<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2275
THE SEAGRAM COMPANY LTD.
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(Exact name of registrant as specified in its charter)
Canada None
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1430 Peel Street, Montreal, Quebec, Canada H3A 1S9
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(Address of principal executive offices) (Zip Code)
514-849-5271
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No /_/
As of April 30, 1998, there were 346,301,125 common shares without nominal or
par value issued and outstanding.
<PAGE> 2
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income and
Retained Earnings -
Quarter and Nine Months Ended
March 31, 1998 and 1997 1
Consolidated Balance Sheet -
March 31, 1998 and June 30, 1997 2
Consolidated Statement of Cash Flows -
Nine Months Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
</TABLE>
<PAGE> 3
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(United States dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ............................................... $ 2,534 $ 2,847 $ 9,014 $ 9,540
Cost of revenues ....................................... 1,529 1,755 5,403 5,771
Selling, general and administrative expenses ........... 940 966 2,987 2,957
--------- --------- --------- ---------
OPERATING INCOME ....................................... 65 126 624 812
Interest, net and other ................................ (722) 61 (584) 134
--------- --------- --------- ---------
787 65 1,208 678
Provision for income taxes ............................. 293 34 538 312
Minority interest ...................................... 33 4 48 12
--------- --------- --------- ---------
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 ............................. $ 1.34 $ 0.07 $ 1.77 $ 0.96
========= ========= ========= =========
- Diluted ........................... $ 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
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(United States dollars in millions)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and short-term investments at cost $ 1,451 $ 504
Receivables, net 2,071 1,931
Inventories 2,863 2,974
Film costs, net of amortization 154 387
Deferred income taxes 540 521
Prepaid expenses and other current assets 438 402
-------- --------
TOTAL CURRENT ASSETS 7,517 6,719
-------- --------
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 734 714
Property, plant and equipment, net 3,195 3,125
Investments in unconsolidated companies 3,292 1,303
Excess of cost over fair value of assets acquired 3,990 4,236
-------- --------
$ 22,745 $ 20,852
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings and indebtedness payable within one year $ 1,929 $ 255
Accrued royalties and participations 698 726
Payables and accrued liabilities 2,111 2,077
Income and other taxes 662 314
-------- --------
TOTAL CURRENT LIABILITIES 5,400 3,372
-------- --------
Long-term indebtedness 2,152 2,494
Accrued royalties and participations 454 339
Deferred income taxes 2,544 2,461
Other credits 1,070 913
Minority interest 1,903 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
-------- --------
$ 22,745 $ 20,852
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(United States dollars in millions)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
1998 1997
------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 622 $ 354
------- -----
Adjustments to reconcile net income to net cash provided
Depreciation and amortization of assets 270 261
Amortization of excess of cost over fair value of assets acquired 186 146
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 (67) 77
Changes in assets and liabilities
Receivables (144) (224)
Inventories 48 39
Film costs, net of amortization 9 (175)
Prepaid expenses and other current assets (74) 7
Artists' contracts, advances and other entertainment assets (106) 30
Payables and accrued liabilities (271) 78
Income and other taxes 349 151
Deferred income taxes (13) 9
Other credits 161 (8)
------- -----
(397) 279
------- -----
Net cash provided by operating activities 225 633
------- -----
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 (324) (336)
Proceeds from sale of DuPont warrants -- 500
Proceeds from sale of Putnam -- 330
Acquisition of Multimedia Entertainment assets -- (55)
Sundry (17) (113)
------- -----
Net cash provided by investing activities 249 326
------- -----
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 (30) (32)
Increase (decrease) in short-term borrowings and indebtedness payable within one year 1,373 (477)
------- -----
Net cash provided by (used for) financing activities 473 (815)
------- -----
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS $ 947 $ 144
======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
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 in the Company's Annual
Report to Shareholders for the fiscal year ended June 30, 1997. 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 year 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
<PAGE> 7
Pro Forma Income Statement Data
(millions, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenues $ 8,651 $ 9,309
--------- ---------
Net income $ 638 $ 332
========= =========
EARNINGS PER SHARE:
Basic $ 1.82 $ 0.90
--------- ---------
Diluted $ 1.80 $ 0.89
--------- ---------
</TABLE>
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.
