (133) $ 82 $ (24)
Canada 70 (24) 17 15
Other jurisdictions 574 222 250 372
------- ------- ------- -------
Income before minority interest and
discontinued DuPont activities 899 65 349 363
Discontinued DuPont activities -- -- 5,283 637
------- ------- ------- -------
Income before minority interest $ 899 $ 65 $ 5,632 $ 1,000
======= ======= ======= =======
</TABLE>
COMPONENTS OF INCOME TAX EXPENSE
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
Millions 1997 1996 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense (benefit) applicable to:
Continuing operations $ 385 $ 52 $ 153 $ 104
1981 transaction* -- (67) -- 65
Discontinued DuPont activities -- -- 2,051 20
------ ------ ------ ------
Total income tax expense (benefit) $ 385 $ (15) $2,204 $ 189
====== ====== ====== ======
</TABLE>
*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.
<TABLE>
<S> <C> <C> <C> <C>
Current
Continuing operations
Federal $ 224 $ (14) $ 26 $ (12)
State and local 43 6 19 --
1981 transaction -- (105) -- 188
Other jurisdictions 170 83 94 107
------- ------- ------- -------
437 (30) 139 283
------- ------- ------- -------
Discontinued DuPont activities -- -- 612 20
------- ------- ------- -------
437 (30) 751 303
------- ------- ------- -------
Deferred
Continuing operations
Federal (24) (8) 39 4
State and local (19) (2) (2) --
1981 transaction -- 38 -- (123)
Other jurisdictions (9) (13) (23) 5
------- ------- ------- -------
(52) 15 14 (114)
------- ------- ------- -------
Discontinued DuPont activities -- -- 1,439 --
------- ------- ------- -------
(52) 15 1,453 (114)
------- ------- ------- -------
Total income tax expense (benefit) $ 385 $ (15) $ 2,204 $ 189
======= ======= ======= =======
</TABLE>
65
<PAGE> 14
COMPONENTS OF NET DEFERRED TAX LIABILITY
<TABLE>
<CAPTION>
June 30, June 30 January 31,
Millions 1997 1996 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basis and amortization differences $ 547 $ 471 $ 428
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 20 86 80
------- ------- -------
Deferred tax liabilities 2,586 2,307 2,234
------- ------- -------
Deferred revenue (132) -- --
Employee benefits (117) (102) (101)
Tax credit carryovers (49) (172) (150)
Valuation, doubtful accounts and return reserves (262) (323) (269)
Other, net (128) (99) (24)
------- ------- -------
Deferred tax assets (688) (696) (544)
Valuation allowance 42 150 134
------- ------- -------
(646) (546) (410)
------- ------- -------
Net deferred tax liability $ 1,940 $ 1,761 $ 1,824
======= ======= =======
</TABLE>
The Company has U.S. tax credit carryovers of $49 million; $18 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
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. statutory rate 35% 35% 35% 35%
1981 transaction -- (103) -- 18
State and local 2 4 3 --
Dividends received deduction (1) (7) (3) (3)
Goodwill amortization 7 45 11 4
Other -- 3 (2) (7)
----- ----- ----- -----
Effective income tax rate -- continuing operations 43% (23%) 44% 47%
===== ===== ===== =====
</TABLE>
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 11
PENSION
Pension costs were $48 million for the fiscal year ended June 30, 1997, $27
million for the transition period ended June 30, 1996 and $45 million and $24
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.