6. Supplementary Financial Statement Information
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
------- -------
(millions)
<S> <C> <C>
INVENTORIES
Beverages $ 2,455 $ 2,704
Materials, supplies and other 408 270
------- -------
$ 2,863 $ 2,974
======= =======
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost $ 4,668 $ 4,435
Accumulated depreciation (1,473) (1,310)
------- -------
$ 3,195 $ 3,125
======= =======
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
----- ----- ----- ----
(millions)
<S> <C> <C> <C> <C>
EXCISE TAXES (included in revenues and cost of revenues) $ 144 $ 154 $ 566 $619
----- ----- ----- ----
</TABLE>
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:
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
----- ---- ------ ------
(millions)
<S> <C> <C> <C> <C>
Revenues $ 906 $925 $2,901 $2,908
Cost of revenues $ 715 $645 $2,234 $2,157
Net income(loss) $ (15) $ 16 $ 21 $ 100
</TABLE>
Consolidated Balance Sheet information for JES follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
------- -------
(millions)
<S> <C> <C>
Current assets $ 2,504 $ 957
Noncurrent assets 11,967 12,666
------- -------
$14,471 $13,623
======= =======
Current liabilities $ 1,344 $ 671
Noncurrent liabilities 3,883 3,809
Shareholder's equity 9,244 9,143
------- -------
$14,471 $13,623
======= =======
</TABLE>
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.
6
<PAGE> 9
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.
7
<PAGE> 10
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The Company operates two core, global segments: beverages and entertainment. The
Company's beverage businesses are engaged principally in the production and
marketing of distilled spirits, wines, fruit juices, coolers, beers and mixers.
The Company's entertainment unit, Universal Studios, Inc., produces and
distributes motion picture, television and home video products; produces and
distributes recorded music; and operates theme parks and retail stores.
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.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
------- ------- -------- --------
(millions)
<S> <C> <C> <C> <C>
Reported Revenues $ 2,534 $ 2,847 $ 9,014 $ 9,540
======= ======= ======== ========
Attributed Revenues $ 2,947 $ 3,169 $ 10,117 $ 10,265
======= ======= ======== ========
Beverages - EBITDA
Spirits and Wine $ 80 $ 143 $ 524 $ 640
Fruit Juices and Other 56 50 197 178
------- ------- -------- --------
Beverages EBITDA before Charge for
Asia Spirits and Wine Operations 136 193 721 818
Charge for Asia Spirits and Wine Operations -- -- (60) --
------- ------- -------- --------
Total Beverages EBITDA 136 193 661 818
Adjustment for Equity Companies (1) (1) (5) (6)
Depreciation and Amortization (59) (55) (173) (165)
------- ------- -------- --------
Beverages - Operating Income 76 137 483 647
Entertainment - EBITDA
Filmed Entertainment 115 87 386 304
Music Entertainment 12 10 77 62
Recreation and Other 22 17 124 132
Gain on Sale of Putnam -- -- -- 64
------- ------- -------- --------
Total Entertainment EBITDA 149 114 587 562
Adjustment for Equity Companies (50) (25) (118) (72)
Depreciation and Amortization (97) (77) (283) (242)
------- ------- -------- --------
Entertainment - Operating Income 2 12 186 248
Corporate Expenses (13) (23) (45) (83)
------- ------- -------- --------
TOTAL OPERATING INCOME $ 65 $ 126 $ 624 $ 812
======= ======= ======== ========
</TABLE>
8
<PAGE> 11
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 11 percent and six 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 48 percent to $65 million and was 23
percent lower for the nine months, at $624 million. Strong growth experienced at
Universal, Tropicana 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 $2.9 billion, were seven percent
lower than in the prior year while EBITDA declined seven percent to $285
million. For the nine months, attributed revenues showed a three percent
decline, but fell only one percent if the Putnam contribution is excluded from
the prior year. EBITDA for the nine months decreased ten percent to $1.2
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, the Beverages segment contributed $1.4
billion to reported revenues and $76 million to operating income versus $1.6
billion of reported revenues and $137 million of operating income in the prior
year. Nine months reported revenues for the Beverages segment were $5.0 billion
while operating income was $483 million compared to prior year reported revenues
of $5.3 billion and operating income of $647 million.