66
<PAGE> 15
The majority of the pension arrangements for the Company's employees of
affiliates outside the U.S., the United Kingdom and Canada are either insured or
government sponsored. In those affiliates outside of the U.S. where defined
benefit plans exist (United Kingdom, 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
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
Millions 1997 1996 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost -- benefits earned during the period $ 20 $ 8 $ 17 $ 18
Interest cost on Projected Benefit Obligation 54 22 52 47
Return on plan assets
Actual (gain) loss (174) (55) (204) 11
Deferred actuarial gain (loss) 94 26 147 (75)
Net amortization 2 2 4 4
----- ----- ----- -----
Net pension (income) cost $ (4) $ 3 $ 16 $ 5
===== ===== ===== =====
</TABLE>
STATUS OF U.S. DEFINED BENEFIT PENSION PLANS
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Millions Benefits Exceed Assets Benefits Exceed Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of Vested Benefit Obligation $(517) $ (82) $(501) $ (78)
----- ----- ----- -----
Accumulated Benefit Obligation $(543) $ (85) $(525) $ (81)
----- ----- ----- -----
Projected Benefit Obligation $(625) $(110) $(609) $(105)
Plan assets at fair value, principally equity securities 892 -- 757 --
----- ----- ----- -----
Plan assets in excess of (less than) Projected
Benefit Obligation 267 (110) 148 (105)
Deferred net actuarial (gain) loss (195) 35 (95) 38
Unamortized prior service cost 7 5 7 6
Unamortized transition obligation -- 2 -- 3
Recognition of minimum liability -- (17) -- (23)
----- ----- ----- -----
Prepaid (accrued) pension cost $ 79 $ (85) $ 60 $ (81)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
January 31, 1996
Assets Exceed Accumulated
Accumulated Benefits
Millions Benefits Exceed Assets
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of Vested Benefit Obligation $(532) $ (82)
----- -----
Accumulated Benefit Obligation $(559) $ (84)
----- -----
Projected Benefit Obligation $(648) $(110)
Plan assets at fair value, principally equity securities 715 --
----- -----
Plan assets in excess of (less than) Projected
Benefit Obligation 67 (110)
Deferred net actuarial (gain) loss (20) 46
Unamortized prior service cost 6 6
Unamortized transition obligation -- 3
Recognition of minimum liability -- (30)
----- -----
Prepaid (accrued) pension cost $ 53 $ (85)
===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
Millions 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost -- benefits earned during the period $ 4 $ 2 $ 3 $ 3
Interest cost on accumulated postretirement benefit obligation 14 6 14 11
Amortization of prior service cost (4) (2) (4) (4)
---- ---- ---- ----
Net postretirement benefit cost $ 14 $ 6 $ 13 $ 10
==== ==== ==== ====
</TABLE>
67
<PAGE> 16
The accumulated postretirement benefit obligation, included in other credits in
the accompanying balance sheet, comprises the following:
<TABLE>
<CAPTION>
June 30, June 30, January 31,
Millions 1997 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retirees $ 113 $ 125 $ 132
Fully eligible active plan participants 28 25 27
Other active plan participants 48 46 50
Unrecognized:
Actuarial gain (loss) 15 3 (11)
Prior service cost 33 37 39
----- ----- -----
Accrued postretirement benefit obligation $ 237 $ 236 $ 237
===== ===== =====
</TABLE>
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 $11 million
($7 million after tax), with an increase in pretax expense of $1 million 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 14.
68
<PAGE> 17
BUSINESS SEGMENT AND GEOGRAPHIC DATA NOTE 12
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
Millions Beverages Entertainment Corporate(1) Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1997
Revenues $ 6,967 $ 5,593 $ -- $ 12,560
Depreciation and amortization of assets 164 185 4 353
Amortization of goodwill 51 143 -- 194
Operating income (expense) 823 242 (132) 933
Identifiable assets 7,429 10,670 2,837 20,936
Capital expenditures 301 206 -- 507
JUNE 30, 1996 (TRANSITION PERIOD)
Revenues $ 2,653 $ 2,360 $ -- $ 5,013
Depreciation and amortization of assets 70 86 2 158
Amortization of goodwill 22 62 -- 84
Operating income (expense) 225 1 (47) 179
Identifiable assets 7,665 10,269 3,694 21,628
Capital expenditures 168 136 1 305
JANUARY 31, 1996
Revenues $ 6,694 $ 3,053 $ -- $ 9,747
Depreciation and amortization of assets 154 97 4 255
Amortization of goodwill 51 62 -- 113
Operating income (expense) 456 205 (77) 584
Identifiable assets 7,603 9,997 3,755 21,355
Capital expenditures 257 175 1 433
JANUARY 31, 1995
Revenues $ 6,399 $ -- $ 6,399
Depreciation and amortization of assets 134 4 138
Amortization of goodwill 46 -- 46
Operating income (expense) 781 (56) 725
Identifiable assets 7,028 5,964 12,992
Capital expenditures 156 16 172
</TABLE>
(1) 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.
(2) Includes a $290 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.
69
<PAGE> 18
GEOGRAPHIC DATA
<TABLE>
<CAPTION>
Revenues(1)
Unrelated Inter- Operating Total
Millions Parties company Income Assets(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1997
U.S. $ 7,057 $ 172 $ 132 $ 13,150
Europe 3,679 390 544 4,168
Asia Pacific 960 -- 46 559
Latin America 480 27 37 355
Canada 384 235 174 379
-------- -------- -------- --------
$ 12,560 $ 824 $ 933 $ 18,611
-------- -------- -------- --------
JUNE 30, 1996 (TRANSITION PERIOD)
U.S. $ 2,735 $ 73 $ (105) $ 12,773
Europe 1,588 176 239 4,402
Asia Pacific 395 -- (8) 429
Latin America 147 13 22 288
Canada 148 61 31 417
-------- -------- -------- --------
$ 5,013 $ 323 $ 179 $ 18,309
-------- -------- -------- --------
JANUARY 31, 1996
U.S. $ 5,185 $ 167 $ 131 $ 12,171
Europe 3,026 464 276 4,585
Asia Pacific 860 -- 30 463
Latin America 415 29 14 324
Canada 261 212 133 385
-------- -------- -------- --------
$ 9,747 $ 872 $ 584 $ 17,928
-------- -------- -------- --------
JANUARY 31, 1995
U.S. $ 2,818 $ 112 $ 160 $ 2,510
Europe 2,254 400 365 3,749
Asia Pacific 750 -- 15 395
Latin America 440 30 43 388
Canada 137 207 142 237
-------- -------- -------- --------
$ 6,399 $ 749 $ 725 $ 7,279
-------- -------- -------- --------
</TABLE>
(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 DuPont and Time Warner holdings.