Spirits and Wine
In the third quarter, reported revenues and attributed revenues declined 18
percent and 21 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 eight 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 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, 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 $63 million in the third quarter, to $80 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 19
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.
9
<PAGE> 12
Fruit Juices and Other
Reported and attributed revenues for Fruit Juices and Other were up three
percent and two percent, respectively, in the quarter and two percent for nine
months. Revenue growth in the quarter and nine months was affected by an
unfavorable foreign exchange variance. Revenue growth was also impacted by
difficult comparisons with the prior year which included an extra week of sales
in the U.K. in the third quarter and in North America in the nine months.
Excluding the impact of these items, reported revenues would have increased four
percent in the third quarter and six percent in the nine months. The flagship
brand, Tropicana Pure Premium, experienced 15 percent volume growth in the
quarter and 14 percent through nine months in North America. Tropicana's share
of the total U.S. chilled orange juice market was 41 percent, up more than one
share point from last year. Tropicana's share of the not-from-concentrate orange
juice market was just under 72 percent. Internationally, volume increased two
percent (four percent excluding the extra week in the U.K. from last year) for
the quarter and nine percent for the nine months, reflecting growth in Europe
and Asia Pacific.
EBITDA for Fruit Juices and Other increased 12 percent in the quarter to $56
million and 11 percent, to $197 million, for the nine months reflecting the
strong performance of Tropicana Pure Premium in North America. Overall, Fruit
Juices and Other margins continue to improve, increasing in the quarter to 10.3
percent from 9.4 percent in the prior year.
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 were flat 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, 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.
10
<PAGE> 13
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 $13 million in the current quarter as compared to $23
million in the prior year and $45 million for nine months compared to $83
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 $722 million of income. This included net
interest expense of $77 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 transaction. In the prior year,
Interest, net and other was $61 million which was comprised of net interest
expense of $71 million offset by $10 million of dividend income from DuPont and
Time Warner. Interest, net and other for the nine months was $584 million of
income as compared to expense of $134 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, net income was $461 million or $1.34 per share compared
with net income of $27 million, or $0.07 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 of $7 million, or $(0.02) per share, was realized in the quarter. For the
nine months, net income was $622 million or $1.77 per share compared to $354
million or $0.96 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, net income for the nine
months was $204 million or $0.58 per share compared to $315 million or $0.85 per
share last year.
The effective tax rate for the nine months ended March 31, 1998 was 45 percent
as compared to an effective tax rate of 46 percent in the prior year. The 1998
fiscal year effective tax rate on ongoing operations has increased to 55 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 45 percent.
Liquidity and Capital Resources
The increase in Current assets to $7.5 billion at March 31, 1998 from $6.7
billion at June 30, 1997 is due primarily to additional Cash and short-term
investments of $1 billion 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 $5.4 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
11
<PAGE> 14
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 $225 million was provided by operating activities in the nine months
ended March 31, 1998, compared to $633 million in the prior year period,
reflecting the decline in income from ongoing operations in the current year.
Cash provided by investing activities was $249 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 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 $324 million.
In the prior year, cash provided by investing activities of $326 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 $336
million and the acquisition of Multimedia Entertainment for $55 million. The
Company's liquidity is enhanced by its remaining investment in Time Warner stock
which had a market value of $847 million on March 31, 1998. As previously
indicated, the Company does not view its remaining investment in Time Warner as
a strategic asset.
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 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 in this Form 10-Q 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.
12
<PAGE> 15
THE SEAGRAM COMPANY LTD. AND SUBSIDIARY COMPANIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the litigation entitled Digital Distribution Inc. d/b/a
Compact Disc Warehouse v. CEMA Distribution, Sony Music Entertainment, Inc.
Warner Elektra Atlantic Corporation, Universal Music & Video Distribution, Inc.
(formerly UNI Distribution Corp.), Bertelsmann Music Group, Inc. and Polygram
Group Distribution, Inc., No. 95-3596 JSL described on page 9 of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (the "Form
10-K"). Upon reinstatement of this litigation by the Ninth Circuit as described
in the Form 10-K, a number of related actions were filed, which all arise out of
the same claims and subject matter. These related actions are captioned: Chandu
Dani d/b/a Compact Disc Warehouse and Record Revolution, et at., v. EMI Music
Distribution (formerly known as CEMA Distribution); Sony Music Entertainment,
Inc.; Warner Elektra Atlantic Corporation; Universal Music & Video Distribution,
Inc. (formerly known as UNI Distribution Corp.); Bertelsmann Music Group,
Inc.; and Polygram Group Distribution, Inc., No. CV 97-7226 (JSL), filed on
September 30, 1997 in the U.S. District Court for the Central District of
California; Third Street Jazz and Rock Holding Corporation, et al., v. EMI Music
Distribution (formerly known as CEMA Distribution); Sony Music Entertainment,
Inc.; Warner Elektra Atlantic Corporation; Universal Music & Video Distribution,
Inc. (formerly known as UNI Distribution Corp.); Bertelsmann Music Group,
Inc.; and Polygram Group Distribution, Inc., No. CV 97-8864 JSL (VAPx), filed
October 21, 1997 in the U.S. District Court for the Central District of
California; T. Obie, Inc. d/b/a/ Chestnut Hill Compact Disc v. EMI Music
Distribution (formerly known as CEMA Distribution); Sony Music Entertainment,
Inc. Warner Elektra Atlantic Corporation; Universal Music & Video Distribution,
Inc. (formerly known as UNI Distribution Corp.); Bertelsmann Music Group,
Inc.; and Polygram Group Distribution, Inc., No. 97 Civ. 7764 LMM, filed October
21, 1997 in the U.S. District Court for the Southern District of New York;
Nathan Muchnick, Inc. et al. v. Sony Music Entertainment, Inc.; Polygram Group
Distribution, Inc.; Bertelsmann Music Group, Inc.; Universal Music & Video
Distribution, Inc. (formerly known as UNI Distribution Corp.); Warner Elektra
Atlantic Corporation; and EMI Music Distribution, Inc./Capitol Records, Inc.,
No. 98 Civ. 0612, filed on January 28, 1998 in the U.S. District Court for the
Southern District of New York; Doris D. Ottinger et al v. EMI Music
Distribution, Inc., Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corp., Universal Music & Video Distribution, Inc. (formerly known as UNI
Distribution Corp.), Bertelsmann Music Group, Inc., and Polygram Group
Distribution, Inc., Civil Action No. 24,885 II, filed on February 17, 1998 in
the Circuit Court for Cocke County, Tennessee.
13
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed with this Form 10-Q is on page 14.
(b) Current Reports on Form 8-K
1. A Current Report on Form 8-K dated February 5, 1998 to report under item 5
and file under item 7 a press release announcing the sale of 15 million
shares of Time Warner.
2. A Current Report on Form 8-K dated February 12, 1998 to (a) report under
item 2 Universal's sale of its 50 percent interest in USA Networks to USA
Networks, Inc. (formerly known as HSNi) and Universal's contribution of the
remaining 50 percent interest in USA Networks and its domestic television
production and distribution operations to USANi LLC, a subsidiary of USA
Networks, Inc. in the transaction described in Note 2 to the financial
statements and (b) file under item 7 pro forma financial information,
certain agreements relating to such transaction and a press release
announcing the closing of such transaction.