FISCAL YEAR CHANGE NOTE 13
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.
<TABLE>
<CAPTION>
Five Months Ended
Millions, Except Per Share Amounts (Unaudited) June 30, 1995
- --------------------------------------------------------------------------------
<S> <C>
Revenues $2,715
Operating income 256
Provision for income taxes 63
Income before discontinued DuPont activities 117
Discontinued DuPont activities, after tax 3,232
Net income 3,349
EARNINGS PER SHARE
Income before discontinued DuPont activities $ .32
Discontinued DuPont activities, after tax 8.67
Net income 8.99
</TABLE>
70
<PAGE> 19
REENGINEERING ACTIVITIES NOTE 14
In connection with a program to better position its beverage operations to
achieve its strategic growth objectives, the Company recorded a pretax charge of
$290 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 $290 million charge reflected approximately a $100 million provision for
severance costs, $120 million for asset write-downs/impairments and $70 million
for facility rationalization, including lease terminations, and other
reengineering programs.
ADDITIONAL FINANCIAL INFORMATION NOTE 15
INCOME STATEMENT AND CASH FLOW DATA
<TABLE>
<CAPTION>
Fiscal Transition
Year Ended Period Ended Fiscal Years
June 30, June 30, Ended January 31,
Millions 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST, NET AND OTHER
Interest expense $ 326 $ 151 $ 378 $ 408
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)
------- ------- ------- -------
$ 34 $ 114 $ 235 $ 362
------- ------- ------- -------
EXCISE TAXES
(included in revenues and cost of revenues) $ 808 $ 296 $ 812 $ 836
CASH FLOW DATA
Interest paid, net $ 293 $ 113 $ 262 $ 361
Income taxes paid (refunded) $ 138 $ (37) $ 1,083 $ 101
</TABLE>
71
<PAGE> 20
BALANCE SHEET DATA
<TABLE>
<CAPTION>
June 30, June 30, January 31,
Millions 1997 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
RECEIVABLES
Trade $ 1,899 $ 1,860 $ 2,370
Other 430 267 189
------- ------- -------
2,329 2,127 2,559
Allowance for doubtful accounts and
other valuation accounts (314) (357) (283)
------- ------- -------
$ 2,015 $ 1,770 $ 2,276
------- ------- -------
INVENTORIES
Beverages $ 2,704 $ 2,789 $ 2,600
Materials, supplies and other 270 353 314
------- ------- -------
$ 2,974 $ 3,142 $ 2,914
------- ------- -------
LIFO INVENTORIES
Estimated replacement cost $ 631 $ 680 $ 473
Excess of replacement cost over
LIFO carrying value (169) (175) (180)
------- ------- -------
$ 462 $ 505 $ 293
------- ------- -------
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
------- ------- -------
</TABLE>
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.
<TABLE>
<CAPTION>
June 30, June 30, January 31,
Millions 1997 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Land $ 543 $ 544 $ 528
Buildings and improvements 1,577 1,367 1,297
Machinery and equipment 1,634 1,531 1,456
Furniture and fixtures 338 348 355
Construction in progress 343 294 226
------- ------- -------
4,435 4,084 3,862
Accumulated depreciation (1,310) (1,133) (1,056)
------- ------- -------
$ 3,125 $ 2,951 $ 2,806
------- ------- -------
PAYABLES AND ACCRUED LIABILITIES
Trade $ 457 $ 576 $ 596
Other 1,626 1,510 1,568
------- ------- -------
$ 2,083 $ 2,086 $ 2,164
------- ------- -------
</TABLE>
72
<PAGE> 21
COMMITMENTS AND CONTINGENCIES NOTE 16
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.
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 17
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 $1.02 billion and
increase working capital by approximately $110 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.
73
<PAGE> 22
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, Price Waterhouse 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.
<TABLE>
<S> <C> <C>
/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
</TABLE>
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 11.
/S/PRICE WATERHOUSE LLP
---------------------
PRICE WATERHOUSE LLP
New York, New York
August 13, 1997
74