14
<PAGE> 17
SIGNATURES
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)
By: /s/ Robert W. Matschullat
------------------------------------
Robert W. Matschullat
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Dated: May 15, 1998
15
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
12(a) Computation of Ratio of Earnings to Fixed Charges
- The Seagram Company Ltd.
12(b) Computation of Ratio of Earnings to Fixed Charges
- Joseph E. Seagram & Sons, Inc.
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
Exhibit 12(a)
THE SEAGRAM COMPANY LTD.
and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Fiscal Transition
Nine Months Ended Year Ended Period Ended
March 31, June 30, June 30,
1998 1997 1997 1996
----- ----- ------- -----
(millions)
<S> <C> <C> <C> <C>
Earnings before income taxes and $1,208 $678 $ 899 $ 65
minority interest
Add (deduct):
Equity in net earnings of less than 50%
owned companies 2 (22) (28) (4)
Dividends from less than 50% owned 7 5 12 9
companies
Fixed charges 287 297 398 183
Interest capitalized, net of amortization (--) (3) (2) (4)
----- ---- ------ -----
Earnings available for fixed charges $1,504 $955 $1,279 $ 249
----- ---- ------ -----
Fixed Charges:
Interest Expense $231 $245 $ 326 $ 151
Proportionate share of 50% owned companies'
fixed charges 13 12 16 8
Portion of rent expense deemed to represent
interest factor 43 40 56 24
----- --- ------ -----
Fixed Charges $287 $297 $ 398 $ 183
----- ---- ------ -----
Ratio of Earnings to Fixed Charges 5.2x 3.2x 3.2x 1.4x
===== ==== ====== =====
</TABLE>
<PAGE> 1
Exhibit 12(b)
JOSEPH E. SEAGRAM & SONS, INC.
and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Fiscal Transition
Nine Months Ended Year Ended Period Ended
March 31, June 30, June 30,
1998 1997 1997 1996
----- ----- ------- -----
(millions)
<S> <C> <C> <C> <C>
Earnings before income taxes and minority interest $ 35 $ 156 $151 ($30)
Add (deduct):
Fixed charges 132 130 176 72
Interest capitalized, net of amortization -- -- (1) --
--------- ------ ---- ----
Earnings available for fixed charges $ 167 $ 286 $326 $ 42
--------- ------ ---- ----
Fixed charges:
Interest Expense $ 119 $ 117 $159 $ 65
Portion of rent expense deemed to represent
interest factor 13 13 17 7
--------- ------ ---- ----
Fixed Charges $ 132 $ 130 $176 $ 72
--------- ------ ---- ----
Ratio of Earnings to Fixed Charges 1.3x 2.2x 1.9x - (a)
=== === === ----
</TABLE>
(a) Fixed charges exceeded earnings by $30 million for the transition period
ended June 30, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE SEAGRAM COMPANY LTD. FOR THE NINE MONTHS ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,451
<SECURITIES> 0
<RECEIVABLES> 2,071
<ALLOWANCES> 0
<INVENTORY> 2,863
<CURRENT-ASSETS> 7,517
<PP&E> 4,668
<DEPRECIATION> (1,473)
<TOTAL-ASSETS> 22,745
<CURRENT-LIABILITIES> 5,400
<BONDS> 2,152
0
0
<COMMON> 814
<OTHER-SE> 8,408
<TOTAL-LIABILITY-AND-EQUITY> 22,745
<SALES> 0
<TOTAL-REVENUES> 9,014
<CGS> 5,403
<TOTAL-COSTS> 5,403
<OTHER-EXPENSES> 2,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (584)
<INCOME-PRETAX> 1,208
<INCOME-TAX> 538
<INCOME-CONTINUING> 622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 622
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.76
</TABLE>
